-----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, LUrFFtik9Kocffzm/1m62gqhunX/SUavZB0q+bFbcFec1nlN7bdHYz7xdFN+cehy O1Oj6NE96Q0w6iB2TZDEIA== 0001047469-98-036089.txt : 19981002 0001047469-98-036089.hdr.sgml : 19981002 ACCESSION NUMBER: 0001047469-98-036089 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19981001 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DAY RUNNER INC CENTRAL INDEX KEY: 0000853102 STANDARD INDUSTRIAL CLASSIFICATION: BLANKBOOKS, LOOSELEAF BINDERS & BOOKBINDING & RELATED WORK [2780] IRS NUMBER: 953624280 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-19835 FILM NUMBER: 98718981 BUSINESS ADDRESS: STREET 1: 15295 ALTON PARKWAY CITY: IRVINE STATE: CA ZIP: 92718 BUSINESS PHONE: 714/680-3500 MAIL ADDRESS: STREET 1: 15295 ALTON PARKWAY CITY: IRVINE STATE: CA ZIP: 92718 10-K 1 ANNUAL REPORT ON FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1998 |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ACT OF 1934 Commission file number 0-19835 DAY RUNNER, INC. (Exact name of registrant as specified in its charter) Delaware 95-3624280 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 15295 Alton Parkway, Irvine, California 92618 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (714) 680-3500 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES |X| NO |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing price of the Common Stock on September 16, 1998 as reported on The Nasdaq Stock Market, was approximately $171,000,000. The number of shares outstanding of the registrant's Common Stock on September 16, 1998 was 11,880,098. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive Proxy Statement to be delivered to stockholders in connection with their Annual Meeting of Stockholders to be held on November 23, 1998 are incorporated by reference into Part III of this Annual Report. PART I Item 1. Business THE COMPANY Day Runner(R), Inc. ("Day Runner") develops, manufactures and markets personal organizing products to broad-based consumer audiences through retail distribution channels. We are the leading developer, manufacturer and marketer of paper-based organizers for the retail market. We also develop, manufacture and market related organizing products. Day Runner's products are carried by more than 20,000 retail stores across the U.S. and are available in a number of other countries in North America, Europe and the Asia-Pacific region. We market our products to customers through our own sales force, through manufacturers' representatives and, in certain markets outside the U.S., through independent distributors. Our major customers in our primary domestic channels include office products superstores Office Depot, Inc., Staples, Inc. and OfficeMax, Inc. and mass market retailers Wal-Mart and Kmart. Sales to the office products and mass market channels accounted for approximately 47% and 39%, respectively, of fiscal 1998 sales. Our organizers and planners are loose-leaf and spiral-bound time and information management systems that range from simple to sophisticated. For example, our flagship Day Runner System organizers include not only the traditional planner components of appointment calendar, telephone/address section and note pad but also interrelated pages for managing time and information, tracking expenses, establishing goals and planning projects. Segmenting the market for organizers and planners is a key element of our strategy. We aim our product lines at market segments ranging from students to women shopping in the mass market to business and professional people and offer many of our organizers and planners in a choice of sizes, styles, cover materials and colors. Suggested retail prices for our organizers and planners range from $4 to $150. Organizers and planners accounted for approximately 49% of our fiscal 1998 sales. Most of our organizers and planners are refillable. Refills, which include calendars, other pages and accessories, accounted for approximately 31% of our sales in fiscal 1998. Suggested retail prices for refills range from $0.75 to $40. Our related organizing products include telephone/address books, appointment books, products for students from elementary school through college, business accessories, organizing and other wall boards and personal information management (PIM) software designed to complement our paper-based organizers, among others. This category accounted for approximately 20% of fiscal 1998 sales. With the exception of our software and electronic products we include in certain of our products and sell as accessories, all of our current products have been developed internally. In addition, all of the products of Ram Manufacturing and Timeposters Inc., companies we acquired in fiscal 1998, were developed by those companies. We manufacture and assemble a portion of our products at our Fullerton, California and Little Rock, Arkansas facilities and at our Mexican and Toronto subsidiaries and also use foreign and domestic contractors to supply both product components and finished goods. BUSINESS STRATEGY Day Runner sells broad-based personal organizing products through retail distribution channels. Our strategy is to leverage our brand name awareness and distribution strength to maximize sales of our existing products, extend those product lines and introduce new product lines. Key elements of our strategy include: o Segmenting the market for organizers and planners. o Entering related organizing product categories. o Building sales through major customers. o Marketing to increase sales. o Expanding foreign sales. o Providing excellent customer service. o Pursuing strategic acquisitions and alliances. SEGMENTING THE MARKET FOR ORGANIZERS AND PLANNERS. In order to expand and segment our market, we offer our organizers and planners in a broad range of systems, sizes, styles and cover materials and at suggested retail prices ranging from $4 to $150. As a result, our products appeal to a large consumer market comprised of users with differing needs, tastes and budgets and are appropriate for sale through a broad range of retailers. Versatile Day Runner System organizers and planners are suitable for use by adults in virtually all walks of life. Specific target markets addressed by other Day Runner organizers and planners include business and professional people, cost-conscious consumers, young women shopping in the mass market and students from elementary school through college, among others. ENTERING RELATED ORGANIZING PRODUCT CATEGORIES. Day Runner believes that related personal organizing products offer us an opportunity to leverage our brand name and distribution and build upon our heritage in the area of personal organization. Our strategy is to: o Redefine existing product categories as value-added and offer a superior price/value relationship to the consumer. o Create new categories of personal organizing products. o Gain initial distribution through our existing customers. o Produce sales results we can build upon. BUILDING SALES THROUGH MAJOR CUSTOMERS. To reach consumers with differing needs and varying retail shopping habits, we distribute our products in the U.S. through multiple channels, including: o Office products superstores, wholesalers and dealers. o Mass market retailers, including discount department stores, wholesale clubs, drug chains and other mass market retailers. o A wide variety of other customers, including the U.S. Government and book, department, gift, leather and luggage, stationery and other specialty stores. Day Runner's products are carried by more than 20,000 retail outlets in the U.S., including leading retailers in our key office products and mass market channels of distribution. Our strategy is to grow our sales through our major customers by increasing our everyday shelf space where appropriate, continuing to expand our product selection, serving the back-to-school market and creating other seasonal, promotional and product opportunities. PURSUING STRATEGIC ACQUISITIONS AND ALLIANCES. Day Runner believes that acquisitions and other strategic alliances are important to the future growth of the Company. During fiscal 1998, we acquired three companies: Ultima Distribution Inc., our Canadian distributor based in Toronto; Ram Manufacturing, Inc., a developer, manufacturer and marketer of wall boards, headquartered in Little Rock, Arkansas; and Timeposters Inc., a Toronto-based developer, manufacturer and marketer of planning and presentation products, including laminated flexible wall planners. On September 24, 1998, Day Runner announced a cash offer for Filofax Group plc ("Filofax"), a UK-based company traded on the London Stock Exchange. The offer was for (pound)2.00 (approximately US $3.36) per share pursuant to a tender offer for all of the outstanding ordinary shares of stock of Filofax. This offer was not recommended by Filofax's Board of Directors. On September 25, 1998, we announced that the Company had reached agreement with the Board of Directors of Filofax on the terms of a recommended cash tender offer (the "Recommended Offer"). The Recommended Offer was for (pound)2.10 (approximately US $3.53) per share for all of the outstanding ordinary shares of stock of Filofax for a total purchase price for such shares of appoximately (pound)50,300,000 (approximately US $84,500,000). The proposed acquisition of Filofax (the "Proposed Acquisition of Filofax") will be funded by bank debt pursuant to a credit facility Day Runner entered into on September 23, 1998 (see Note 20 to the Consolidated Financial Statements). The Company currently estimates that the aggregate fees and expenses of the Proposed Acquisition of Filofax, including investment banking, legal, accounting and other fees and expenses, will be in the range of $4 to 6 million. Actual total fees and expenses may differ from this estimate and are subject to future contingencies. Filofax is a manufacturer and supplier of stationery products, including Filofax, Lefax and Microfile brand personal organizers. In addition to its core personal organizer business, Filofax markets business forms and high-end pens. Filofax has wholly owned sales subsidiaries in France, Germany, Hong Kong, Scandinavia, the UK and the U.S. and sells primarily through retail distribution channels in each market. Filofax's sales from continuing operations for its fiscal year ended March 31, 1998 were (pound)37,700,000 (approximately US $63,300,000), with 86%, or approximately US $54,600,000, to markets outside the U.S. In this discussion all exchange rate conversions between the U.S. dollar and the UK pound sterling were based on an exchange rate of 1.68, which was the exchange rate on September 23, 1998. The exchange rate between the dollar and the pound sterling is likely to fluctuate, up or down, between such date and the date of any payments to Filofax stockholders. The Company has purchased a call option to partially hedge our exposure to such currency fluctuations. Consummation of Day Runner's Proposed Acquisition of Filofax is subject to, among other things, the acceptance of Filofax's stockholders, regulatory approvals and the satisfaction or waiver of various other conditions. There can be no assurance at this time that the Proposed Acquisition of Filofax will be completed. MARKETING TO INCREASE SALES. We market our products to customers to inform them of the benefits of selling Day Runner's products and to consumers to further build brand name awareness and to maximize the productivity of the retail shelf space our products occupy. EXPANDING FOREIGN SALES. We are working to build our sales outside the United States by focusing on key markets and offering products with features, aesthetics and price points appropriate for those markets. We offer some of our products in French, German and Spanish versions. During fiscal 1998, we launched several product lines designed especially for Europe and for Asia. We completed two acquisitions in Canada in fiscal 1998, purchasing Ultima Distribution Inc., our Canadian distributor, and Timeposters Inc., a manufacturer and marketer of planning and presentation products. These acquisitions are intended to help us further expand our business in Canada. We also established a direct sales and marketing subsidiary in Australia in fiscal 1998. We expect Day Runner's foreign sales to substantially increase if the Proposed Acquisition of Filofax is consummated. In Filofax's most recent fiscal year, 86% of its sales from continuing operations were to markets outside the U.S. There can be no assurance at this time that the Proposed Acquisition of Filofax will be completed. PROVIDING EXCELLENT CUSTOMER SERVICE. Day Runner believes that excellent customer service can provide us with additional competitive advantage. We serve customers from both our Fullerton, California and our Nashville, Tennessee-area distribution centers and ship directly to the individual retail locations of a number of our large customers. We conduct business via EDI (Electronic Data Interchange) with virtually all our key customers and recognize the importance of continuing to implement applicable customer service/distribution technology. Industry Overview Day Runner's roots are in paper-based organizers and planners and their refills, and approximately 80% of our fiscal 1998 sales were generated by this core business. In recent years, we have moved beyond organizers and now market a number of other products that help people become better organized in a variety of ways. ORGANIZERS. Day Runner was instrumental in creating and defining paper-based "organizers" as a product category in the United States. Although time management products that included some "organizer" features had been on the market for some time, the product category, as such, did not emerge until the 1980s. We believe that the introduction of the Day Runner System in 1982 helped define the product category and, ultimately, led to the growth of the organizer industry. By the late 1980s, organizers had become accepted tools for improving individual and group productivity. (Because the distinctions between organizers and planners have become blurred, except where otherwise specified, we are using the terms "organizer" and "planner" interchangeably in this report.) Today, awareness of the organizer product category is widespread; organizers are broadly accepted as substitutes for traditional dated goods; and the usefulness of time management techniques is well recognized. Organizers are sold through a wide variety of channels, including: office products superstores, wholesalers and dealers; mass market retailers; book, department, gift, leather and luggage, stationery and other specialty stores; and are sold direct to organizations, the U.S. Government and individuals. RELATED ORGANIZING PRODUCTS. Product categories Day Runner has entered include telephone/address books, diaries, assignment books and similar products for children, appointment books (also referred to as traditional spiral dated goods), organizing and other wall boards, such as Home Manager(TM); pocket calendars, desk and desk pad calendars, and business accessories, among others. Day Runner sells these products through the same channels as its organizers. In fiscal 1998, we acquired companies that manufacture and market cork boards, white boards and combination boards, laminated wall planners, easels, signage boards and similar planning and presentation products. We group all these products under the umbrella term "related organizing products," but this does not constitute an industry as such. Some of these products are office supplies, and some are school supplies. Others share features and functions with office and/or school supplies but are intended for use in the home. These products are generally marketed through the same channels as organizers. There are many companies, both domestic and foreign, that compete with us, with competition varying from product category to product category. Day Runner believes the current principal competitive factors in the industries in which it participates are distribution breadth, depth and strength; brand name recognition; product development capability; product function, design, perceived quality and value; marketing capability; breadth of product lines; financial resources; customer service; manufacturing/sourcing expertise; and price. MARKET POTENTIAL. Day Runner believes that the appeal of organizers and other personal organizing products in the United States is attributable to a number of economic and cultural trends, including: the increased percentage of women in the work force and the resulting prevalence of two-income families; the continuing trend toward corporate downsizing; the growth of the small business sector; the rising percentage of business done away from the office; the greater emphasis on productivity; the ongoing shift to a service economy; and the trend towards global competition. Many of these trends contribute to widespread concerns with saving and better using time and increasing personal productivity. Day Runner's products address these concerns. We target both potential first-time organizer users and existing users who may need refills or replacements for their organizers. In addition, our expansion into related, non-organizer/planner products that provide other ways for people to become better organized offers us an opportunity to reach consumers who do not use an organizer or planner and to market additional Day Runner branded products to consumers who already use a Day Runner organizer or planner. Our goal is to offer one or more products that appeal to and meet the organizing needs of virtually every American consumer, no matter what that individual's income, occupation or age. INDUSTRIES MARKETING SIMILAR OR SUBSTITUTE PRODUCTS. Day Runner's products have features, functions or components in common with products in several other industries. Our market overlaps to a limited extent that of companies marketing training products and services designed to improve group and individual productivity and to upgrade management skills. In addition, both PIM software and electronic organizers are designed to fill many of the same needs addressed by paper-based organizers, although virtually all PIM software products provide for paper-based output and a number of such products allow users to print out pages in sizes that fit Day Runner's organizers. PRODUCTS Day Runner's products are designed to help people become better organized. We aim our products at various segments of a broad-based consumer audience. Our goal is to help consumers to be "organized for life(TM)" and to offer consumers in each target segment the perception of broad choice and good value for their money. Our products include: o Multiple lines of paper-based organizers and planners. o Refills, which include calendars and accessories. o Related organizing products. ORGANIZERS AND PLANNERS. Our organizers and planners are available in varying systems, sizes, styles, cover materials and colors and at a broad range of price points. These loose-leaf and spiral-bound portable "books" help users keep "Everything in One Place(TM)." For example, in addition to the traditional planner components of appointment calendar, telephone/address section and note pad, Day Runner System organizers include, among other things, interrelated pages for managing time and information, tracking expenses, establishing goals and planning projects. REFILLS. The great majority of our organizers, planners and telephone/address books are refillable. Users may customize their loose-leaf organizers and planners by choosing from a variety of additional pages and accessories, ranging from Mileage Record, Strategy and Things To Do pages to Currency/Checkbook Insert, Diskette Holders and a solar powered Calculator/Ruler. RELATED ORGANIZING PRODUCTS. Our related organizing products include telephone/address books, appointment books, products for students from elementary school through college, business accessories, organizing and other wall boards and PIM software designed to complement our paper-based organizers, among others. For a complete list, see the breakdown of current products below. The following table sets forth, for the periods indicated, approximate Day Runner sales by product category and as a percentage of total sales.
Fiscal Fiscal Fiscal Products 1998 1997 1996 -------- ----------------- ------------------- ------------------- (Unaudited; dollars in thousands) Organizers and planners. $ 83,069 49.5% $ 73,858 58.0% $ 77,293 61.8% Refills................. 51,876 30.9 43,264 34.0 43,473 34.7 Related organizing products 32,896 19.6 10,254 8.0 4,360 3.5 -------- ----- -------- ------ --------- ------ Total............. $167,841 100.0% $127,376 100.0% $125,126 100.0% ======== ===== ======== ====== ========== ======
Covers for Day Runner's organizers, planners and paper-based related organizing products are made of leathers, vinyls and a variety of other natural and man-made materials. In addition to holding loose-leaf or spiral-bound pages, the covers of most of our organizers and loose-leaf planners are also designed to hold note pads and many have additional features, such as places to store pens, business and credit cards, calculators, loose papers and spare keys. The following table sets forth basic price and other information concerning the products we market in the United States.
Current Suggested Current Products Retail Price(s) Organizers and planners: $4-150 Day Runner DILBERT(TM) FactCentre(TM) THE FAR SIDE(R) 4-1-1 Student Planners(TM) Looney Tunes(TM Mickey Unlimited(TM) Perennials(TM) PRO Business System(R) Refills (which include calendars, other pages and accessories) $0.75-40 Current Suggested Current Products Retail Price(s) Related organizing products: Assignment books: $3-9.50 4-1-1 Mickey Unlimited Mickey For Kids(TM) Business accessories $4-50 Telephone/address books: $6-24 Day Runner DILBERT FactCentre Looney Tunes Perennials Mickey For Kids Mickey Unlimited Appointment books $4.30-35.75 Software and electronics: Day Runner PC $17 Day Runner Planner for Windows(R)95 $75 Electronic Teleplanner $30-40 Pocket Calendars: $5-8 DILBERT Looney Tunes Perennials Wall Boards $3.75-$650 Core boards Wipe-Out(R) Timeposters(R) Planning boards Flexible planners Timeposters Organizing boards Home Manager(TM) Business Manager(TM) Cubicle Manager(TM) Message Manager(TM) org.board(TM) Looney Tunes DILBERT Other: Mickey For Kids Sticker Books $6.50-10.50 Mickey For Kids Diaries $10-26 Day Runner, PRO Business System, Timeposters and Wipe-Out are registered trademarks, and Business Manager, Cubicle Manager, Entrepreneur, Everything in One Place, FactCentre, 4-1-1, Home Manager, Message Manager, org.board and Perennials are trademarks of Day Runner, Inc. DILBERT(C) is a trademark of United Feature Syndicate, Inc. Mickey For Kids and Mickey Unlimited are trademarks of Disney. THE FAR SIDE is a registered trademark of FarWorks, Inc. LOONEY TUNES characters, names and all related indicia are trademarks of Warner Bros. Post-it(R) is a registered trademark of 3M. Windows is a registered trademark of Microsoft Corporation.
PRODUCT DEVELOPMENT Day Runner's product development programs emphasize (i) identifying unmet consumer needs and developing organizers, planners and related organizing products to meet those needs; (ii) extending our existing product lines through additional sizes, styles and materials; and (iii) augmenting the selection of refills and accessories available for our product lines. In addition, we monitor our existing products for continued viability, needed enhancements, improvements in quality and potential reductions in cost. With the exception of our software product and the calculators we include in certain of our products and sell as accessories, all of our current products have been developed internally. Internally developed products accounted for substantially all of Day Runner's fiscal 1998 sales. The products of Ram Manufacturing and Timeposters Inc., companies we acquired during fiscal 1998, were also developed by those companies. Since the introduction of the first Day Runner System organizer in 1982, we have transformed this single product into a broad line. Our products are available in a variety of sizes, styles and materials, designed to appeal to a broad spectrum of consumers and at a wide range of price points. We offer organizers that appeal to students from elementary school through college, business professionals and people working at home. Our product introductions reflect our focus on market segmentation and consumer needs. In 1991, as part of our strategy of offering products aimed at more cost-conscious consumers, we introduced the FactCentre line, which now includes organizers, planners and telephone/address books. In 1993, we introduced the PRO Business System organizer, aimed at people seeking a sophisticated but easy-to-use organizing system that is designed specifically for business and professional use. In short fiscal 1994 (effective January 1, 1994, the Company changed its fiscal year end from December 31 to June 30, resulting in a short fiscal year), we began shipping 4-1-1 Student Planners, a line aimed at middle school, high school and college students and marketed primarily for sale during the back-to-school consumer buying season. In fiscal 1995, we added telephone/address books to our Day Runner and FactCentre lines and launched Perennials, a line of organizers, planners and telephone/address books aimed primarily at young women shopping in mass market outlets. In fiscal 1996, we launched our first licensed products: a line of planners and telephone/address books featuring Warner Bros. Looney Tunes cartoon characters and a line of "sticker books" and "sticker diaries" developed and marketed under the Mickey Unlimited brand of Disney Enterprises. The Mickey Unlimited Sticker Books and Diaries incorporate colorful stickers to make planning and diary-keeping fun. We also introduced a line of appointment books designed for consumers who prefer traditional planning tools. In fiscal 1997, we introduced THE FAR SIDE organizers featuring the classic cartoons created by Gary Larson, a line of business accessories, including travel document holders, business card cases, business card files and pad holders, and the Home Manager, a unique product that builds upon the American family's habit of using the refrigerator door as a communication center. The Home Manager combines a dry-erase board, bulletin board strip or storage pocket, Post-it(R) notes in a holder and a dated monthly calendar and mounts on a refrigerator via heavy-duty magnetic backing or on a wall with hooks. In fiscal 1998, we began shipment of a line of DILBERT organizers, refills, telephone/address books and pocket calendars. Building on the success of Home Manager, we extended our line of organizing wall boards to include Business Manager, Cubicle Manager and Message Manager, designed for business professionals and office workers. We expanded our selection of everyday student products, introducing additional accessories like calculator/rulers and binder accessories. Also in fiscal 1998, we introduced Day Runner PC Software, consisting of three value-priced software modules that allow users to create and update telephone/address directories, notes and calendars on the PC. We also introduced Day Runner Planner for Windows 95 software, a more complex software program for updating organizer information on-line, for Windows users. Both software offerings were developed under our direction. Users of our software can print out updated pages on paper compatible with Day Runner organizers. SALES AND DISTRIBUTION We market our products to customers through our own sales force, through manufacturers' representatives and, in certain markets outside the U.S., through independent distributors. Our primary domestic channels of distribution are office products and the mass market. Day Runner's products are carried by more than 20,000 retail stores across the U.S. Our sales policies encourage smaller customers to purchase through wholesalers. In fiscal 1998, we shipped directly to approximately 9,500 retail locations, to distribution centers serving approximately 9,700 retail locations and to approximately 200 wholesalers, each of which serves a number of dealers. During fiscal 1998 and 1997, Day Runner sold products to approximately 700 different customers. The only customers accounting for 10% or more of the Company's fiscal 1998 sales were Wal-Mart Stores, Inc. and its affiliates, including Sam's Clubs; Office Depot, Inc. and its affiliates; Staples, Inc. and its affiliates; and OfficeMax, Inc. and its affiliates. These customers accounted for approximately 28%, 16%, 15% and 14%, respectively, of fiscal 1998 sales. Including their affiliates, the top five customers of the Company accounted for an aggregate of approximately 80% of fiscal 1998 sales. The following table sets forth, for the periods indicated, approximate Day Runner sales by distribution channel and as a percentage of total sales.
Fiscal Fiscal Fiscal Distribution Channel 1998 1997 1996 -------------------- ------------------ ------------------- ----------------- (Unaudited; dollars in thousands) Office products channel. $ 79,303 47.2% $ 59,416 46.7% $ 62,381 49.8% Mass market............. 65,752 39.2 53,785 42.2 46,804 37.4 Foreign customers....... 12,182 7.3 5,583 4.4 6,346 5.1 Other channels.......... 10,604 6.3 8,592 6.7 9,595 7.7 -------- ----- -------- ------ -------- ------ Total............. $167,841 100.0% $127,376 100.0% $125,126 100.0% ======== ===== ======== ====== ======== ======
OFFICE PRODUCTS CHANNEL. Since 1987, Day Runner products have been broadly distributed through the office products channel. While sales to the office products superstores have become increasingly significant, we continue to sell our products to office products wholesalers and dealers. OFFICE PRODUCTS SUPERSTORES. Since their emergence in 1986, office products superstores offering discount prices in a warehouse atmosphere have become a major factor in office products distribution. Our products are carried by all the leading superstores, including Office Depot, Inc., Staples, Inc. and OfficeMax, Inc. OFFICE PRODUCTS WHOLESALERS. Day Runner products are currently distributed by local and regional office products wholesalers and by both national wholesalers, S.P. Richards Company and United Stationers Supply Co., which reach office products consumers through dealers nationwide. OFFICE PRODUCTS DEALERS. Our products are also distributed through traditional office products dealers, which buy directly from manufacturers and indirectly through wholesalers. These customers include both storefront dealers and contract stationers (also known as commercial dealers) that specialize in selling to larger businesses through catalogs and their direct sales forces. MASS MARKET. Discount chains addressing the mass market have become an increasingly important factor in the distribution of a wide variety of consumer goods. Day Runner products are distributed through a number of mass market retailers, including: Wal-mart, Kmart, and Target; the major wholesale clubs, Sam's Clubs and Costco Companies, Inc.; a number of discount drug chains, including CVS Corp., Rite Aid Corp., and Eckerd Drug; and a variety of other mass market resellers. FOREIGN CUSTOMERS. Day Runner products are marketed internationally through Day Runner Australia Limited, Day Runner Hong Kong Limited, Day Runner International Limited, and Ultima Distribution Inc. (the Company's wholly owned Australian, Hong Kong, United Kingdom and Canadian subsidiaries), independent foreign distributors and our own sales force. The United Kingdom and key markets on the European continent are served by Day Runner International; Asian and Pacific Rim markets are served by Day Runner Hong Kong Limited and Day Runner Australia; Canada is served by Ultima; and Mexico is served by Day Runner's U.S.-based sales force. If the Proposed Acquisition of Filofax is completed, we may market current Day Runner products through Filofax's distribution system in countries in Europe and Asia. There can be no assurance at this time that the Proposed Acquisition of Filofax will be completed. OTHER CHANNELS. The Company also distributes its products through a number of additional channels, including book, department, gift, leather and luggage and stationery stores and other specialty retailers. Since March 1989, Day Runner has held a General Services Administration ("GSA") contract, which extends through February 2002 and which allows the Company to market certain of its products to the U.S. Government. MARKETING We market our products to consumers to increase awareness of the Day Runner brand name and of specific products, to communicate the benefits of our products and to create and reinforce an image that our products enable the user to manage time and personal resources more effectively. Our packaging, merchandising and promotions are designed to appeal to the consumer on the retail floor. We position Day Runner to our distribution channels as the leader in the retail organizer market and the logical source for organizers, planners and related organizing products at a wide range of price points and appropriate for a wide range of broad consumer markets. PROMOTIONAL PROGRAMS. Day Runner offers special promotional and incentive programs as part of our introduction of new products and to build sales at specific times of the year; conducts promotions designed to build awareness, expand distribution and increase sales of specific products; and conducts sales incentive programs for wholesalers, dealers and manufacturers' representatives. ADVERTISING AND PUBLIC RELATIONS. Day Runner participates with customers in co-op advertising and advertises from time to time in certain wholesale flyers and in trade publications. In addition, from time to time, we conduct consumer advertising campaigns, primarily in business and lifestyle magazines. Public relations campaigns, focused on trade and consumer publications, is another important element in our marketing strategy. SALES SUPPORT. We support our retailers with point-of-sale materials developed based upon research and intended to build brand name awareness and increase sales. Day Runner displays are designed to be easy for consumers to shop and for store personnel to refill. Our packaging is designed to help consumers choose the right product and make the decision to buy. TRADE SHOWS. Day Runner exhibits or is represented by manufacturers' representatives in a number of national and regional trade shows aimed at office products, mass market and other customers. MARKET RESEARCH. We regularly conduct market research and test product concepts and prototypes through the use of focus groups and other consumer research. In addition, we maintain a database containing information on users who have mailed in the Welcome Cards included in many of our products. USER SUPPORT. We estimate that we have sold approximately 38 million organizers and planners since our inception. To encourage our current users to continue to purchase and recommend our products and their refills, we provide a toll-free consumer hotline that consumers may call for referral to conveniently located dealers or dealers that carry specific refills or accessories, for customer service, to contribute suggestions and to purchase products directly from Day Runner. We make such sales primarily as a service to our users and charge consumers full suggested retail price plus handling and shipping. Although Day Runner products require no special training, we provide a free user's guide in each of our two most sophisticated organizers. Each Day Runner System and PRO Business System organizer includes an "Owner's Manual." Each of these booklets includes illustrations showing effective use of the system and of specific pages as well as tips on time management, project management and organization. MANUFACTURING Day Runner's manufacturing strategy combines internal manufacturing with the domestic and foreign subcontracting of product components and finished goods. Our policy is to develop and maintain at least two sources for key raw materials, product components and the finished products we subcontract. Although we rely on foreign subcontractors for adequate capacity, we have the ability to act as our own second or third source for the manufacture of our loose-leaf binders and for the final assembly of many of our products. This provides a degree of protection against vendor problems and, under certain conditions, allows us to respond to higher than anticipated demand and improve turn-around time. INTERNAL MANUFACTURING. We manufacture a portion of our binders and assemble a portion of our finished products in our Fullerton, California facility and at Day Runner de Mexico, S.A. de C.V., our wholly owned manufacturing subsidiary located in Tijuana. Wall boards are manufactured at our facilities in Little Rock, Arkansas and Toronto, Canada. PURCHASED COMPONENTS. In addition to vinyl and leather raw materials, we purchase from suppliers certain major product components, including printed pages, loose-leaf rings, pens, software disks containing our PIM software, electronic components and certain accessories. With few exceptions, these items are manufactured by a variety of outside contractors and are available both domestically and overseas. SUBCONTRACTED FINISHED GOODS. We subcontract the manufacture and assembly of a portion of our finished products, including the great majority of our lower priced organizers, planners and related products. Day Runner Hong Kong Limited acts as our liaison with our Asian suppliers. COMPETITION The product categories in which Day Runner participates are competitive and subject to rapid change. Day Runner competes directly with other companies marketing paper-based organizers and planners, appointment books, calendars, wall boards, laminated wall planners and business accessories to consumers through retail channels and indirectly with companies marketing such products through mail order or via other means. Our competitors also include companies marketing substitutes for paper-based organizer and planner products, such as electronic organizers and PIM software, and we compete for the same target market with companies marketing organizers and/or organizers coupled with time management training via direct sales to individuals and to organizations. The companies with which Day Runner competes vary by product category. Each product category is competitive and subject to rapid change, and none of the lists of competitors provided here are intended to be all inclusive. Our competitors in personal organizers/planners include At-A-Glance(R), Day-Timer(R), Filofax(R), FranklinCovey(TM), Mead, many leather goods manufacturers and a number of companies manufacturing inexpensive, non-branded organizers overseas for sale in the United States. (If the Proposed Acquisition of Filofax is completed, Filofax will, of course, cease to be a competitor; however, there can be no assurance at this time that the Proposed Acquisition of Filofax will be completed.) Competitors in telephone/address books include At-A-Glance, E-Z Record, Stuart Hall(R) and a number of companies marketing inexpensive imported products. Companies marketing appointment books and calendars include At-A-Glance, House of Doolittle(R), Southworth(TM), Visual Organizer and many printers producing inexpensive calendars for use in advertising promotion. A number of calendar companies also produce laminated wall planners. Business accessories are marketed by Day-Timer, Hazel(R), and many leather goods manufacturers. Wall board manufacturers include Baker(R), Boone(R) Boards, Quartet(R), Rose Art, Sanford(R) and Stempel. Day Runner believes the current principal competitive factors in the product categories in which we participate are distribution breadth, depth and strength; brand name recognition; product development capability; product function, design, perceived quality and value; marketing capability; breadth of product lines; financial resources; customer service; manufacturing/sourcing expertise; and price. In the organizer/planner category, the size and loyalty of a company's user base is also a key factor. Although a number of our competitors have greater financial resources than Day Runner, we believe that we compete well against our direct competition on each of the other principal competitive factors and against certain of our direct competition with respect to our financial strength. We believe that Day Runner has a number of competitive advantages. Our products occupy significant shelf space in the office products and mass market channels. Our leadership position in the retail organizer/planner market, brand name recognition, ability to develop new products, broad product lines, marketing expertise, manufacturing/sourcing skill, large user base and the appeal of our products to consumers have been competitive advantages for us in these channels and in certain other channels. There can be no assurance, however, that we will be able to maintain or continue to benefit from our competitive advantages or that the competitive environment will not change to our detriment. EMPLOYEES At September 3, 1998, Day Runner had 1,298 full-time employees, including 71 in sales; 37 in marketing; 123 in executive, finance and administration; 31 in product development; and 1,036 in manufacturing operations and distribution. None of our employees is represented by a labor union, and we have experienced no labor-related work stoppages. PATENTS, COPYRIGHTS AND TRADEMARKS Day Runner relies upon, among other things, a combination of copyright, patent and trademark laws to protect our rights to certain aspects of our products. There can be no assurance, however, that the steps taken by Day Runner to protect our proprietary rights will be adequate to prevent imitation of our products or independent development by others of similar products. Day Runner holds fourteen United States patents and sixteen foreign patents. The Company also has several United States and foreign patents pending. The patents we hold are related to improvements in the structure of and devices associated with our loose-leaf binders and related organizing products, and we do not believe that any of these patents is material to our business. We have also been issued United States copyright registrations covering the text and the compilation and editing of data in certain of our material products. Day Runner holds United States trademark registrations for "Day Runner," "MEMO-RY," "PRO Business System," "Running Mate," "Timeposters," "Wipe-Out," and the Day Runner logo and we have obtained certain state and foreign registrations for certain of our trademarks. Item 2. PROPERTIES. Day Runner's principal operating facility is located in an approximately 221,000-square foot building in Fullerton, California, under leases expiring in 2001. The leases include multiple, successive renewal options that, if exercised in full, would extend the lease terms to expire in 2011. The Company's corporate headquarters occupy approximately 21,300-square feet in Irvine, California under a lease that expires in August 2001. The Company's LaVergne, Tennessee distribution facility occupies an approximately 101,200-square foot facility under a lease expiring in 2005. The lease includes multiple, successive renewal options that, if exercised in full, would extend the lease terms to expire in 2011. The Company's Little Rock, Arkansas manufacturing facility occupies an approximately 114,000-square foot facility under a lease expiring in 2002. The Company Canadian subsidiary occupies an approximately 40,200-square foot facility under a lease expiring in 2008. The Company's Mexican subsidiary operates in approximately 54,860 square feet in four buildings under separate leases expiring in 1999. The Company currently has under construction a 70,000 square foot building to replace the currently leased buildings. The new building lease will expire in 2006 and includes options to extend the terms. The Company's Hong Kong subsidiary occupies an approximately 1,200-square foot facility under a lease expiring in June 2000 and the Company's Canadian subsidiary occupies an approximately 40,000-square foot facility under a lease expiring in 2008. The Company believes it has sufficient space in its facilities or will be able to lease additional space on acceptable terms to meet its needs for the foreseeable future. Item 3. LEGAL PROCEEDINGS. Inapplicable. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Inapplicable. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Day Runner's Common Stock is traded over-the-counter on The Nasdaq Stock Market under the symbol "DAYR." The table below shows the high and low closing sales prices for the Common Stock as reported on The Nasdaq Stock Market for the fiscal years ended June 30, 1998 and 1997. As of September 16, 1998, there were 189 recordholders of the Company's Common Stock based on information provided by the Company's transfer agent. Fiscal Year Fiscal Year 1998 1997 ---------------- ------------------ Quarter High Low High Low -------- ---------------- ------------------ First $19-1/2 $16-1/4 $15 $12-3/4 Second 21-1/16 18 15-1/2 9-3/8 Third 23-1/16 18-7/16 13 8-15/16 Fourth 25-1/4 18-1/8 16-3/4 12-9/16 The Company has never paid cash dividends. It is the present policy of the Company to retain earnings to finance the growth and development of its business, and therefore the Company does not anticipate paying cash dividends on its Common Stock in the foreseeable future. Certain financial covenants in the Company's bank line of credit agreement restrict the Company's ability to pay cash dividends in excess of $200,000. Item 6. SELECTED FINANCIAL DATA. The selected consolidated income statement data for the fiscal years ended June 30, 1998, 1997 and 1996 and the consolidated balance sheet data at June 30, 1998 and 1997 are derived from, and are qualified in their entirety by reference to, the Company's audited consolidated financial statements and notes thereto included elsewhere in this Annual Report that have been audited by Deloitte & Touche LLP, independent auditors, as indicated in their report, which is also included elsewhere in this Annual Report. Information for the twelve months ended June 30, 1994 is unaudited, and in the opinion of the Company's management, the accounting principles used to prepare the unaudited financial information are consistent with those used to prepare the audited financial statements. The selected consolidated income statement data for the fiscal year ended June 30, 1995, short fiscal year ended June 30, 1994 and the year ended December 31, 1993 and the consolidated balance sheet data at June 30, 1996, 1995 and 1994 are derived from audited consolidated financial statements of the Company that are not included herein. Effective January 1, 1994, the Company changed its fiscal year end from December 31 to June 30. The six-month period ended June 30, 1994 is therefore referred to as "short fiscal year 1994."
Consolidated Income Statement Data: (In thousands, except per share data) Twelve Months Short Year Ended Fiscal Ended Fiscal Year December 31, ---------------------------------------------------------------------------------------- 1998 1997 1996 1995 June 30, 1994 1994 1993 ------- ------- ------- -------- ------------- ---------- ---------- Net sales....................... $167,841 $127,376 $125,126 $121,801 $ 97,027 $ 43,160 $81,892 Cost of goods sold.............. 80,663 60,452 59,920 62,175 50,405 22,981 41,699 ------- ------- ------- -------- -------- -------- ------- Gross profit.................... 87,178 66,924 65,206 59,626 46,622 20,179 40,193 ------- ------- ------- -------- -------- -------- ------- Operating expenses: Selling, marketing and distribution................ 43,193 31,673 29,878 32,154 25,180 12,156 21,786 General and administrative... 18,416 14,451 16,376 13,792 11,400 5,686 9,479 Costs incurred in pursuing acquisitions................ 1,451 ------- ------- ------- -------- -------- -------- ------- Total operating expenses..... 61,609 47,575 46,254 45,946 36,580 17,842 31,265 ------- ------- ------- -------- -------- -------- ------- Income from operations.......... 25,569 19,349 18,952 13,680 10,042 2,337 8,928 Net interest (income)........... (172) (1,301) (706) (161) (88) (91) ------- ------- ------- -------- -------- -------- ------- Income before provision for income taxes, extraordinary item and cumulative effect of accounting change............ 25,741 20,650 19,658 13,841 10,130 2,428 8,928 Provision for income taxes...... 9,833 8,102 7,840 5,863 4,196 1,061 3,638 ------- ------- ------- -------- -------- -------- ------- Income before extraordinary item and cumulative effect of accounting change............ 15,908 12,548 11,818 7,978 5,934 1,367 5,290 Extraordinary item litigation settlement - net............ 718 718 Cumulative effect of change in accounting for income taxes.. 350 ------- ------- ------- -------- -------- -------- ------- Net income...................... $15,908 $12,548 $11,818 $ 7,978 $ 6,652 $ 2,085 $ 5,640 ======= ======= ======= ======== ======== ======== ======= Earnings per common share: Basic......................... $ 1.38 $ 1.01 $ 0.95 $ 0.66 $ 0.57 $ 0.17 $ 0.50 ======== ======== ======== ======== ======= ========= ======= Diluted....................... $ 1.27 $ 0.95 $ 0.89 $ 0.63 $ 0.54 $ 0.17 $ 0.47 ======== ======== ======== ======== ======= ========= ======= Weighted average number of common shares outstanding: Basic......................... 11,533 12,432 12,468 12,176 11,731 11,956 11,276 ======== ======== ========= ========= ======== ======== ======= Diluted....................... 12,523 13,182 13,252 12,748 12,370 12,616 12,130 ======== ======== ========= ========= ======== ======== ======= (1) Information for the twelve months ended June 30, 1994 is provided on an unaudited basis for comparison purposes only.
Consolidated Balance Sheet Data: (In thousands) June 30, 1998 1997 1996 1995 1994 ------------ ------------ ------------ ------------- ---------- Working capital............. $ 57,975 $ 50,710 $ 51,653 $ 38,260 $ 30,581 Total assets................ 101,179 78,880 77,931 63,650 50,769 Short-term debt............. 2,749 475 152 200 Long-term liabilities....... 53 52 12 141 Stockholders' equity........ 74,532 59,484 59,498 44,787 35,786
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion should be read in conjunction with, and is qualified in its entirety by, the Consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report. Historical results and percentage relationships among any amounts included in the Consolidated Financial Statements are not necessarily indicative of trends in operating results for any future period. OVERVIEW 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. The Company focuses the great majority of its product development, sales and marketing efforts on the office products and the mass market channels. The office products channel and the mass market channel accounted for 47.2% and 39.2%, respectively, of fiscal 1998 sales. RESULTS OF OPERATIONS The following tables set forth, for the periods indicated, the percentages that selected income statement items bear to sales and the percentage change in the dollar amounts of such items.
Percentage of Sales Years Ended June 30, 1998 1997 1996 --------- -------- ------- Net sales.................................... 100.0% 100.0% 100.0% Cost of goods sold........................... 48.1 47.5 47.9 ------ ----- ----- Gross profit................................. 51.9 52.5 52.1 ------ ----- ----- Operating expenses: Selling, marketing and distribution....... 25.7 24.9 23.9 General and administrative................ 11.0 11.3 13.1 Costs incurred in pursuing acquisitions... 1.1 ----- ----- Total operating expenses................. 36.7 37.3 37.0 ------ ----- ----- Income from operations....................... 15.2 15.2 15.1 Net interest income.......................... 0.1 1.0 0.6 ------ ----- ----- Income before provision for income taxes..... 15.3 16.2 15.7 Provision for income taxes................... 5.8 6.3 6.3 ------ ----- ----- Net income................................... 9.5% 9.9 % 9.4% ====== ===== =====
Percentage Change Fiscal 1997 Fiscal 1996 to to Fiscal 1998 Fiscal 1997 -------------------- ----------------- Net sales......................................... 31.8% 1.8% Cost of goods sold................................ 33.4 0.9 Gross profit...................................... 30.3 2.6 Operating expenses: Selling, marketing and distribution............ 36.4 6.0 General and administrative..................... 27.4 (11.8) Costs incurred in pursuing acquisitions........ (100.0) NM Total operating expenses...................... 29.5 2.9 Income from operations............................ 32.1 2.1 Net interest income............................... (86.8) 84.3 Income before provision for income taxes.......... 24.7 5.0 Provision for income taxes........................ 21.4 3.3 Net income........................................ 26.8 6.2
FISCAL YEAR ENDED JUNE 30, 1998 COMPARED WITH FISCAL YEAR ENDED JUNE 30, 1997 NET SALES. Net sales consist of revenues from gross product shipments net of allowances for returns, rebates and credits. In fiscal 1998, sales increased by $40,465,000, or 31.8%, compared with fiscal 1997 primarily because of higher unit sales of related organizing products. Product sales were primarily to the office products channel and secondarily to mass market customers. Sales to the office products channel increased by $19,887,000, or 33.5%; sales to mass market customers grew by $11,967,000, or 22.2%; sales to foreign customers grew by $6,599,000, or 118.2%; and sales to miscellaneous customers grouped together as "other," grew by $2,012,000, or 23.4%. Sales of related organizing products increased by $22,642,000, or 220.8%; sales of organizers and planners increased during the year by $9,211,000, or 12.5%; and sales of refills increased by $8,612,000, or 19.9%. 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. Gross profit as a percentage of sales decreased from 52.5% in fiscal 1997 to 51.9% in fiscal 1998 primarily because the gross profit levels of certain of the Company's smaller operations are lower as a percentage of sales than those of the parent company. OPERATING EXPENSES. Total operating expenses increased by $14,034,000, or 29.5%, for fiscal 1998 compared with fiscal 1997 but decreased as a percentage of net sales from 37.3% to 36.7% primarily because operating expenses for fiscal 1997 included $1,451,000 of costs incurred in pursuing acquisitions that did not come to fruition. No such costs were incurred in fiscal 1998. Excluding the fiscal 1997 costs of pursuing acquisitions, total operating expenses would have grown by $15,485,000, or 33.6%, and increased as a percentage of net sales from 36.2% to 36.7%. Primarily because of expenses associated with new and recently introduced products, selling, marketing and distribution expenses increased by $11,520,000 and from 24.9% to 25.7% as a percentage of net sales. General and administrative expenses increased by $3,965,000, but declined from 11.3% to 11.0% as a percentage of net sales primarily because of the Company's increased ability to absorb fixed costs as a result of higher sales. NET INTEREST INCOME. Primarily because of a decrease in the Company's cash available for short-term investment resulting from the Company's repurchase of common stock, net interest income in fiscal 1998 compared with fiscal 1997 decreased by $1,129,000 and by 0.9% as a percentage of net sales. INCOME TAXES. Primarily as a result of state tax planning and secondarily the continued growth of the Company's Hong Kong subsidiary, the Company's fiscal 1998 effective tax rate was 38.2%, compared with 39.2% for fiscal 1997. NET INCOME. Compared with fiscal 1997, net income for fiscal 1998 increased by $3,360,000, or 26.8%. Excluding the fiscal 1997 costs incurred in pursuing acquisitions, fiscal 1998 net income would have grown $2,471,000 or 18.4%, compared with fiscal 1997. EARNINGS PER SHARE. In fiscal 1998, the Company repurchased an aggregate of 695,588 shares from certain officers and directors of the Company. Separately, during fiscal 1997, the Company repurchased 1,026,200 shares of Common Stock under the Company's stock repurchase program. These repurchases reduced the number of shares that would otherwise have been used to calculate earnings per share. Subsequent to fiscal year end 1998, the Company repurchased an additional 76,000 shares of Common Stock under its stock repurchase program (see Note 13 to Consolidated Financial Statements). FISCAL YEAR ENDED JUNE 30, 1997 COMPARED WITH FISCAL YEAR ENDED JUNE 30, 1996 NET SALES. In fiscal 1997, net sales increased by $2,250,000, or 1.8%, compared with fiscal 1996 primarily because of higher unit sales of related organizing products. Product sales were primarily to the office products channel and secondarily to mass market customers. Sales to mass market customers grew by $6,981,000, or 14.9%, primarily due to higher sales to Wal-Mart. Sales to the office products channel decreased by $2,965,000, or 4.8%. Sales to foreign customers declined by $763,000, or 12.0%, and sales to miscellaneous customers grouped together as "other," decreased by $1,003,000, or 10.5%. Sales of related organizing products increased by $5,894,000, or 135.2%. Sales of organizers and planners decreased during the year by $3,435,000, or 4.4%, and sales of refills decreased by $209,000, or 0.5%. GROSS PROFIT. Primarily because of improved purchasing efficiencies, gross profit as a percentage of sales increased to 52.5% for fiscal 1997 from 52.1% for fiscal 1996. OPERATING EXPENSES. Total operating expenses increased by $1,321,000, or 2.9%, for fiscal 1997 compared with fiscal 1996 and increased as a percentage of net sales from 37.0% to 37.3% primarily because of $1,451,000 of costs incurred in pursuing two significant acquisitions that did not come to fruition. These costs included legal and accounting fees and miscellaneous expenses. Without such costs, operating expenses for fiscal 1997 compared with fiscal 1996 would have declined by $130,000 and would have decreased as a percentage of net sales from 37.0% to 36.2%. Selling, marketing and distribution expenses as a percentage of net sales increased from 23.9% to 24.9% primarily because of increased display costs. General and administrative expenses as a percentage of net sales decreased from 13.1% to 11.3% primarily because of lower personnel costs. NET INTEREST INCOME. Primarily because of the Company's higher levels of cash available for short-term investment during the year, net interest income in fiscal 1997 compared with fiscal 1996 increased by $595,000 and by 0.4% as a percentage of net sales. INCOME TAXES. Primarily as a result of the improved financial results of the Company's Hong Kong subsidiary, the Company's fiscal 1997 effective tax rate was 39.2%, compared with 39.9% for fiscal 1996. Prior to fiscal 1996, the operating losses incurred by the Company's United Kingdom and Hong Kong subsidiaries, which were formed in 1993 and 1994, respectively, and the tax treatment required for these losses had increased the Company's effective tax rate above what it otherwise would have been. NET INCOME. Compared with fiscal 1996, net income for fiscal 1997 increased by $730,000, or 6.2%. Without the costs of pursuing acquisitions, fiscal 1997 net income would have grown $1,619,000 or 13.7%, compared with fiscal 1996. QUARTERLY RESULTS The following tables set forth selected unaudited quarterly consolidated financial data and the percentages such items represent of sales. The quarterly consolidated financial data reflect, in the opinion of Management of the Company, all adjustments (which include only normal recurring adjustments) necessary to present fairly the results of operations for such periods. Results of any one or more quarters are not necessarily indicative of annual results or continuing trends.
Quarters Ended -------------- June 30, March 31, December 31, September 30, 1998 1998 1997 1997 --------------- ------------------ ---------------- ---------------- (In thousands, except per share amounts) Net sales........................... $ 50,927 100.0% $ 29,388 100.0% $ 49,388 100.0% $ 38,138 100.0% Gross profit........................ 26,057 51.2 15,253 51.9 25,762 52.2 20,106 52.7 Total operating expenses............ 18,392 36.1 13,474 45.8 16,677 33.8 13,066 34.3 Income from operations.............. 7,665 15.1 1,779 6.1 9,085 18.4 7,040 18.4 Net interest (income) expense....... (123) (0.2) 16 0.1 30 0.1 (95) (0.3) Income before provision for income taxes..................... 7,788 15.3 1,763 6.0 9,055 18.3 7,135 18.7 Net income.......................... $ 4,957 9.7 $ 1,075 3.7 $ 5,524 11.2 $ 4,352 11.4 Earnings per common share: Basic.......................... $ 0.42 $ 0.09 $ 0.49 $ 0.38 Diluted........................ $ 0.39 $ 0.09 $ 0.45 $ 0.35 Weighted average number of common shares outstanding: Basic.......................... 11,776 11,571 11,273 11,513 Diluted........................ 12,695 12,520 12,323 12,511
Quarters Ended -------------- June 30, March 31, December 31, September 30, 1997 1997 1996 1996 ------------------- ----------------- ----------------- ----------------- (In thousands, except per share amounts) Net sales........................... $ 37,793 100.0% $ 21,020 100.0% $ 35,014 100.0% $ 33,549 100.0% Gross profit........................ 19,803 52.4 11,024 52.4 18,512 52.9 17,585 52.4 Total operating expenses............ 13,613 36.0 11,272 53.6 11,308 32.3 11,382 33.9 Income (loss) from operations....... 6,190 16.4 (248) (1.2) 7,204 20.6 6,203 18.5 Net interest (income)............... (443) (1.1) (345) (1.7) (303) (0.9) (210) (0.6) Income before provision for income taxes..................... 6,633 17.5 97 0.5 7,507 21.5 6,413 19.1 Net income.......................... $ 4,138 10.9 $ 58 0.3 $ 4,504 12.9 $ 3,848 11.5 Earnings per common share: Basic.......................... $ 0.35 $ 0.00 $ 0.36 $ 0.30 Diluted........................ $ 0.33 $ 0.00 $ 0.34 $ 0.29 Weighted average number of common shares outstanding: Basic.......................... 11,831 12,603 12,663 12,635 Diluted........................ 12,666 13,229 13,398 13,448
SEASONAL FLUCTUATIONS The Company has historically experienced and expects to continue to experience significant seasonal fluctuations in its sales and other financial results that it believes have resulted and will continue to result primarily from its customers' and users' buying patterns. These buying patterns have typically adversely affected orders for the Company's products in the third quarter of each fiscal year. Although it is difficult to predict the future seasonality of sales, the Company believes that future seasonality should be influenced at least in part by customer and user buying patterns similar to those that have historically affected the Company. Quarterly financial results are also affected by new product introductions and line extensions, the timing of large orders, changes in product sales or customer mix, vendor and customer pricing, production levels, supply and manufacturing delays, large customers' inventory management and general industry and economic conditions. The seasonality of the Company's financial results and the unpredictability of the factors affecting such seasonality make the Company's quarterly and yearly financial results difficult to predict and subject to significant fluctuation. LIQUIDITY AND CAPITAL RESOURCES During fiscal 1998, the Company financed its operating cash needs primarily from internally generated funds. The Company's cash and cash equivalents at June 30, 1998 decreased to $2,923,000 from $15,550,000 at June 30, 1997. In fiscal 1998, net cash of $7,035,000 provided by operating activities, was offset by net cash of $11,911,000 and $7,697,000 used in investing activities and financing activities, respectively. Of the $7,035,000 net amount provided by the Company's operating activities, $15,908,000 was provided by net income, $5,517,000 was provided by depreciation and amortization and $3,755,000 was provided by an increase in accrued expenses. These amounts were partially offset by an increase of $11,050,000 in inventories and an increase of $8,100,000 in accounts receivable. Of the $11,911,000 net amount used in the Company's investing activities, $7,175,000 was used to acquire primarily machinery and equipment and secondarily computer equipment and software, and $4,626,000 was used for business acquisitions. Of the $7,697,000 net amount used in the Company's financing activities, $11,564,000 was used to repurchase 695,588 shares of Common Stock from certain officers and directors. This amount was partially offset by $4,580,000 and $673,000 that were provided by the issuance of Common Stock upon exercise of then-outstanding stock options and warrants, respectively. Accounts receivable (net) at June 30, 1998 increased by $10,239,000, or 45.9%, from the amount at June 30, 1997 primarily due to the growth in sales. The average collection period of accounts receivable at June 30, 1998 decreased to 45 days from 47 days at June 30, 1997. Inventories increased by $14,204,000, or 60.7%, from the June 30, 1997 amount primarily because of the inventories of the three companies acquired during fiscal 1998 and secondarily because of new and recently introduced products. Effective February 1, 1998, the Company entered into a $15,000,000 line of credit. Borrowings under this line of credit bear interest at the Company's election at either the bank's prime rate less certain margins, or at LIBOR plus certain margins, with the margins dependent upon the Company's meeting certain funded debt-to-EBITDA ratios. Prior to February 1, 1998, borrowings under the line bore interest either at the bank's prime rate or at LIBOR plus 1.75%. At June 30, 1998, the Company had $1,253,000 outstanding under its primary bank line and had outstanding letters of credit totaling approximately $1,050,000, which reduced the availability under the line to approximately $12,697,000. (See Note 5 to Consolidated Financial Statements.) The Canadian lines of credit allow for aggregate borrowings by the Company's two Canadian subsidiaries of up to Canadian $3,000,000 (approximately US $2,039,000). Borrowings bear interest at the Canadian bank's prime rate and are due and payable on demand. At June 30, 1998, approximately Canadian $2,155,000 (approximately US $1,463,000) was outstanding under these lines of credit. (See Note 5 to Consolidated Financial Statements.) On September 23, 1998, the Company entered into a Revolving Loan Agreement (the "Loan Agreement") with Wells Fargo Bank, National Association ("Wells Fargo"). The Loan Agreement provides for borrowings through September 30, 2005 (the "Maturity Date"). Borrowings will 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. The maximum amount that may be outstanding under the Loan Agreement is $160,000,000 through December 31, 2000. Thereafter, the maximum amount of borrowings that may be outstanding under the Loan Agreement is reduced by $20,000,000 in calendar 2001 and by $10,000,000 in each of the following calendar years up to the Maturity Date. This Loan Agreement replaces the Company's domestic and Canadian lines of credit discussed above. (see Note 20 to the Consolidated Financial Statements). In connection with the Proposed Acquisition of Filofax, 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 in the range of $4 to 6 million. Actual total fees and expenses may differ from this estimate and are subject to future contingencies. The fees and expenses, as well as any payments for the Filofax shares, will be paid with available cash and with borrowings under the Loan Agreement. 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 is expected to increase if the Proposed Acquisition of Filofax is completed and the Company incurs substantial debt under its new Loan Agreement. The Company has entered into a call option with respect to the Proposed Acquisition of Filofax and may in the future enter into additional call options or foreign currency exchange contracts, swap agreements or other financial instruments as hedges to moderate the impact of foreign currency fluctuations. There can be no assurance that the Proposed Acquisition of Filofax will be completed. A single currency called the euro will be introduced in certain countries in Europe on January 1, 1999, but will not be introduced in England. 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 has not yet evaluated the impact of the single currency. The Company believes that cash flow from operations, vendor credit, its existing working capital and its bank line of credit will be sufficient to satisfy the Company's anticipated cash requirements at least through fiscal 1999. 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 accurate dates commencing on or after January 1, 2000. This has the potential to affect the operation of these systems adversely and materially. Day Runner has identified four phases in its Year 2000 compliance efforts: discovery, assessment, remediation and applicable testing and verification. The Company has substantially completed the discovery and assessment phases for its own systems and applications and believes that by modifying existing software and converting to new software for certain tasks it can prevent the Year 2000 transition from posing significant internal operational problems. The Company plans to complete the remediation phase by the second quarter of fiscal year 1999 and complete the applicable testing and verification phase by the end of the third quarter of fiscal year 1999. Day Runner currently estimates that total incremental cash requirements related to the Year 2000 issue will be approximately $750,000 to $1,200,000, of which approximately $650,000 was incurred as of June 30, 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. The cash requirements described above do not include any estimates for costs of Year 2000 remediation or compliance that may be incurred if the Proposed Acquisition of Filofax is completed. The Company is unable to estimate these costs at this time. There can be no assurance that the Proposed Acquisition of Filofax will be completed. Day Runner is surveying its vendors, customers and others on whom it relies to assure that their systems will be Year 2000 compliant and that they will be able to continue their business with the Company without interruption. 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 would 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 material 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 annual report are forward looking statements that involve risks and uncertainties that could affect actual future results. Such risks and uncertainties include, but are not limited to: timing and size of orders from large customers, timing and size of orders for new products, competition, large customers' inventory management, general economic conditions, the health of the retail environment, supply constraints, supplier performance and other risks indicated in the Company's filings with the Securities and Exchange Commission. EFFECTS OF INFLATION The Company believes that inflation has not had a material effect on its operations. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Inapplicable Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See the Consolidated Financial Statements of the Company and its subsidiaries included herein and listed in Item 14(a) of this Annual Report. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Inapplicable. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this Item is incorporated by reference to the sections of the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on November 23, 1998, entitled "Election of Directors" and "Executive Officers," to be filed with the Commission. Item 11. EXECUTIVE COMPENSATION. The information required by this Item is incorporated by reference to the sections of the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on November 23, 1998, entitled "Election of Directors -- Compensation of Directors," "Executive Compensation and Other Information," "Compensation Committee Report on Executive Compensation" and "Performance Graph," to be filed with the Commission. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this Item is incorporated by reference to the section of the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on November 23, 1998, entitled "Common Stock Ownership of Principal Stockholders and Management," to be filed with the Commission. Item 13. CERTAIN TRANSACTIONS. The information required by this Item is incorporated by reference to the sections of the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on November 23, 1998, entitled "Election of Directors -- Compensation of Directors" and "Certain Relationships and Related Transactions," to be filed with the Commission.
PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) The following documents are filed as part of this Report: PAGE 1. Consolidated Financial Statements Independent Auditors' Report F-1 Consolidated Balance Sheets at June 30, 1998 and 1997 F-2 Consolidated Statements of Income for Each of the Three Years in the Period Ended June 30, 1998 F-3 Consolidated Statements of Stockholders' Equity for Each of the Three Years in the Period Ended June 30, 1998 F-4 Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended June 30, 1998 F-5 Notes to Consolidated Financial Statements F-6 2. Financial Statement Schedules Independent Auditors' Report S-1 Schedule II - Valuation and Qualifying Accounts S-2 Schedules which are not listed above have been omitted because they are not applicable or the information required to be set forth therein is included in the Consolidated Financial Statements or notes thereto.
3. List of Exhibits 3.1 Certificate of Incorporation of the Registrant, as amended(1) 3.2 Bylaws of the Registrant(2) 10.1 Amended and Restated 1986 Stock Option Plan, including forms of Stock Option Agreements and Stock Purchase Agreement(3) and Amendment Nos. 1(4), 2(5), 3(5) and 4(6) thereto dated July 17, 1992, February 28, 1993, May 10, 1993 and May 12, 1994, respectively(7) 10.2 1995 Stock Option Plan, including forms of Stock Option Agreements(8) and Amendment Nos. 1 (9) and 2 (10) thereto dated October 21, 1996 and September 19, 1997 (7) 10.3 Employee Stock Purchase Plan(3) and Amendment No. 1 thereto dated July 17, 1992(4)(7) 10.4 Day Runner Restated 401(k) Plan effective as of July 1, 1998 and Trust Agreement effective as of July 1, 1998 between the Registrant and New York Life Trust Company(7) 10.5 1998 Officer Bonus Plan(7)(12) 10.6 1999 Officer Bonus Plan(7) 10.7 Officer Severance Plan effective as of February 28, 1993, including form of Employment Separation Agreement(11) and First Amendment thereto effective as of August 17, 1998(7) 10.8 Credit Agreement dated as of February 1, 1998 between the Registrant and Wells Fargo Bank, National Association, including Revolving Line of Credit Note(13) 10.9 Triple Net Lease, as amended, effective as of March 22, 1991 between Catellus Development Corporation and the Registrant(3) and as amended by Lease Amendment dated June 29, 1992(10) 10.10 Triple Net Lease dated July 28, 1992 between Catellus Development Corporation and the Registrant(11) 10.11 Koll Business Center Lease dated September 7, 1994 between the Registrant and Koll Alton Plaza and Aetna Life Insurance Co.(14) 10.12 Standard Commercial Lease Agreement dated as of July 31, 1996 between System Realty Nine, Inc. and the Registrant(15) 10.13 Standard Commercial Lease Agreement dated as of October 1, 1997 between RDC Sales and the Registrant 10.14 Standard Commercial Lease Agreement dated as of May 11, 1998 between GPM Real Property (7) Ltd. and Endow (7) Inc. and the Registrant 10.15 Form of Warrant to purchase shares of the Registrant's Common Stock issued to certain directors and officers of the Registrant(3) and Schedule of Warrants(7) 10.16 Form of Warrant dated August 19, 1997 to purchase shares of the Registrant's Common Stock issued to certain officers of the Company and Schedule of Warrants(7)(16) 10.17 Form of Stock Purchase Agreement dated August 27, 1997 and Schedule of Sellers(12) 10.18 Form of Warrant dated April 20, 1998 to purchase shares of the Registrant's Common Stock issued to the non-employee directors of the Company and Schedule of Warrants(7) 10.19 Consulting Agreement effective April 22, 1997 between the Registrant and Alan R. Rachlin(7)(17) 10.20 Revolving Loan Agreement dated September 23, 1998 between the Registrant, Day Runner UK plc, Ultima Distribution Inc. and Wells Fargo Bank, National Association, including Revolving Line of Credit Note(18) 21.1 Subsidiaries of the Registrant 23.1 Consent of Deloitte & Touche LLP 27.1 Financial Data Schedule (b) Reports on Form 8-K No reports on Form 8-K were filed or required to be filed by the Registrant during the fourth quarter of the fiscal year ended June 30, 1998. (c) Exhibits See the list of Exhibits under Item 14(a)3 of this Annual Report on Form 10-K. (d) Financial Statement Schedules See the list of Schedules under Item 14(a)2 of this Annual Report on Form 10-K. - ------------------------ (1) Incorporated by reference to the Registrant's 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) Incorporated by reference to the Registrant's Registration Statement on Form S-1 (Registration No. 33-45391) filed with the Commission on January 30, 1992. (4) Incorporated by reference to the Registrant's Registration Statement on Form S-8 (Registration No. 33-53422) filed with the Commission on October 15, 1992. (5) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q (Registration No. 0-19835) filed with the Commission on August 16, 1993. (6) Incorporated by reference to the Registrant's Registration Statement on Form S-8 (Registration No. 33-84036) filed with the Commission on September 15, 1994. (7) Constitutes a management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of this Annual Report on Form 10-K. (8) Incorporated by reference to the Registrant's Registration Statement on Form S-8 (Registration No. 33-80819) filed with the Commission on December 22, 1995. (9) Incorporated by reference to the Registrant's Registration Statement on Form S-8 (Registration No. 333-20247) filed with the Commission on January 23, 1997. (10) Incorporated by reference to the Registrant's Registration Statement on Form S-8 (Registration No. 333-44627) filed with the Commission on January 21, 1998. (11) Incorporated by reference to the Registrant's Annual Report on Form 10-K (File No. 0-19835) filed with the Commission on March 31, 1993. (12) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q (File No. 0-19835) filed with the Commission on November 13, 1997. (13) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q(File No. 0-19835) filed with the Commission on February 17, 1998. (14) Incorporated by reference to the Registrant's Transition Report on Form 10-K(File No. 0-19835) filed with the Commission on September 27, 1994. (15) Incorporated by reference to the Registrant's Annual Report on Form 10-K(File No. 0-19835) filed with the Commission on September 27, 1996. (16) Incorporated by reference to the Registrant's Annual Report on Form 10-K(File No. 0-19835) filed with the Commission on September 29, 1997. (17) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q (File No. 0-19835) filed with the Commission on May 15, 1997. (18) Incorporated by reference to the Registrant's Current Report on Form 8-K (File No. 0-19835) filed with the Commission on September 24, 1998. SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Irvine, California. DAY RUNNER, INC. By: /s/ James E. Freeman, Jr. -------------------------------- James E. Freeman, Jr. Chief Executive Officer Dated: September 30, 1998 Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date ------------- ------------------------- ----------------------- /s/ Mark A. Vidovich Chairman of the Board September 30, 1998 - ---------------------------------------- Mark A. Vidovich /s/ James E. Freeman, Jr. - ----------------------------------------- Chief Executive Officer September 30, 1998 James E. Freeman, Jr (Principal Executive Officer) . /s/ Dennis K. Marquardt Executive Vice President, September 30, 1998 - ---------------------------------------- Finance & Administration and Dennis K. Marquardt Chief Financial Officer (Principal Financial Officer and Accounting Officer) /s/ James P. Higgins Director September 30, 1998 - ---------------------------------------- James P. Higgins 3029, 1998 - ---------------------------------------- Jill Tate Higgins /s/ Charles Miller Director September 30, 1998 ---------------------------------------- Charles Miller /s/ Alan R. Rachlin Director September 30, 1998 - ---------------------------------------- Alan R. Rachlin /s/ Boyd I. Willat Director September 30, 1998 - ---------------------------------------- Boyd I. Willat /s/ Felice Willat Director September 30, 1998 - ---------------------------------------- Felice Willat
INDEPENDENT AUDITORS' REPORT Day Runner, Inc.: We have audited the accompanying consolidated balance sheets of Day Runner, Inc. and subsidiaries (the "Company") as of June 30, 1998 and 1997, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Day Runner, Inc. and subsidiaries as of June 30, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1998 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP /s/ DELOITTE & TOUCHE LLP Los Angeles, CA August 17, 1998 (September 25, 1998 as to Note 20) F-1
DAY RUNNER, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands) ASSETS June 30, 1998 1997 --------- ------ Current assets: Cash and cash equivalents...................................................... $ 2,923 $15,550 Accounts receivable (less allowance for doubtful accounts and sales returns and other allowances of $9,942 and $8,664 at June 30, 1998 and 1997, respectively)....................................... 32,542 22,303 Inventories.................................................................... 37,610 23,406 Prepaid expenses and other current assets...................................... 1,670 2,409 Income taxes receivable........................................................ 2,606 Deferred income taxes.......................................................... 7,218 6,386 --------- ------- Total current assets........................................................ 84,569 70,054 Property and equipment, net ....................................................... 11,888 8,688 Other assets (net of accumulated amortization of $196,000 at June 30, 1998)........ 4,722 138 --------- ------- Total assets....................................................................... $101,179 $78,880 ========= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Lines of credit................................................................ $ 2,716 $ 452 Accounts payable............................................................... 9,969 8,320 Accrued expenses............................................................... 13,876 9,500 Income taxes payable........................................................... 1,049 Current portion of capital lease obligations................................... 33 23 --------- ------- Total current liabilities................................................... 26,594 19,344 --------- ------- Long-term liabilities: Capital lease obligations...................................................... 53 52 --------- ------- 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; 13,677,386 shares issued and 11,955,598 outstanding at June 30, 1998; 12,728,858 shares issued and 11,702,658 outstanding at June 30, 1997)........ 14 13 Additional paid-in capital..................................................... 34,445 23,752 Retained earnings.............................................................. 65,076 49,168 Cumulative translation adjustment.............................................. 102 92 Treasury stock - At cost (1,721,788 and 1,026,200 shares, at June 30, 1998 and 1997, respectively).......................................................... (25,105) (13,541) --------- -------- Total stockholders' equity.................................................. 74,532 59,484 --------- ------- Total liabilities and stockholders' equity......................................... $101,179 $78,880 ========= ======= See accompanying notes to consolidated financial statements. F-2
DAY RUNNER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) Years Ended June 30, 1998 1997 1996 --------- ---------- -------- Net sales................................................... $ 167,841 $ 127,376 $125,126 Cost of goods sold.......................................... 80,663 60,452 59,920 --------- --------- --------- Gross profit................................................ 87,178 66,924 65,206 --------- --------- --------- Operating expenses: Selling, marketing and distribution..................... 43,193 31,673 29,878 General and administrative.............................. 18,416 14,451 16,376 Costs incurred in pursuing acquisitions................. 1,451 --------- --------- Total operating expenses............................. 61,609 47,575 46,254 --------- --------- --------- Income from operations...................................... 25,569 19,349 18,952 --------- --------- --------- Interest (income) expense: Interest income......................................... (390) (1,431) (823) Interest expense........................................ 218 130 117 --------- --------- --------- Net interest income.................................. (172) (1,301) (706) --------- --------- --------- Income before provision for income taxes.................... 25,741 20,650 19,658 Provision for income taxes.................................. 9,833 8,102 7,840 --------- --------- --------- Net income.................................................. $ 15,908 $ 12,548 $ 11,818 ========= ========= ========= Earnings per common share: Basic................................................ $ 1.38 $ 1.01 $ 0.95 ========= ========= ========= Diluted.............................................. $ 1.27 $ 0.95 $ 0.89 ========= ========= ========= Weighted average number of common shares outstanding: Basic................................................ 11,533 12,432 12,468 ========= ========= ========= Diluted.............................................. 12,523 13,182 13,252 ========= ========= =========
See accompanying notes to consolidated financial statements. F-3
DAY RUNNER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars in thousands) Number Additional Cumulative of Shares Common Paid-In Retained Translation Treasury Outstanding Stock Capital Earnings Adjustment Stock Total ----------- --------------- ---------------- -------- ---------- ---------- ------ Balance, July 1, 1995..................... 12,251,594 $ 12 $ 19,936 $ 24,802 $ 37 $44,787 Exercise of options......................... 357,948 1,475 1,475 Tax benefit of options...................... 1,452 1,452 Cumulative translation adjustment .......... (34) (34) Net income.................................. 11,818 11,818 ---------- ------ -------- ------ ------ -------- ------- Balance, June 30, 1996...................... 12,609,542 12 22,863 36,620 3 59,498 Exercise of warrants........................ 11,000 22 22 Exercise of options......................... 108,316 1 660 661 Tax benefit of options...................... 157 157 Compensation cost associated with warrant grant........................... 50 50 Cumulative translation adjustment........... 89 89 Treasury stock.............................. (1,026,200) $(13,541) (13,541) Net income.................................. 12,548 12,548 ---------- ------- ----------- -------- ----- --------- -------- Balance, June 30, 1997...................... 11,702,658 13 23,752 49,168 92 ( 13,541) 59,484 Exercise of warrants........................ 278,000 673 673 Exercise of options......................... 670,528 1 4,579 4,580 Tax benefit of options...................... 5,208 5,208 Compensation cost associated with warrant grant........................... 233 233 Cumulative translation adjustment........... 10 10 Treasury stock.............................. (695,588) (11,564) (11,564) Net income.................................. 15,908 15,908 ---------- ------- --------- --------- ------ -------- -------- Balance, June 30, 1998...................... 11,955,598 $ 14 $ 34,445 $ 65,076 $ 102 $(25,105) $74,532 ========== ===== ========= ========= ===== ======== ======== See accompanying notes to consolidated financial statements. F-4
DAY RUNNER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) Years Ended June 30, 1998 1997 1996 --------- ---------- ------- Cash flows from operating activities: Net income.............................................. $ 15,908 $ 12,548 $11,818 Adjustments to reconcile net income to net cash provided by(used in) operating activities: Depreciation and amortization......................... 5,517 3,869 2,548 Provision for losses on accounts receivable........... 381 810 Write-off of barter credits........................... 200 520 Utilization of barter credits......................... 100 Compensation expense related to issuance of warrants.. 233 50 Deferred income tax benefit........................... (832) (1,186) (26) Changes in operating assets and liabilities, net of effects from purchase of businesses: Accounts receivable................................ (8,100) (1,220) (2,884) Inventories ...................................... (11,050) (3,294) 6,543 Prepaid expenses and other current assets.......... 595 (689) (87) Income taxes receivable............................ 2,087 1,930 (1,930) Accounts payable................................... (725) 225 (1,028) Accrued expenses................................... 3,755 (872) 3,606 Income taxes payable............................... (453) 1,206 (1,247) -------- -------- ------- Net cash provided by operating activities........... 7,035 13,148 18,643 -------- -------- ------- Cash flows from investing activities: Acquisition of property and equipment................... (7,175) (4,972) (4,393) Purchase of businesses...................................... (4,626) Other assets............................................ (110) 5 (8) --------- ---------- ---------- Net cash used in investing activities................... (11,911) (4,967) (4,401) --------- ---------- ---------- Cash flows from financing activities: Net borrowings under line of credit..................... (338) 452 Payment of long-term debt............................... (990) (141) Payment of capital lease obligations.................... (58) (13) (23) Exercise of warrants.................................... 673 22 Exercise of options......................................... 4,580 661 1,475 Repurchase of common stock.............................. (11,564) (13,541) -------- -------- Net cash (used in) provided by financing activities..... (7,697) (12,419) 1,311 -------- -------- ------- Effect of exchange rate changes on cash and cash equivalents (54) 23 (57) --------- --------- --------- Net (decrease) increase in cash and cash equivalents........ (12,627) (4,215) 15,496 Cash and cash equivalents, beginning of year................ 15,550 19,765 4,269 --------- -------- --------- Cash and cash equivalents, end of year...................... $ 2,923 $ 15,550 $19,765 ======== ======== ========= See accompanying notes to consolidated financial statements.
F-5 DAY RUNNER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Day Runner, Inc. and subsidiaries (the "Company") is a developer, manufacturer and marketer of paper-based organizers for the retail market. The Company also develops, manufactures and markets a number of related organizing products, including telephone/address books, spiral dated goods, executive accessories, products for children and students, organizing and other wall boards and planners. A substantial portion of the Company's sales is to office products superstores, wholesalers and dealers and to mass market retailers throughout the United States and abroad. The Company grants credit to substantially all of its customers. CONSOLIDATION. The consolidated financial statements include the accounts of Day Runner, Inc. and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the reporting period. Actual results could differ from those estimates. FOREIGN CURRENCY TRANSLATION. Assets and liabilities of the Company's foreign subsidiaries are translated into U.S. dollars at the exchange rate prevailing at the balance sheet date and, where appropriate, at historical rates of exchange. Income and expense accounts are translated at the weighted average rate in effect during the year. The aggregate effect of translating the financial statements of the foreign subsidiaries is included as a separate component of stockholders' equity. Foreign exchange gains (losses) were not significant during the years ended June 30, 1998, 1997 and 1996. CASH EQUIVALENTS. The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. FAIR VALUE OF FINANCIAL INSTRUMENTS. THe Company's financial instruments consist primarily of cash, accounts receivable and payable, and debt instruments. The book values of financial instruments, other than the debt instruments, are representative of their fair values due to their short-term maturity. The book value of the Company's debt instruments is considered to approximate its fair value because the interest rate of these instruments is based on current rates offered to the Company. PROPERTY AND DEPRECIATION. Property and equipment are stated at cost less accumulated depreciation. Depreciation is provided for over the estimated useful lives of the respective assets, using the straight-line method. Estimated useful lives range from three to seven years. Vehicles and equipment under capital leases and leasehold improvements are amortized using the straight-line method over the lesser of the estimated useful life of the asset or the life of the lease. F-1 OTHER ASSETS. Other assets consist primarily of goodwill and non-competition agreements that arose as a result of the Company's acquisitions during fiscal 1998. Goodwill is being amortized using the straight- line method over a period of 20 years, and the non-competition agreements are being amortized using the straight-line method over a period of five years. IMPAIRMENT OF LONG-LIVED ASSETS. Long-lived assets are reviewed for impairment, based on cash flows undiscounted without interest charges, whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Impairment losses would be recognized if the carrying amount of the asset exceeds the fair value of the assets. INCOME TAXES. Deferred taxes are determined based on temporary differences between the financial reporting and income tax bases of assets and liabilities at the balance sheet date multiplied by the applicable tax rates. NET SALES. Revenue is recognized upon shipment of product to the customer, with appropriate allowances for estimated returns, rebates and other allowances. SIGNIFICANT CUSTOMERS. In 1998, sales to four customers accounted for 28%, 16%, 15% and 14% of the Company's sales. In 1997, sales to four customers accounted for 25%, 15%, 14% and 11% of the Company's sales. In 1996, sales to three customers accounted for 17%, 15% and 12% of the Company's sales. NEW ACCOUNTING STANDARDS. In June 1997, the Financial Accounting Standards Board (the "Board") issued Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. These statements are effective for financial statements issued for periods beginning after December 15, 1997. In June 1998, the Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement is effective for financial statements issued for periods beginning after June 15, 1999. The Company is evaluating what, if any, additional disclosures may be required upon implementation of SFAS Nos. 130, 131 and 133. RECLASSIFICATIONS. Certain reclassifications were made to the prior year financial statements to conform to the current presentation. 2. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined on the first-in, first-out basis. Inventories consist of the following (in thousands): June 30, 1998 1997 --------- --------- Raw materials................. $ 14,087 $ 10,204 Work in process............... 831 426 Finished goods................ 22,692 12,776 --------- -------- Total................ $ 37,610 $ 23,406 ========= ======== F-2 3. PROPERTY AND EQUIPMENT Property and equipment consist of the following (in thousands):
June 30, 1998 1997 -------- ------- Displays..................................... $ 9,003 $ 6,094 Data processing equipment and software....... 8,913 5,863 Machinery and equipment...................... 6,577 4,222 Leasehold improvements....................... 2,229 1,838 Vehicles..................................... 250 214 -------- --------- Total................................ 26,972 18,231 Accumulated depreciation and amortization.... (15,084) (9,543) -------- --------- Property and equipment - net................. $ 11,888 $ 8,688 ======== =========
4. ACCRUED EXPENSES Accrued expenses consist of the following (in thousands):
June 30, 1998 1997 -------- ------- Accrued sales and promotion costs........ $ 7,473 $ 5,223 Accrued payroll and related costs........ 2,955 2,128 Other.................................... 3,448 2,149 -------- --------- Total............................ $ 13,876 $ 9,500 ======== =========
5. LINES OF CREDIT Effective February 1, 1998, the Company entered into a credit agreement with a bank to allow the Company to borrow up to $15,000,000 under a line of credit through February 1, 2000 and open commercial or standby letters of credit up to $10,000,000, with the aggregate of borrowings and letters of credit not to exceed $15,000,000. Commercial letters of credit shall be issued for a term not to exceed 180 days, provided, however, that no letters of credit shall have an expiration date subsequent to May 1, 2000. At June 30, 1998, the Company had $1,253,000 outstanding under this line of credit and had outstanding letters of credit totaling approximately $1,050,000. Under this new credit agreement, borrowings bear interest at the Company's election either at the bank's prime rate (8.50% at June 30, 1998) less certain margins, which range from .50% to 1.00%, or at LIBOR (5.66% at June 30, 1998) plus certain margins, which range from .75% to 1.25%, with the margins dependent upon the Company's meeting certain funded debt-to-EBITDA ratios. The credit agreement requires the Company to: maintain a current ratio of not less than 1.50 to 1.00, maintain tangible net worth of not less than $45,000,000, and maintain a funded debt-to-EBITDA ratio of less than 1.50 to 1.00. The Company also is required to obtain the bank's approval to declare or pay dividends in excess of $200,000 (See Note 20). Each of the Company's two Canadian subsidiaries has a credit agreement with a Canadian bank. The aggregate borrowings under these lines of credit, which are guaranteed by the Company and are used for working capital by these subsidiaries, may not exceed Canadian $3,000,000 (approximately US $2,039,000), bear interest at the bank's prime rate (6.50% at June 30, 1998) and are due and payable on demand. At June 30, 1998, approximately Canadian $2,155,000 (approximately US $1,463,000) was outstanding under these lines of credit. These borrowings were collateralized by substantially all of the two Canadian subsidiaries' assets (See Note 20). F-3 Total borrowings under the credit agreement and the two Canadian credit agreements bore interest at an average interest rate of 7.00% and 8.50% for the years ended June 30, 1998 and 1997, respectively. The Company had no borrowings outstanding under its lines of credit during the year ended June 30, 1996. 6. LEASES The Company has four noncancelable operating leases for its principal operating facilities and its corporate headquarters. The leases expire through 2005. The leases include renewal options that, if exercised, would extend the lease terms through 2011, and the leases provide for increases in future minimum annual rental payments based on defined increases in the Consumer Price Index, subject to certain minimum increases. The Company also has entered into leases for certain production, warehouse, computer and office equipment under noncancelable operating leases that expire through August 2002. The Company also leases certain vehicles and equipment under agreements that meet the criteria for classification as capital leases. Future minimum lease payments under these capital leases, and the future minimum lease payments under the operating leases at June 30, 1998, are summarized as follows (in thousands):
Capital Operating Years Ending June 30, Leases Leases --------------------- --------- --------- 1999.................................................... $ 33 $ 4,525 2000.................................................... 24 3,626 2001.................................................... 12 3,014 2002.................................................... 13 1,478 2003.................................................... 4 1,137 Thereafter.............................................. 836 --------- -------- Total minimum lease payments............................ 86 $ 14,616 ======== Less current portion of capital lease obligations....... 33 --------- Long-term portion of capital lease obligations.......... $ 53 =========
Included in property and equipment at June 30, 1998 and 1997 are vehicles and equipment under capital leases with a cost of $157,000 and $88,000 and accumulated depreciation of $47,000 and $43,000, respectively. Rent expense was $4,025,000, $3,841,000 and $3,927,000 for the years ended June 30, 1998, 1997 and 1996, respectively. 7. INCOME TAXES The components of income before provision for income taxes were (in thousands):
Years Ended June 30, 1998 1997 1996 ---------- --------- -------- United States......................... $ 22,856 $ 18,765 $ 18,029 Other................................. 2,885 1,885 1,629 --------- --------- --------- Total.............................. $ 25,741 $ 20,650 $ 19,658 ========= ========= =========
F-4 The provision for income taxes consists of the following (in thousands):
Years Ended June 30, 1998 1997 1996 ---------- --------- ------- Current: Federal............................... $ 8,565 $ 7,076 $ 6,051 State................................. 1,477 1,825 1,473 Foreign............................... 623 387 342 --------- --------- --------- Total current........................... 10,665 9,288 7,866 --------- --------- --------- Deferred: Federal............................... (920) (961) (37) State................................. 88 (225) 11 --------- --------- --------- Total deferred.......................... (832) (1,186) (26) --------- --------- --------- Total provision for income taxes........ $ 9,833 $ 8,102 $ 7,840 ========= ========= =========
Differences between the total income tax provision and the amount computed by applying the statutory federal income tax rate to income before provision for income taxes are as follows (in thousands):
Years Ended June 30, 1998 1997 1996 ---------- ----------- ------- Computed tax expense using the statutory federal income tax rate..... $ 9,009 $ 7,228 $ 6,880 Increase (decrease) in taxes arising from: State taxes, net of federal benefit... 769 1,000 980 Foreign earnings taxed at other than federal statutory rate......... (387) (273) (229) Other................................. 442 147 209 --------- --------- --------- Total................................. $ 9,833 $ 8,102 $ 7,840 ========= ========= ========= Effective income tax rate............... 38% 39% 40% ========= ========= =========
Total deferred tax assets and deferred tax liabilities consist of the following (in thousands):
June 30, 1998 1997 ---------------- ---------- Allowance for sales returns............................ $ 2,918 $ 2,490 Inventory obsolescence reserve......................... 1,220 1,394 Allowance for doubtful accounts........................ 1,074 1,147 State taxes............................................ 615 615 Sales programs......................................... 608 374 Other deferred tax assets.............................. 1,368 1,117 ------ -------- Total deferred tax assets.............................. 7,803 7,137 Deferred tax liabilities............................... (585) (751) ------- -------- Total.................................................. $7,218 $ 6,386 ======= ========
Cumulative undistributed earnings of foreign subsidiaries for which no deferred taxes have been provided approximated $4,153,000 at June 30, 1998. The additional taxes payable on the earnings of foreign subsidiaries, if remitted, would be offset by U.S. tax credits for foreign taxes paid. F-5 8. EARNINGS PER SHARE The Company adopted 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):
Years Ended June 30, 1998 1997 1996 ------------ ------------- ---------- Net Income $ 15,908 $ 12,548 $ 11,818 ========== ============= ========== Basic Weighted Average Shares Weighted average number of common shares outstanding 11,533 12,432 12,468 Effect of Dilutive Securities Additional shares from the assumed exercise of options and warrants 3,093 2,757 2,295 Shares assumed to be repurchased under the treasury stock method (2,103) (2,007) (1,511) ---------- ----------- ---------- Diluted Weighted Average Shares Weighted average number of common shares outstanding and common share equivalents 12,523 13,182 13,252 ========== =========== ========== Basic $ 1.38 $ 1.01 $ 0.95 ========== ========== ========== Diluted $ 1.27 $ 0.95 $ 0.89 ========== =========== ==========
9. STOCK OPTION PLANS Under the Company's 1995 Stock Option Plan (the "Plan"), an aggregate of 1,550,000 shares of common stock is reserved for issuance to key employees, including officers and directors, and consultants of the Company. Both incentive stock options and nonstatutory stock options are authorized for issuance under the Plan. The terms of the options are determined at the time of grant. Pursuant to the Plan, the per share option price of incentive stock options may not be less than the fair market value of a share of common stock at the date of grant, and no options may be granted after December 2005. The outstanding options typically become exercisable over a period of five years from the date of issuance and have terms of up to ten years. The Company also authorized the issuance of up to 3,450,000 shares of the Company's common stock under its Amended and Restated 1986 Stock Option Plan. Such options typically become exercisable ratably over a period of five years from the date of issuance and have terms of six to ten years. As of June 30, 1998, options covering 2,406,564 shares have been exercised and options covering 1,027,186 shares remain outstanding. No additional options will be granted under this plan. F-6 During the years ended June 30, 1998, 1997 and 1996, certain officers and employees exercised options to purchase an additional 651,414, 74,300 and 328,050 shares, respectively, of the Company's common stock for an aggregate of $4,278,000, $381,000 and $1,214,000, respectively (see Note 10). In connection with the exercise of nonstatutory stock options and the sale of shares purchased pursuant to incentive stock options, the Company realized a reduction in its current tax liability during the years ended June 30, 1998, 1997 and 1996. This reduction totaled $5,208,000, $157,000 and $1,452,000, respectively, and was credited to additional paid-in capital.
A summary of option activity is as follows: Weighted Weighted Average Average Number of Exercise Options Exercise Options Price Exercisable Price ------- ----- ----------- ----- Outstanding, July 1, 1995........... 1,733,450 $ 5.96 Granted.......................... 336,750 8.38 Exercised........................ (328,050) 3.69 Cancelled........................ (10,000) 7.65 ------------ Outstanding, June 30, 1996.......... 1,732,150 6.85 753,774 $ 6.22 Granted.......................... 465,000 13.00 Exercised........................ (74,300) 5.13 Cancelled........................ (31,250) 11.96 ------------ Outstanding, June 30, 1997.......... 2,091,600 8.20 1,102,314 6.90 Granted.......................... 565,000 17.10 Exercised........................ (651,414) 6.57 ------------ Outstanding, June 30, 1998.......... 2,005,186 11.24 933,648 8.61 ============
At June 30, 1998, the range of option prices for shares under options and the weighted average remaining contractual life is as follows:
Options Outstanding Options Exercisable ------------------- ------------------- Weighted Weighted Average Weighted Average Remaining Average Number of Exercise Contractual Number Exercise Range of Option Exercise Price Options Price Life Exercisable Price ------------------------------ ------------ -------- ------------ ----------- -------- $ 5.13 - $8.38 818,636 $ 6.69 5.80 601,098 $ 6.32 9.75 - 13.00 623,550 11.91 7.42 253,050 11.41 16.88 - 20.63 563,000 17.10 9.16 79,500 17.00
The Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock option plans. Accordingly, no compensation cost has been recognized for stock option awards. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant dates for awards under those plans as required by SFAS No. 123, Accounting for Stock-Based Compensation, the Company's net income and earnings per common and common equivalent shares would have been reduced to the pro forma amounts indicated below: F-7
Years Ended June 30, 1998 1997 1996 ---------- ---------- -------- As reported $ 15,908 $ 12,548 $ 11,818 Pro forma $ 12,617 $ 11,094 $ 11,294 Earnings per common and common equivalent shares: As reported: Basic $ 1.38 $ 1.01 $ 0.95 Diluted $ 1.27 $ 0.95 $ 0.89 Pro forma: Basic $ 1.09 $ 0.89 $ 0.91 Diluted $ 1.01 $ 0.84 $ 0.85
The fair values of the options granted under the plans during 1998, 1997 and 1996 were estimated on the date of grant using the Black-Scholes option-pricing model. The weighted-average fair value of the options at the date of grant were $9.03, $14.53 and $10.10, during fiscal 1998, 1997 and 1996, respectively. The following weighted average assumptions for 1998, 1997 and 1996, respectively, were used: no dividend yield; volatility of 57.21%, 53.28% and 56.26%; risk-free interest rates of 5.24% to 6.21%, 5.41% to 6.95% and 5.69% to 6.40%; and expected option lives of one to four years for all periods. Pro forma compensation cost of options granted under the Employee Stock Purchase Plan is measured based on the discount from market value (see Note 10). On August 17, 1998, the Company issued options to key employees to purchase 375,000 shares of the Company's common stock at $18.75 per share. The options vest over a period of five years and expire in 2008. 10. EMPLOYEE STOCK PURCHASE PLAN During 1992, the Company adopted an Employee Stock Purchase Plan under which 350,000 shares of common stock were authorized for issuance to employees. Under the plan, eligible employees may purchase, through payroll deductions withheld during an offering period, an amount of common stock not to exceed approximately 5% of the employee's annual compensation. The purchase price per share is the lower of 85% of the fair market value of a share of common stock on the first day of the offering period or on the last day of the offering period. There are two offering periods during each year. During the years ended June 30, 1998, 1997 and 1996, employees purchased an aggregate of 19,114, 34,016 and 29,898 shares of common stock for $302,000, $280,000 and $261,000, respectively, under this plan. These amounts are included in the amounts shown for exercise of options on the consolidated statements of stockholders' equity (see Note 9). 11. WARRANTS During the years ended June 30, 1998, 1997 and 1996, the Board of Directors approved the issuance of warrants to purchase an aggregate of 565,000 shares of the Company's common stock. Such warrants are exercisable at prices ranging from $9.50 to $20.625 per share, vest over periods up to 48 months and expire at various times through April 2008. F-8 During fiscal 1998 and 1997, certain directors exercised warrants to purchase 278,000 and 11,000 shares, respectively, of the Company's common stock for an aggregate of $673,000 and $22,000, respectively. No warrants were exercised during the year ended June 30, 1996. Included in the issuance of warrants to purchase 565,000 aggregate shares of the Company's common stock is a warrant to purchase 50,000 shares that was issued to a director under the terms of a consulting agreement during fiscal 1997. Such issuance was accounted for under SFAS No. 123 using the Black-Scholes option pricing model, which resulted in the recording of $233,000 and $50,000 in compensation cost during the years ended June 30, 1998 and 1997, respectively.
A summary of warrant activity is as follows: Weighted Weighted Average Average Number of Exercise Options Exercise Warrants Price Exercisable Price -------- ----- ----------- ----- Outstanding, July 1, 1995........... 427,000 $ 3.84 Granted.......................... 50,000 9.50 ------------ Outstanding, June 30, 1996.......... 477,000 4.44 449,916 $4.13 Granted.......................... 300,000 11.95 Exercised........................ (11,000) 2.00 ------------ Outstanding, June 30, 1997.......... 766,000 7.42 493,082 4.91 Granted.......................... 215,000 17.31 Exercised........................ (278,000) 2.42 ------------ Outstanding, June 30, 1998.......... 703,000 12.42 482,166 12.20 ============
At June 30, 1998, the range of warrant prices for shares under warrants and the weighted average remaining contractual life is as follows:
Warrants Outstanding Warrants Exercisable -------------------- -------------------- Weighted Weighted Average Weighted Average Remaining Average Number of Exercise Contractual Number Exercise Range of Warrant Exercise Price Warrants Price Life Exercisable Price ------------------------------- ---------- -------- ------------ ----------- --------- $ 6.00 - 9.50 200,000 $ 7.81 5.83 200,000 $ 7.81 11.78 - 12.81 288,000 11.96 6.01 92,166 12.11 16.88 - 20.63 215,000 17.31 9.22 190,000 16.88
12. STOCK SPLIT At a Special Meeting of the Company's stockholders held on March 17, 1998, the Company's stockholders approved an amendment to the Company's Certificate of Incorporation to (i) effect a two-for-one split of each of the outstanding shares of common stock of the Company and (ii) increase the number of authorized shares of all classes of stock of the Company from 15,000,000 to 30,000,000, consisting of 29,000,000 shares of common stock, $0.001 par value per share, and 1,000,000 shares of preferred stock, $0.001 par value per share. Both actions were effective March 18, 1998. All share and per share data has been retroactively restated to reflect the two-for-one stock split. F-9 13. TREASURY STOCK In fiscal 1997, the Board of Directors authorized the purchase of up to 1,200,000 shares of the Company's common stock, which may be used to meet the Company's common stock requirements for its stock benefit plans. In fiscal 1998, the Board of Directors increased the number of shares of common stock that the Company is authorized to repurchase under this plan by 200,000 shares and authorized the purchase of up to 720,000 shares of the Company's common stock from officers and directors. During fiscal 1998 and 1997, the Company repurchased 695,588 and 1,026,200 shares, respectively, at an average per share cost of $16.625 and $13.195, respectively. All the shares repurchased in fiscal 1998 were from officers and directors at a per share cost equal to the closing price of the stock on the day of the repurchase. 14. ACQUISITIONS On July 29, 1997, the Company purchased the stock of Ultima Distribution Inc. ("Ultima"), which was the distributor of the Company's products in Canada, for approximately $130,000. The Company also entered into non-competition agreements with certain of Ultima's former stockholders. In addition, contingent payments may be paid over the two years following the acquisition based on Ultima's operating performance during that period. On October 1, 1997, the Company purchased substantially all the operating assets of Ram Manufacturing, Inc. ("Ram"), an Arkansas based developer, manufacturer and marketer of wall boards. The purchase price was approximately $2,400,000, of which approximately $1,950,000 had been paid as of June 30, 1998. The Company also assumed certain liabilities totaling approximately $3,000,000. In addition, contingent payments may be paid over the three years following the acquisition based upon Ram's operating performance during that period. The owner of Ram, who now works for the Company, entered into a non-competition agreement with the Company. On February 1, 1998, the Company purchased the stock of Timeposters Inc. ("Timeposters"), a Canadian developer, manufacturer and marketer of planning and presentation products, including flexible planners, planning boards, other wall boards and easels, and entered into certain non-competition agreements with the founders, who continue to work for Timeposters. The purchase price was approximately $2,546,000. In addition, contingent payments may be paid over the two years following the acquisition based on Timeposters' operating performance during that period. The following table presents summarized unaudited pro forma operating results assuming that the Company had acquired these three companies on July 1, 1996 (in thousands, except per share amounts): Years Ended June 30, 1998 1997 ------------- ----------- Net Sales $ 172,168 $ 138,475 Income from opera $ 25,667 $ 19,616 Net income $ 15,959 $ 12,574 Earnings per share Basic $ 1.38 $ 1.01 Diluted $ 1.27 $ 0.95 Weighted average shares outstanding: Basic 11,533 12,432 Diluted 12,523 13,182 F-10 15. OTHER TRANSACTIONS During 1995 and 1993, the Company entered into barter agreements whereby it delivered $132,000 and $1,098,000, respectively, of its inventory in exchange for future advertising credits and other items. The credits, which expire in October 1999, are valued at the lower of the Company's cost or market value of the inventory transferred. The Company has recorded barter credits of $15,000 and $36,000 in prepaid expenses and other current assets at June 30, 1998 and 1997, respectively. At June 30, 1997, other assets include $79,000 of such credits. No amounts were included in other assets at June 30, 1998. Under the terms of the agreement, the Company is required to pay cash equal to a negotiated amount of the bartered advertising, or other items, and use the barter credits to pay the balance. These credits are charged to expense as they are used. During the year ended June 30, 1998, approximately $100,000 was charged to expense for barter credits used. No amounts were charged to expense for barter credits used during the years ended June 30, 1997 and 1996. The Company assesses the recoverability of barter credits periodically. Factors considered in evaluating the recoverability include management's plans with respect to advertising and other expenditures for which barter credits can be used. Any impairment losses are charged to operations as they are determinable. During the years ended June 30, 1997 and 1996, the Company charged $200,000 and $520,000, respectively, to operations for such impairment losses. No such impairment losses were charged to operations during the year ended June 30, 1998. 16. PROFIT-SHARING AND BONUS PLANS In January 1991, the Company established a 401(k) profit-sharing plan in which eligible employees may contribute up to 15% of their eligible earnings. The Company may contribute to the plan at the discretion of the Board of Directors, subject to applicable regulations. In the years ended June 30, 1998, 1997 and 1996, the Board elected to contribute an amount equal to 25% of the first 6% of eligible earnings. Participants vest in the Company's contributions at a rate of 20% after two years of plan participation and 20% each year thereafter until fully vested. During the years ended June 30, 1998, 1997 and 1996, the Company's matching contributions were $156,000, $133,000 and, $128,000, respectively. The Company has an executive bonus plan and incentive compensation arrangements for key employees based on an earnings formula. Compensation expense recorded under these plans was $628,000 and $1,120,000 during the years ended June 30, 1998 and 1996, respectively. No amounts were recorded under these plans during the year ended June 30, 1997. 17. OPERATIONS IN FOREIGN COUNTRIES The following is a summary of the financial activity of the Company by geographical area (in thousands):
Year Ended June 30, 1998 United States Other Eliminations Total ------------- ----- ------------ ----- Net sales to unaffiliated entities $ 152,938 $ 14,903 $ 167,841 Transfers between geographic areas 2,348 2,125 $ (4,473) ------------- --------- ----------- ---------- Net sales $ 155,286 $ 17,028 $ (4,473) $ 167,841 ============= ========= =========== ========== Income from operations $ 31,883 $ 2,671 $ (8,985) $ 25,569 ============= ========= =========== ========== Identifiable assets $ 88,818 $ 13,096 $ (735) $ 101,179 ============= ========= =========== ==========
F-11
Year Ended June 30, 1997 United States Other Eliminations Total ------------- ----- ------------ ----- Net sales to unaffiliated entities $ 122,618 $ 4,758 $ 127,376 Transfers between geographic areas 490 1,621 $ (2,111) ------------- --------- ---------- ---------- Net sales $ 123,108 $ 6,379 $ (2,111) $ 127,376 ============= ========= ========== ========== Income from operations $ 23,927 $ 1,834 $ (6,412) $ 19,349 ============= ========= ========== ========== Identifiable assets $ 74,050 $ 4,968 $ (138) $ 78,880 ============= ========= ========== ========== Year Ended June 30, 1996 United States Other Eliminations Total Net sales to unaffiliated entities $ 120,519 $ 4,607 $ 125,126 Transfers between geographic areas 443 1,302 $ (1,745) ------------- --------- ---------- Net sales $ 120,962 $ 5,909 $ (1,745) $ 125,126 ============= ========= ========== ========== Income from operations $ 22,022 $ 1,675 $ (4,745) $ 18,952 ============= ========= =========== ========== Identifiable assets $ 73,940 $ 4,061 $ (70) $ 77,931 ============= ========= ========== ==========
18. CONTINGENCIES In the normal course of business, the Company and certain of its subsidiaries are defendants in various lawsuits. After consultation with counsel, management is of the opinion that these various lawsuits, individually or in the aggregate, will not have a materially adverse effect on the consolidated financial statements. 19. SUPPLEMENTAL CASH FLOW INFORMATION Disclosure of cash flow information (in thousands): Years Ended June 30, 1998 1997 1996 ------------ ----------- -------- Cash paid during the period for: Interest....................... $ 91 $ 130 $ 24 Income taxes................... $ 8,862 $6,026 $ 9,988 In fiscal 1998, the Company purchased all of the capital stock of Ultima Distribution Inc. and Timeposters Inc. The Company also purchased certain of the assets of Ram Manufacturing, Inc. In conjunction with these acquisitions, net cash expended was as follows (in thousands) (see Note 14): Fair value of assets acquired $ (11,809) Liabilities assumed 7,183 --------- Cash paid $ (4,626) ========== F-12 Disclosure of noncash investing and financing activities: Capital lease obligations totaling $88,000 were incurred in 1997 when the Company entered into leases to acquire certain vehicles. The Company realized a reduction in its current tax liability during 1998, 1997 and 1996 in the amount of $5,208,000, $157,000 and $1,452,000, respectively. Such amounts were credited to additional paid-in capital (see Note 9). 20. SUBSEQUENT EVENTS On September 15, 1998, the Board of Directors of the Company approved the Non-Employee Director Stock Option Plan. Under this plan, an aggregate of 150,000 shares of common stock is reserved for issuance to members of the Board of Directors who are not employees of the Company. In accordance with the plan, the per share option price must equal the fair market value of a share of common stock at the date of grant. The outstanding options become exercisable over a period of one year from the date of issuance and have terms of 10 years. The plan is subject to final approval by the stockholders of the Company. On September 23, 1998, the Company entered into a Revolving Loan Agreement (the "Loan Agreement") with Wells Fargo Bank, National Association ("Wells Fargo"). The Loan Agreement provides for borrowings through September 30, 2005 (the "Maturity Date"). Borrowings will 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. The maximum amount that may be outstanding under the Loan Agreement is $160,000,000 through December 31, 2000. Thereafter, the maximum amount of borrowings that may be outstanding under the Loan Agreement is reduced by $20,000,000 in calendar 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 will pay the Wells Fargo $1.2 million plus an unused commitment fee during the term of the Loan Agreement. The Company will also pay legal, accounting and other fees and expenses in connection with the Loan Agreement. On September 24, 1998, the Company announced a cash offer for Filofax Group plc ("Filofax"), a UK-based company traded on the London Stock Exchange. The offer was for (pound)2.00 (approximately US $3.36) per share pursuant to a tender offer for all of the outstanding ordinary shares of stock of Filofax. The offer was not recommended by Filofax's Board of Directors. On September 25, 1998, the Company announced it had reached agreement with the Board of Directors of Filofax on the terms of a recommended cash tender offer (the "Recommended Offer"). The Recommended Offer was for (pound)2.10 (approximately US $3.53) per share for all of the outstanding ordinary shares of Filofax for a total purchase price of approximately (pound)50,300,000 (approximately US $84,500,000). The proposed acquisition of Filofax (the "Proposed Acquisition of Filofax") will be funded by bank debt pursuant to the Loan Agreement. In this discussion all exchange rate conversions between the U.S. dollar and the UK pound sterling were based on an exchange rate of 1.68, which was the exchange rate on September 23, 1998. Consummation of the Company's Proposed Acquisition of Filofax is subject to, among other things, the tender of at least the majority of shares by Filofax's stockholders, regulatory approvals and the satisfaction or waiver of various other conditions. There can be no assurance at this time that the Proposed Acquisition of Filofax will be completed. F-13 INDEPENDENT AUDITORS' REPORT Day Runner, Inc.: We have audited the consolidated financial statements of Day Runner, Inc. and its subsidiaries as of June 30, 1998 and 1997, and for each of the three years in the period ended June 30, 1998, and have issued our report thereon dated August 17, 1998 (September 25, 1998 as to Note 20); such report is included elsewhere in this Form 10-K. Our audits also included the consolidated financial statement schedule of Day Runner, Inc. and its subsidiaries, listed in Item 14(a)2. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP /s/ DELOITTE & TOUCHE LLP Los Angeles, California August 17, 1998 S-1
DAY RUNNER, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (Dollars in thousands) Balance at Balance at June 30, Charged to June 30, Classification 1997 Operations Deductions 1998 - -------------- ---------------- ---------- ---------- --------- Allowance for doubtful accounts............ $2,682 $ 76 $ 2,606 Allowance for sales returns................ 5,982 $ 9,799 8,445 7,336 Reserve for obsolete inventory............. 3,259 898 1,105 3,052 Balance at Balance at June 30, Charged to June 30, Classification 1996 Operations Deductions 1997 - -------------- ---------------- ---------- ---------- --------- Allowance for doubtful accounts............ $2,358 $ 381 $ 57 $ 2,682 Allowance for sales returns................ 5,016 13,883 12,917 5,982 Reserve for obsolete inventory............. 3,473 1,267 1,481 3,259 Balance at Balance at June 30, Charged to June 30, Classification 1995 Operations Deductions 1996 - -------------- ---------------- ---------- ---------- --------- Allowance for doubtful accounts............ $1,671 $ 810 $ 123 $ 2,358 Allowance for sales returns................ 5,461 8,221 8,666 5,016 Reserve for obsolete inventory............. 3,214 2,754 2,495 3,473
S-2 EXHIBIT INDEX Exhibit Number Description 10.4 Day Runner Restated 401(K) Plan effective as of July 1, 1998 and Trust Agreement effective as of July 1, 1998 between the Registrant and New York Life Trust Company 10.6 1999 Officer Bonus Plan 10.7 First Amendment to Officer Severance Plan effective as of August 17, 1998 10.13 Standard Commercial Lease Agreement dated as of October 1, 1997 between RDC Sales and the Registrant 10.14 Standard Commercial Lease Agreement dated as of May 11, 1998 between GPM Real Property (7) Ltd. and Endow (7) Inc. and the Registrant 10.15 Schedule of Warrants 10.18 Form of Warrant dated April 20, 1998 to purchase shares of the Registrant's Common Stock issued to the non-employee directors of the Company and Schedule of Warrants 21.1 Subsidiaries of the Registrant 23.1 Consent of Deloitte & Touche LLP 27.1 Financial Data Schedule EX-10 2 401(K) PLAN AND TRUST AGREEMENT DAY RUNNER, INC. DAY RUNNER, INC. 401(k) PLAN WHEREAS, Day Runner, Inc. (hereinafter referred to as the "Employer") heretofore adopted the Day Runner, Inc. 401(k) Plan (hereinafter referred to as the "Plan") for the benefit of its eligible Employees, effective as of January 1, 1991; and WHEREAS, the Employer reserved the right to amend the Plan; and WHEREAS, the Employer heretofore amended the Plan from time to time and desires to further amend the Plan; and WHEREAS, it is intended that the Plan is to continue to be a qualified plan under Section 401(a) of the Internal Revenue Code for the exclusive benefit of the Participants and their Beneficiaries; NOW, THEREFORE, the Plan is hereby amended by restating the Plan in its entirety as follows: Table of Contents ARTICLE ONE--DEFINITIONS 1.1 Account 1.2 Administrator 1.3 Beneficiary 1.4 Break in Service 1.5 Code 1.6 Compensation 1.7 Disability 1.8 Effective Date 1.9 Employee 1.10 Employer 1.11 Employment Date 1.12 Highly-Compensated Employee 1.13 Hour of Service 1.14 Leased Employee 1.15 Nonhighly-Compensated Employee 1.16 Normal Retirement Date 1.17 Participant 1.18 Plan 1.19 Plan Year 1.20 Trust 1.21 Trustee 1.22 Valuation Date 1.23 Year of Service ARTICLE TWO--SERVICE DEFINITIONS AND RULES 2.1 Year of Service 2.2 Break in Service 2.3 Leave of Absence 2.4 Rule of Parity on Return to Employment 2.5 Service in Excluded Job Classifications or with Related Companies ARTICLE THREE--PLAN PARTICIPATION 3.1 Participation 3.2 Re-employment of Former Participant 3.3 Termination of Eligibility ARTICLE FOUR--ELECTIVE DEFERRALS, EMPLOYER CONTRIBUTIONS, ROLLOVERS AND TRANSFERS FROM OTHER PLANS 4.1 Elective Deferrals 4.2 Employer Contributions 4.3 Rollovers and Transfers of Funds from Other Plans 4.4 Timing of Contributions ARTICLE FIVE--ACCOUNTING RULES 5.1 Investment of Accounts and Accounting Rules 5.2 Participants Omitted in Error ARTICLE SIX--VESTING, RETIREMENT AND DISABILITY BENEFITS 6.1 Vesting 6.2 Forfeiture of Nonvested Balance 6.3 Return to Employment Before Distribution of Vested Account Balance 6.4 Normal Retirement 6.5 Disability ARTICLE SEVEN--MANNER AND TIME OF DISTRIBUTING BENEFITS 7.1 Manner of Payment 7.2 Time of Commencement of Benefit Payments 7.3 Furnishing Information 7.4 Amount of Death Benefit 7.5 Designation of Beneficiary 7.6 Distribution of Death Benefits 7.7 Eligible Rollover Distributions ARTICLE EIGHT--LOANS AND IN-SERVICE WITHDRAWALS 8.1 Loans 8.2 Hardship Distributions 8.3 Withdrawals of Rollover Contributions 8.4 Withdrawals After Age 59 1/2 ARTICLE NINE--ADMINISTRATION OF THE PLAN 9.1 Plan Administration 9.2 Claims Procedure 9.3 Trust Agreement ARTICLE TEN--SPECIAL COMPLIANCE PROVISIONS 10.1 Distribution of Excess Elective Deferrals 10.2 Limitations on 401(k) Contributions 10.3 Nondiscrimination Test for Employer Matching Contributions 10.4 Limitation on the Multiple Use Alternative ARTICLE ELEVEN--LIMITATION ON ANNUAL ADDITIONS 11.1 Rules and Definitions ARTICLE TWELVE--AMENDMENT AND TERMINATION 12.1 Amendment 12.2 Termination of the Plan ARTICLE THIRTEEN--TOP-HEAVY PROVISIONS 13.1 Applicability 13.2 Definitions 13.3 Allocation of Employer Contributions and Forfeitures for Top-Heavy Plan Year 13.4 Vesting ARTICLE FOURTEEN--MISCELLANEOUS PROVISIONS 14.1 Plan Does Not Affect Employment 14.2 Successor to the Employer 14.3 Repayments to the Employer 14.4 Benefits not Assignable 14.5 Merger of Plans 14.6 Investment Experience not a Forfeiture 14.7 Distribution to Legally Incapacitated 14.8 Construction 14.9 Governing Documents 14.10 Governing Law 14.11 Headings 14.12 Counterparts 14.13 Location of Participant or Beneficiary Unknown ARTICLE ONE--DEFINITIONS For purposes of the Plan, unless the context or an alternative definition specified within another Article provides otherwise, the following words and phrases shall have the definitions provided: 1.1 "ACCOUNT" shall mean the individual bookkeeping accounts maintained for a Participant under the Plan which shall record (a) the Participant's allocations of Employer contributions and forfeitures if applicable, (b) amounts of Compensation deferred to the Plan pursuant to the Participant's election, (c) any amounts transferred to this Plan under Section 4.3 from another qualified retirement plan, and (d) the allocation of Trust investment experience. 1.2 "ADMINISTRATOR" shall mean the Plan Administrator appointed from time to time in accordance with the provisions of Article Nine hereof. 1.3 "BENEFICIARY" shall mean any person, trust, organization, or estate entitled to receive payment under the terms of the Plan upon the death of a Participant. 1.4 "BREAK IN SERVICE" shall mean the twelve (12)-month computation period specified in Article Two. 1.5 "CODE" shall mean the Internal Revenue Code of 1986, as amended from time to time. 1.6 "COMPENSATION" shall mean the compensation paid to a Participant by the Employer for the Plan Year, but exclusive of stock options, expense allowances and reimbursements, any program of deferred compensation or additional benefits payable other than in cash and any compensation received prior to his becoming a Participant in the Plan. Compensation shall include any amounts deferred under a salary reduction agreement in accordance with Section 4.1 or under a Code Section 125 plan maintained by the Employer. In addition to other applicable limitations set forth in the Plan, and notwithstanding any other provision of the Plan to the contrary, the annual Compensation of each Participant taken into account under the Plan shall not exceed the OBRA `93 annual compensation limit. The OBRA `93 annual compensation limit is $150,000, as adjusted by the Secretary of the Treasury or his delegate for increases in the cost of living in accordance with Section 401(a)(17)(B) of the Code. The cost-of-living adjustment in effect for a calendar year applies to any period, not exceeding twelve (12) months, over which Compensation is determined (determination period) beginning in such calendar year. If a determination period consists of fewer than twelve (12) months, the OBRA `93 annual compensation limit shall be multiplied by a fraction, the numerator of which is the number of months in the determination period, and the denominator of which is twelve (12). Any reference in the Plan to the limitation under Section 401(a)(17) of the Code shall mean the OBRA `93 annual compensation limit set forth in this provision. If Compensation for any prior determination period is taken into account in determining a Participant's benefits accruing in the current Plan Year, the Compensation for that prior determination period is subject to the OBRA `93 annual compensation limit in effect for that prior determination period. For purposes of determining who is a Highly-Compensated Employee, Compensation shall mean compensation as defined in Code Section 414(q)(4). 1.7 "DISABILITY." Disability shall mean a "permanent and total" disability incurred by a Participant while in the employ of the Employer. For this purpose, a permanent and total disability shall mean suffering from a physical or mental condition for which the Participant is eligible to receive benefits under the Employer's long-term disability insurance plan covering such Participant. 1.8 "EFFECTIVE DATE." The Plan's initial Effective Date is January 1, 1991. The Effective Date of this restated Plan, on and after which it supersedes the terms of the existing Plan document, is July 1, 1998 except where the provisions of the Plan shall otherwise specifically provide. The rights of any Participant who separated from the Employer's Service prior to this date shall be established under the terms of the Plan and Trust as in effect at the time of the Participant's separation from Service, unless the Participant subsequently returns to Service with the Employer. Rights of spouses and Beneficiaries of such Participants shall also be governed by those documents. 1.9 "EMPLOYEE" shall mean a common law employee of the Employer, who for the entire period of his employment, was also treated as a common law employee on the payroll records of the Employer. 1.10 "EMPLOYER" shall mean Day Runner, Inc. and any subsidiary or affiliate which is a member of its "related group" (as defined in Section 2.5) which has adopted the Plan (a "Participating Affiliate"), and shall include any successor(s) thereto which adopt this Plan. Any such subsidiary or affiliate of Day Runner, Inc. may adopt the Plan with the approval of its board of directors (or noncorporate counterpart) subject to the approval of Day Runner, Inc. The provisions of this Plan shall apply equally to each Participating Affiliate and its Employees except as specifically set forth in the Plan; provided, however, notwithstanding any other provision of this Plan, the amount and timing of contributions under Article 4 to be made by any Employer which is a Participating Affiliate shall be made subject to the approval of Day Runner, Inc. For purposes hereof, each Participating Affiliate shall be deemed to have appointed Day Runner, Inc. as its agent to act on its behalf in all matters relating to the administration, amendment, termination of the Plan and the investment of the assets of the Plan. For purposes of the Code and ERISA, the Plan as maintained by Day Runner, Inc. and the Participating Affiliates shall constitute a single plan rather than a separate plan of each Participating Affiliate. All assets in the Trust shall be available to pay benefits to all Participants and their Beneficiaries. 1.11 "EMPLOYMENT DATE" shall mean the first date as of which an Employee is credited with an Hour of Service, provided that, in the case of a Break in Service, the Employment Date shall be the first date thereafter as of which an Employee is credited with an Hour of Service. 1.12 "HIGHLY-COMPENSATED EMPLOYEE" shall mean any Employee of the Employer who: (a) was a five percent (5%) owner of the Employer (as defined in Code Section 416(i)(1)) during the "determination year" or "look-back year"; or (b) earned more than $80,000 (as increased by cost-of-living adjustments) of Compensation from the Employer during the "look-back year" and, if the Employer elects, was in the top twenty percent (20%) of Employees by Compensation for such year. An Employee who separated from Service prior to the "determination year" shall be treated as a Highly-Compensated Employee for the "determination year" if such Employee was a Highly-Compensated Employee when such Employee separated from Service, or was a Highly-Compensated Employee at any time after attaining age fifty-five (55). For purposes of this Section, the "determination year" shall be the Plan Year for which a determination is being made as to whether an Employee is a Highly-Compensated Employee. The "look-back year" shall be the twelve (12) month period immediately preceding the "determination year". 1.13 "HOUR OF SERVICE" shall mean: (a) each hour for which an Employee is paid or entitled to payment for the performance of duties for the Employer. These hours shall be credited to the Employee for the computation period in which the duties are performed; and (b) each hour for which an Employee is paid, or entitled to payment, by the Employer on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, involuntary military duty, or leave of absence. No more than five hundred and one (501) Hours of Service shall be credited under this subsection for any single continuous period during which no duties are performed (whether or not such period occurs in a single computation period). Hours under this subsection shall be calculated and credited pursuant to Section 2530.200b-2(b) and (c) of the Department of Labor Regulations which are incorporated herein by this reference; and (c) each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by the Employer. The same Hours of Service shall not be credited both under subsection (a) or subsection (b), as the case may be, and under this subsection (c). These hours shall be credited to the Employee for the computation period or periods to which the award or agreement pertains rather than the computation period in which the award, agreement, or payment is made. In crediting Hours of Service for Employees who are paid on an hourly basis, the "actual" method shall be utilized. For this purpose, the "actual" method shall mean the determination of Hours of Service from records of hours worked and hours for which the Employer makes payment or for which payment is due from the Employer, subject to the limitations enumerated above. In crediting Hours of Service the "weeks of employment" method shall be utilized. Under this method, an Employee shall be credited with forty-five (45) Hours of Service for each week for which the Employee would be required to be credited with at least one (1) Hour of Service pursuant to the provisions enumerated above. 1.14 "LEASED EMPLOYEE" shall mean any person who, pursuant to an agreement between the Employer and any other person or organization, has performed services for the Employer (determined in accordance with Code Section 414(n)(6)) on a substantially full-time basis for a period of at least one (1) year and where such services are performed under the primary direction and control of the Employer. A person shall not be considered a Leased Employee if the total number of Leased Employees does not exceed twenty percent (20%) of the Nonhighly-Compensated Employees employed by the Employer, and if any such person is covered by a money purchase pension plan providing (a) a nonintegrated employer contribution rate of at least ten percent (10%) of compensation, as defined in Section 11.1(b)(2) of the Plan but including amounts contributed pursuant to a salary reduction agreement which are excludable from the employee's gross income under Code Sections 125, 402(g) or 403(b), (b) immediate participation, and (c) full and immediate vesting. 1.15 "NONHIGHLY-COMPENSATED EMPLOYEE" shall mean an Employee of the Employer who is not a Highly-Compensated Employee. 1.16 "NORMAL RETIREMENT DATE" shall mean a Participant's sixty-fifth (65th) birthday. 1.17 "PARTICIPANT" shall mean any Employee who has satisfied the eligibility requirements of Article Three and who is participating in the Plan. 1.18 "PLAN" shall mean the Day Runner, Inc. 401(k) Plan, as set forth herein and as may be amended from time to time. ---- 1.19 "PLAN YEAR" shall mean the twelve (12)-consecutive month period beginning January 1 and ending December 31. ---- 1.20 "TRUST" shall mean the Trust Agreement entered into between the Employer and the Trustee forming part of this Plan, together with any amendments thereto. "Trust Fund" shall mean any and all property held by the Trustee pursuant to the Trust Agreement, together with income therefrom. 1.21 "TRUSTEE" shall mean the Trustee or Trustees appointed by the Employer, and any successors thereto. 1.22 "VALUATION DATE" shall mean the date or dates established by the Administrator for the valuation of the assets of the Plan. In no event shall the assets of the Plan be valued less frequently than once each Plan Year. 1.24 "YEAR OF SERVICE" or "SERVICE" and the special rules with respect to crediting Service are in Article Two of the Plan. ARTICLE TWO--SERVICE DEFINITIONS AND RULES Service is the period of employment credited under the Plan. Definitions and special rules related to Service are as follows: 2.1 YEAR OF SERVICE. An Employee shall be credited with a Year of Service for each Plan Year in which he is credited with at least one thousand (1,000) Hours of Service. 2.2 BREAK IN SERVICE. A Break in Service shall be a twelve (12)-month computation period (as used for measuring Years of Service) in which an Employee or Participant is not credited with at least five hundred and one (501) Hours of Service. 2.3 LEAVE OF ABSENCE. A Participant on an unpaid leave of absence pursuant to the Employer's normal personnel policies shall be credited with Hours of Service at his regularly-scheduled weekly rate while on such leave, provided the Employer acknowledges in writing that the leave is with its approval. These Hours of Service shall be credited only for purposes of determining if a Break in Service has occurred and, unless specified otherwise by the Employer in writing, shall not be credited for eligibility to participate in the Plan, vesting, or qualification to receive an allocation of Employer contributions and forfeitures. Hours of Service during a paid leave of absence shall be credited as provided in Section 1.13. For any individual who is absent from work for any period by reason of the individual's pregnancy, birth of the individual's child, placement of a child with the individual in connection with the individual's adoption of the child, or by reason of the individual's caring for the child for a period beginning immediately following such birth or adoption, the Plan shall treat as Hours of Service, solely for determining if a Break in Service has occurred, the following Hours of Service: (a) the Hours of Service which otherwise normally would have been credited to such individual but for such absence; or (b) in any case where the Administrator is unable to determine the Hours of Service, on the basis of an assumed eight (8) hours per day. In no event shall more than five hundred and one (501) of such hours be credited by reason of such period of absence. The Hours of Service shall be credited in the computation period (used for measuring Years of Service) which starts after the leave of absence begins. However, the Hours of Service shall instead be credited in the computation period in which the absence begins if it is necessary to credit the Hours of Service in that computation period to avoid the occurrence of a Break in Service. 2.4 RULE OF PARITY ON RETURN TO EMPLOYMENT. An Employee who returns to employment after a Break in Service shall retain credit for his pre-Break Years of Service, subject to the following rules: (a) If a Participant incurs five (5) or more consecutive Breaks in Service, any Years of Service performed thereafter shall not be used to increase the nonforfeitable interest in his Account accrued prior to such five (5) or more consecutive Breaks in Service. (b) If when a Participant incurred a Break in Service, he had not completed sufficient Years of Service to be credited with a vested benefit under the schedule set forth in Section 6.1, his pre-Break Years of Service shall be disregarded if his consecutive Breaks in Service equal or exceed five (5). 2.5 SERVICE IN EXCLUDED JOB CLASSIFICATIONS OR WITH RELATED COMPANIES. (a) Service while a Member of an Ineligible Classification ofEmployees.An Employee who is a member of an ineligible classification of Employees shall not be eligible to participate in the Plan while a member of such ineligible classification. However, if any such Employee is transferred to an eligible classification, such Employee shall be credited with any prior periods of Service completed while a member of such an ineligible classification both for purposes of determining his Years of Service and his "Months of Service" under Section 3.1. For this purpose, an Employee shall be considered a member of an ineligible classification of Employees for any period during which: (i) he is a Leased Employee; or (ii) he is employed in a job classification which is excluded from participating in the Plan under Section 3.1 below. (b) Service with Related Group Members. For each Plan Year in which the Employer is a member of a "related group", as hereinafter defined, all Service of an Employee with any one or more members of such related group shall be treated as employment by the Employer for purposes of determining the Employee's Years of Service under Section 2.1 and his Months of Service under Section 3.1. The transfer of employment by any such Employee to another member of the related group shall not be deemed to constitute a retirement or other termination of employment by the Employee for purposes of the Plan, but the Employee shall be deemed to have continued in employment with the Employer for purposes hereof. For purposes of this subsection (b), "related group" shall mean the Employer and all corporations, trades or businesses (whether or not incorporated) which constitute a controlled group of corporations with the Employer, a group of trades or businesses under common control with the Employer, or an affiliated service group which includes the Employer, within the meaning of Section 414(b), Section 414(c), or Section 414(m), respectively, of the Code or any other entity required to be aggregated under Code Section 414(o). (c) Construction. This Section is included in the Plan to comply with the Code provisions regarding the crediting of Service, and not to extend any additional rights to Employees in ineligible classifications other than as required by the Code and regulations thereunder. ARTICLE THREE--PLAN PARTICIPATION 3.1 PARTICIPATION. All Employees participating in the Plan prior to the Plan's restatement shall continue to participate, subject to the terms hereof. Each other Employee shall become a Participant under the Plan effective as of the January 1, April 1, July 1 or October 1 coincident with or next following the later of the Employee's completion of six (6) Months of Service and attainment of age twenty-one (21). For purposes of this Section 3.1, an Employee shall be credited with six (6) Months of Service for each six (6) month period commencing on his Employment Date and the six (6) month anniversaries of that date and ending on the date he separates from Service. Fractional periods of a month shall be expressed in terms of days, with thirty (30) days being equal to one (1) month. In no event, however, shall any Employee participate under the Plan while: (i) he is included in a unit of Employees covered by a collective bargaining agreement between the Employer and the Employee representatives under which retirement benefits were the subject of good faith bargaining, unless the terms of such bargaining agreement expressly provides for inclusion in the Plan; (ii) he is employed on a "temporary basis", that is, hired for the duration of a particular project or projects; (iii) employed as a nonresident alien who receives no earned income (within the meaning of Section 911(d)(2) of the Code) from the Employer which constitutes income from sources within the United States (within the meaning of Section 861(a)(3) of the Code); or (iv) he is a Leased Employee. 3.2 RE-EMPLOYMENT OF FORMER PARTICIPANT. A Participant whose participation ceased because of termination of employment with the Employer shall participate as soon as administratively possible following his re-employment. 3.3 TERMINATION OF ELIGIBILITY. In the event a Participant is no longer a member of an eligible class of Employees and he becomes ineligible to participate, such Employee shall participate as soon as administratively possible following his return to an eligible class of Employees. In the event an Employee who is not a member of an eligible class of Employees becomes a member of an eligible class, such Employee shall participate as soon as administratively possible thereafter, if such Employee has satisfied the eligibility requirements of Section 3.1 and would have otherwise previously become a Participant. ARTICLE FOUR--ELECTIVE DEFERRALS, EMPLOYER CONTRIBUTIONS, ROLLOVERS AND TRANSFERS FROM OTHER PLANS 4.1 ELECTIVE DEFERRALS. (a) Elections. A Participant may elect to defer a portion of his Compensation for a Plan Year. The amount of a Participant's Compensation that is deferred in accordance with the Participant's election shall be withheld by the Employer from the Participant's Compensation. The amount deferred on behalf of each Participant shall be contributed by the Employer to the Plan and allocated to the Participant's Account. (b) Changes in Election. A Participant may prospectively elect to change or revoke the amount (or percentage) of his elective deferrals during the Plan Year by filing a written election with the Employer, or via a telephone "voice response" or on-line access system designated by the Administrator, provided that a written confirmation is forwarded in response to such request. (c) Limitations on Deferrals. No Participant shall defer an amount which exceeds $10,000 (or such amount as adjusted for cost-of-living increases under Section 402(g) of the Code) for any calendar year ending with or within the Plan Year. (d) Administrative Rules. All elections made under this Section 4.1, including the amount and frequency of deferrals, shall be subject to the rules of the Administrator which shall be consistently applied and which may be changed from time to time. 4.2 EMPLOYER CONTRIBUTIONS. (a) Employer Matching Contributions. For each Plan Year, the Employer may contribute to the Plan, on behalf of each Participant, a discretionary matching contribution equal to a percentage of the elective deferrals made by each such Participant. The amount, if any, of the Employer matching contribution for any Plan Year shall be made at the discretion of the board of directors of the Employer. The Employer's board of directors may also determine to suspend or reduce its contributions under this Section for any Plan Year or any portion thereof. Allocations under this Section shall be subject to the special rules of Section 13.3 in any Plan Year in which the Plan is a Top-Heavy Plan (as defined in Section 13.2(c)). Notwithstanding the foregoing provisions of this Section 4.2(a), at the end of each Plan Year, the Employer may elect to make a supplemental matching contribution on behalf of a Participant, to the extent required, to ensure that such Participant receives the same rate of matching contribution afforded to the remaining eligible Participants for such Plan Year. Such supplemental matching contribution shall be made only on behalf of a Participant who is employed by the Employer on the last day of the Plan Year. Any supplemental matching contribution and matching contributions received by any such Participant shall, however, be limited to the extent required to comply with the requirements of applicable Federal law. (b) Additional Employer Contributions. Additional Employer contributions may be made at the discretion of the Employer's board of directors for any Plan Year, subject to limits for tax deductions under the Code and provided that the special allocation in Section 13.3 has been satisfied if the Plan is a Top-Heavy Plan (as defined in Section 13.2(c)). (c) Eligibility for Additional Employer Contributions. To be eligible for an allocation of additional Employer contributions under Section 4.2(b) for a Plan Year, a Participant must be employed by the Employer on the last day of the Plan Year. (d) Allocation of Additional Employer Contributions. Any contribution made under Section 4.2(c) shall be allocated among the Accounts of eligible Participants in accordance with the ratio that each such eligible Participant's Compensation bears to the total Compensation of all such eligible Participants for the Plan Year. 4.3 ROLLOVERS AND TRANSFERS OF FUNDS FROM OTHER PLANS. With the approval of the Administrator, there may be paid to the Trustee amounts which have been held under other plans qualified under Code Section 401 either (a) maintained by the Employer which have been discontinued or terminated with respect to any Employee, or (b) maintained by another employer with respect to which any Employee has ceased to participate. Any such transfer or rollover may also be made by means of an Individual Retirement Account qualified under Section 408 of the Code, where the Individual Retirement Account was used as a conduit from the former plan. Any amounts so transferred on behalf of any Employee shall be nonforfeitable and shall be maintained under a separate Plan account, to be paid in addition to amounts otherwise payable under this Plan. The amount of any such account shall be equal to the fair market value of such account as adjusted for income, expenses, gains, losses, and withdrawals attributable thereto. Notwithstanding anything contained herein to the contrary, in no event shall the Administrator accept on behalf of any Employee a transfer of funds from a qualified plan which would subject the Plan to the provisions of Section 401(a)(11) of the Code. An Employee who would otherwise be eligible to participate in the Plan but for the failure to satisfy the age and/or service requirement for participation as set forth under Section 3.1, shall be eligible to complete a rollover to the Plan. Such an Employee shall also be eligible to obtain a loan or withdrawal in accordance with the provisions of Article Eight prior to satisfying such age and/or service requirement. 4.4 TIMING OF CONTRIBUTIONS. Employer contributions shall be made to the Plan no later than the time prescribed by law for filing the Employer's Federal income tax return (including extensions) for its taxable year ending with or within the Plan Year. Elective deferrals under Section 4.1 shall be paid to the Plan as soon as administratively possible, but no later than the time prescribed by applicable law, following receipt of such deferrals by the Administrator. ARTICLE FIVE--ACCOUNTING RULES 5.1 INVESTMENT OF ACCOUNTS AND ACCOUNTING RULES. (a) Investment Funds. The investment of Participants' Accounts shall be made in a manner consistent with the provisions of the Trust. The Administrator, in its discretion, may allow the Trust to provide for separate funds for the directed investment of each Participant's Account. (b) Participant Direction of Investments. In the event Participants' Accounts are subject to their investment direction, each Participant may direct how his Account is to be invested among the available investment funds in the percentage multiples established by the Administrator. In the event a Participant fails to make an investment election, with respect to all or any portion of his Account, the Trustee shall invest all or such portion of his Account in the investment fund to be designated by the Administrator. A Participant may change his investment election, with respect to future contributions and, if applicable, forfeitures, and/or amounts previously accumulated in the Participant's Account, in writing, on such form as the Administrator shall specify, or via a telephone "voice response" or on-line access system designated by the Administrator, provided that a written confirmation is forwarded in response to such request. Any such change in a Participant's investment election shall be effective at such time as may be prescribed by the Administrator. If the Plan's recordkeeper or investments are changed, the Administrator may suspend the Participants' investment direction of their Accounts. (c) Allocation of Investment Experience. As of each Valuation Date, the investment fund(s) of the Trust shall be valued at fair market value, and the income, loss, appreciation and depreciation (realized and unrealized), and any paid expenses of the Trust attributable to such fund shall be apportioned among Participants' Accounts within the fund based upon the value of each Account within the fund as of the preceding Valuation Date. (d) Allocation of Contributions. Employer contributions shall be allocated to the Account of each eligible Participant as of the last day of the period for which the contributions are made, or as soon as administratively practical thereafter. Elective deferrals shall be allocated to the Account of each Participant as soon as administratively practical following receipt of such contributions by the Administrator. (e) Manner and Time of Debiting Distributions. For any Participant who is entitled to receive a distribution from his Account, such distribution shall be made in accordance with the provisions of Section 7.2. The amount distributed shall be based upon the fair market value of the Participant's vested Account as of the Valuation Date preceding the distribution. 5.2 PARTICIPANTS OMITTED IN ERROR. In the event a Participant is not allocated a share of the Employer contribution and/or forfeitures as a result of an administrative error in any Plan Year, the Employer may elect to either (a) make an additional contribution on behalf of such omitted Participant in an appropriate amount, or (b) deduct the appropriate amount from the next succeeding Employer contribution and/or forfeitures and allocate such amount to the Participant's Account prior to making the allocations set forth under Section 5.1(d). ARTICLE SIX--VESTING, RETIREMENT AND DISABILITY BENEFITS 6.1 VESTING. A Participant shall at all times have a nonforfeitable (vested) right to his Account derived from elective deferrals, Employer "fail-safe" contributions under Section 10.2, and rollovers or transfers from other plans, as adjusted for investment experience. Except as otherwise provided with respect to Normal Retirement, Disability, or death, a Participant shall have a nonforfeitable (vested) right to a percentage of the value of his Account derived from Employer matching contributions under Section 4.2(a) and additional Employer contributions under Section 4.2(b) as follows: Years of Service Vested Percentage Less than 2 years 0% 2 years but less than 3 20% 3 years but less than 4 40% 4 years but less than 5 60% 5 years but less than 6 80% 6 years and thereafter 100% 6.2 FORFEITURE OF NONVESTED BALANCE. The nonvested portion of a Participant's Account, as determined in accordance with Section 6.1, shall be forfeited as of the earlier of (i) the date on which the Participant receives distribution of his vested Account or (ii) the last day of the Plan Year in which the Participant incurs five (5) consecutive Breaks in Service. The amount forfeited shall be used to reduce Employer contributions under Sections 4.2(a)/4.2(b). If the Participant returns to the employment of the Employer prior to incurring five (5) consecutive Breaks in Service, and prior to receiving distribution of his vested Account, the nonvested portion shall be restored. However, if the nonvested portion of the Participant's Account was allocated as a forfeiture as the result of the Participant receiving distribution of his vested Account balance, the nonvested portion shall be restored if: (a) the Participant resumes employment prior to incurring five (5) consecutive Breaks in Service; and (b) the Participant repays to the Plan, as of the earlier of (i) the date which is five (5) years after his reemployment date or (ii) the date which is the last day of the period in which the Participant incurs five (5) consecutive Breaks in Service, an amount equal to the total distribution, derived from Employer contributions under Section 4.2 and, if applicable, Section 13.3. The nonvested amount shall be restored to the Participant's Account, without interest or adjustment for interim Trust valuation experience, by a special Employer contribution or from the next succeeding Employer contribution and forfeitures, as appropriate. 6.3 RETURN TO EMPLOYMENT BEFORE DISTRIBUTION OF VESTED ACCOUNT BALANCE. If distribution is made to an Employee of less than the Employee's entire vested Account, and if the Employee returns to Service, a separate record shall be maintained of said Account balance. The Employee's vested interest at any time in this separate account shall be an amount equal to the formula P(AB+D)-D, where P is the vested percentage at the relevant time, AB is the Account balance at the relevant time, and D is the amount of the distribution made to the Employee. 6.4 NORMAL RETIREMENT. A Participant who is in the employment of the Employer at his Normal Retirement Date shall have a nonforfeitable interest in one hundred percent (100%) of his Account, if not otherwise one hundred percent (100%) vested under the vesting schedule in Section 6.1. A Participant who continues employment with the Employer after his Normal Retirement Date shall continue to participate under the Plan. 6.5 DISABILITY. If a Participant incurs a Disability, the Participant shall have a nonforfeitable interest in one hundred percent (100%) of his Account, if not otherwise one hundred percent (100%) vested under the vesting schedule in Section 6.1. Payment of such Participant's Account balance shall be made at the time and in the manner specified in Article Seven, following receipt by the Administrator of the Participant's written distribution request. ARTICLE SEVEN--MANNER AND TIME OF DISTRIBUTING BENEFITS 7.1 MANNER OF PAYMENT. The Participant's vested Account shall be distributed to the Participant (or to the Participant's Beneficiary in the event of the Participant's death) in a single lump-sum payment. 7.2 TIME OF COMMENCEMENT OF BENEFIT PAYMENTS. If a Participant terminates employment on or after his Normal Retirement Date, or as a result of his Disability, and if his vested Account balance totals $5,000 or less, distribution of his vested Account balance shall be made as soon as administratively practical following the Participant's separation from Service. Subject to the following provisions of this Section, if the Participant's vested Account balance exceeds $5,000, distribution shall not be made or commence, unless the Participant otherwise requests in writing. If a Participant terminates employment for any reason other than Normal Retirement, Disability or death, and if his vested Account balance totals $5,000 or less, distribution of his vested Account balance shall be made as soon as administratively practical following the Participant's separation from Service. Subject to the following provisions of this Section, if the vested balance of a Participant's Account exceeds $5,000, distribution shall not be made or commence unless the Participant otherwise requests in writing. The failure of a Participant to consent to a distribution while his vested Account balance is immediately distributable, shall be deemed to be an election to defer commencement of payment of his vested Account balance. Notwithstanding any provision contained herein to the contrary, a Participant who is not vested in any portion of his Account balance attributable to Employer contributions shall be deemed to have received distribution of such portion of his Account as of the end of the Plan Year in which he incurs a Break in Service. A Participant who terminates employment after his Normal Retirement Date may elect to defer receipt of his Account; provided however, that in no event shall the distribution be made or commence later than the April 1st following the end of the calendar year in which the Participant attains age seventy and one-half (70-1/2), or except for a Participant who is a five percent (5%) owner of the Employer (within the meaning of Section 401(a)(9) of the Code), if later, the April 1st following the calendar year in which the Participant retires or otherwise separates from service. In the event distribution is required to be made while the Participant is employed by the Employer, such Participant may elect to receive the minimum required under Section 401(a)(9) of the Code and the regulations thereunder. 7.3 FURNISHING INFORMATION. Prior to the payment of any benefit under the Plan, each Participant or Beneficiary may be required to complete such administrative forms and furnish such proof as may be deemed necessary or appropriate by the Employer, Administrator, and/or Trustee. 7.4 AMOUNT OF DEATH BENEFIT. (a) Death Before Termination of Employment. In the event of the death of a Participant while in the employ of the Employer, vesting in the Participant's Account shall be one hundred percent (100%), if not otherwise one hundred percent (100%) vested under Section 6.1, with the credit balance of the Participant's Account being payable to his Beneficiary. (b) Death After Termination of Employment. In the event of the death of a former Participant after termination of employment, but prior to the complete distribution of his vested Account balance under the Plan, the undistributed vested balance of the Participant's Account shall be paid to the Participant's Beneficiary. 7.5 DESIGNATION OF BENEFICIARY. Each Participant shall file with the Administrator a designation of Beneficiary to receive payment of any death benefit payable hereunder if such Beneficiary should survive the Participant. However, no Participant who is married shall be permitted to designate a Beneficiary other than his spouse unless the Participant's spouse has signed a written consent witnessed by a Plan representative or a notary public, which provides for the designation of an alternate Beneficiary. Subject to the above, Beneficiary designations may include primary and contingent Beneficiaries, and may be revoked or amended at any time in similar manner or form, and the most recent designation shall govern. In the absence of an effective designation of Beneficiary, or if the Beneficiary dies before complete distribution of the Participant's vested Account, all amounts shall be paid to the surviving spouse of the Participant, if living, or otherwise to the Participant's estate. Notification to Participants of the death benefits under the Plan and the method of designating a Beneficiary shall be given at the time and in the manner provided by regulations and rulings under the Code. 7.6 DISTRIBUTION OF DEATH BENEFITS. Distribution of any death benefit hereunder shall be made within one (1) year of the Participant's death or, in the case of a surviving spouse, within a reasonable time after the Participant's death or, if the surviving spouse so elects and if the Participant's vested Account exceeds $5,000, no later than the date on which the Participant would have reached age seventy and one-half (70-1/2). If a surviving spouse dies before distributions to the spouse begin, this paragraph shall be applied as if the surviving spouse were the Participant. To the extent payments are not designated to or for the benefit of a natural person, or if payments commence after the required time, any death benefit shall be paid in a lump sum within five (5) years of the Participant's death. If a Participant dies after payments have commenced, any survivor's benefit must be paid no less rapidly than the method of payment in effect at the time of the Participant's death. 7.7 ELIGIBLE ROLLOVER DISTRIBUTIONS. Notwithstanding the foregoing provisions of this Article Seven, the provisions of this Section 7.7 shall apply to distributions made under the Plan. (a) A distributee may elect, at the time and in the manner prescribed by the Administrator, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. (b) Definitions: (i) Eligible Rollover Distribution. An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's designated Beneficiary, or for a specified period of ten (10) years or more; any distribution to the extent such distribution is required under Section 401(a)(9) of the Code; and the portion of any distribution that is not includable in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities). (ii) Eligible Retirement Plan. An eligible retirement plan is an individual retirement account described in Section 408(a) of the Code, an individual retirement annuity described in Section 408(b) of the Code, an annuity plan described in Section 403(a) of the Code or a qualified trust described in Section 401(a) of the Code, that accepts the distributee's eligible rollover distribution. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity. (iii) Distributee. A distributee includes an Employee or former Employee. In addition, the Employee's or former Employee's surviving spouse and the Employee's or former Employee's spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Section 414(p) of the Code, are distributees with regard to the interest of the spouse or former spouse. (iv) Direct Rollover. A direct rollover is a payment by the Plan to the eligible retirement plan specified by the distributee. (c) If a distribution is one to which Sections 401(a)(11) and 417 of the Code do not apply, such distribution may commence less than 30 days after the notice required under Section 1.411(a)-11(c) of the Income Tax Regulations is given, provided that: (i) the Administrator clearly informs the Participant that the Participant has a right to a period of at least 30 days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option), and (ii) the Participant, after receiving the notice, affirmatively elects a distribution. ARTICLE EIGHT--LOANS AND IN-SERVICE WITHDRAWALS 8.1 LOANS. (a) Permissible Amount and Procedures. Upon the application of a Participant, the Administrator may, in accordance with a uniform and nondiscriminatory policy, direct the Trustee to grant a loan to the Participant, which loan shall be secured by the Participant's vested Account balance. The Participant's signature shall be required on a promissory note. In determining a rate of interest on such loan, the Administrator may refer to the rate of interest used for obligations of a comparable nature by commercial lending institutions within a radius of fifty (50) miles of the Employer's principal place of business. Participant loans shall be treated as segregated investments, and interest repayments shall be credited only to the Participant's Account. (b) Limitation on Amount of Loans. A Participant's loan shall not exceed the lesser of: (1) $50,000, which amount shall be reduced by the highest outstanding loan balance during the preceding twelve (12)-month period; or (2) one-half (1/2) of the vested value of the Participant's Account, determined as of the Valuation Date preceding the date of the Participant's loan; or (3) the value of the Participant's Account attributable to his elective deferrals and rollover contributions, including earnings thereon. Any loan must be repaid within five (5) years, unless made for the purpose of acquiring the primary residence of the Participant, in which case such loan may be repaid over a longer period of time not to exceed ten (10) years. The repayment of any loan must be made in at least quarterly installments of principal and interest. If a Participant defaults on any outstanding loan, the unpaid balance, and any interest due thereon, shall become due and payable in accordance with the terms of the underlying promissory note; provided, however, that such foreclosure on the promissory note and attachment of security shall not occur until a distributable event occurs in accordance with the provisions of Article Seven. If a Participant terminates employment while any loan balance is outstanding, the unpaid balance, and any interest due thereon, shall become due and payable in accordance with the terms of the underlying promissory note. If such amount is not paid to the Plan, it shall be charged against the amounts that are otherwise payable to the Participant or the Participant's Beneficiary under the provisions of the Plan. In the case of a Participant who has loans outstanding from other plans of the Employer (or a member of the Employer's related group (within the meaning of Section 2.5(b)), the Administrator shall be responsible for reporting to the Trustee the existence of said loans in order to aggregate all such loans within the limits of Section 72(p) of the Code. 8.2 HARDSHIP DISTRIBUTIONS. In the case of a financial hardship resulting from a proven immediate and heavy financial need, a Participant may receive a distribution not to exceed the lesser of (i) the value of the Participant's Account attributable to his elective deferrals, without regard to earnings thereon, and any rollover contributions made pursuant to Section 4.3, including earnings thereon, or (ii) the amount necessary to satisfy the financial hardship. The amount of any such immediate and heavy financial need may include any amounts necessary to pay Federal, state or local income taxes or penalties reasonably anticipated to result from the distribution. Such distribution shall be made in accordance with nondiscriminatory and objective standards consistently applied by the Administrator. Hardship distributions under this Section shall be deemed to be the result of an immediate and heavy financial need if such distribution is to (a) pay expenses for medical care (as described in Section 213(d) of the Code) previously incurred by the Participant, the Participant's spouse, or any dependents of the Participant (as defined in Section 152 of the Code), or to permit the Participant, the Participant's spouse, or any dependents of the Participant to obtain such medical care, (b) purchase the principal residence of the Participant (excluding mortgage payments), (c) pay tuition and related educational fees for the next twelve (12) months of post-secondary education for the Participant, Participant's spouse, or any of the Participant's dependents or (d) prevent the eviction of the Participant from his principal residence or foreclosure on the Participant's principal residence. In addition, any hardship distribution hereunder shall only be made provided that the funds for such hardship are not available from other financial resources of the Participant, the Participant's spouse or the Participant's children. Distributions paid pursuant to this Section shall be deemed to be made as of the Valuation Date immediately preceding the hardship distribution, and the Participant's Account shall be reduced accordingly. The provisions of this Section (relating to hardship distributions) are intended to comply with Treasury Regulations issued under Section 401(k) of the Code, and shall be so interpreted. 8.3 WITHDRAWALS OF ROLLOVER CONTRIBUTIONS. A Participant, by giving written notice to the Administrator, may withdraw from the Plan a sum (a) not in excess of the credit balance of his Account attributable to any rollover contributions made pursuant to Section 4.3, including earnings thereon, and (b) not less than such minimum amount as the Administrator may establish from time to time to facilitate administration of the Plan. Any such withdrawals shall be made in accordance with nondiscriminatory and objective standards consistently applied by the Administrator. 8.4 WITHDRAWALS AFTER AGE 59-1/2. After attaining age fifty-nine and one-half (59-1/2), a Participant, by giving written notice to the Administrator, may withdraw from the Plan a sum (a) not in excess of the credit balance of his vested Account and (b) not less than such minimum amount as the Administrator may establish from time to time to facilitate administration of the Plan. Any such withdrawals shall be made in accordance with nondiscriminatory and objective standards consistently applied by the Administrator. ARTICLE NINE --ADMINISTRATION OF THE PLAN 9.1 PLAN ADMINISTRATION. The Employer shall be the Plan Administrator, hereinbefore and hereinafter called the Administrator, and "named fiduciary" (for purposes of Section 402(a)(1) of the Employee Retirement Income Security Act of 1974, as amended from time to time) of the Plan, unless the Employer, by action of its board of directors, shall designate a person or committee of persons to be the Administrator and named fiduciary. The administration of the Plan, as provided herein, including a determination of the payment of benefits to Participants and their Beneficiaries, shall be the responsibility of the Administrator; provided, however, that the Administrator may delegate any of its powers, authority, duties or responsibilities to any person or committee of persons. In the event more than one party shall act as Administrator, all actions shall be made by majority decisions. In the administration of the Plan, the Administrator may (a) employ agents to carry out nonfiduciary responsibilities (other than Trustee responsibilities), (b) consult with counsel, who may be counsel to the Employer, and (c) provide for the allocation of fiduciary responsibilities (other than Trustee responsibilities) among its members. Actions dealing with fiduciary responsibilities shall be taken in writing and the performance of agents, counsel and fiduciaries to whom fiduciary responsibilities have been delegated shall be reviewed periodically. The expenses of administering the Plan and the compensation of all employees, agents, or counsel of the Administrator, including accounting fees, recordkeeper's fees, and the fees of any benefit consulting firm, shall be paid by the Plan, or shall be paid by the Employer if the Employer so elects. To the extent required by applicable law, compensation may not be paid by the Plan to full-time Employees of the Employer. In the event the Employer pays the expenses of administering the Plan, the Employer may seek reimbursement from the Plan for the payment of such expenses. Reimbursement shall be permitted only for Plan expenses paid by the Employer within the last twelve (12)-month period. The Administrator shall obtain from the Trustee, not less often than annually, a report with respect to the value of the assets held in the Trust Fund, in such form as may be required by the Administrator. The Administrator shall administer the Plan and adopt such rules and regulations as, in the opinion of the Administrator, are necessary or advisable to implement and administer the Plan and to transact its business. 9.2 CLAIMS PROCEDURE. Pursuant to procedures established by the Administrator, adequate notice in writing shall be provided to any Participant or Beneficiary whose claim for benefits under the Plan has been denied within ninety (90) days of receipt of such claim. Such notice shall be written in a manner calculated to be understood by the claimant, shall advise the claimant the right to administrative review, and shall set forth the specific reason for such denial, the specific references to the pertinent Plan provisions on which the denial is based, and a description of any additional material or information necessary to perfect the claim, and an explanation of why such material or information is necessary. If such review is requested by the claimant or his authorized representative within ninety (90) days after receipt by the claimant of written notification of denial of his claim, the Administrator shall afford a reasonable opportunity for a full and fair review by the Administrator of the decision denying the claim. The review shall focus on the additional facts, legal interpretations or material, if any, presented by the claimant. The Administrator shall, within sixty (60) days (or if special circumstances apply, one hundred twenty (120) days) of a request for review, render a written decision on its review setting forth the specific reasons for such decision, written in a manner calculated to be understood by the claimant. 9.3 TRUST AGREEMENT. The Trust Agreement entered into by and between the Employer and the Trustee, including any supplements or amendments thereto, or any successor Trust Agreement, is incorporated by reference herein. ARTICLE TEN--SPECIAL COMPLIANCE PROVISIONS 10.1 DISTRIBUTION OF EXCESS ELECTIVE DEFERRALS. If the amount of any elective deferrals made by a Participant exceeds the dollar limitation of Section 4.1(c), then the excess amount, and any income allocable thereto, shall be distributed to such Participant subject to the requirements of applicable law. 10.2 LIMITATIONS ON 401(k) CONTRIBUTIONS. (a) Average Actual Deferral Percentage Test. Amounts contributed as elective deferrals under Section 4.1(a), and any "fail-safe" contributions made under this Section, are considered to be amounts deferred pursuant to Section 401(k) of the Code. For purposes of this Article, these amounts are referred to as the "deferred amounts." For purposes of the "average actual deferral percentage test" described below, such deferred amounts must be made before the last day of the twelve (12)-month period immediately following the Plan Year to which the contributions relate. The Employer shall maintain records sufficient to demonstrate satisfaction of the average actual deferral percentage test and the deferred amounts used in such test. As of the last day of each Plan Year, the deferred amounts for the Plan Year for the Participants who are Highly-Compensated Employees shall satisfy either of the following tests: (1) The average actual deferral percentage for the eligible Participants who are Highly-Compensated Employees shall not exceed the average actual deferral percentage for eligible Participants who are Nonhighly-Compensated Employees multiplied by 1.25; or (2) The average actual deferral percentage for eligible Participants who are Highly-Compensated Employees shall not exceed the average actual deferral percentage of eligible Participants who are Nonhighly-Compensated Employees multiplied by two (2), provided that the average actual deferral percentage for eligible Participants who are Highly-Compensated Employees does not exceed the average actual deferral percentage for eligible Participants who are Nonhighly-Compensated Employees by more than two (2) percentage points, or such lesser amount as the Secretary of the Treasury shall prescribe to prevent the multiple use of this alternative limitation with respect to any Highly-Compensated Employee. For purposes of the above tests, the "actual deferral percentage" shall mean the ratio (expressed as a percentage) that the deferred amounts, which are allocated to the Participant's Account as of any day in the Plan Year, on behalf of each eligible Participant for the Plan Year bears to the eligible Participant's compensation, as defined in Code Section 414(s) and the regulations promulgated thereunder. The "average actual deferral percentage" shall mean the average (expressed as a percentage) of the actual deferral percentages of the eligible Participants in each group. "Eligible Participant" shall mean each Employee who is eligible to participate in the Plan under Section 3.1. For purposes of this Section 10.2, the actual deferral percentage for any eligible Participant who is a Highly-Compensated Employee for the Plan Year and who is eligible to have elective deferrals allocated to his account under two (2) or more plans or arrangements described in Code Section 401(k) that are maintained by the Employer or any employer who is a related group member (within the meaning of Section 2.5(b)) shall be determined as if all such deferrals were made under a single arrangement. In the event that this Plan satisfies the requirements of Code Section 410(b) only if aggregated with one (1) or more other plans, or if one (1) or more other plans satisfy the requirements of Code Section 410(b) only if aggregated with this Plan, then the provisions of this Section 10.2 shall be applied by determining the actual deferral percentage of eligible Participants as if all such plans were a single plan. The determination and treatment of deferred amounts and the actual deferral percentage of any Participant shall be subject to the prescribed requirements of the Secretary of the Treasury. In the event the average actual deferral percentage test is not satisfied for a Plan Year, the Employer, in its discretion, may make a special "fail-safe" contribution for eligible Participants who are Nonhighly Compensated Employees, to be allocated among their Accounts in proportion to their Compensation for the Plan Year. (b) Distributions of Excess Contributions. (1) In General. If the average actual deferral percentage test of Section 10.2(a) is not satisfied for a Plan Year, then the "excess contributions", and income allocable thereto, shall be distributed, to the extent required under Treasury regulations, no later than the last day of the Plan Year following the Plan Year for which the excess contributions were made. However, if such excess contributions are distributed later than two and one-half (2-1/2) months following the last day of the Plan Year in which such excess contributions were made, a ten percent (10%) excise tax shall be imposed upon the Employer with respect to such excess contributions. (2) Excess Contributions. For purposes of this Section, "excess contributions" shall consist of the excess of the aggregate amount of deferred amounts made by or on behalf of the affected Highly-Compensated Employee over the maximum amount of all such contributions permitted under the test under Section 10.2(a). In reducing the excess contribution hereunder, the reduction shall be first applied to the Highly-Compensated Employee with the highest percentage under Section 10.2(a). If reductions are further required to comply with Section 10.2(a), such reductions shall be applied to the Highly-Compensated Employee with the next highest percentage, and so forth until the nondiscrimination test of Section 10.2(a) is satisfied. (3) Determination of Income. The income allocable to excess contributions shall be determined by multiplying the income allocable to the Participant's deferred amounts for the Plan Year by a fraction, the numerator of which is the excess contributions made on behalf of the Participant for the Plan Year, and the denominator of which is the sum of the Participant's Account balances attributable to the Participant's deferred amounts on the last day of the Plan Year. (4) Maximum Distributable Amount. The excess contributions to be distributed to a Participant shall be adjusted for income and, if there is a loss allocable to the excess contribution, shall in no event be less than the lesser of the Participant's Account under the Plan or the Participant's deferred amounts for the Plan Year. Excess contributions shall be distributed from that portion of the Participant's Account attributable to such deferred amounts to the extent allowable under Treasury regulations. 10.3 NONDISCRIMINATION TEST FOR EMPLOYER MATCHING CONTRIBUTIONS. (a) Average Contribution Percentage Test. The provisions of this Section shall apply if Employer matching contributions are made in any Plan Year under Section 4.2(a). As of the last day of each Plan Year, the average contribution percentage for Highly-Compensated Employees for the Plan Year shall satisfy either of the following tests: (1) The average contribution percentage for eligible Participants who are Highly-Compensated Employees shall not exceed the average contribution percentage for eligible Participants who are Nonhighly-Compensated Employees for the Plan Year multiplied by 1.25; or (2) The average contribution percentage for eligible Participants who are Highly-Compensated Employees shall not exceed the average contribution percentage for eligible Participants who are Nonhighly-Compensated Employees for the Plan Year multiplied by two (2), provided that the average contribution percentage for eligible Participants who are Highly-Compensated Employees does not exceed the average contribution percentage for eligible Participants who are Nonhighly-Compensated Employees by more than two (2) percentage points or such lesser amount as the Secretary of the Treasury shall prescribe to prevent the multiple use of this alternative limitation with respect to any Highly-Compensated Employee. For purposes of the above tests, the "average contribution percentage" shall mean the average (expressed as a percentage) of the contribution percentages of the "eligible Participants" in each group. The contribution percentage" shall mean the ratio (expressed as a percentage) that the sum of Employer matching contributions and elective deferrals (to the extent such elective deferrals are not used to satisfy the average actual deferral percentage test of Section 10.2) under the Plan on behalf of the eligible Participant for the Plan Year bears to the eligible Participant's compensation (as defined in Code Section 414(s) and the regulations promulgated thereunder) for the Plan Year. "Eligible Participant" shall mean each Employee who is eligible to participate in the Plan under Section 3.1. For purposes of this Section 10.3, the contribution percentage for any eligible Participant who is a Highly-Compensated Employee for the Plan Year and who is eligible to have Employer matching contributions or elective deferrals allocated to his account under two (2) or more plans described in Section 401(a) of the Code or under arrangements described in Section 401(k) of the Code that are maintained by the Employer or any member of the Employer's related group (within the meaning of Section 2.5(b)), shall be determined as if all such contributions and elective deferrals were made under a single plan. In the event that this Plan satisfies the requirements of Section 410(b) of the Code only if aggregated with one (1) or more other plans, or if one (1) or more other plans satisfy the requirements of Section 410(b) of the Code only if aggregated with this Plan, then the provisions of this Section 10.3 shall be applied by determining the contribution percentages of eligible Participants as if all such plans were a single plan. The determination and treatment of the contribution percentage of any Participant shall satisfy such other requirements as may be prescribed by the Secretary of the Treasury. (b) Distribution of Excess Employer Matching Contributions. (1) In General. If the nondiscrimination tests of Section 10.3(a) are not satisfied for a Plan Year, then the "excess contributions", and any income allocable thereto, shall be forfeited, if otherwise forfeitable, no later than the last day of the Plan Year following the Plan Year for which the nondiscrimination tests are not satisfied, and shall be used to reduce Employer contributions under Section 4.2(a). To the extent that such "excess contributions" are nonforfeitable, such excess contributions shall be distributed to the Participant on whose behalf the excess contributions were made no later than the last day of the Plan Year following the Plan Year for which such "excess contributions" were made. However, if such excess contributions are distributed later than two and one-half (2-1/2) months following the last day of the Plan Year in which such excess contributions were made, a ten percent (10%) excise tax shall be imposed upon the Employer with respect to such excess contributions. For purposes of the limitations of Section 11.1(b)(1) of the Plan, excess contributions shall be considered annual additions. (2) Excess Contributions. For purposes of this Section, "excess contributions" shall consist of the excess of the amount of Employer matching contributions and elective deferrals (to the extent not used to satisfy the average actual deferral percentage test of Section 10.2) made on behalf of the affected Highly-Compensated Employee over the maximum amount of all such contributions permitted under the nondiscrimination tests under Section 10.3(a). In reducing the excess contribution hereunder, the reduction shall be first applied to the Highly-Compensated Employee with the highest percentage under Section 10.3(a). If reductions are further required to comply with Section 10.3(a), such reductions shall be applied to the Highly-Compensated Employee with the next highest percentage, and so forth until the nondiscrimination tests of Section 10.3(a) are satisfied. (3) Determination of Income. The income allocable to excess contributions shall be determined by multiplying the income allocable to the Employer matching contributions and such elective deferrals, by a fraction, the numerator of which is the excess contributions on behalf of the Participant for the Plan Year, and the denominator of which is the sum of the Participant's Account balances attributable to Employer matching contributions and such elective deferrals on the last day of the Plan Year. Notwithstanding the foregoing, to the extent otherwise required to comply with the requirements of Section 401(a)(4) of the Code and the regulations thereunder, vested matching contributions may be forfeited. 10.4 LIMITATION ON THE MULTIPLE USE ALTERNATIVE. The sum of the average actual deferral percentage of Highly-Compensated Employees under Section 10.2(a) and the average contribution percentage of Highly-Compensated Employees under Section 10.3(a) shall not exceed the "aggregate limit", as defined in Section 401(m)(9) of the Code and the regulations promulgated thereunder. If the aggregate limit is exceeded, the average contribution percentage of the Highly-Compensated Employees shall be reduced in accordance with the provisions of Section 10.3(b). In lieu of reducing the average contribution percentage, the Administrator may reduce the average actual deferral percentage of the Highly-Compensated Employees in accordance with the provisions of Section 10.2(b). The reductions under this Section shall be made only to the extent necessary to comply with the restrictions on the multiple use of the "alternative limitation" within the meaning of Code Section 401(m)(9). ARTICLE ELEVEN--LIMITATION ON ANNUAL ADDITIONS 11.1 RULES AND DEFINITIONS. (a) Rules. The following rules shall limit additions to Participants' Accounts: (1) If the Participant does not participate, and has never participated, in another qualified plan maintained by the Employer, the amount of annual additions which may be credited to the Participant's Account for any limitation year shall not exceed the lesser of the "maximum permissible" amount (as hereafter defined) or any other limitation contained in this Plan. If the Employer contribution that would otherwise be allocated to the Participant's Account would cause the annual additions for the limitation year to exceed the maximum permissible amount, the amount allocated shall be reduced so that the annual additions for the limitation year shall equal the maximum permissible amount. (2) Prior to determining the Participant's actual compensation for the limitation year, the Employer may determine the maximum permissible amount for a Participant on the basis of a reasonable estimation of the Participant's compensation for the limitation year, uniformly determined for all Participants similarly situated. (3) As soon as is administratively feasible after the end of the limitation year, the maximum permissible amount for the limitation year shall be determined on the basis of the Participant's actual compensation for the limitation year. (4) If there is an excess amount, the excess shall be disposed of as follows: (A) Any nondeductible voluntary Employee after-tax contributions and, to the extent elected by the Administrator pursuant to a nondiscriminatory procedure, elective deferrals under Section 4.1(a), and any earnings thereon, to the extent they would reduce the excess amount, shall be returned to the Participant. (B) If an excess amount still exists after the application of subparagraph (A), and the Participant is covered by the Plan at the end of the limitation year, the excess amount in the Participant's Account shall be used to reduce Employer contributions (including any allocation of forfeitures, if applicable) for such Participant in the next limitation year, and each succeeding limitation year if necessary; (C) If an excess amount still exists after the application of subparagraphs (A) and (B), and the Participant is not covered by the Plan at the end of the limitation year, the excess amount shall be held unallocated in a suspense account and applied to reduce future Employer contributions (including allocation of any forfeitures) for all remaining Participants in the next limitation year, and each succeeding limitation year if necessary. (D) If a suspense account is in existence at any time during the limitation year pursuant to this Section 11.1(a)(4), it shall not participate in the allocation of the Trust's investment gains and losses. In addition, all amounts held in the suspense account shall be allocated and reallocated to Participants' Accounts before any Employer or Employee contributions may be made for the limitation year. (5) If, in addition to this Plan, the Participant is covered under another defined contribution plan maintained by the Employer, or a welfare benefit fund, as defined in Code Section 419(e), maintained by the Employer, or an individual medical account, as defined in Code Section 415(1)(2), maintained by the Employer which provides an annual addition, the annual additions which may be credited to a Participant's account under all such plans for any such limitation year shall not exceed the maximum permissible amount. Benefits shall be reduced under any discretionary defined contribution plan before they are reduced under any defined contribution pension plan. If both plans are discretionary contribution plans, they shall first be reduced under this Plan. Any excess amount attributable to this Plan shall be disposed of in the manner described in Section 11.1(a)(4). (6) If the Employer maintains, or at any time maintained, a qualified defined benefit plan covering any Participant in this Plan, the sum of the Participant's defined benefit plan fraction and defined contribution plan fraction shall not exceed 1.0 in any limitation year. The annual additions which may be credited to the Participant's Account under this Plan for any limitation year shall be limited so that if the limitations of Code Section 415(e) become applicable, benefits under a defined contribution plan shall have first been provided before benefits under a defined benefit plan are provided. (7) In any Plan Year in which the Plan becomes a Super Top-Heavy Plan (as defined in Section 13.2(b)), the denominators of the defined benefit fraction and defined contribution fraction shall be computed using one hundred percent (100%) of the maximum dollar limitation instead of one hundred and twenty-five percent (125%). (8) In any year in which the Plan is a Top-Heavy Plan (as defined in Section 13.2(c)) (but not a Super Top-Heavy Plan), the limitations shall be similarly reduced, subject to the special provisions of Section 13.3, which provide for the use of the one hundred and twenty-five percent (125%) limitation subject to the added minimum allocations. (b) Definitions. (1) Annual additions: The following amounts credited to a Participant's Account for the limitation year shall be treated as annual additions: (A) Employer contributions; (B) Elective deferrals; (C) Employee after-tax contributions, if any; (D) Forfeitures, if any; and (E) Amounts allocated after March 31, 1984 to an individual medical account, as defined in Section 415(l)(2) of the Code, which is part of a defined benefit plan maintained by the Employer. Also, amounts derived from contributions paid or accrued after December 31, 1985 in taxable years ending after such date which are attributable to post-retirement medical benefits allocated to the separate account of a Key Employee, as defined in Section 419A(d)(3), and amounts under a welfare benefit fund, as defined in Section 419(e), maintained by the Employer, shall be treated as annual additions to a defined contribution plan. For this purpose, any excess amount applied under Section 11.1(a)(4) in the limitation year to reduce Employer contributions shall be considered annual additions for such limitation year. (2) Compensation: For purposes of determining maximum permitted benefits under this Section, compensation shall include all of a Participant's earned income, wages, salaries, and fees for professional services, and other amounts received for personal services actually rendered in the course of employment with the Employer, including, but not limited to, commissions paid to salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips and bonuses, and excluding the following: (A) Employer contributions to a plan of deferred compensation which are not included in the Employee's gross income for the taxable year in which contributed, or Employer contributions under a simplified employee pension plan (funded with individual retirement accounts or annuities) to the extent such contributions are deductible by the Employee, or any distributions from a plan of deferred compensation; (B) Amounts realized from the exercise of a nonqualified stock option, or when restricted stock (or property) held by the Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture; (C) Amounts realized from the sale, exchange, or other disposition of stock acquired under a qualified stock option; and (D) Other amounts which received special tax benefits, or contributions made by the Employer (whether or not under a salary reduction agreement) toward the purchase of an annuity described in Section 403(b) of the Code (whether or not the amounts are actually excludable from the gross income of the Employee). Compensation shall be measured on the basis of compensation paid in the limitation year. (3) Defined benefit fraction: This shall mean a fraction, the numerator of which is the sum of the Participant's projected annual benefits under all the defined benefit plans maintained or previously maintained by the Employer, and the denominator of which is the lesser of one hundred and twenty-five percent (125%) of the dollar limitation in effect for the limitation year under Section 415(b)(1)(A) of the Code or one hundred and forty percent (140%) of the highest average compensation including any adjustment under Code Section 415(b). (4) Defined contribution fraction: This shall mean a fraction, the numerator of which is the sum of the annual additions to the Participant's account under all the defined contribution plans (whether or not terminated), welfare benefit funds, and individual medical accounts maintained by the Employer for the current and all prior limitation years, and the denominator of which is the sum of the maximum aggregate amounts for the current and all prior limitation years of Service with the Employer, regardless of whether a defined contribution plan was maintained by the Employer. The maximum aggregate amount in any limitation year is the lesser of one hundred and twenty-five percent (125%) of the dollar limitation then in effect under Section 415(c)(1)(A) of the Code or thirty-five (35%) of the Participant's compensation for such year. If the Employee, as of the end of the first day of the first limitation year beginning after December 31, 1986, was a participant in one (1) or more defined contribution plans maintained by the Employer which were in existence on May 5, 1986, the numerator of this fraction shall be adjusted if the sum of this fraction and the defined benefit fraction would otherwise exceed 1.0 under the terms of this Plan. Under the adjustment, an amount equal to the product of (i) the excess of the sum of the fractions over 1.0 and (ii) the denominator of this fraction, will be permanently subtracted from the numerator of this fraction. The adjustment is calculated using the fractions as they would be computed as of the end of the last limitation year beginning before January 1, 1987, and disregarding any changes in the terms and conditions of the Plan made after May 5, 1986, but using the Code Section 415 limitation applicable to the first limitation year beginning on or after January 1, 1987. The annual addition for any limitation year beginning before January 1, 1987, shall not be recomputed to treat all Employee contributions as annual additions. (5) Defined contribution dollar limitation: This shall mean the greater of $30,000 or one-fourth (1/4) of the defined benefit dollar limitation of Section 415(b)(1) of the Code in effect for the limitation year. (6) Employer: This term refers to the Employer that adopts this Plan, and all members of a controlled group of corporations (as defined in Section 414(b) of the Code, as modified by Section 415(h)), commonly-controlled trades or businesses (as defined in Section 414(c), as modified by Section 415(h)), or affiliated service groups (as defined in Section 414(m)) of which the Employer is a part, or any other entity required to be aggregated with the Employer under Code Section 414(o). (7) Highest average compensation: This means the average compensation for the three (3) consecutive limitation years with the Employer that produces the highest average. (8) Limitation year: This shall mean the Plan Year. (9) Maximum permissible amount: This shall mean an amount equal to the lesser of the defined contribution dollar limitation or twenty-five percent (25%) of the Participant's compensation for the limitation year. If a short limitation year is created because of an amendment changing the limitation year to a different twelve (12)-consecutive month period, the maximum permissible amount shall not exceed the defined contribution dollar limitation multiplied by the following fraction: Number of months in the short limitation year 12 (10) Projected annual benefit: This is the annual retirement benefit (adjusted to an actuarially equivalent straight life annuity if such benefit is expressed in a form other than a straight life annuity or qualified joint and survivor annuity) to which the Participant would be entitled under the terms of the plan, assuming: (A) the Participant will continue employment until normal retirement age under the plan (or current age, if later), and (B) the Participant's compensation for the current limitation year and all other relevant factors used to determine benefits under the plan will remain constant for all future limitation years. ARTICLE TWELVE--AMENDMENT AND TERMINATION 12.1 AMENDMENT. The Employer, by resolution of its board of directors, (or, to the extent permitted by resolution of such board of directors, by action of a duly authorized officer of the Employer) shall have the right to amend, alter or modify the Plan at any time, or from time to time, in whole or in part. Any such amendment shall become effective under its terms upon adoption by the Employer. However, no amendment affecting the duties, powers or responsibilities of the Trustee may be made without the written consent of the Trustee. No amendment shall be made to the Plan which shall: (a) make it possible (other than as provided in Section 14.3) for any part of the corpus or income of the Trust Fund (other than such part as may be required to pay taxes and administrative expenses) to be used for or diverted to purposes other than the exclusive benefit of the Participants or their Beneficiaries; (b) decrease a Participant's account balance or eliminate an optional form of payment with respect to benefits accrued as of the later of (i) the date such amendment is adopted, or (ii) the date the amendment becomes effective; or (c) alter the schedule for vesting in a Participant's Account with respect to any Participant with three (3) or more Years of Service without his consent or deprive any Participant of any nonforfeitable portion of his Account. Notwithstanding the other provisions of this Section or any other provisions of the Plan, any amendment or modification of the Plan may be made retroactively if necessary or appropriate to conform to or to satisfy the conditions of any law, governmental regulation, or ruling, and to meet the requirements of the Employee Retirement Income Security Act of 1974, as it may be amended. 12.2 TERMINATION OF THE PLAN. The Employer, by resolution of its board of directors, reserves the right at any time and in its sole discretion to discontinue payments under the Plan and to terminate the Plan. In the event the Plan is terminated, or upon complete discontinuance of contributions under the Plan by the Employer, the rights of each Participant to his Account on the date of such termination or discontinuance of contributions, to the extent of the fair market value under the Trust Fund, shall become fully vested and nonforfeitable. The Employer shall direct the Trustee to distribute the Trust Fund in accordance with the Plan's distribution provisions to the Participants and their Beneficiaries, each Participant or Beneficiary receiving a portion of the Trust Fund equal to the value of his Account as of the date of distribution. These distributions may be implemented by the continuance of the Trust and the distribution of the Participants' Account shall be made at such time and in such manner as though the Plan had not terminated, or by any other appropriate method, including rollover into Individual Retirement Accounts. Upon distribution of the Trust Fund, the Trustee shall be discharged from all obligations under the Trust and no Participant or Beneficiary shall have any further right or claim therein. If a partial termination of the Plan is deemed to have occurred, this Section shall apply only to those Participant's affected by such partial termination. ARTICLE THIRTEEN--TOP-HEAVY PROVISIONS 13.1 APPLICABILITY. The provisions of this Article shall become applicable only for any Plan Year in which the Plan is a Top-Heavy Plan (as defined in Section 13.2(c)). The determination of whether the Plan is a Top-Heavy Plan shall be made each Plan Year by the Administrator. 13.2 DEFINITIONS. For purposes of this Article, the following definitions shall apply: (a) "Key Employee": "Key Employee" shall mean any Employee or former Employee (and the Beneficiaries of such Employee) who, at any time during the determination period, was (1) an officer of the Employer earning compensation (as defined in Section 416(i) of the Code) in excess of fifty percent (50%) of the dollar limitation under Section 415(b)(1)(A) of the Code, (2) an owner (or considered an owner under Section 318 of the Code) of both more than a one-half percent (1/2%) interest in the Employer and one of the ten (10) largest interests in the Employer if such individual's compensation exceeds the dollar limitation under Section 415(c)(1)(A) of the Code, (3) a five percent (5%) owner of the Employer, or (4) a one percent (1%) owner of the Employer who has an annual compensation of more than $150,000. For purposes of this Section, annual compensation shall mean compensation as defined in Code Section 415(c)(3), but including amounts contributed by the Employer pursuant to a salary reduction agreement which are excludable from the Employee's income under Code Sections 125, 402(g), 402(h) or 403(b). The determination period of the Plan is the Plan Year containing the "determination date" as defined in Section 13.2(c)(4) and the four (4) preceding Plan Years. The determination of who is a Key Employee (including the terms "5% owner" and "1% owner") shall be made in accordance with Section 416(i)(1) of the Code and the regulations thereunder. (b) "Super Top-Heavy Plan": The Plan shall constitute a "Super Top-Heavy Plan" if it meets the test for status as a Top-Heavy Plan, where "90%" is substituted for "60%" at each place in Section 13.2(c). (c) "Top-Heavy Plan": (1) The Plan shall constitute a "Top-Heavy Plan" if any of the following conditions exist: (A) The top-heavy ratio for the Plan exceeds sixty percent (60%) and the Plan is not part of any required aggregation group or permissive aggregation group of plans; or (B) The Plan is part of a required aggregation group of plans (but is not part of a permissive aggregation group) and the top-heavy ratio for the group of plans exceeds sixty percent (60%); or (C) The Plan is a part of a required aggregation group of plans and part of a permissive aggregation group and the top-heavy ratio for the permissive aggregation group exceeds sixty percent (60%). (2) If the Employer maintains one (1) or more defined contribution plans (including any simplified employee pension plan funded with individual retirement accounts or annuities) and the Employer maintains or has maintained one (1) or more defined benefit plans which have covered or could cover a Participant in this Plan, the top-heavy ratio is a fraction, the numerator of which is the sum of account balances under the defined contribution plans for all Key Employees and the actuarial equivalents of accrued benefits under the defined benefit plans for all Key Employees, and the denominator of which is the sum of the account balances under the defined contribution plans for all Participants and the actuarial equivalents of accrued benefits under the defined benefit plans for all Participants. Both the numerator and denominator of the top-heavy ratio shall include any distribution of an account balance or an accrued benefit made in the five (5)-year period ending on the determination date and any contribution due to a defined contribution pension plan but unpaid as of the determination date. In determining the accrued benefit of a non-Key Employee who is participating in a plan that is part of a required aggregation group, the method of determining such benefit shall be either (i) in accordance with the method, if any, that uniformly applies for accrual purposes under all plans maintained by the Employer or any member of the Employer's related group (within the meaning of Section 2.5(b)), or (ii) if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional accrual rate of Code Section 411(b)(1)(C). (3) For purposes of (1) and (2) above, the value of account balances and the actuarial equivalents of accrued benefits shall be determined as of the most recent Valuation Date that falls within or ends with the twelve (12)-month period ending on the determination date. The account balances and accrued benefits of a Participant who is not a Key Employee but who was a Key Employee in a prior year shall be disregarded. The accrued benefits and account balances of Participants who have performed no Hours of Service with any Employer maintaining the plan for the five (5)-year period ending on the determination date shall be disregarded. The calculations of the top-heavy ratio, and the extent to which distributions, rollovers, and transfers are taken into account shall be made under Section 416 of the Code and regulations issued thereunder. Deductible Employee contributions shall not be taken into account for purposes of computing the top-heavy ratio. When aggregating plans, the value of account balances and accrued benefits shall be calculated with reference to the determination dates that fall within the same calendar year. (4) Definition of terms for Top-Heavy status: (A) "Top-heavy ratio" shall mean the following: (1) If the Employer maintains one or more defined contribution plans (including any simplified employee pension plan funded with individual retirement accounts or annuities) and the Employer has never maintained any defined benefit plans which have covered or could cover a Participant in this Plan, the top-heavy ratio is a fraction, the numerator of which is the sum of the account balances of all Key Employees as of the determination date (including any part of any account balance distributed in the five (5)-year period ending on the determination date), and the denominator of which is the sum of the account balances (including any part of any account balance distributed in the five (5)-year period ending on the determination date) of all Participants as of the determination date. Both the numerator and the denominator shall be increased by any contributions due but unpaid to a defined contribution pension plan as of the determination date. (B) "Permissive aggregation group" shall mean the required aggregation group of plans plus any other plan or plans of the Employer which, when considered as a group with the required aggregation group, would continue to satisfy the requirements of Section 401(a)(4) and/or 410 of the Code. (C) "Required aggregation group" shall mean (i) each qualified plan of the Employer (including any terminated plan) in which at least one Key Employee participates, and (ii) any other qualified plan of the Employer which enables a plan described in (i) to meet the requirements of Section 401(a)(4) and/or 410 of the Code. (D) "Determination date" shall mean, for any Plan Year subsequent to the first Plan Year, the last day of the preceding Plan Year. For the first Plan Year of the Plan, "determination date" shall mean the last day of that Plan Year. (E) "Valuation Date" shall mean the last day of the Plan Year. (F) Actuarial equivalence shall be based on the interest and mortality rates utilized to determine actuarial equivalence when benefits are paid from any defined benefit plan. If no rates are specified in said plan, the following shall be utilized: pre- and post-retirement interest -five percent (5%); post-retirement mortality based on the Unisex Pension (1984) Table as used by the Pension Benefit Guaranty Corporation on the date of execution hereof. 13.3 ALLOCATION OF EMPLOYER CONTRIBUTIONS AND FORFEITURES FOR A TOP-HEAVY PLAN YEAR. (a) Except as otherwise provided below, in any Plan Year in which the Plan is a Top-Heavy Plan, the Employer contributions and forfeitures allocated on behalf of any Participant who is a non-Key Employee shall not be less than the lesser of three percent (3%) of such Participant's compensation (as defined in Section 11.1(b)(2)) or the largest percentage of Employer contributions and forfeitures as a percentage of the Key Employee's Compensation, allocated on behalf of any Key Employee for that Plan Year. This minimum allocation shall be made even though, under other Plan provisions, the Participant would not otherwise be entitled to receive an allocation or would have received a lesser allocation for the Plan Year because of insufficient Employer contributions under Section 4.2, the Participant's failure to complete one thousand (1,000) Hours of Service or the Participant's failure to make elective deferrals under Section 4.1. (b) The minimum allocation under this Section shall not apply to any Participant who was not employed by the Employer on the last day of the Plan Year. (c) The minimum allocation under this Section shall be offset and reduced by any allocation of contributions and forfeitures under Section 4.2, and under any other defined contribution plan (if such contributions are not matching contributions under Code Section 401(m)) with a Plan Year ending in the same calendar year as the Valuation Date. (d) For purposes of the Plan, a non-Key Employee shall be any Employee or Beneficiary of such Employee, any former Employee, or Beneficiary of such former Employee, who is not or was not a Key Employee during the Plan Year ending on the determination date, nor during the four (4) preceding Plan Years. (e) If no defined benefit plan has ever been part of a permissive or required aggregation group of plans of the Employer, the contributions and forfeitures under this step shall be offset by any allocation of contributions and forfeitures under any other defined contribution plan of the Employer with a Plan Year ending in the same calendar year as this Plan's Valuation Date. (f) There shall be no duplication of the minimum benefits required under Code Section 416. Benefits shall be provided under defined contribution plans before under defined benefit plans. If a defined benefit plan (active or terminated) is part of the permissive or required aggregation group of plans, the allocation method of subparagraph (a) above shall apply, except that "3%" shall be increased to "5%." (g) There shall be no duplication of the minimum benefits required under Code Section 416. Benefits shall be provided under defined contribution plans before defined benefit plans. If a defined benefit plan (active or terminated) is part of the permissive or required aggregation group of plans, and if any Participant in the Plan would have his benefits limited due to the application of the Code limitation rule in Section 11.1 in a Plan Year in which the Plan is a Top-Heavy Plan but not a Super Top-Heavy Plan, the allocation method of subparagraph (f) above shall apply, except that "5%" shall be increased to "7.5%." 13.4 VESTING. The provisions contained in Section 6.1 relating to vesting shall continue to apply in any Plan Year in which the Plan is a Top-Heavy Plan, and apply to all benefits within the meaning of Section 411(a)(7) of the Code except those attributable to Employee contributions and elective deferrals under Section 4.1, including benefits accrued before the effective date of Section 416 and benefits accrued before the Plan became a Top-Heavy Plan. Further, no reduction in vested benefits may occur in the event the Plan's status as a Top-Heavy Plan changes for any Plan Year and the vesting schedule is amended. In addition, if a Plan's status changes from a Top-Heavy Plan to that of a non-Top-Heavy Plan, a Participant with three (3) Years of Service shall continue to have his vested rights determined under the schedule which he selects, in the event the vesting schedule is subsequently amended. Payment of a Participant's vested Account balance under this Section shall be made in accordance with the provisions of Article Seven. ARTICLE FOURTEEN--MISCELLANEOUS PROVISIONS 14.1 PLAN DOES NOT AFFECT EMPLOYMENT. Neither the creation of this Plan, any amendment thereto, the creation of any fund nor the payment of benefits hereunder shall be construed as giving any legal or equitable right to any Employee or Participant against the Employer, its officers or Employees, or against the Trustee. All liabilities under this Plan shall be satisfied, if at all, only out of the Trust Fund held by the Trustee. Participation in the Plan shall not give any Participant any right to be retained in the employ of the Employer, and the Employer hereby expressly retains the right to hire and discharge any Employee at any time with or without cause, as if the Plan had not been adopted, and any such discharged Participant shall have only such rights or interests in the Trust Fund as may be specified herein. 14.2 SUCCESSOR TO THE EMPLOYER. In the event of the merger, consolidation, reorganization or sale of assets of the Employer, under circumstances in which a successor person, firm, or corporation shall carry on all or a substantial part of the business of the Employer, and such successor shall employ a substantial number of Employees of the Employer and shall elect to carry on the provisions of the Plan, such successor shall be substituted for the Employer under the terms and provisions of the Plan upon the filing in writing with the Trustee of its election to do so. 14.3 REPAYMENTS TO THE EMPLOYER. Notwithstanding any provisions of this Plan to the contrary: (a) Any monies or other Plan assets attributable to any contribution made to this Plan by the Employer because of a mistake of fact shall be returned to the Employer within one (1) year after the date of contribution. (b) Any monies or other Plan assets attributable to any contribution made to this Plan by the Employer shall be refunded to the Employer, to the extent such contribution is predicated on the deductibility thereof under the Code and the income tax deduction for such contribution is disallowed. Such amount shall be refunded within one (1) taxable year after the date of such disallowance or within one (1) year of the resolution of any judicial or administrative process with respect to the disallowance. All Employer contributions hereunder are expressly contributed based upon such contributions' deductibility under the Code. However, the provisions of this Section shall not apply to elective deferrals made by a Participant under Section 4.1. 14.4 BENEFITS NOT ASSIGNABLE. Except as provided in Section 414(p) of the Code with respect to "qualified domestic relations orders," the rights of any Participant or his Beneficiary to any benefit or payment hereunder shall not be subject to voluntary or involuntary alienation or assignment. With respect to any "qualified domestic relations order" relating to the Plan, the Plan shall permit distribution to an alternate payee under such order at any time, irrespective of whether the Participant has attained his "earliest retirement age" (within the meaning of Section 414(p)(4)(B) of the Code) under the Plan. A distribution to an alternate payee prior to the Participant's attainment of his earliest retirement age shall, however, be available only if the order specifies distribution at that time or permits an agreement between the Plan and the alternate payee to authorize an earlier distribution. Nothing in this paragraph shall, however, give a Participant a right to receive distribution at a time otherwise not permitted under the Plan nor does it permit the alternate payee to receive a form of payment not otherwise permitted under the Plan or under said Section 414(p) of the Code. 14.5 MERGER OF PLANS. In the case of any merger or consolidation of this Plan with, or transfer of the assets or liabilities of the Plan to, any other plan, the terms of such merger, consolidation or transfer shall be such that each Participant would receive (in the event of termination of this Plan or its successor immediately thereafter) a benefit which is no less than what the Participant would have received in the event of termination of this Plan immediately before such merger, consolidation or transfer. 14.6 INVESTMENT EXPERIENCE NOT A FORFEITURE. The decrease in value of any Account due to adverse investment experience shall not be considered an impermissible "forfeiture" of any vested balance. 14.7 DISTRIBUTION TO LEGALLY INCAPACITATED. In the event any benefit is payable to a minor or to a person deemed to be incompetent or to a person otherwise under legal disability, or who is by sole reason of advanced age, illness, or other physical or mental incapacity incapable of handling the disposition of his property, the Administrator, may direct the Trustee to apply all or any portion of such benefit directly to the care, comfort, maintenance, support, education or use of such person or to pay or distribute the whole or any part of such benefit to (a) the spouse of such person, (b) the parent of such person, (c) the guardian, committee, or other legal representative, wherever appointed, of such person, (d) the person with whom such person shall reside, (e) any other person having the care and control of such person, or (f) such person. The receipt of any such payment or distribution shall be a complete discharge of liability for Plan obligations. 14.8 CONSTRUCTION. Wherever appropriate, the use of the masculine gender shall be extended to include the feminine and/or neuter or vice versa; and the singular form of words shall be extended to include the plural; and the plural shall be restricted to mean the singular. 14.9 GOVERNING DOCUMENTS. A Participant's rights shall be determined under the terms of the Plan as in effect at the Participant's date of separation from Service. 14.10 GOVERNING LAW. The provisions of this Plan shall be construed under the laws of the state of the situs of the Trust, except to the extent such laws are preempted by Federal law. 14.11 HEADINGS. The Article headings and Section numbers are included solely for ease of reference. If there is any conflict between such headings or numbers and the text of the Plan, the text shall control. 14.12 COUNTERPARTS. This Plan may be executed in any number of counterparts, each of which shall be deemed an original; said counterparts shall constitute but one and the same instrument, which may be sufficiently evidenced by any one counterpart. 14.13 LOCATION OF PARTICIPANT OR BENEFICIARY UNKNOWN. In the event that all or any portion of the distribution payable to a Participant or to a Participant's Beneficiary hereunder shall, at the expiration of five (5) years after it shall become payable, remain unpaid solely by reason of the inability of the Administrator to ascertain the whereabouts of such Participant or Beneficiary, after sending a registered letter, return receipt requested, to the last known address, and after further diligent effort, the amount so distributable shall be handled in the same manner as a forfeiture under Section 6.2 pursuant to this Plan. In the event a Participant or Beneficiary is located subsequent to the forfeiture of his Account balance, such Account balance shall be restored in accordance with the provisions of Section 6.2. IN WITNESS WHEREOF, the Employer, by its duly authorized officer, has caused this Plan to be executed on the ________________ day of _________________, 199___. DAY RUNNER, INC. By ___________________________ Authorized Officer DAY RUNNER, INC. 401(K) PLAN TRUST AGREEMENT
ARTICLE PAGE I Establishment of Trust and Appointment and Acceptance of Trustee.........................................1 1.01 Establishment of Trust........................................................................1 1.02 Title of Trust................................................................................1 1.03 Appointment and Acceptance of Trustee.........................................................1 1.04 Effectiveness.................................................................................1 II Fiduciaries..............................................................................................1 2.01 Administrative and Investment Fiduciaries.....................................................1 2.02 Identification of Fiduciaries and Designees...................................................2 III Trust Fund 2 3.01 Receipts......................................................................................2 3.02 Trust ........................................................................................2 3.03 Another Trust.................................................................................3 IV Investments..............................................................................................3 4.01 Investment Management.........................................................................3 4.02 Investment Managers...........................................................................3 4.03 Participant Direction.........................................................................3 4.04 Selection of Investments......................................................................4 4.05 Funds Awaiting Investment.....................................................................4 4.06 Voting, Tendering and Other Rights............................................................4 4.07 Services Through Affiliated Organizations.....................................................4 4.08 Investment Directions.........................................................................5 4.09 Custody of Participant Loan Documentation.....................................................5 4.10 Common and Collective Trust Funds.............................................................5 4.11 Mutual and Other Investment Funds.............................................................5 V Disbursements, Administrative Directions and Expenses....................................................6 5.01 Disbursements ................................................................................6 5.02 Administrative Fiduciary's Directions.........................................................6 5.03 Disputed Payments.............................................................................6 5.04 Taxes.........................................................................................7 5.05 Expenses of Administration....................................................................7 ARTICLE PAGE VI Powers of Trustee........................................................................................7 6.01 Nondiscretionary Investment Powers............................................................7 6.02 Standard of Care.............................................................................10 6.03 Location and Indicia of Ownership............................................................10 VII Responsibilities, Agents, Indemnification and Bonding...................................................10 7.01 Relationship of Fiduciaries..................................................................10 7.02 Benefit of Participants......................................................................10 7.03 Agents of Administrative Fiduciary and Investment Fiduciary.........................................................................10 7.04 Agents of Trustee............................................................................10 7.05 Protection of Designees......................................................................10 7.06 Bond.........................................................................................11 7.07 Indemnification..............................................................................11 7.08 Trustee's Reliance...........................................................................11 7.09 Survival of Provisions.......................................................................11 VIII Payments to Trustee and Agents..........................................................................11 8.01 Payments to the Trustee......................................................................11 8.02 Expenses and Compensation....................................................................12 IX Records, Accountings and Valuations.....................................................................12 9.01 Records......................................................................................12 9.02 Accountings..................................................................................12 9.03 Valuation....................................................................................13 X Amendment and Termination of Trust......................................................................13 10.01 Amendment....................................................................................13 10.02 Termination..................................................................................13 XI Resignation and Removal of Trustee......................................................................13 11.01 Resignation..................................................................................13 11.02 Removal......................................................................................14 11.03 Appointment of a Successor...................................................................14 11.04 Settlement of Account........................................................................14 11.05 Termination of Responsibility and Liability..................................................14 ARTICLE PAGE XII Miscellaneous...........................................................................................14 12.01 Exclusive Benefit Rule.......................................................................14 12.02 Conflict with Plan...........................................................................14 12.03 Failure to Maintain Qualification............................................................15 12.04 Appointment of a Successor...................................................................15 12.05 Restriction on Alienation....................................................................15 12.06 Payment on Court Order.......................................................................15 12.07 Arbitration..................................................................................15 12.08 Governing Law and Construction...............................................................16 12.09 Successors and Assigns.......................................................................16 12.10 Gender.......................................................................................16 12.11 Headings.....................................................................................16 12.12 Counterparts.................................................................................16 12.13 Special, Indirect or Consequential Damages...................................................16 12.14 Amendment, Modification or Waiver............................................................17 SCHEDULES A Administrative and Investment Fiduciaries and Agents.........................................18 B Selection of Investments, Including Investment for Funds Awaiting Investment and Default Investment.......................................19 C Voting of Employer Securities................................................................20 D Existing GICs/GACs...........................................................................21 E Trustee's Fees and Expenses and Allocation Method............................................22
DAY RUNNER, INC. 401(K) PLAN TRUST AGREEMENT This Trust Agreement is entered into as of July 1, 1998, by and between the Day Runner, Inc. (the "Sponsor") and New York Life Trust Company, a New York corporation (the "Trustee"), with respect to a trust ("Trust") forming part of the Day Runner, Inc. 401(k) Plan (the "Plan") and shall supersede any previous trust agreements. The Sponsor and the Trustee hereby agree as follows: ARTICLE I ESTABLISHMENT OF TRUST AND APPOINTMENT AND ACCEPTANCE OF TRUSTEE 1.01 Establishment of Trust. The Trust is intended to be a qualified trust under section 401(a) of the Internal Revenue Code of 1986, as amended from time to time (the "Code"), and exempt from taxation pursuant to section 501(a) of the Code. If this Trust is established as a successor trust, the Trustee shall have no duty to ascertain the qualified status of any prior trust. 1.02 Title of Trust. The Trust shall be known as the Day Runner, Inc. 401(k) Trust. 1.03 Appointment and Acceptance of Trustee. The Sponsor hereby appoints New York Life Trust Company as Trustee of the Trust and represents that this Trust Agreement constitutes a legal, valid and binding obligation of the Sponsor. The Trustee accepts its appointment as Trustee hereunder. 1.04 Effectiveness. This Trust Agreement shall become effective as of July 1, 1998. ARTICLE II FIDUCIARIES 2.01 Administrative and Investment Fiduciaries. The Sponsor agrees that it shall appoint, by resolution of its Board of Directors, or other governing body, an Administrative Fiduciary and an Investment Fiduciary. The Sponsor further agrees that it shall ensure that such Administrative Fiduciary and Investment Fiduciary each adhere to their respective responsibilities set forth in this Trust Agreement. "Administrative Fiduciary" refers to the person(s) or entity which is responsible for the administration and operation of the Plan. "Investment Fiduciary" refers to the person(s) or entity which is responsible for the investment and management of Plan assets. The Administrative Fiduciary and the Investment Fiduciary may be the same person(s) or entity. If the Administrative and/or Investment Fiduciaries designated on Schedule A are not then serving, the Sponsor shall be the Administrative Fiduciary or the Investment Fiduciary or both, as the case may be. In no event shall the Trustee be either the Administrative Fiduciary or the Investment Fiduciary. 2.02 Identification of Fiduciaries and Designees. The Administrative Fiduciary and the Investment Fiduciary under the Plan shall each be identified to the Trustee by the Sponsor on Schedule A attached hereto, and specimen signatures of each member thereof, shall be provided to the Trustee by the Sponsor in a form acceptable to the Trustee. The Sponsor shall promptly give written notice to the Trustee of a change in the identity of the Administrative Fiduciary or Investment Fiduciary, or any member thereof, by submitting a revised Schedule A to the Trustee, and until such revised Schedule A is received by the Trustee, the Trustee shall be fully protected in assuming that the identity on Schedule A of the Administrative Fiduciary or Investment Fiduciary, and the members thereof, is unchanged. Each person authorized in accordance with the Plan to give a direction to the Trustee on behalf of the Administrative Fiduciary or the Investment Fiduciary shall be identified to the Trustee and such Schedule A shall contain a specimen of the signature of each such authorized person. The Trustee shall be entitled to rely on Schedule A as evidence of the identity and authority of the persons appointed until a revised Schedule A setting forth the appointment of a successor is received by the Trustee from the Sponsor, the Administrative Fiduciary, or Investment Fiduciary, as the case may be. A revision to Schedule A hereunder shall not require or constitute formal amendment of this Trust Agreement. ARTICLE III TRUST FUND 3.01 Receipts. The Trustee shall receive in cash or other assets acceptable to the Trustee, subject to any applicable minimum amount established by the Trustee, all contributions paid or delivered to it which are allocable under the Plan and to the Trust and all transfers paid or delivered under the Plan to the Trust from a predecessor trustee or another trust of a plan qualified under section 401(a) of the Code, provided that the Trustee shall not be obligated to receive any such contribution or transfer unless prior thereto, as the Trustee may specify, the Trustee has received such reconciliation, allocation, investment or other information concerning, or such direction, contribution or representation with respect to, the contribution or transfer or the source thereof as the Trustee, in its sole discretion, may require. The Trustee shall have no duty or authority to (a) require any contributions or transfers to be made under the Plan or to the Trustee, (b) compute any amount to be contributed or transferred under the Plan to the Trustee, or (c) determine whether amounts received by the Trustee comply with the Plan. The Trustee shall not be responsible for any assets until it receives such assets. 3.02 Trust. The Trust shall consist of all money and other property acceptable to and received by the Trustee pursuant to Section 3.01 hereof, plus any income or gains on such assets and less any investment loss or expense, benefit or disbursement paid pursuant to this Trust Agreement or the Plan. The Trustee shall hold the Trust, without distinction between principal and income, as a nondiscretionary trustee pursuant to the terms of this Trust Agreement. The Trustee may use a general disbursement account for distributions from the Trust, without incurring any liability for payment of interest thereon, notwithstanding the Trustee's receipt of credit or interest in respect of funds held in such disbursement account. 3.03 Another Trust. If the Sponsor so elects, and the Trustee consents, the Sponsor may appoint another trustee under the Plan with respect to assets which the Sponsor desires to contribute or have transferred to the Trustee, but which the Trustee does not choose to accept. The Trustee shall discharge its duties and responsibilities solely with respect to those assets of the Trust delivered into its possession and, except pursuant to the Employee Retirement Income Security Act of 1974, as amended from time to time ("ERISA"), shall have no duties or responsibilities or obligations with respect to property of the other trust nor any liability for the acts or omissions of the other trustee. As a condition to the Trustee's consent to the appointment of another trustee, the Sponsor shall assure that recordkeeping, distribution and reporting procedures are established on a coordinated basis between the Trustee and the other trustee as the Trustee considers necessary or appropriate with respect to the Trust. ARTICLE IV INVESTMENTS 4.01 Investment Management. The Investment Fiduciary shall manage the investment of the Trust except insofar as (a) a person (an "Investment Manager") who meets the requirements of section 3(38) of ERISA has authority to manage Trust assets as referred to in Section 4.02 hereof, or (b) the Plan provides for participant or beneficiary direction of the investment of assets allocable under the Plan to the accounts of such participants and beneficiaries. Except as may otherwise be required by ERISA, the Trustee shall invest the Trust as directed by the Investment Fiduciary, an Investment Manager or a Plan participant or beneficiary, as the case may be, and the Trustee shall have no discretionary control over, nor any other discretion regarding, the investment or reinvestment of any asset of the Trust. 4.02 Investment Managers. Notwithstanding any provision of the Plan to the contrary, the Investment Fiduciary may appoint one or more Investment Managers, who may be an affiliate of the Trustee, provided such appointment does not violate any law or regulation, to direct the Trustee in the investment of all or a specified portion of the assets of the Trust. Any such Investment Manager shall be directed by the Investment Fiduciary to act in accordance with the procedures referred to in Section 4.08. The Investment Fiduciary shall notify the Trustee in writing before the effectiveness of the appointment or removal of any Investment Manager. If there is more than one Investment Manager whose appointment is effective under the Plan at any one time, the Trustee shall, upon written instructions from the Investment Fiduciary, establish separate funds for control by each such Investment Manager. The funds shall consist of those Trust assets designated by the Investment Fiduciary. 4.03 Participant Direction. In the event the Plan provides for participant or beneficiary direction of investment of assets allocable under the Plan to the accounts of such participants and beneficiaries, such information as the Trustee may specify shall be provided by the Sponsor or the Administrative Fiduciary to the Trustee, and/or such other person(s) as are necessary, for the implementation of the directions in accordance with procedures established by the Trustee. 4.04 Selection of Investments. The Investment Fiduciary or any duly appointed Investment Manager, as the case may be, shall set forth on Schedule B attached hereto, those investments, from among the permitted investments listed in Section 6.01 hereof and subject to the Trustee's acceptance of such investments, in which the assets of the Trust shall be invested. Schedule B may be revised from time to time in writing by the Investment Fiduciary or any duly appointed Investment Manager, as the case may be, and delivered to the Trustee, without formal amendment of this Trust Agreement. Notwithstanding the permissible investments listed in Section 6.01 hereof, the Trustee may limit the categories of assets in which the Trust may be invested. 4.05 Funds Awaiting Investment. It is understood that the Trustee may, from time to time, have on hand funds which are received as contributions or transfers to the Trust, including IRA rollovers, which are awaiting investment, or funds from the sale of Trust assets which are awaiting reinvestment. Absent receipt by the Trustee of a direction from the proper person for the investment or reinvestment of such funds or otherwise prior to the application of funds in implementation of such a direction, the Trustee shall cause such funds to be invested in the MainStay Institutional Money Market Fund (Institutional Class). The Investment Fiduciary or duly appointed Investment Manager, as the case may be, hereby acknowledges that it has read or will have read the then current prospectus (or similar disclosure document) for said fund. 4.06 Voting, Tendering and Other Rights. Unless directed otherwise in writing by the Sponsor or the Investment Fiduciary, the Trustee shall vote all proxy and other materials for all securities held by the Trust, other than "employer securities" (within the meaning of Section 407(d)(1) of ERISA) in accordance with the recommendations made by the common or collective trust's or mutual fund's board of trustees, board of directors, or other governing body. If all or any part of the Trust Fund consists of "employer securities" (within the meaning of Section 407(d)(1) of ERISA), the voting of such securities shall be made in accordance with the provisions of Schedule C of this Trust Agreement. Except as required under ERISA, the Trustee shall follow all directions in this Section 4.06 and shall have no duty to exercise voting or other rights relating to any such security or other asset. 4.07 Services Through Affiliated Organizations. The Trustee may enter into agreements with New York Life Insurance Company ("NYLIFE"), NYLIFE Securities Inc. ("Broker"), NYLIFE Distributors, Inc. ("Underwriter"), and any of their affiliates and/or subsidiaries, successors and assigns for the provision of services to the Trust. The Trustee is specifically authorized to place securities orders, settle securities trades, hold securities in custody and perform related activities on behalf of the Trust through or by the Broker. The Broker shall perform such acts for the participants' accounts only if the Investment Fiduciary has designated the Broker as the brokerage firm for participants' accounts under the Plan and the Investment Fiduciary and participants have received disclosure as described in this Section 4.07. Trades and related activities effected through the Broker shall be subject to fees and commissions established by the Broker, which may be paid from the Trust or netted from the proceeds of trades. No trades shall be executed through the Broker or other services provided unless the Sponsor or Investment Fiduciary has received disclosure concerning the relationship of NYLIFE, Broker, Underwriter, or their affiliates, as the case may be, to the Trustee, and notice of the fees and commissions that may be paid to NYLIFE, the Broker, the Underwriter, Trustee and/or their affiliates or subsidiaries. 4.08 Investment Directions. Directions for the investment or reinvestment of Trust assets from the Investment Fiduciary, an Investment Manager or a Plan participant or beneficiary, as the case may be, shall be communicated to, and implemented by, the Trustee, the Trustee's designee or, with the Trustee's consent, a broker/dealer designated for the purpose by the Investment Fiduciary. Communication of any such direction to the Trustee or to such a designee or broker/dealer shall be in a manner acceptable to the Trustee and shall conclusively be deemed an authorization to the Trustee, such designee or broker/dealer to implement the direction. The Trustee shall have no liability for it or any other person following such directions or failing to act in the absence of any such directions. The Trustee shall have no liability for the acts or omissions of any person directing the investment or reinvestment of Trust assets or making or failing to make any direction referred to in Section 4.06. Neither shall the Trustee have any duty or obligation to review any such investment or other direction, act or omission or, except upon receipt of a proper direction, to invest or otherwise manage any asset of the Trust which is subject to the control of any such person or to exercise any voting or other right referred to in Section 4.06. In the event no direction is received with respect to investment or reinvestment of uninvested Trust assets, such assets shall be invested by the Trustee in the investment specified on Schedule B attached hereto. 4.09 Custody of Participant Loan Documentation. If participant loans are permitted under the Plan, the Administrative Fiduciary or New York Life Benefit Services, Inc. ("NYLBSI"), an affiliate of the Trustee, may act as the Trustee's agent for the purpose of holding all participant loan notes and related documentation and as such shall (a) hold physical custody of and keep safe the notes and other loan documents, (b) collect and remit all principal and interest payments to the Trustee, (c) keep the proceeds of such loans separate from the other assets of the Administrative Fiduciary and clearly identify such assets as Plan assets, (d) advise the Trustee of the date, amount and payee of the checks to be drawn representing loans, and (e) cancel and surrender the notes and other loan documentation when a loan has been paid in full. 4.10 Common and Collective Trust Funds. The Investment Fiduciary may direct the Trustee to invest the assets of the Trust in a common or collective trust established for the investment of the assets of employee benefit plans qualified under Section 401(a) of the Code, individual retirement accounts under section 408(a) of the Code and plans of governmental units described in section 818(a)(6) of the Code maintained by the Trustee or its affiliates. The documents governing any such common or collective trust fund in which Trust assets have been invested are hereby incorporated into this Trust Agreement by reference. 4.11 Mutual and Other Investment Funds. The Investment Fiduciary may direct the Trustee to purchase shares of a regulated investment company, or an interest in another pooled investment fund (individually and collectively referred to hereafter as "Investment Fund") advised, managed or offered by NYLIFE, Broker, Underwriter or Trustee, or an affiliate or subsidiary of any of them. If any such Investment Fund held on behalf of the Trust or a participant account is terminated or reorganized, or a new series or class of such Investment Fund is issued, pursuant to the terms set forth in the prospectus, statement of additional information or other documents governing such Investment Fund, the Trustee shall be authorized to surrender any shares or interests in such Investment Fund, and accept and hold shares or interests of equivalent value issued in connection with such termination, reorganization or issuance on behalf of the Trust and participant accounts, as applicable. The Sponsor acknowledges that the Investment Fiduciary and the participants, if appropriate, have received a copy of the prospectus or other similar disclosure document for each Investment Fund selected by the Investment Fiduciary, any duly appointed Investment Manager, or the participants, as the case may be. Purchases and sales of units of Investment Funds (other than for exchanges) shall be made on the date on which the Trustee receives from the Sponsor or Investment Fiduciary, in good order, all information and documentation necessary to accurately effect such purchases and sales (or in the case of a purchase, the subsequent date on which the Trustee has received the funds necessary to make such purchase). ARTICLE V DISBURSEMENTS, ADMINISTRATIVE DIRECTIONS AND EXPENSES 5.01 Disbursements. Disbursements of money or property from the Trust shall be made by the Trustee upon direction from the Administrative Fiduciary or its designee. Disbursements by the Trustee shall be transmitted to the Administrative Fiduciary or its designee for delivery to the proper payees or to payee addresses supplied by the Administrative Fiduciary or its designee, and the Trustee's obligation to make such payments shall be satisfied upon such transmittal. The Trustee shall have no obligation to determine the identity of persons entitled to disbursements under the Plan or their addresses furnished by the Administrative Fiduciary, its designee or agent in accordance with the terms of this Trust. The Trustee shall not be required to make any disbursement in excess of the liquidated value of the Trust at the time of the disbursement. The Trustee shall not be responsible for the adequacy of the Trust to meet and discharge any and all disbursements and liabilities under the Plan. 5.02 Administrative Fiduciary's Directions. Directions from or on behalf of the Administrative Fiduciary or its designee shall be communicated to the Trustee or the Trustee's designee only in a manner and in accordance with procedures acceptable to the Trustee. The Trustee's designee shall be empowered to implement any such directions, provided they are in accordance with procedures acceptable to the Trustee. The Trustee shall have no liability for following any such directions or failing to act in the absence of any such directions. The Trustee shall have no liability for the acts or omissions of any person making or failing to make any directions under the Plan or this Trust Agreement nor any duty or obligation to review any such direction, act or omission. 5.03 Disputed Payments. If a dispute arises over the propriety of the Trustee making any payment from the Trust, the Trustee may withhold the payment until the dispute has been resolved by a court of competent jurisdiction or settled by the parties to the dispute. The Trustee may consult legal counsel and shall be fully protected in acting upon the advice of counsel. The Sponsor hereby indemnifies the Trustee pursuant to Section 7.07 of this Trust Agreement for any acts taken or failed to be taken in good faith by the Trustee under this Section 5.03. 5.04 Taxes. The Trustee is authorized, with or without direction from the Administrative Fiduciary or any other person, to deduct from and charge against the Trust any taxes or assessments by any lawful taxing or governmental authority, including interest and penalties with respect thereto, which may be imposed upon the Trust or any account or the income thereof, or which the Trustee is required to pay with respect to the interest of any person therein, under existing or future laws. The Trustee shall have full power to pay any such tax or assessment, in the case of an individual account plan as defined in section 3(34) of ERISA, only out of any money or other property in the account of the person whose interest is liable therefor, provided that at least fifteen (15) days prior to making such payment the Trustee shall give notice to the Administrative Fiduciary of its intention to make such payment. Until paid, such taxes shall be a lien against the Trust. The Trustee shall not be personally liable for any such taxes, charges or assessments. 5.05 Expenses of Administration. Expenses incurred by the Sponsor, Administrative Fiduciary, Investment Fiduciary, any Investment Manager designated pursuant to Section 4.02, or any other persons designated to act on behalf of the Sponsor, Administrative Fiduciary or Investment Fiduciary, including reimbursement for expenses incurred in the performance of their respective duties shall be paid from the Trust unless paid directly by the Sponsor. ARTICLE VI POWERS OF TRUSTEE 6.01 Nondiscretionary Investment Powers. At the direction of the person authorized to direct such action as referred to in Article IV hereof, but limited to those assets or categories of assets acceptable to the Trustee as referred to in Sections 3.01 and 4.04, the Trustee, or the Trustee's designee or a broker/dealer as referred to in Section 4.07 and 4.08, is authorized and empowered: (a) To invest and reinvest the Trust Fund, together with the income therefrom, in: (i) Common stock, preferred stock, convertible preferred stock, bonds, debentures, convertible debentures and bonds, mortgages, notes, commercial paper and other evidences of indebtedness; (ii) Bank investment contracts; (iii) Shares of regulated investment companies, including those advised, managed or offered by the Trustee, or an affiliate of the Trustee; (iv) Common, pooled, group or commingled investment funds established for the investment of the assets of employee benefit plans qualified under section 401 of the Code, individual retirement accounts under section 408(a) of the Code and plans of governmental units described in section 818(a)(6) of the Code maintained by the Trustee or its affiliates. The commingling of assets of this Trust with assets of other qualified trusts in such funds is hereby specifically authorized; provided, however, the declaration of trust establishing any such fund, as amended from time to time, will be a part of this Trust Agreement; (v) Options to buy or sell securities or other assets, provided same are within regulated investment companies or common, pooled, group or commingled investment funds; (vi) Notes evidencing loans to participants in accordance with the terms of the Plan; (vii) Equity securities issued by the Sponsor or an affiliate which are "qualifying employer securities" within the meaning of Section 407(d)(5) of ERISA, as amended; (viii)Stable value investments, whether or not issued by an affiliate of the Trustee, including, without limitation, separate account contracts, guaranteed investment contracts ("GICs"), and synthetic guaranteed investment contracts ("synthetic GICs"); (ix) Guaranteed investment and annuity contracts heretofore entered into by the predecessor trustee and specifically identified on Schedule D attached hereto ("Existing GICs") provided, however, that the Investment Fiduciary hereby directs the Trustee to continue to hold such Existing GICs until the Investment Fiduciary directs otherwise, it being expressly understood that such direction is given in accordance with Section 403(a) of ERISA; and (x) Other marketable securities traded on a national securities exchange which are acceptable to the Trustee. (b) To sell, exchange, convey, transfer, or otherwise dispose of any property held in the Trust, by private contract or at public auction. No person dealing with the Trustee shall be bound to see to the application of the purchase money or other property delivered to the Trustee or to inquire into the validity, expediency, or propriety of any such sale or other disposition. (c) To cause any securities or other property held as part of the Trust to be registered in the Trustee's own name, in the name of one or more of its nominees or to be held in bearer form, but the books and records of the Trustee shall at all times show that all such investments are part of the Trust. (d) To keep that portion of the Trust in cash or cash balances as the Investment Fiduciary may, from time to time, deem to be in the best interest of the Trust. (e) To make, execute, acknowledge, and deliver any and all documents of transfer or conveyance and to carry out the powers herein granted. (f) To consent to or participate in any plans for the reorganization, recapitalization, consolidation or merger, or sale or lease of assets of any corporation, any security of which is held in the Trust, and to pay any and all costs and assessments imposed upon the owners of such securities as a condition of their participation therein, and to consent to any contract, lease, mortgage, purchase or sale of property, by or between such corporation and any other corporation or person. (g) To grant options to purchase any property. (h) To foreclose any obligation by judicial proceedings or otherwise. (i) To disclose any information concerning the existence, condition, management and administration of the assets of the Trust as may be required by law or as may be necessary to prepare any reports required by law. (j) To lend, through a common, collective, or Investment Fund, any securities held in such fund to brokers, dealers or other borrowers and to permit the loaned securities to be transferred into the name and custody and be voted by the borrower or others. (k) To retain any assets in the Trust for such period of time as the Trustee deems appropriate. (l) To exercise or dispose of any conversion privilege or subscription right which the Trustee may have as a holder of any security or otherwise. (m) To deposit any security in any voting trust or under any pooling agreement or with any protective or reorganization committee, or with depositories designated by such trust, agreement or committee, and to delegate such power and authority with relation thereto as the Trustee may deem proper, and to agree to pay and to pay out of the Trust assets such portion of the expenses and compensation of such trust, agreement or committee as the Trustee may deem proper. (n) To execute and deliver any general or specific proxies or powers of attorney, with or without power of substitution, to such person or persons as the Trustee may deem proper, granting to such persons such power and authority with relation to any property or securities at any time held by the Trust as the Trustee may deem proper. (o) To borrow money from any source other than a "party in interest" (as such term is defined by Section 3(14) of ERISA) with or without giving security, and to encumber the Trust assets by mortgage, deed of trust, pledge or otherwise. (p) To renew or extend the time of payments of any obligation due or becoming due. (q) To settle, compromise, or submit to arbitration any claims, debts, or damages due to or arising from the Trust; to commence or defend suits or legal or administrative proceedings; to represent the Trust in all suits and legal and administrative hearings; and to pay all reasonable expenses arising from any such action, from the Trust if not paid by the Sponsor. (r) To employ legal, accounting, clerical, and other assistance as may be required in carrying out the provisions of this Trust Agreement and to pay their reasonable expenses and compensation from the Trust if not paid by the Sponsor. (s) To do all other acts although not specifically mentioned herein, as the Trustee may deem necessary to carry out any of the foregoing powers and the purposes of this Trust Agreement. 6.02 Standard of Care. The Trustee shall discharge its duties hereunder with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. As a directed trustee, the Trustee assumes no responsibility and shall not be liable for any losses sustained by the Trust by reason of the purchase, retention, sale or exchange of any investment in accordance with the provisions of this Trust Agreement and in accordance with ERISA and the regulations promulgated thereunder. 6.03 Location and Indicia of Ownership. Except as permitted by ERISA, the Trustee shall not maintain the indicia of ownership of any assets of the Trust outside the jurisdiction of the district courts of the United States. ARTICLE VII RESPONSIBILITIES, AGENTS, INDEMNIFICATION AND BONDING 7.01 Relationship of Fiduciaries. Each fiduciary of the Plan and this Trust shall be solely responsible for its own acts or omissions. The Trustee shall have no duty to question any other Plan fiduciary's performance of fiduciary duties allocated to such other fiduciary pursuant to the Plan or this Trust Agreement. The Trustee shall not be responsible for a breach of responsibility by any other Plan fiduciary except as provided for in ERISA. 7.02 Benefit of Participants. Each fiduciary, within the meaning of the Code and ERISA, shall discharge its duties with respect to the Trust solely in the interest of participants in the Plan and their beneficiaries and for the exclusive purpose of providing benefits to such participants and beneficiaries and defraying reasonable expenses of administering the Plan. 7.03 Agents of Administrative Fiduciary and Investment Fiduciary. The Administrative Fiduciary and the Investment Fiduciary may use agents, as identified in Schedule A attached hereto, for the purpose of satisfying its responsibilities under the terms of the Plan and this Trust Agreement. The direction of the Trustee by any such agent shall have the same effect as if made directly by the Administrative Fiduciary or Investment Fiduciary, as appropriate, under this Trust Agreement. In connection herewith, the Sponsor hereby designates NYLBSI, by its authorized individuals, as the party who may provide the Trustee with directions from the Administrative Fiduciary and Investment Fiduciary upon which the Trustee will be fully protected in relying to the extent consistent with this Trust Agreement. The signature of each authorized NYLBSI individual will be provided and certified to the Trustee by NYLBSI. 7.04 Agents of Trustee. The Sponsor, Administrative Fiduciary and Investment Fiduciary acknowledge and authorize the Trustee to use and employ agents, including its affiliates, in the performance of its responsibilities under this Agreement. The expenses and compensation for the services of any such agent as specified in Schedule E attached hereto, shall be paid from the Trust unless paid directly by the Sponsor as set forth in Section 8.01 of this Trust Agreement. 7.05 Protection of Designees. To the extent that any designee of the Trustee is performing a function of the Trustee under this Trust Agreement, the designee shall have the benefit of all of the applicable limitations on the scope of the Trustee's duties and liabilities, all applicable rights of indemnification granted hereunder to the Trustee and all other applicable protections of any nature afforded to the Trustee provided the designation is pursuant to this Trust Agreement and consistent with the requirements of ERISA. 7.06 Bond. The Trustee hereby warrants that it complies with the bonding provisions of Section 412 of ERISA. 7.07 Indemnification. The Sponsor hereby indemnifies the Trustee against, and shall hold the Trustee harmless from, any and all loss, claim, liability, and expense, including reasonable attorneys fees, imposed upon the Trustee or incurred by the Trustee as a result of any acts taken, or any failure to act, in accordance with directions from the Administrative Fiduciary, Investment Fiduciary, Investment Manager or any other person specified in Article IV or V hereof, or any designee of any such person, or by reason of the Trustee's good faith execution of its duties with respect to the Trust, including, but not limited to, its holding of assets of the Trust as provided for in Section 3.02, the Sponsor's obligations in the foregoing regard to be satisfied promptly on request by the Trustee, provided that in the event that the loss, claim, liability or expense involved is determined by a no longer appealable final judgment entered in a lawsuit or proceeding to have resulted from the negligence or willful misconduct of the Trustee, the Trustee shall promptly thereafter return to the Sponsor any amount previously received by the Trustee under this Section with respect to such loss, claim, liability or expense. 7.08 Trustee's Reliance. The Trustee shall have no duty to inquire whether directions by the Sponsor, the Administrative Fiduciary, the Investment Fiduciary or any other person conform to the Plan, and the Trustee shall be fully protected in relying on such direction communicated in accordance with procedures acceptable to the Trustee from any person who the Trustee reasonably believes is a proper person to give the direction. The Trustee shall have no liability to any participant, any beneficiary or any other person for payments made, any failure to make payments, or any discontinuance of payments, on direction of the Administrative Fiduciary, the Investment Fiduciary or any designee of either of them, or for any failure to make payments in the absence of directions from the Administrative Fiduciary or any person responsible for or purporting to be responsible for directing the investment of Trust assets. The Trustee shall have no obligation to request proper directions from any person. The Trustee may request instructions from the Administrative Fiduciary or the Investment Fiduciary and shall have no duty to act or liability for failure to act if such instructions are not forthcoming. 7.09 Survival of Provisions.The provisions of this Article VII shall survive the termination of this Trust Agreement. ARTICLE VIII PAYMENTS TO TRUSTEE AND AGENTS 8.01 Payments to the Trustee. The Sponsor understands and acknowledges that the Trustee's fees would be higher if the Trustee did not receive credit and/or interest on aggregate cash balances the Trustee has on deposit with a third party bank in respect of the Trust either (i) with respect to funds awaiting investment or reinvestment, where such funds are received by the Trustee on any day after the close of the New York Stock Exchange, or (ii) with respect to funds pending distribution from the Trust. Except as otherwise provided by ERISA, regulations promulgated thereunder, and interpretations by the Department of Labor, the Sponsor hereby authorizes the Trust to pay the Trustee, as compensation hereunder, the Trust's prorata portion of any such credit or interest and such additional amount as is set forth on Schedule E attached hereto, as amended from time to time in writing. In addition, the Trustee shall be entitled to reimbursement for all reasonable expenses incurred by it in the performance of its duties hereunder, including reasonable fees for legal services rendered to the Trustee (whether in connection with any litigation or otherwise), and all other proper charges and disbursements. At the election of the Sponsor, as set forth on Schedule E attached hereto, the Sponsor shall pay such compensation and expenses within 60 days of presentation of the Trustee's statement. Alternatively, the Sponsor may elect on Schedule E to have such compensation and expenses withdrawn from the Trust by the Trustee. If the Sponsor elects to pay such expenses and does not do so within 60 days of presentation of the Trustee's statement, such compensation and expenses shall be a charge upon the Trust and shall be withdrawn from the Trust by the Trustee, without direction from the Administrative Fiduciary or any other person. The Trustee is specifically authorized to sell such Trust assets as are necessary to pay all amounts due under this Article VIII. 8.02 Expenses and Compensation. The Trustee shall not be obligated to transfer Trust assets until the Trustee is provided assurance by the Sponsor satisfactory to the Trustee that all fees and expenses reasonably anticipated will be paid. ARTICLE IX RECORDS, ACCOUNTINGS AND VALUATIONS 9.01 Records. The Trustee shall maintain or cause to be maintained records generated by the Trustee and accounts of all Trust transactions and assets. The records and accounts of all Trust transactions and assets shall be available at reasonable times during normal business hours for inspection or audit by the Administrative Fiduciary and the Investment Fiduciary or any person designated for the purpose by either of them. 9.02 Accountings. The Trustee shall, not less than quarterly, and within 90 days following the close of each fiscal year of the Plan or the effective date of the removal or resignation of the Trustee, file with the Administrative Fiduciary a written accounting setting forth all transactions since the end of the period covered by the last previous accounting. The accounting shall include a listing of the assets of the Trust showing the value of such assets at the close of the period covered by the accounting. On direction of the Administrative Fiduciary, and if previously agreed to by the Trustee in writing, the Trustee shall submit to the Administrative Fiduciary interim valuations, reports or other information pertaining to the Trust. The Administrative Fiduciary may approve the accounting by written approval delivered to the Trustee or by failure to deliver written objections to the Trustee within 60 days after receipt of the accounting. Any such approval shall be binding on the Sponsor, the Administrative Fiduciary, the Investment Fiduciary and, to the extent permitted by ERISA, all other persons. 9.03 Valuation. The assets of the Trust shall be valued as of each valuation date as specified under the Plan at fair market value as determined by the Trustee based upon such sources of information as it may deem reliable. The reasonable costs incurred in establishing values of the Trust shall be a charge against the Trust, unless paid by the Sponsor pursuant to Section 8.01 hereof. Except as otherwise provided by ERISA and regulations promulgated thereunder, the Trustee, may, when unable to arrive at a value based upon information from independent sources, rely upon information from the Sponsor, Administrative Fiduciary, Investment Fiduciary, appraisers, or other sources, and shall not incur any liability for inaccurate valuation based in good faith upon such information. ARTICLE X AMENDMENT AND TERMINATION OF TRUST 10.01 Amendment. This Trust Agreement may be amended by agreement between the Trustee and the Sponsor, provided that no amendment of this Trust Agreement or the Plan shall be effective which would (a) cause any assets of the Trust to be used for, or diverted to, purposes other than the exclusive benefit of Plan participants or their beneficiaries other than an amendment permissible under the Code and ERISA, or (b) affect the rights, duties, responsibilities, obligations or liabilities of the Trustee without the Trustee's written consent. The Sponsor shall amend this Trust Agreement as requested by the Trustee to reflect changes in law which counsel for the Trustee advises the Trustee require such changes. Any proposed amendment under consideration by the Sponsor shall be communicated to the Trustee in writing to permit the Trustee to review and comment thereon in due course before the Sponsor acts on the proposed amendment. Final amendments to the Trust Agreement or a certified copy thereof shall be delivered to the Trustee promptly after adoption by the Sponsor. NYLBSI is authorized to act as the Trustee's agent for the purpose of holding an original executed copy of the Plan and all amendments of the Plan. The Sponsor, prior to the execution of this Trust Agreement by both parties, has delivered to NYLBSI the text of the Plan and all amendments of the Plan as in effect as of the date of this Trust Agreement. The Sponsor shall deliver to NYLBSI promptly after adoption thereof a certified copy of each other amendment of the Plan. 10.02 Termination. The Trust may be terminated by the Sponsor upon at least 60 days written notice to the Trustee. Upon such termination, and subject to Section 12.01 hereof, the Trust shall be distributed as directed by the Administrative Fiduciary. ARTICLE XI RESIGNATION AND REMOVAL OF TRUSTEE 11.01 Resignation. The Trustee may resign at any time upon at least 60 days written notice to the Sponsor, unless the parties agree to a shorter period. 11.02 Removal The Sponsor may remove the Trustee upon at least 60 days written notice to the Trustee, unless the parties agree to a shorter period. 11.03 Appointment of a Successor. Upon resignation or removal of the Trustee, the Sponsor shall appoint a successor trustee. Upon failure of the Sponsor to appoint, or the failure of the effectiveness of the appointment by the Sponsor of, a successor trustee by the effective date of the resignation or removal, the Trustee may apply to any court of competent jurisdiction for the appointment of a successor. Promptly after receipt by the Trustee of notice of the effectiveness of the appointment of the successor trustee, the Trustee shall deliver to the successor trustee such records as may be reasonably requested to enable the successor trustee to properly administer the Trust and all property of the Trust after deducting therefrom such amounts as the Trustee deems necessary to provide for expenses, taxes, compensation or other amounts due to or by the Trustee pursuant to Sections 4.06, 5.04, 5.05 and 8.01 hereof not paid by the Sponsor prior to the delivery, provided such expenses, taxes, compensation or other amounts are reasonable and such deduction is consistent with the requirements of ERISA. 11.04 Settlement of Account. Upon resignation or removal of the Trustee, the Trustee shall have the right to a settlement of its account, which settlement shall be made by a settlement agreement between the Trustee and the Sponsor or, if no settlement is reached within 60 days, by a judicial settlement in an action instituted by the Trustee. The Sponsor shall bear their costs of any such judicial settlement. The parties shall bear the fees of their own attorneys. 11.05 Termination of Responsibility and Liability. Upon settlement of the account and transfer of the Trust to the successor trustee, all rights and privileges under this Trust Agreement shall vest in the successor trustee and all responsibility and liability of the Trustee with respect to the Trust and assets thereof shall, except as otherwise required by ERISA, terminate subject only to the requirement that the Trustee execute all necessary documents to transfer the Trust assets to the successor trustee. ARTICLE XII MISCELLANEOUS 12.01 Exclusive Benefit Rule. Except as otherwise provided in this Trust Agreement or permitted or required by ERISA or the Code, no asset of this Trust shall be used for, or diverted to, purposes other than the exclusive benefit of Plan participants or their beneficiaries or for the reasonable expenses of administering the Plan and Trust until all liabilities for benefits due Plan participants or their beneficiaries have been satisfied. Notwithstanding the foregoing, the Trustee shall, upon the written direction of the Administrative Fiduciary which shall include a certification that such action is proper under the Plan, ERISA and the Code specifying any relevant sections thereof, return to the Sponsor any amount referred to in section 403(c)(2) of ERISA or excess sums contributed to the Trust as a result of a mistake of fact. 12.02 Conflict with Plan. The rights, duties, responsibilities, obligations and liabilities of the Trustee are as set forth in this Trust Agreement, and no provision of the Plan or any other document shall be deemed to affect such rights, duties, responsibilities, obligations and liabilities. If there is a conflict between provisions of the Plan and this Trust Agreement with respect to any subject involving the Trustee, including but not limited to the responsibility, authority or powers of the Trustee, the provisions of this Trust Agreement shall be controlling. 12.03 Failure to Maintain Qualification. If the Plan fails to qualify as a qualified plan under section 401(a) of the Code, or loses its status as such a qualified plan, the Sponsor shall immediately so notify the Trustee, and the Trustee shall, without further notice or direction, remove the Trust assets from any common or collective trust fund for investments by qualified trusts. Absent receipt by the Trustee of a direction from the proper person(s) for the investment of such removed assets, the Trustee shall cause such removed assets to be invested in accordance with Section 4.05. 12.04 Appointment of a Successor. Any action to be taken under this Trust Agreement by a Sponsor or other person which is: (a) a corporation shall be taken by the board of directors of the corporation or any person or persons duly empowered by the board of directors to take the action involved, (b) a partnership shall be taken by an authorized general partner of the partnership, (c) a sole proprietorship by the sole proprietor, and (d) a committee shall be taken (i) at a meeting at which a quorum is present by the vote or concurrence of a majority of the members present or (ii) without a meeting by unanimous written consent of the members. 12.05 Restriction on Alienation. Except as provided in Section 12.06 hereof, under section 401(a)(13) of the Code or other provision of ERISA, the interest of any Plan participant or beneficiary in the Trust shall not be subject to the claims of such person's creditors and may not be assigned, sold, transferred, alienated or encumbered. Any attempt to do so shall be void; and the Trustee shall disregard any attempt. Trust assets shall not in any manner be liable for or subject to debts, contracts, liabilities, engagement or torts of any Plan participant or beneficiary, and benefits shall not be considered an asset of any such a person in the event of the person's insolvency or bankruptcy. 12.06 Payment on Court Order. The Trustee is authorized to make any payments directed by court order in any action in which the Trustee is a party or pursuant to a domestic relations order that has been determined by the administrator of the Plan to constitute a "qualified domestic relations order" under section 414(p) of the Code; provided that the Trustee shall not make such payment if the Trustee is indemnified and held harmless by the Sponsor in a manner satisfactory to the Trustee against all consequences of such failure to pay. The Trustee is not obligated to defend actions in which the Trustee is named but shall notify the Sponsor or Administrative Fiduciary of any such action and may tender defense of the action to the Sponsor, Administrative Fiduciary or the participant or beneficiary whose interest is affected. The Trustee may in its discretion defend any action in which the Trustee is named and any expenses, including reasonable attorneys fees, incurred by the Trustee in that connection shall be paid or reimbursed in accordance with Section 8.01 hereof. 12.07 Arbitration. The Sponsor hereby agrees that all controversies or claims that may arise between the Sponsor and the Trustee and its affiliates in connection with the Trust shall be settled by arbitration. The Sponsor further agrees that the arbitration shall be held in the State, City and County of New York and administered by the American Arbitration Association under its Commercial Arbitration Rules, applying New York law. The arbitration shall be submitted to a panel (the "Panel") consisting of one arbitrator appointed by the claimant(s), one arbitrator appointed by the respondent(s) and a third arbitrator (the "neutral arbitrator") chosen by the party-appointed arbitrators. The Panel shall be impartial and disinterested. The arbitrators shall be persons who are experienced and knowledgeable in securities and trust or pension law and shall be attorneys duly licensed to practice law in one or more states. The Panel shall not have the authority to grant any remedy which contravenes or changes any term of this Trust Agreement and shall not have the authority to award punitive, exemplary or extracontractual damages under any circumstances. Each party shall bear the expense of the arbitrator selected by it and shall jointly and equally bear the expenses of the neutral arbitrator and of any stenographer present at the arbitration. The remaining costs of the arbitration shall be finally allocated by the Panel, except that the Panel shall not have the power to award attorney's fees. The Panel shall render its decision within 30 days after termination of the arbitration proceeding, which decision shall be in writing, stating the reasons therefor and including a brief description of each element of any damages awarded. The decision of the majority shall be final and binding. Judgment on the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. 12.08 Governing Law and Construction. This Trust Agreement and the Trust shall by construed, administered and governed under ERISA and other pertinent federal law, and to the extent that federal law is inapplicable, under the laws of the State of New York. If any provision of this Trust Agreement is susceptible to more than one interpretation, the interpretation to be given is that which is consistent with the Trust being a qualified trust under section 401(a) of the Code. If any provision of this Trust Agreement is held by a court of competent jurisdiction to be invalid or unenforceable, the remaining provisions shall continue to be fully effective to the extent possible under the circumstances. 12.09 Successors and Assigns. This Trust Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns. 12.10 Gender. As used in this Trust Agreement, the masculine gender shall include the feminine and the neuter genders and the singular shall include the plural and the plural the singular as the context requires. 12.11 Headings. Headings and subheadings in this Trust Agreement are for convenience of reference only and are not to be considered in the construction of the provisions of the Trust Agreement. 12.12 Counterparts. This Trust Agreement may be executed in several counterparts, each of which shall be deemed an original, and these counterparts shall constitute one and the same instrument which may be sufficiently evidenced by any one counterpart. 12.13 Special, Indirect or Consequential Damages. No party to this Trust Agreement shall be liable to any other party for special, indirect or consequential damages under any provision of this Trust Agreement or for any special, indirect or consequential damages arising out of any act or failure to act hereunder. 12.14 Amendment, Modification or Waiver. This Trust Agreement may be amended or modified at any time and from time to time, and any term or condition of this Trust Agreement may be amended, modified or waived only by a written agreement executed by an authorized representative of each party. Any waiver by either party of any requirement hereunder shall not be deemed to be a continuing waiver nor waiver of any other term or condition of this Trust Agreement. IN WITNESS WHEREOF, the Sponsor and the Trustee have executed this Trust Agreement each by action of a duly authorized person. DAY RUNNER, INC. By: __________________________________________ Name: Title: __________________________________________ NEW YORK LIFE TRUST COMPANY NEW YORK, NY By: __________________________________________ William V. Zaleski, President & C.E.O. New York Life Trust Company 22 Effective as of: July 1, 1998 SCHEDULE A ADMINISTRATIVE AND INVESTMENT FIDUCIARIES AND AGENTS In accordance with Sections 2.02 and 7.03 of the Trust Agreement, the following persons are hereby designated to act singly and/or jointly, on behalf of the Plan: ADMINISTRATIVE FIDUCIARY: Name: Cyndi Mikkelson Signature: _______________________________________ Name: Dennis Marquardt Signature: _______________________________________ Name: Charles Miller Signature: _______________________________________ Name: Harold Pierce Signature: _______________________________________ AGENT OF ADMINISTRATIVE FIDUCIARY: New York Life Benefit Services, Inc., by its authorized individuals, signatures of such individuals being on file with New York Life Trust Company. INVESTMENT FIDUCIARY: Name: Dennis Marquardt Signature: _______________________________________ Name: Charles Miller Signature: _______________________________________ Name: Harold Pierce Signature: _______________________________________ AGENT OF INVESTMENT FIDUCIARY: New York Life Benefit Services, Inc., by its authorized individuals, signatures of such individuals being on file with New York Life Trust Company. INVESTMENT MANAGER(S): - N/A BROKER: - N/A_____ OTHER: - N/A SCHEDULE B SELECTION OF INVESTMENTS, INCLUDING INVESTMENT FOR FUNDS AWAITING INVESTMENT AND DEFAULT INVESTMENT In accordance with Section 4.04 of the Trust Agreement, the Investment Fiduciary hereby directs that the assets of the Trust shall be invested in the following investments*: ____________MainStay Money Market Fund (Class A) ____________MainStay High Yield Corporate Bond Fund (Class A) ____________PIMCO Total Return Fund (Administrative Class) ____________Franklin Balance Sheet Investment Fund ____________Janus Balanced Fund ____________MainStay Equity Index Fund (Class A) ____________Baron Asset Fund ____________Fidelity Advisors Growth Opportunities Fund (Class T) ____________Janus Worldwide Fund * The direction by the Investment Fiduciary to direct the assets of the Trust in the above-enumerated funds shall continue to apply notwithstanding any subsequent changes to names of such funds. In accordance with Section 4.08 of the Trust Agreement, absent receipt by the Trustee of a direction from the proper person(s) for the investment or reinvestment of Trust assets, the Trustee shall cause such assets to be invested in the MainStay Money Market Fund (Class A). SCHEDULE C VOTING OF EMPLOYER SECURITIES N/A SCHEDULE D EXISTING GICs/GACs In accordance with Section 6.01(a) of the Trust Agreement, the Trustee is hereby directed to continue to hold the following guaranteed insurance contracts and/or guaranteed annuity contracts until such time as the Trustee is directed otherwise by the person(s) authorized to direct such action under Article IV of the Trust Agreement: N/A SCHEDULE E TRUSTEE'S FEES AND EXPENSES AND ALLOCATION METHOD In accordance with Section 8.01 of the Trust Agreement, the Sponsor agrees to pay the Trustee, as compensation, the Trust's prorata portion of any credit and/or interest on aggregate cash balances the Trustee has on deposit with a third party bank with respect to funds awaiting investment or reinvestment in the case where such funds are received by the Trustee on any day after the close of the New York Stock Exchange or with respect to funds pending distribution from the Trust, and the following additional amounts: Trustee Fees: $3,000 per annum (included in NYLBSI's fees) Other Fees and Expenses of the Trustee: None Fees and Expenses of the Trustee's Agent(s): None EX-10 3 1999 OFFICER BONUS PLAN
DAY RUNNER, INC. Fiscal Year 1999 Officer Bonus Schedule(3) --------------------------------------------------- Group I - Bonus Factor 2.43% --------------------------------------------------- ----------------------- ---------------------- Chairman of the Board Chief Executive Officer ----------------------- ---------------------- ----------------------- ---------------------- Base Salary Base Salary --------------------------- 1998 N/I (1) (2) = $ 15,908 $330,000 $300,000 Total (Group I) ---------------------------- ----------------------- ---------------------- --------------------- ---------------------------------------------- Percent Percent Percent Net Income Net Income of of of Growth Rate Target Salary Bonus Amount Salary Bonus Amount Salary Bonus Amount ----------------------------------------------------------------------------------------------------- 15.00% $ 18,294 15.00% $ 49,500 15.00% $ 45,000 15.00 $ 94,500 16.00% $ 18,453 17.43% $ 57,514 17.43% $ 52,286 17.43% $109,800 17.00% $ 18,612 19.86% $ 65,529 19.86% $ 59,571 19.87% $125,100 18.00% $ 18,771 22.29% $ 73,543 22.29% $ 66,857 22.29% $140,400 19.00% $ 18,931 24.71% $ 81,557 24.71% $ 74,143 24.71% $155,700 ---------------------------- ----------------------- ---------------------- --------------------- 20.00% $ 19,090 27.14% $ 89,571 27.14% $ 81,429 27.14% $171,000 21.00% $ 19,249 29.57% $ 97,586 29.57% $ 88,714 29.57% $186,300 22.00% $ 19,408 32.00% $105,600 32.00% $ 96,000 32.00% $201,600 23.00% $ 19,567 34.43% $113,614 34.43% $103,286 34.43% $216,900 24.00% $ 19,726 36.86% $121,629 36.86% $110,571 36.86% $232,200 ---------------------------- ----------------------- ---------------------- --------------------- 25.00% $ 19,885 39.29% $129,643 39.29% $117,857 39.29% $247,500 26.00% $ 20,044 41.71% $137,657 41.71% $125,143 41.71% $262,800 27.00% $ 20,203 44.14% $145,671 44.14% $132,429 44.14% $278,100 28.00% $ 20,362 46.57% $153,686 46.57% $139,714 46.57% $293,400 29.00% $ 20,521 49.00% $161,700 49.00% $147,000 49.00% $308,700 ---------------------------- ----------------------- ---------------------- --------------------- 30.00% $ 20,680 51.43% $169,714 51.43% $154,286 51.43% $324,000 31.00% $ 20,839 53.86% $177,729 53.86% $161,571 53.86% $339,300 32.00% $ 20,999 56.29% $185,743 56.29% $168,857 56.29% $354,600 33.00% $ 21,158 58.71% $193,757 58.71% $176,143 58.71% $369,900 34.00% $ 21,317 61.14% $201,771 61.14% $183,429 61.14% $385,200 ---------------------------- ----------------------- ---------------------- --------------------- 35.00% $ 21,476 63.57% $209,786 63.57% $190,714 63.57% $400,500 36.00% $ 21,635 66.00% $217,800 66.00% $198,000 66.00% $415,800 37.00% $ 21,794 68.43% $225,814 68.43% $205,286 68.43% $431,100 38.00% $ 21,953 70.86% $233,829 70.86% $212,571 70.86% $446,400 39.00% $ 22,112 73.29% $241,843 73.29% $219,857 73.29% $461,700 ---------------------------- ----------------------- ---------------------- --------------------- 40.00% $ 22,271 75.71% $249,857 75.71% $227,143 75.71% $477,000 41.00% $ 22,430 78.14% $257,871 78.14% $234,429 78.14% $492,300 42.00% $ 22,589 80.57% $265,886 80.57% $241,714 80.57% $507,600 43.00% $ 22,748 83.00% $273,900 83.00% $249,000 83.00% $522,900 44.00% $ 22,908 85.43% $281,914 85.43% $256,286 85.43% $538,200 ---------------------------- ----------------------- ---------------------- --------------------- 45.00% $ 23,067 87.86% $289,929 87.86% $263,571 87.86% $553,500 46.00% $ 23,226 90.29% $297,943 90.29% $270,857 90.29% $568,800 47.00% $ 23,385 92.71% $305,957 92.71% $278,143 92.71% $584,100 48.00% $ 23,544 95.14% $313,971 95.14% $285,429 95.14% $599,400 49.00% $ 23,703 97.57% $321,986 97.57% $292,714 97.57% $614,700 ---------------------------- ----------------------- ---------------------- --------------------- 50.00% $ 23,862 100.00% $330,000 100.00% $300,000 100.00% $630,000 ---------------------------- ----------------------- ---------------------- --------------------- -------------------------------------------------------------------------------------------------- Group II - Bonus Factor 2.14% -------------------------------------------------------------------------------------------------- Chief Financial Officer Chief Operating Officer EVP - Product Devel. Vice President - Sales ----------------------- ---------------------- ---------------------- ---------------------------- Base Salary Base Salary Base Salary Base Salary 1998 N/I (1) (2) = $ 15,908 $180,000 $165,000 $160,000 $155,000 --------------------------- ---------------------- ---------------------- ----------------------- -------------------------- Percent Percent Percent Percent Net Income Net Income of of of of Growth Rate Target Salary Bonus Amount Salary Bonus Amount Salary Bonus Amount Salary Bonus Amount ------------------------ ------------------------- ---------------------- -------------------- ------------------------- 15.00% $ 18,294 15.00% $ 27,000 15.00% $ 24,750 15.00% $ 24,000 15.00% $ 23,250 16.00% $ 18,453 17.14% $ 30,857 17.14% $ 28,286 17.14% $ 27,429 17.14% $ 26,571 17.00% $ 18,612 19.29% $ 34,714 19.29% $ 31,821 19.29% $ 30,857 19.29% $ 29,893 18.00% $ 18,771 21.43% $ 38,571 21.43% $ 35,357 21.43% $ 34,286 21.43% $ 33,214 19.00% $ 18,931 23.57% $ 42,429 23.57% $ 38,893 23.57% $ 37,714 23.57% $ 36,536 ----------------------------------------------------------------------------------------------------------------------------------- 20.00% $ 19,090 25.71% $ 46,286 25.71% $ 42,429 25.71% $ 41,143 25.71% $ 39,857 21.00% $ 19,249 27.86% $ 50,143 27.86% $ 45,964 27.86% $ 44,571 27.86% $ 43,179 22.00% $ 19,408 30.00% $ 54,000 30.00% $ 49,500 30.00% $ 48,000 30.00% $ 46,500 23.00% $ 19,567 32.14% $ 57,857 32.14% $ 53,036 32.14% $ 51,429 32.14% $ 49,821 24.00% $ 19,726 34.29% $ 61,714 34.29% $ 56,571 34.29% $ 54,857 34.29% $ 53,143 ----------------------------------------------------------------------------------------------------------------------------------- 25.00% $ 19,885 36.43% $ 65,571 36.43% $ 60,107 36.43% $ 58,286 36.43 $ 56,464 26.00% $ 20,044 38.57% $ 69,429 38.57% $ 63,643 38.57% $ 61,714 38.57 $ 59,786 27.00% $ 20,203 40.71% $ 73,286 40.71% $ 67,179 40.71% $ 65,143 40.71 $ 63,107 28.00% $ 20,362 42.86% $ 77,143 42.86% $ 70,714 42.86% $ 68,571 42.86 $ 66,429 29.00% $ 20,521 45.00% $ 81,000 45.00% $ 74,250 45.00% $ 72,000 45.00 $ 69,750 ----------------------------------------------------------------------------------------------------------------------------------- 30.00% $ 20,680 47.14% $ 84,857 47.14% $ 77,786 47.14% $ 75,429 47.14 $ 73,071 31.00% $ 20,839 49.29% $ 88,714 49.29% $ 81,321 49.29% $ 78,857 49.29 $ 76,393 32.00% $ 20,999 51.43% $ 92,571 51.43% $ 84,857 51.43% $ 82,286 51.43 $ 79,714 33.00% $ 21,158 53.57% $ 96,429 53.57% $ 88,393 53.57% $ 85,714 53.57 $ 83,036 34.00% $ 21,317 55.71% $100,286 55.71% $ 91,929 55.71% $ 89,143 55.71 $ 86,357 ----------------------------------------------------------------------------------------------------------------------------------- 35.00% $ 21,476 57.86% $104,143 57.86% $ 95,464 57.86% $ 92,571 57.86 $ 89,679 36.00% $ 21,635 60.00% $108,000 60.00% $ 99,000 60.00% $ 96,000 60.00 $ 93,000 37.00% $ 21,794 62.14% $111,857 62.14% $102,536 62.14% $ 99,429 62.14 $ 96,321 38.00% $ 21,953 64.29% $115,714 64.29% $106,071 64.29% $102,857 64.29% $ 99,643 39.00% $ 22,112 66.43% $119,571 66.43% $109,607 66.43% $106,286 66.4% $102,964 ----------------------------------------------------------------------------------------------------------------------------------- 40.00% $ 22,271 68.57% $123,429 68.57% $113,143 68.57% $109,714 68.57% $106,286 41.00% $ 22,430 70.71% $127,286 70.71% $116,679 70.71% $113,143 70.71% $109,607 42.00% $ 22,589 72.86% $131,143 72.86% $120,214 72.86% $116,571 72.86% $112,929 43.00% $ 22,748 75.00% $135,000 75.00% $123,750 75.00% $120,000 75.00% $116,250 44.00% $ 22,908 77.14% $138,857 77.14% $127,286 77.14% $123,429 77.14% $119,571 ----------------------------------------------------------------------------------------------------------------------------------- 45.00% $ 23,067 79.29% $142,714 79.29% $130,821 79.29% $126,857 79.29% $122,893 46.00% $ 23,226 81.43% $146,571 81.43% $134,357 81.43% $130,286 81.43% $126,214 47.00% $ 23,385 83.57% $150,429 83.57% $137,893 83.57% $133,714 83.57% $129,536 48.00% $ 23,544 85.71% $154,286 85.71% $141,429 85.71% $137,143 85.71% $132,857 49.00% $ 23,703 87.86% $158,143 87.86% $144,964 87.86% $140,571 87.86% $136,179 ----------------------------------------------------------------------------------------------------------------------------------- 50.00% $ 23,862 90.00% $162,000 90.00% $148,500 90.00% $144,000 90.00% $139,500 ----------------------------------------------------------------------------------------------------------------------------------- -------------------- Percent of Salary Bonus Amount ----------------------- 15.00% $ 99,000 17.14% $113,143 19.29% $127,286 21.43% $141,429 23.57% $155,571 ------------------------ 25.71% $169,714 27.86% $183,857 30.00% $198,000 32.14% $212,143 34.29% $226,286 ------------------------ 36.43% $240,429 38.57% $254,571 40.71% $268,714 42.86% $282,857 45.00% $297,000 ------------------------ 47.14% $311,143 49.29% $325,286 51.43% $339,429 53.57% $353,571 55.71% $367,714 ------------------------ 57.86 $381,857 60.00 $396,000 62.14 $410,143 64.29 $424,286 66.43 $438,429 ------------------------ 68.57 $452,571 70.71 $466,714 72.86 $480,857 75.00 $495,000 77.14 $509,143 ------------------------ 79.29 $523,286 81.43 $537,429 83.57 $551,571 85.71 $565,714 87.86 $579,857 ------------------------ 90.00 $594,000 ------------------------ ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- V.P. Information V.P. International V.P. Business Vice President, Services Sales Development General Counsel ----------------------- ---------------------- ---------------------- --------------------------- Base Salary Base Salary Base Salary Base Salary 1998 N/I (1) (2) = $ 15,908 $135,000 $125,000 $125,000 $125,000 ---------------------- ---------------------- ----------------------- --------------------------- Percent Percent Percent Percent Net Income Net Income of of of of Growth Rate Target Salary Bonus Amount Salary Bonus Amount Salary Bonus Amount Salary Bonus Amount --------------------------- ------------------------------------------------------------------------------------------------------ 15.00% $ 18,294 15.00% $ 20,250 15.00% $18,750 15.00% $18,750 15.00% $18,750 16.00% $ 18,453 16.29% $ 21,986 16.29% $20,357 16.29% $20,357 16.29% $20,357 17.00% $ 18,612 17.57% $ 23,721 17.57% $21,964 17.57% $21,964 17.57% $21,964 18.00% $ 18,771 18.86% $ 25,457 18.86% $23,571 18.86% $23,571 18.86% $23,571 19.00% $ 18,931 20.14% $ 27,193 20.14% $25,179 20.14% $25,179 20.14% $25,179 ------------------------------------------------------------------------------- --------------------------------------------------- 20.00% $ 19,090 21.43% $ 28,929 15.00% $18,750 21.43% $26,786 21.43% $26,786 21.00% $ 19,249 22.71% $ 30,664 16.29% $20,357 22.71% $28,393 22.71% $28,393 22.00% $ 19,408 24.00% $ 32,400 17.57% $21,964 24.00% $30,000 24.00% $30,000 23.00% $ 19,567 25.29% $ 34,136 18.86% $23,571 25.29% $31,607 25.29% $31,607 24.00% $ 19,726 26.57% $ 35,871 20.14% $25,179 26.57% $33,214 26.57% $33,214 ------------------------------------------------------------------------------- --------------------------------------------------- 25.00% $ 19,885 27.86% $ 37,607 21.43% $26,786 27.86% $34,821 27.86% $34,821 26.00% $ 20,044 29.14% $ 39,343 22.71% $28,393 29.14% $36,429 29.14% $36,429 27.00% $ 20,203 30.43% $ 41,079 24.00% $30,000 30.43% $38,036 30.43% $38,036 28.00% $ 20,362 31.71% $ 42,814 25.29% $31,607 31.71% $39,643 31.71% $39,643 29.00% $ 20,521 33.00% $ 44,550 26.57% $33,214 33.00% $41,250 33.00% $41,250 ----------------------------------------------------------------------------------------------------------------------------------- 30.00% $ 20,680 34.29% $ 46,286 15.00% $18,750 34.29% $42,857 34.29% $42,857 31.00% $ 20,839 35.57% $ 48,021 16.29% $20,357 35.57% $44,464 35.57% $44,464 32.00% $ 20,999 36.86% $ 49,757 17.57% $21,964 36.86% $46,071 36.86% $46,071 33.00% $ 21,158 38.14% $ 51,493 18.86% 23,571 38.14% $47,679 38.14% $47,679 34.00% $ 21,317 39.43% $ 53,229 20.14% $25,179 39.43% $49,286 39.43% $49,286 ----------------------------------------------------------------------------------------------------------------------------------- 35.00% $ 21,476 40.71% $ 54,964 21.43% $26,786 40.71% $50,893 40.71% $50,893 36.00% $ 21,635 42.00% $ 56,700 22.71% $28,393 42.00% $52,500 42.00% $52,500 37.00% $ 21,794 43.29% $ 58,436 24.00% $30,000 43.29% $54,107 43.29% $54,107 38.00% $ 21,953 44.57% $ 60,171 25.29% $31,607 44.57% $55,714 44.57% $55,714 39.00% $ 22,112 45.86% $ 61,907 26.57% $33,214 45.86% $57,321 45.86% $57,321 ------------------------------------------------------------------------------- --------------------------------------------------- 40.00% $ 22,271 47.14% $ 63,643 27.86% $34,821 47.14% $58,929 47.14% $58,929 41.00% $ 22,430 48.43% $ 65,379 29.14% $36,429 48.43% $60,536 48.43% $60,536 42.00% $ 22,589 49.71% $ 67,114 30.43% $38,036 49.71% $62,143 49.71% $62,143 43.00% $ 22,748 51.00% $ 68,850 31.71% $39,643 51.00% $63,750 51.00% $63,750 44.00% $ 22,908 52.29% $ 70,586 33.00% $41,250 52.29% $65,357 52.29% $65,357 ----------------------------------------------------------------------------------------------------------------------------------- 45.00% $ 23,067 53.57% $ 72,321 53.57% $66,964 53.57% $66,964 53.57% $66,964 46.00% $ 23,226 54.86% $ 74,057 54.86% $68,571 54.86% $68,571 54.86% $68,571 47.00% $ 23,385 56.14% $ 75,793 56.14% $70,179 56.14% $70,179 56.14% $70,179 48.00% $ 23,544 57.43% $ 77,529 57.43% $71,786 57.43% $71,786 57.43% $71,786 49.00% $ 23,703 58.71% $ 79,264 58.71% $73,393 58.71% $73,393 58.71% $73,393 ------------------------------------------------------------------------------- --------------------------------------------------- 50.00% $ 23,862 60.00% $ 81,000 60.00% $75,000 60.00% $75,000 60.00% $75,000 ----------------------------------------------------------------------------------------------------------------------------------- V.P. Strategic V.P. Human Resources Operational Projects ----------------------- ---------------------- ----------------------- Base Salary Base Salary $125,000 $110,000 Total (Group III) ---------------------- ---------------------- ----------------------- Percent Percent Percent of of of ------------------------------------------------------------------------ 15.00% $18,750 15.00% $16,500 15.00% $111,750 16.29 $20,357 16.29% $17,914 16.29% $121,329 17.57% $21,964 17.57% $19,329 17.57% $130,907 18.86% $23,571 18.86% $20,743 18.86% $140,486 20.14% $25,179 20.14% $22,157 20.14% $150,064 ------------------------------------------------------------------------ 21.43% $26,786 21.43% $23,571 21.43% $159,643 22.71% $28,393 22.71% $24,986 22.71% $169,221 24.00% $30,000 24.00% $26,400 24.00% $178,800 25.29% $31,607 25.29% $27,814 25.29% $188,379 26.57% $33,214 26.57% $29,229 26.57% $197,957 ------------------------------------------------------------------------ 27.86% $34,821 27.86% $30,643 27.86% $207,536 29.14% $36,429 29.14% $32,057 29.14% $217,114 30.43% $38,036 30.43% $33,471 30.43% $226,693 31.71% $39,643 31.71% $34,886 31.71% $236,271 33.00% $41,250 33.00% $36,300 33.00% $245,850 ------------------------------------------------------------------------- 34.29% $42,857 34.29% $37,714 34.29% $255,429 35.57% $44,464 35.57% $39,129 35.57% $265,007 36.86% $46,071 36.86% $40,543 36.86% $274,586 38.14% $47,679 38.14% $41,957 38.14% $284,164 39.43% $49,286 39.43% $43,371 39.43% $293,743 ------------------------------------------------------------------------- 40.71% $50,893 40.71% $44,786 40.71% $303,321 42.00% $52,500 42.00% $46,200 42.00% $312,900 43.29% $54,107 43.29% $47,614 43.29% $322,479 44.57% $55,714 44.57% $49,029 44.57% $332,057 45.86% $57,321 45.86% $50,443 45.86% $341,636 ------------------------------------------------------------------------- 47.14% $58,929 47.14% $51,857 47.14% $351,214 48.43% $60,536 48.43% $53,271 48.43% $360,793 49.71% $62,143 49.71% $54,686 49.71% $370,371 51.00% $63,750 51.00% $56,100 51.00% $379,950 52.29% $65,357 52.29% $57,514 52.29% $389,529 ------------------------------------------------------------------------- 53.57% $66,964 53.57% $58,929 53.57% $399,107 54.86% $68,571 54.86% $60,343 54.86% $408,686 56.14% $70,179 56.14% $61,757 56.14% $418,264 57.43% $71,786 57.43% $63,171 57.43% $427,843 58.71% $73,393 58.71% $64,586 58.71% $437,421 ------------------------------------------------------------------------- 60.00% $75,000 60.00% $66,000 60.00% $447,000 ------------------------------------------------------------------------- (1) Net income amounts are in thousands. (2) Net income amount is estimated. (3) The officer's bonus amount is calculated by multiplying the officer's base salary times a percent of salary at various targeted net income levels. Additionally, this is only a partial schedule.
EX-10 4 FIRST AMENDMENT TO OFFICER SEVERANCE PLAN FIRST AMENDMENT TO OFFICER SEVERANCE PLAN THIS FIRST AMENDMENT is effective as of August 17, 1998 (the "Effective Date"). In accordance with the terms of Section 9(g) of the Officer Severance Plan and pursuant to the action of the Board of Directors of Day Runner, Inc., on August 17, 1998, the Officer Severance Plan is hereby amended as follows: 1. Section 2(f) is amended to read in its entirety as follows: "Employment Period" means the aggregate period of time during which an individual has been employed as a duly elected or appointed officer (other than solely as Secretary and/or Assistant Secretary) by the Company prior to the Termination Date." 2. Section 3(b)(iii) is amended to read in its entirety as follows: the result of such officer having submitted to the Company his or her written resignation (even if such indicates that such resignation is "voluntary") upon and in accordance with (A) the request by the Board in writing or pursuant to a duly adopted resolution of the Board or (B) with respect to all Eligible Officers other than the Chairman of the Board or the Chief Executive Officer of the Company, the written request of the Chief Executive Officer of the Company; 3. Section 4(b) is amended to read in its entirety as follows: Severance Bonus. The amount of severance bonus shall be based on the highest office of the Company attained by the Eligible Officer at or prior to the Termination Date and shall be determined in accordance with the following schedule: HIGHEST OFFICE ATTAINED ----------------------- ASST. VP/VP SVP/EVP/COO CHR/PRES/CEO ----------- ----------- ------------ Number of months of severance bonus 3 months 4 months 5 months 4. The Officer Severance Plan, except as expressly amended by this Amendment, shall continue in full force and effect. IN WITNESS WHEREOF, the undersigned has executed this First Amendment to the Officer Severance Plan as of the date first written above. DAY RUNNER, INC. ----------------------------- Mark Vidovich, Chairman of the Board EX-10 5 LEASE AGREEMENT BETWEEN RDC SALES AND REGISTRANT LEASE AGREEMENT THIS AGREEMENT made and entered into by and between RDC Sales, Inc., an Arkansas corporation (herein called "Landlord"), and Day Runner, Inc., a Delaware corporation (herein called "Tenant"). WITNESSETH: For and in consideration of the covenants and agreements hereinafter contained, Landlord does hereby let, lease, and demise unto Tenant, and Tenant does hereby lease from Landlord 84,000 square foot of a 114,000 square foot warehouse and office facility (the "Leased Premises"), which is depicted on Exhibit "A", affixed hereto, located on Lot 1, Phase I, North Little Rock I-440 Industrial Park Addition to the City of North Little Rock, Pulaski County, Arkansas (the "RDC Tract"). TO HAVE AND TO HOLD the same unto the said Tenant and unto the said Tenant's heirs, successors and assigns, together with all privileges and appurtenances thereunto belonging, for the term and under the conditions hereinafter set forth. 1. Term. The term (the "Term") of this Lease shall be for a period of five (5) years, beginning on the 1st day of October, 1997 ("Commencement Date"), and ending on the 1st day of October, 2002. Provided that no event of default (as defined in Section 15) has occurred and is then continuing, Tenant shall have the right and option to extend the Term of the Lease for one (1) successive, additional period of five (5) years(the "Renewal Term") in accordance with the provisions of this Section 1. The option for the Renewal Term may be exercised by Tenant by written notice given to Landlord not less than six (6) months prior to the end of the initial Term. All of the terms and provisions of this Lease shall govern and be applicable to the Renewal Term, except that the rent due during such Renewal Term shall be the amount determined pursuant to Section 3 hereof. 2. Rental. As rental for said Leased Premises during the Term, Tenant shall pay to Landlord rental in the amount of Twenty Thousand Dollars ($20,000.00) per month payable monthly in advance on or before the 1st day of each month during the Term of this Lease. 3. (a) Renewal Rent. If the Tenant exercises its option to extend the Term of this Lease, its fixed rent during the Renewal Term shall be Twenty Thousand and 00/100 Dollars ($20,000.00) per month, plus any increase as determined in accordance with the provisions of subdivision (B) below; provided, however, that in no event shall such increase exceed eight percent (8%). (b) Rent Adjustment. (1) As promptly as practicable after the end of the initial five-year Term of this Lease, the Landlord shall compute any increase in the cost of living for the preceding five-year period based upon the "Revised Consumers Price Index--Cities (1967 = 100)" (the "Index"), published by the Bureau of Labor Statistics of the United States Department of Labor. (2) The "base index number" shall be the Index number indicated for the City of Little Rock, Arkansas, entitled "all items", for the month of September, 1997. The "current index number" shall be the corresponding Index number for the month of September, 2002. (3) The current Index number shall be divided by the base Index number, and the integer 1 shall be subtracted from such quotient. Any resulting positive number shall be deemed to be the percentage of increase in the cost of living. (4) The increase referred to in subdivision (A) above shall be determined by multiplying the percentage of increase by Twenty Thousand and 00/100 Dollars ($20,000.00). (5) Landlord shall give Tenant notice of any such increase within a reasonable time after obtaining the necessary data for computing it. Landlord's computation shall be conclusive and binding, but shall not preclude any adjustment that may be required by a published amendment of the index figures upon which such computation was based unless Tenant notifies Landlord of any claimed error therein within 60 days after such notice is given. (C) Rent Payment. The fixed rent, as determined above (i.e., $20,000.00 plus the "increase" calculated in accordance with paragraphs (1) through (4) of subdivision (B)), shall be due and payable monthly to Landlord, commencing with the first month of the extended Term of this Lease. Any retroactive payments then due shall be payable within five days after the above provided notice is given. If there is any subsequent redetermination of such amount, the parties shall promptly make the indicated adjustment. (D) Substituted Index. If publication of the Consumers Price Index is discontinued, the parties shall accept comparable statistics on the cost of living for the City of Little Rock, Arkansas, as such statistics are computed and published by a federal agency or by a recognized financial periodical selected by the parties or by arbitration. If comparable statistics are used in place of the Consumers Price Index, or if the Index figure is published at non-monthly intervals, the method of computation shall include all revisions required to carry out the intent of this Article. 4. Utilities. Tenant shall be responsible for the prompt and full payment, as and when due, of all charges for water (including sewer taxes), electricity, gas, telephone and other utilities consumed on the Leased Premises. 5. Taxes. Tenant shall pay in each Tax Year during the Term, as Additional Rental, a proportionate share of all real estate taxes, ad valorem taxes and assessments, general and special assessments, or any other tax imposed upon or levied against real estate or upon owners of real estate as such rather than persons generally, including taxes imposed on leasehold improvements which are assessed against Landlord, payable with respect to allocable to the RDC Tract, including all land, the Leased Premises and all other building improvements situated thereon, together with the reasonable cost (including fees of attorneys, consultants and appraisers) of any negotiation, contest or appeal pursued by Landlord in an effort to reduce any such tax, assessment or charge, but only to the extent of the actual reduction realized as a result of such negotiation, contest or appeal, all the foregoing being collectively referred to herein as "Taxes". Tenant's proportionate share of Taxes for any Tax Year shall be computed by multiplying the amount of such Taxes by a fraction, the numerator of which shall be Tenant's floor area of 84,000 square feet and the denominator of which shall be the floor area for all buildings located on the RDC Tract (currently totaling 114,000 square feet). For the Tax Year in which the term of this Lease commences or terminates, the provisions of this Section shall apply, but Tenant's liability for its proportionate share of any taxes for such year shall be subject to a pro-rata adjustment based upon the number of days of such Tax Year falling with the term of this Lease. Tenant's proportionate share of Taxes shall be paid by Tenant annually in such amounts as are estimated and billed for each Tax Year by Landlord during the term, each such payment being due on October 1 of each Tax Year. If at any time during a Tax Year it shall appear that Landlord has underestimated Tenant's proportionate share of Taxes for such Tax Year, Landlord may re-estimate Tenant's proportionate share of Taxes and may bill Landlord for any deficiency which may have accrued during such Tax Year. Within one hundred twenty (120) days after Landlord's receipt of tax bills for each Tax Year, or such reasonable (in Landlord's determination) time thereafter, Landlord will notify Tenant of the amount of Taxes for the Tax Year in question and the amount of Tenant's proportionate share thereof. Any overpayment or deficiency in Tenant's payment of its proportionate share of Taxes for each Tax year shall be adjusted between Landlord and Tenant, and Landlord and Tenant hereby agree that Tenant shall pay Landlord or Landlord shall credit to Tenant's account (or, if such adjustment is at the end of the Term, pay Tenant), as the case may be, within thirty (30) days of the aforesaid notification to Tenant, such amount necessary to effect such adjustment. The failure of Landlord to provide such notification within the time prescribed above shall not relieve Tenant of its obligations hereunder. Tenant will be entitled from time to time to audit the books and records of Landlord regarding Taxes on the RDC Tract to assure that the prorations of Taxes from time to time reported by Landlord are in keeping with the provisions of the Lease. In the event such audit discloses any error, Landlord shall make a correcting payment in full to Tenant within 30 days after the determination of the amount of such error. The term "Tax Year" means each twelve (12) month period (deemed, for the purpose of this Section, to have 365 days) established as the real estate tax year by the taxing authorities having lawful jurisdiction over the RDC Tract. Landlord agrees to cooperate with Tenant in any action initiated by Tenant to protest, reduce or minimize real property taxes affecting the RDC Tract. 6. Repairs. Landlord agrees that it will keep and maintain in good condition and repair, at its sole cost and expense, the exterior walls, exterior plumbing, roof, roof membrane and points of entry to the Leased Premises, including, without limitation, the plate glass portions thereof (collectively, the "Structural Elements"); provided, however, if Tenant's operations or construction activities at the Leased Premises cause a penetration of the roof membrane, Tenant and not Landlord shall be responsible for the cost of repairs thereto. Landlord further agrees that if any portion of the Structural Elements shall become defective or damaged at any time during the Term, Landlord will immediately cause repairs to be made and restore the defective portions to good condition. Should Landlord fail or refuse to commence repair of any defective condition of the Structural Elements within ten (10) days from receipt of notice of the condition requiring repair, Tenant may cause such defect to be remedied and restored to good condition and may charge the reasonable cost thereof to Landlord. Tenant agrees to be responsible for the maintenance and normal operating condition of all heating, electrical and air conditioning equipment and interior plumbing on the Leased Premises. Tenant at its own cost and expense shall maintain and keep the interior and the plate glass portions of the Leased Premises in as good repair as when the premises were received, ordinary wear and tear and casualties beyond Tenant's control alone excepted, and Tenant shall return the Leased Premises at the expiration or termination of this Lease in good order and condition, excepting only ordinary wear and tear and casualties beyond Tenant's control. 7. Alterations. Tenant shall have the right and privilege to make, at Tenant's expense, ordinary repairs and alterations to the Leased Premises without Landlord's prior consent; provided, however, no alterations or changes of a structural nature shall be made without the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed. 8. Fixtures. All trade fixtures installed by Tenant or acquired by Tenant independently of this Lease shall remain Tenant's property and may be removed by Tenant at the expiration of this Lease; provided, however, Tenant shall restore the Leased Premises and repair any damage thereto caused by such removal. 9. Acceptance of Premises. Subject to the following representations and warranties of Landlord, it is expressly understood and agreed by the Tenant that it is leasing the demised premises in its current condition. Landlord represents and warrants that the Leased Premises (including, without limitation, any Tenant improvements contemplated to be made by Landlord), at the time of execution of the Lease is and shall be in compliance with any and all applicable federal, state or local laws, ordinances and regulations ("Legal Requirements"), including, without limitation, those relating to (a) the environment (including, without limitation, those relating to hazardous materials, hazardous substances, hazardous waste, infectious waste, toxic materials, regulated materials and substances and the like), health and/or safety, (b) the Americans with Disabilities Act ("ADA"), and (c) zoning and building codes, occupancy and permit requirements required for Tenant's intended use, and (d) laws or regulations pertaining to "CFCs". Notwithstanding anything to the contrary. Tenant shall not be responsible for compliance with items (a) through (d) above or any other Legal Requirements not relating to the Leased Premises and occasioned by Tenant's particular use of the Leased Premises. Landlord further represents and warrants to Tenant that as of the Commencement Date (i) the existing electrical, plumbing, lighting, heating, ventilating and air conditioning systems, and loading doors (if any) and all other such elements of the building, in the Leased Premises, other than those constructed by Tenant, shall be in good operating condition, (ii) the surface and structural elements of the roof, bearing walls and foundation of the building on the Leased Premises shall be free of material defects, and (iii) there shall exist separate secured entrances to each of the Leased Premises and the premises of the other tenant of the Property. In the event that it s determined that this warranty has been violated, then it shall be the obligation of Landlord, after receipt of written notice from Tenant setting forth with specificity the nature of the violation, to promptly, at Landlord's sole cost, rectify such violation; provided, however, that Landlord shall not be obligated to rectify such violation if Tenant fails to give such written notice to Landlord within one hundred twenty (120) days after the commencement of this Lease. 10. Untenantability. Should the improvements on the Leased Premises, or any part thereof, be rendered unfit for occupancy for the purposes for which they are hereby let, by reason of fire, windstorm, or other act of nature or unavoidable casualty, the rentals hereinabove stipulated to be paid by the Tenant, or such proportion thereof as is related to that portion of the improvements on the premises rendered untenantable by reason of such damage, shall be remitted and abated by Landlord while the same remains unfit for occupancy and until the premises involved shall have been repaired or returned to tenantable condition by Landlord. Provided, however, during the last twelve (12) months of the Term, Landlord may, upon the occurrence of any such casualty, elect to terminate this Lease if the cost of replacing or repairing the improvements so damaged upon the premises equals or exceeds Fifty Percent (50%) of the property damage insurance coverage maintained by Landlord thereon. As used in this Section 10, the term "untenantable" includes, without limitation, the following conditions: (i) inadequate waterproofing and weather protection of roof and exterior walls, such as broken windows and doors, (ii) non-operational plumbing, water or electrical systems, or (iii) non-operational gas facilities. Landlord shall in no way be liable or responsible for any damage to any property of the Tenant in or about the Leased Premises by reason of flood, water, fire, windstorm or other casualty or act of nature. 11. Warranties of Title. Landlord hereby warrants and covenants with and unto Tenant that he has an absolute and indefeasible title to the Leased Premises, and that Landlord will, during the term hereof and the full performance by Tenant of Tenant's obligations and covenants hereunder, defend the same and hold harmless the Tenant against the lawful claims of any and all persons whomsoever. 12. Conduct of Business and Uses. The Leased Premises are leased to Tenant for the purpose of carrying on the business of manufacturing and distributing marker boards, cork boards, markers, and organizers, planners and other similar products, and related uses, and Tenant covenants and agrees with and unto Landlord that the premises will be used for those purposes and those related to them and no other, except with the prior written consent of Landlord. Tenant covenants and agrees that Tenant will not do or permit to be done anything in, upon, or about the Leased Premises that increases the hazard of fire beyond that which exists by reason of the uses and occupancy of the premises for the purposes mentioned. Tenant agrees to pay fire insurance premiums on the improvements and building which Landlord shall maintain on the Leased Premises, and Tenant will not do or permit to be done anything within Tenant's control which would make the Leased Premises, or the improvements thereon, uninsurable in whole or in part. Tenant agrees that Tenant will not commit waste nor permit waste to be committed or done upon the Leased Premises. 13. Signs and Advertising. No sign, picture, advertisement, or notice (collectively, "Signs") except on the glass of the doors or windows shall be displayed on any part of the outside of said building or on or about the premises hereby demised without the prior consent, in writing, of the Landlord, which consent shall not be unreasonably withheld or delayed, and the Landlord may remove any Signs that have not received Landlord's prior consent without notice to the Tenant and at the Tenant's expense. Upon termination of this Lease, Tenant will remove any sign, advertisement or notice painted on or affixed to the Leased Premises, and restore the place it occupied to the condition which existed as of the date this Lease takes effect. 14. Indemnity Against Damage or Injury. Tenant agrees to defend, indemnify, and hold harmless the Landlord against any claim, expense, loss or liability as a result of any breach by Tenant, Tenant's agents, servants, employees, customers, visitors, or licensees, of any covenant or condition of this Lease, or as a result of Tenant's use or occupancy of the Leased Premises, or as a result of the carelessness, negligence, or improper conduct of Tenant, Tenant's agents, servants, employees, customers, visitors, or licensees. Tenant agrees to keep and maintain at all times during the term hereof, in full force and effect, with a company or companies acceptable to Landlord, insurance against third party liability by reason of Tenant's occupancy of the Leased Premises with limits of liability thereunder of not less than $1,000,000.00 per person, $1,000,000.00 per accident, and $250,000.00 coverage for property damage, and Landlord shall be a named an additional insured in such policies. 15. Default. Tenant shall be in default under the provisions of this Lease agreement upon the happening of any of the following events or conditions: (a) Failure to pay the rentals provided herein at the times, in the amounts and in the manner set forth or within ten days after the date the same become due; (b) Failure to keep or perform any of the covenants on the part of the Tenant herein to be kept or performed and such failure shall continue for more than thirty (30) days after Landlord gives Tenant notice of such failure; (c) Should the Tenant become insolvent, or become bankrupt, either voluntary or involuntary, or make any assignment for the benefit of creditors, or if a receiver be appointed for the benefit of Tenant's creditors, or if a receiver be appointed for Tenant to take charge of and manage Tenant's affairs, or if any levee of execution against the Tenant remains unsatisfied for a period of ten days from and after the levy of the same. 16. Remedies in the Event of Default. In the event of a default by Tenant, during the term hereof, Landlord may, at Landlord's option, declare this Lease thereupon terminated, and Landlord shall have the right to enter upon and take possession of the Leased Premises, either with or without notice, and to evict and expel Tenant and any or all of Tenant's property, belongings, and effects therefrom, without legal process and without thereby being guilty of any manner of trespass either at law or in equity which remedy is in addition to any other remedies of Landlord either at law or in equity, including, without limitation, the collection of delinquent rents, possession of the Leased Premises, damages for breach of this agreement by Tenant, or otherwise. No delay in or failure to exercise any of the options herein granted to Landlord by reason of a default shall be a waiver thereof, and the waiver on one occasion of a default shall not be deemed a waiver of Landlord's right to exercise its remedies by reason of the same or a similar default at any later occasion. Notwithstanding the foregoing, Landlord shall not be entitled to use force in the exercise of any of its rights and remedies under this Lease. Notwithstanding anything to the contrary in this Lease, Landlord shall have the duty to mitigate damages in the event of Tenant's default, inter alia, by using reasonable efforts to re-let the Leased Premises. 17. Waiver of Subrogation. Landlord and Tenant and all parties claiming under them hereby mutually release and discharge each other from all claims and liabilities arising from or caused by any hazard covered by insurance on the Leased Premises, or covered by insurance in connection with the property or activities conducted on the Leased Premises, regardless of the cause of the damage or loss. 18. Assignment and Subletting. Tenant shall not assign this Lease, nor sublet the Leased Premises or any part thereof, without the prior consent in writing of Landlord, which consent shall not be unreasonably withheld or delayed. The consent by Landlord to a particular assignment of subletting shall not be construed to relieve Tenant from the obligation to obtain the consent in writing of Landlord on any other or future assignment or subletting. Notwithstanding anything to the contrary in this Lease, Landlord's prior consent shall not be required for any assignment of the Lease or any subletting of all or any portion of the Leased Premises to any affiliate of Tenant. As used in this Section 18, the term "affiliate" means any entity which controls, is controlled by, or which is under common control with Tenant. 19. Condemnation. In the event all or any part of the Leased Premises should be subjected to eminent domain proceedings, and if pursuant thereto a portion of the Leased Premises shall be condemned so as to render the residue inadequate for Tenant's purposes as herein set forth, Tenant shall have the option to terminate and cancel this Lease by giving written notice of such intention to Landlord. If any such taking shall not render the residue of the Leased Premises wholly inadequate for Tenant's purposes as herein set forth, Tenant's rentals hereunder shall be reduced in the proportion which the value of the property taken bears to the whole value of the Leased Premises with improvements. In any such condemnation proceedings, all damages allocable to full fee simple ownership of the Leased Premises shall be payable to Landlord, and any damages for loss of leasehold interest, including the unamortized portion of the value involved in such condemnation of any non-removable fixture placed on the Leased Premises by Tenant with Landlord's approval shall be payable to Tenant. 20. Surrender of Possession. At the end of the term of this Lease, or upon earlier termination by Landlord in accordance with the options herein reserved, Tenant agrees to surrender possession of the Leased Premises without demand. Should Tenant fail so to do, Tenant shall be responsible in addition to the damages generally recoverable by Landlord by reason of any breach by Tenant, for all damages Landlord may sustain, including claims made by any succeeding tenant against Landlord which are founded upon delay or failure in delivering possession of the Leased Premises to such succeeding tenants. 21. Binding Effect. This agreement shall inure to the benefit of and be binding upon the parties hereto, their respective successors, legal representatives, heirs and assigns, except as expressly limited otherwise herein. 22. Time of Essence. The time of the making of the payments and of the keeping of the covenants herein are of the essence of this agreement and the parties hereto so agree. 23. Notices. Any notice called for or permitted under the terms hereof may be given in writing and sent by ordinary mail to the last address of the party to whom the notice is to be given as designated by such party in writing. Landlord designates its address as 1805 East 22nd Street, Little Rock, Arkansas 72206. Tenant hereby designates its address as 15295 Alton Parkway, Irvine, California 92718, Attention: Chief Executive Officer. Any notice so given shall be deemed given when posted. Designations of address may be changed by written notice given by ordinary mail from either party to the other. 24. Non-Disturbance Agreement. This Lease shall not be subordinate to any mortgage, deed of trust or similar interest unless Tenant is provided with a non-disturbance agreement in form reasonably acceptance to Tenant, executed by the mortgagee, trustee, or beneficiary, as the case may be. Landlord agrees to secure a non-disturbance agreement inform reasonably acceptable to Tenant for all such interest holders in existence on the date of execution of the Lease. 25. Use of Common Areas. Landlord grants to Lssee and its agents, employees and customers a non-exclusive license to use the parking areas, sidewalks, driveways and open land areas (the "Common Areas") in common with others during the Term hereof, subject to the exclusive control and management thereof at all times by Landlord and subject, further, to the rights of Landlord set forth herein. Landlord will operate and maintain or will cause to be operated and maintained the Common Areas in a manner deemed by Landlord to be reasonable and appropriate. Landlord will have the right (i) to establish, modify and enforce reasonable rules and regulations with respect to the Common Areas; (ii) to enter into, modify and terminate easement and other agreements pertaining to the use and maintenance of the parking areas and other Common Areas; (iii) to close all or any portion of said parking areas or other Common Areas to such extent as may, in the opinion of Landlord, be necessary to prevent a dedication thereof or the accrual) of any rights to any person or to the public therein; (iv) to close temporarily any or all portions of the Common Areas; (v) to discourage non-customer parking; and (vi) to do and perform such other acts in and to said areas and improvements as, in the exercise of good business judgment, Landlord shall determine to be advisable; provided, however, if Landlord causes a reduction in the parking areas available for Tenant and if the remaining unclosed parking areas do not provide adequate parking for Tenant, its employees and invitees, Landlord shall provide comparable replacement parking, within reasonable walking distance to the Leased Premises, at no additional cost to Tenant, its employees or invitees. Tenant and its employees shall park their cars only in such areas designated for that purpose by Landlord. Tenant shall furnish Landlord with state automobile license numbers assigned to Tenant's car or cars and cars used by its employees within five (5) days after taking possession of the Leased Premises and shall thereafter notify Landlord of any changes in such information within five (5) days after such changes occur. 26. Landlord's Indemnity. Landlord, on behalf of itself and any party claiming by, through or under Landlord, hereby agrees to indemnify, defend and hold Tenant, its agents and employees, harmless from claims for personal injury, death, or property damage to the extent arising from incidents occurring in or about the Leased Premises caused by any negligent action or omission of Landlord, its agents, employees, contractors, licensees or invitees. If Tenant is made a party to any action commenced by or against Landlord and any such action arises out of matters for which Landlord has provided indemnification for Tenant as hereinbefore provided, Landlord agrees to indemnify and hold Tenant harmless therefrom and to pay all judgments, settlements, losses, expenses and costs (including attorneys' fees and expert witness and consultant fees) which may be incurred by Tenant in connection therewith. 27. Landlord's Default. Landlord shall not be in default under this Lease unless Landlord fails to perform its obligations required hereunder within a reasonable time, but in no event later than thirty (30) days after written notice by Tenant to Landlord, specifying the obligations that Landlord has failed to perform. IN WITNESS WHEREOF, Landlord and Tenant have hereunto set their hands effective the 1st day of October, 1997. LANDLORD: RDC SALES, INC. BY:/s/ Charles D. Robertson, Jr. ------------------------------------- CHARLES D. ROBERTSON, JR., PRESIDENT TENANT: DAY RUNNER, INC. BY: /s/ Mark A. Vidovich NAME: MARK A. VIDOVICH ----------------------------------- TITLE: Chief Executive Officer STATE OF CALIFORNIA COUNTY OF ORANGE ACKNOWLEDGEMENT On this 1st day of October, 1997, before me, a Notary Public, duly commissioned, qualified and acting, within and for said County and State, appeared in person the within named Charles D. Robertson, Jr., being the person authorized by said corporation to execute such instrument, to me personally well known, who stated that he was the President of RDC Sales, Inc., executed and delivered said foregoing instrument for the consideration, uses and purposes therein mentioned and set forth. IN TESTIMONY WHEREOF, I have hereunto set my hand and official seal this 1st day of October, 1997. /s/ MICHELE T. LEE ---------------------------------------- NOTARY PUBLIC MY COMMISSION EXPIRES: Michele T. Lee 9/12/2001 Commisison #1155155 - -------------------------- Notary Public - California Orange County My Comm. Expires Sept 12, 2001 STATE OF CALIFORNIA COUNTY OF ORANGE ACKNOWLEDGEMENT On this 1st day of October, 1997, before me, a Notary Public, duly commissioned, qualified and acting, within and for said County and State, appeared in person the within named Mark A. Vidovich, being the person authorized by said corporation to execute such instrument, to me personally well known, who stated that he/she was the Chief Executive Officer of Day Runner, Inc., executed and delivered said foregoing instrument for the consideration, uses and purposes therein mentioned and set forth. IN TESTIMONY WHEREOF, I have hereunto set my hand and official seal this 1st day of October, 1997. /s/ MICHELE T. LEE ---------------------------------------- NOTARY PUBLIC MY COMMISSION EXPIRES: Michele T. Lee 9/12/2001 Commisison #1155155 - -------------------------- Notary Public - California Orange County My Comm. Expires Sept 12, 2001 EX-10 6 LEASE AGREEMENT, GPM REAL PROPERTY Single Tenant Net Industrial Lease 2690 Plymouth Drive, Oakville, Ontario THIS LEASE AGREEMENT made this 11th day of May , 1998 : BETWEEN: GPM REAL PREPERTY (7) LTD. and ENDOW (7) INC. (hereinafter called the "Landlord") OF THE FIRST PART - and - ULTIMA DISTRIBUTION INC. (hereinafter called the "Tenant") OF THE SECOND PART WITNESSETH THAT: WHEREAS the Landlord is the owner of the Lands and Building known municipally as 2690 PLYMOUTH DRIVE , OAKVILLE , Province of ONTARIO and has agreed to lease those Lands and the Building to the Tenant on the terms herein contained; NOW, THEREFORE, in consideration of the rents, covenants and agreements hereinafter contained on the part of the Tenant to be paid, observed and performed, and in consideration of the covenants and agreements hereinafter contained on the part of the Landlord to be observed and performed, the Tenant and Landlord covenant and agree with each other as follows: ARTICLE ONE DEMISE Section 1.01 Demise: The Landlord hereby demises and leases unto the Tenant the Leased Premises upon the terms and conditions set forth herein. ARTICLE TWO TERM Section 2.01 Term: The Tenant shall have and hold the Leased Premises for and during the term of ten (10) years and zero (0) months ("Term"), commencing on the date (the "Commencement Date") which is the later of the 1st day of June , 1998 , and the day of substantial completion of the Landlord Work as determined in Paragraph 3 of Schedule "B" hereof and fully to be completed and ended on the day prior to the tenth (10th) anniversary of the Commencement Date. In the event that the Tenant refuses or fails to provide required input or make any decisions as reasonably requested by the Landlord during the planning, design and construction of the Landlord work, the Landlord's architect shall in its sole and unfettered discretion determine the number of days of delay in planning, design and construction as a result of such delay caused by the Tenant and the Commencement Date of the Lease shall be the day of substantial completion as herein before stated less the number of days of delay of planning, design and construction as caused by the Tenant. ARTICLE THREE RENT Section 3.01 Minimum Rent: See Schedule "B" attached hereto and forming part of this agreement. Section 3.02 Additional Rent: The Tenant shall further pay to the Landlord, yearly and every year during the Term, as additional rent ("Additional Rent") any and all costs and expenses incurred by the Landlord in owning, maintaining, operating, repairing, insuring and managing the Leased Premises, including, without any limitation, insurance arranged by the Landlord, any Leased Premises Taxes, Tenants' Taxes and Rental Taxes payable to the relevant taxing authorities, property administration fees, cost of utilities and utility connections and services, cost of access facilities including rail siding facilities and cost of repairs (except for the exceptions mentioned in Section 8.01). Additional Rent shall be paid within ten (10) days after delivery of Landlord's invoices. If the Landlord so elects, instalments on account of Additional Rent shall be paid to the Landlord monthly and every month, or as otherwise specified by the Landlord, in advance at the same time as payment of Basic Rent is required hereunder, such instalments to be in the amounts estimated from time to time by the Landlord, acting reasonably, as being payable by the Tenant. If required by the Landlord the Tenant shall execute and deliver to the Landlord all documentation required by the Landlord to permit it to withdraw payments on account of the monthly instalments of Basic Rent provided for herein and, if required, the monthly instalments on account of Additional Rent, from the Tenant's bank account by automatic debits; provided that the Tenant shall deliver such further documentation as may be required by the Landlord from time to time or as may be necessitated by any change in the Tenant's bank accounts. Within ninety (90) days of the end of each fiscal year of the Landlord (or with respect to any component of Additional Rent which cannot be calculated within such ninety (90) day period, within ninety (90) days after the Landlord shall have received the information necessary to compute such component of Additional Rent), a final accounting and adjustment of Additional Rent for the preceding fiscal year of the Landlord shall be made, with the aggregate amount of monthly or other instalments paid on account of Additional Rent for such fiscal year being credited to the amount of Additional Rent payable by the Tenant for such year and at such time the Tenant shall pay to the Landlord the amount, if any, by which the Additional Rent payable by the Tenant for such fiscal year exceeds the instalments paid on account thereof by the Tenant, or the Landlord shall credit to future instalments of Rent payable by the Tenant the amount by which the aggregate instalments paid by the Tenant on account of Additional Rent for such fiscal year exceed the Additional Rent payable by the Tenant for such fiscal year. Section 3.03 Accrual of Rent: Rent shall be considered as accruing from day to day hereunder, and where it becomes necessary for any reason to calculate such Rent for an irregular period of less than one year or less than one calendar month, an appropriate apportionment and adjustment shall be made, including an apportionment and adjustment of Additional Rent for the fiscal years of the Landlord in which the tenancy created hereby commences and expires. Notwithstanding the termination of this Lease, the obligation of the Tenant to pay such Additional Rent shall survive the termination hereof, and such amount shall be adjusted by the parties as soon as possible following such termination. Section 3.04 No Set Off: The Tenant waives the benefits of provisions in present or future statutes permitting the Tenant to claim a set off against Rent or abatement of or deduction from Rent for any cause whatsoever. Section 3.05 Payment of Rent: All Rent hereunder shall be payable in lawful money of Canada and shall be paid to the Landlord or to such party as it may from time to time direct, without notice or demand. Section 3.06 Premises not Available: Should the Leased Premises not be available for possession by the Tenant at the time of commencement of the Term, Rent shall abate until the day the Landlord shall have delivered to the Tenant written notice that the Leased Premises are available, or the date when the Tenant commences to carry on business in the Leased Premises, whichever is earlier, it being understood and agreed that this Lease shall otherwise remain in full force and effect and the abatement of Rent hereby specified shall be accepted by the Tenant in full settlement of all claims which the Tenant might otherwise have by reason of the Leased Premises not being available on the commencement date of the Term. Section 3.07 Net Net Lease: It is the intention of the parties that the Tenant shall be solely responsible for all the costs of operation, use, replacement, repair and maintenance of the Leased Premises, and that the Basic Rent hereunder be absolutely net to the Landlord, and accordingly, that the entire cost of owning, operating, repairing, maintaining, insuring, administering and managing the Leased Premises, whether or not specifically provided for herein, shall be borne by the Tenant as if it were owner of the Leased Premises, except to the extent of any expenses expressly stated herein to be the responsibility of the Landlord, and the Tenant covenants with the Landlord accordingly. Section 3.08 Deposit: The Landlord acknowledges that it has received the sum of SIXTY ONE THOUSAND EIGHT HUNDRED SIX DOLLARS FORTY SEVEN CENTS ($61,806.47) inclusive of GST at 7%, to be applied against basic rent due under this agreement for the first (1st) month of the term and the balance as security as security for the performance by the Tenant of its obligations set out in this Lease. Upon any breach by the Tenant of its obligations hereunder the Landlord may at its option apply all or part of the deposit to compensate it for losses sustained by reason of such breach. The Tenant thereafter, on demand, shall restore the deposit to the original amount. After the termination of this Lease and the performance by the Tenant of all its obligations hereunder the Landlord shall return the deposit or so much of it as may then remain unapplied and be in the Landlord's hands. ARTICLE FOUR DEFINITIONS Section 4.01 Additional Rent: "Additional Rent" is defined in Section 3.02. Section 4.02 Basic Rent: "Basic Rent" is defined in Section 3.01. Section 4.03 Building: "Building" means the building standing on the Lands, and includes all fixtures and improvements therein except fixtures and improvements installed or made by or for or at the expense of the Tenant or any subtenant. Section 4.04 Hazardous Substances: "Hazardous Substances" as used in this Lease shall include, without limitation, flammables, explosives, radio-active materials, hazardous chemicals and wastes or substances, petroleum and petroleum products and all substances, materials, goods or gases declared or listed to be hazardous or toxic under laws or regulations now or hereafter in force. Section 4.05 Landlord: "Landlord" means the Landlord named herein, and its successors and assigns subject, however, to the provisions of this Lease. Section 4.06 Lands: "Lands" mean the lands shown outlined in red on Schedule "A" attached hereto and legally described as follows: Parcel Block 2-5, Section 20M-515, being part of Block 2, Plan 20M-515, designated as parts 2 and 3 on Plan 20R-9559, Oakville and include all roads, fences, sidewalks, utility facilities, parking areas, and other access or service facilities located thereon or appurtenant thereto. Section 4.07 Leased Premises: "Leased Premises" mean the Lands and all improvements, structures, fixtures, building services, machinery, equipment, fences, walkways, paving, utility and sewage facilities and systems from time to time thereon, including without limitation the Building, and facilities upon or in the Leased Premises leased or licensed to the Landlord. Section 4.08 Leased Premises Taxes: "Leased Premises Taxes" mean the aggregate of all Taxes payable in respect of the Leased Premises or any part thereof and all fixtures and improvements therein, including without any limitations federal or provincial paid-up capital taxes levied upon the deemed capital employed by the Landlord in the Leased Premises, and Taxes upon Tenant's Work, in every case whether payable by the Landlord, the Tenant, or any other person, firm or corporation, but excluding income taxes. Section 4.09 Rent: "Rent" means Basic Rent, Additional Rent, and all other costs payable by the Tenant hereunder, whether to the Landlord or otherwise. Section 4.10 Rental Taxes: "Rental Taxes" means any tax, duty, levy, assessment, rate or charge imposed upon the Landlord or Tenant which is computed having regard to or based in whole or in part directly or indirectly upon the Rent, whether existing at the date hereof or hereinafter imposed by any governmental authority, including without limitation, any tax, duty, levy, assessment, rate or charge in the nature of or similar to a value tax, business transfer tax, sales tax or goods and services tax. Section 4.11 Taxes: "Taxes" means all taxes, rates, duties, charges, assessments, impositions, levies, charges for local improvements and/or licence fees imposed by any federal, provincial, metropolitan or municipal government, board, agency, or commission, including, without any limitations, school boards and utility commissions, whether payable by the Landlord, the Tenant or any other person, but excluding income taxes. Section 4.12 Tenant: "Tenant" means the Tenant named herein, its successors and permitted assigns. Section 4.13 Tenant's Taxes: "Tenant's Taxes" mean all Taxes (whether imposed upon the Landlord or the Tenant) attributable to the personal property, rental, business, income, sales or occupancy of the Tenant or any other occupant of the Leased Premises. Section 4.14 Tenant's Work: "Tenant's Work" is defined in Section 6.04. Section 4.15 Term: "Term" is defined in Article Two. ARTICLE FIVE GENERAL COVENANTS Section 5.01 Quiet Possession: The Landlord covenants with the Tenant that upon the Tenant paying the Rent and punctually observing, performing and keeping the covenants and agreements herein contained the Tenant may, subject to the terms of this Lease, peacefully possess and enjoy the Leased Premises during the Term. Section 5.02 Tenant's General Covenants: The Tenant covenants with the Landlord: (a) to pay Rent; and (b) to observe and perform all the covenants and obligations of the Tenant herein. ARTICLE SIX USE AND OCCUPANCY OF LEASED PREMISES Section 6.01 Use of Leased Premises: The Tenant covenants that the Leased Premises shall not be used for any purpose other than that of THE WAREHOUSING AND DISTRIBUTION AND LIGHT MANUFACTURING OF OFFICE PRODUCTS PLUS ANCILLARY OFFICES . The Tenant specifically covenants that the Leased Premises shall not be used or permitted to be used for any illegal or immoral purpose, nor any business or use which violates applicable laws or which in the opinion of the Landlord, acting reasonably, would tend to lower the character of the Leased Premises. The Tenant further covenants not to use the Leased Premises in such a way as to permit unreasonable noise, vibration, smoke, dust, debris, garbage or other potential nuisance or Hazardous Substance to emanate from the Leased Premises. Section 6.02 Compliance with Law and Safety Standards: The Tenant covenants that it will promptly comply with, and in its use of the Leased Premises and the carrying out of any acts permitted therein by this Lease, conform to the requirements of every applicable statute, law, by-law, regulation, ordinance, order and safety standard at any time or from time to time in force or recommended to the Landlord or the Tenant during the Term affecting the Leased Premises, the Tenant's operations therein or any part thereof and/or the machinery, equipment and other facilities used in connection therewith. The Tenant will make no use of the Leased Premises, whether within the use hereinbefore permitted or not, or conduct operations upon the Leased Premises which imposes upon the Landlord any obligation to modify, extend or alter the Leased Premises or to remove or remediate Hazardous Substances or replace any part of the Leased Premises. If the Tenant shall at any time during the Term, do or permit to be done or omit to do any act or thing which shall or may result in any such obligation being imposed upon the Landlord, the Landlord may, at its option, either do or cause to be done the necessary work in order to comply with such obligation at the expense of the Tenant, or forthwith by notice in writing to the Tenant, terminate this Lease. If the Landlord shall undertake any such work to be done at the expense of the Tenant, the costs thereof, together with the Landlord's related expenses and reasonable overhead and supervision charges in respect of such work, shall be payable by the Tenant to the Landlord forthwith upon demand. In case of termination of this Lease pursuant to the provisions of this Section, the Tenant shall pay Rent to the date of surrender of possession, and in addition, shall reimburse the Landlord for any income lost to the Landlord by reason of such termination and for any costs which it incurs under any such statute, law, by-law, regulation, ordinance, order, safety standard or requirement. All costs and related expenses incurred by the Landlord under this Section and all Landlord overhead and supervision charges shall be paid by the Tenant as Additional Rent, and the obligation of the Tenant hereunder shall survive the expiry of this Lease. Section 6.03 Fixtures, Signs: (a) The Tenant shall not affix, install or place any signs, boardings, or posters upon the Lands or the exterior of the Building, without the prior written consent of the Landlord such consent not to be unreasonably withheld. All signs, boardings and posters of the Tenant shall only be permitted as approved by the Landlord, such consent not to be unreasonably withheld, and subject to such reasonable terms and conditions as the Landlord may determine from time to time. The Tenant covenants to remove all such signs at or before the expiry of the Term, and to make good all damage caused by those signs and their removal and to restore the Leased Premises to their original condition before the installation of such signs. The Landlord reserves the right at all times during the Term to place upon the Lands at its sole cost outdoor advertising signs. (b) The Tenant will not bring into the Building any articles or fixtures that by reason of their weight or size might damage or endanger the structure or systems of the Building, or, any inflammable liquid or dangerous or explosive materials. (c) All installations of fixtures made by the Tenant hereunder shall be subject to the provisions of Section 6.04 hereof. (d) Upon the expiry of the Term, provided that the Tenant is not then in default hereunder, the Tenant may remove its trade fixtures and shall make good any damage incurred in such removal and restore the Leased Premises to the condition in which they were before the installation of such trade fixtures. Section 6.04 Alterations, Fixtures and Improvements: The Tenant covenants that it will not make, erect or install or permit to be made, erected or installed any partitions, fixtures, leasehold improvements or alterations ("Tenant Work") in or about the Leased Premises except in accordance with all applicable statutes, by-laws, regulations and governmental and municipal requirements, and except with the prior written consent of the Landlord, such consent not to be unreasonably withheld. If the Tenant desires to make, erect or install any Tenant's Work, it shall, at the time of its application for the Landlord's consent, provide the Landlord with reasonable details of the proposed Tenant's Work and, upon the Landlord's request, shall furnish such plans, specifications and designs as shall be necessary therefore and if the Landlord gives its consent, it shall have the right, acting reasonably, to specify such terms and conditions and requirements with respect thereto as it deems reasonable and prudent including those necessary to protect the integrity of the Building and the Lands and to supervise the work and approve of the contractors, subcontractors and tradesmen employed by the Tenant. The Landlord may, by written notice to the Tenant prior to or after the termination hereof, require the removal at the expense of the Tenant, of any or all Tenant's Work and the restoration of the Leased Premises to the same condition that they were in before any such Tenant's Work was made, erected or installed, such work to be done by or at the direction of the Landlord as aforesaid. Provided that the Landlord does not require the removal of same all Tenant's Work shall become the property of the Landlord upon the termination of this lease. All costs incurred by the Landlord under this Section and all Landlord overhead and supervision charges shall be paid by the Tenant as Additional Rent. Section 6.05 Loading and Unloading: The Tenant covenants that all loading and unloading of merchandise, supplies, materials, garbage, refuse and other chattels shall be made only through or by means of such doorways or routes as the Landlord shall designate. Section 6.06 Cleaning and Redecorating of Building: The Tenant covenants to clean and keep tidy and presentable the interior and exterior of the Building including, without any limitations the cleaning of all windows and glass, the periodic repainting of interior and exterior surfaces where reasonably necessary or required by the Landlord, and the cleaning of the floors and walls of the Building, including janitorial services. Section 6.07 Exterior Maintenance: The Tenant covenants to maintain the Lands and the exterior of the Building in a clean, neat and tidy condition, and to keep the Lands and the exterior of the Building free of rubbish, refuse, litter, hazardous substances and flying debris. The Tenant covenants to keep the parking areas, driveways, sidewalks, and other means of access or delivery within or to the Leased Premises (and adjacent public sidewalks to the extent required by law) free of ice and snow, and sanded where necessary, and to provide reasonable landscaping maintenance, including without limitation, periodic cutting of grass, tending of flower beds and other landscaped areas. The Tenant further covenants to provide or make all necessary maintenance and repairs to driveways, stairs, sidewalks, ditches, culverts, fences, parking areas and other access, loading and delivery and service facilities so as to keep them in a safe, clean, and proper condition for their intended purposes and not to commit or suffer any waste on the Leased Premises and not to store any materials, equipment or other articles outside the Building without the prior consent in writing of the Landlord. Section 6.08 Heating Equipment, Etc.: The Tenant shall continuously throughout the Term, as and when reasonably necessary and in any case so as to prevent any damage to the Leased Premises, heat the Leased Premises and maintain, operate, repair, replace where necessary and pay all costs in connection with the climate control equipment and other systems forming part of the Leased Premises, including without limitation any lighting, sprinkler, security, heating, ventilating and air-conditioning equipment and systems. The Tenant shall take out and maintain contracts with contractors approved by the Landlord for the regular maintenance, repair and service of such equipment and systems, and provide the Landlord, upon request, with copies thereof and reports thereon. Section 6.09 Utilities: The Tenant shall be entitled to use the utility services (which may include electricity, telephone, water, gas and sewer) available to the Leased Premises, and covenants to pay all costs and expenses therefore, including, without limitation, the cost of utilities consumed and the cost of maintenance, repair and replacement of any equipment, ducts, pipes and other facilities used in the supply or provision of such utilities. The Tenant shall further be responsible for the replacement and lawful disposal of, at its own expense, all electric light bulbs, tubes or ballasts serving or forming part of the said equipment. Section 6.10 Hazardous Substances: The Tenant shall at its own cost comply with all laws, regulations and government orders or directions relating to the use, generation, manufacture, production, processing, storage, transportation, handling, release, disposal, removal or cleanup of Hazardous Substances and the protection of the environment on, under or about the Leased Premises. The Tenant shall not use or cause or permit to occur the generation, manufacture, production, processing, storage, handling, release, presence, introduction or disposal of any Hazardous Substance on, under or about the Leased Premises or the transportation to or from the Leased Premises of any Hazardous Substance except as specifically disclosed to the Landlord and permitted in this Lease. Upon the request of the Landlord during the Term, and in any event four months preceding the calendar month in which the Term expires, the Tenant shall provide to the Landlord an independent audit report, in form and substance and from qualified experts approved by the Landlord acting reasonably, regarding Hazardous Substances on, under or about the Leased Premises during the Term. Upon the demand by any governmental authority or the Landlord that removal or a cleanup be undertaken because of the presence, introduction, deposit, emission, leak, spill, discharge of Hazardous Substances at the Leased Premises during the Term the Tenant shall promptly at its own expense take all remedial action necessary to carry out a full and complete removal, cleanup and remediation in accordance with the law. No action by the Landlord and no attempt by the Landlord to mitigate damages under any law shall constitute a waiver or release of the Tenant's obligations hereunder and the Tenant shall indemnify and save harmless the Landlord from all costs and expenses incurred by the Landlord pursuant to this Lease and in respect of the Hazardous Substances and from all other damages suffered by the Landlord by reason of the Tenant's actions or default hereunder. The Tenant's obligations and liabilities hereunder shall survive the expiration of this Lease. Without having made any due inquiries, as of the execution of this Lease the Landlord is not aware of any concerns or violations with respect to environmental matters related to the Leased Premises. Upon commencement of the Term, the Landlord shall provide the Tenant with any reports with respect to the environmental condition of the Leased Premises which it may have in its possession at that time. ARTICLE SEVEN INSURANCE Section 7.01 Tenant's Insurance: The Tenant covenants that it will take out and maintain throughout the Term, in the joint names of the Landlord and the Tenant, (protecting the Landlord in respect of claims by the Tenant as if the Landlord were separately insured and containing a waiver of subrogation against the Landlord and its agents): (a) comprehensive general liability insurance (including bodily injury, death and property damage) on an occurrence basis with respect to the Leased Premises and the Tenant's or others' use and occupancy thereof, and with respect to any substances escaping from the Leased Premises, in the minimum amount of $3,000,000 or such other amount as the Landlord may determine from time to time, acting reasonably; and (b) insurance in respect of all risks of direct physical loss or damage to tenant partitions and improvements, Tenant's Work, stock-in-trade, chattels, equipment and furniture in an amount of not less than the replacement cost thereof; and (c) such other insurance in amounts and upon terms reasonable for a prudent tenant to provide, as determined by the Landlord or its insurance advisers or mortgagees. Such policies shall not be cancellable or renewal refused unless the Landlord is first given thirty (30) days notice thereof and further be with insurers and in such form, and contain such other terms, as may be approved by Landlord, acting reasonably. Copies of such policies will be delivered to Landlord at the commencement of the Term and thereafter at least 30 days prior to commencement of each insuring term. If the Tenant does not provide or maintain in force such insurance the Landlord may take out the necessary insurance and pay the premium therefore, and the Tenant shall pay such premium, together with the Landlord's service fee as Additional Rent on demand. Section 7.02 Landlord's Insurance: The Landlord may provide for, take out and maintain, throughout the Term: (a) insurance in respect of risks of destruction or damage to the Building to the extent of the replacement cost thereof; (b) general liability insurance providing insurance for damage, loss of property and death or injury to persons; (c) if the Building contains pressure vessel apparatus, boiler and machinery insurance in a reasonable amount having regard to the nature of the apparatus and the replacement cost of the Building; the Tenant covenants to advise promptly the Landlord of the existence of any pressure vessel apparatus placed or installed by it in the Leased Premises; and (d) rental insurance against loss of Rent. The property and boiler insurance shall, if requested by the Tenant, and if available, include waivers of subrogation by the insurer against the Tenant. The Tenant shall pay the cost of all insurance maintained by the Landlord hereunder, as well as any other insurance or insurance program provided for or arranged by the Landlord for the Leased Premises, as Additional Rent. Section 7.03 Insurance Increase or Cancellation: The Tenant will not permit to be carried on upon the Leased Premises any activity or bring or keep anything upon the Leased Premises which will in any way increase the premium rates for Landlord's insurance or conflict with any laws, by-laws, rules or regulations applicable to the Leased Premises or with any insurance policy on the Leased Premises or any part thereof. If the rates for Landlord's insurance shall be increased as a result of any use made by the Tenant of the Leased Premises or if such insurance shall be cancelled or cancellation threatened by reason of the use made of the Leased Premises or by reason of anything done, omitted to be done, or permitted to be done within the Leased Premises, the Tenant shall pay to the Landlord the amount of such increase in insurance premiums, or, at the option of the Landlord, the Term hereby granted shall immediately terminate upon the service of notice in writing to that effect upon the Tenant. The Tenant shall promptly comply with the requirements of any insurer under any policy of insurance relating to the Leased Premises. ARTICLE EIGHT REPAIRS Section 8.01 Tenant's Repairs: The Tenant covenants to maintain and repair the Leased Premises so often as is reasonably necessary and as would a careful, prudent owner (including, without limiting the generality of the foregoing, structural and capital repairs and replacements to and of all glass, roofs, doors, floors, walls, drains, hardware, plumbing, sewage, climate control and utility systems), but excluding reasonable wear and tear caused by the elements, damage caused by perils against which Landlord is required to be insured pursuant to Sections 7.02(a) and (c). Section 8.02 Inspection: The Tenant covenants that the Landlord or its agents at all reasonable times may enter and view the state of repair and condition of the Leased Premises; and that the Tenant will repair according to notice in writing. Section 8.03 Leave in Repair: The Tenant covenants to leave the Leased Premises and every part thereof well painted and in good repair and good cleanliness all as otherwise provided in this Lease, and free of all refuse, grease, oil, and Hazardous Substances. Section 8.04 Repair of Tenant's Work: The Tenant covenants to maintain and repair all Tenant's Work, including cost of repairs or replacements occasioned by perils against which the Tenant is required to insure. Section 8.05 Notice of Accidents, Defects: The Tenant shall give to the Landlord prompt written notice of any spill, release or presence of Hazardous Substances at the Leased Premises, or of any accident to or defect in the plumbing, water pipes, heating and/or air-conditioning apparatus, electrical equipment, any fire extinguishing or sprinkler systems, and conduits or wires, or of any damage or injury to the Leased Premises or any part thereof howsoever caused. Nothing herein shall be construed, however, so as to require repairs or remediation to be made by the Landlord except as expressly provided in this Lease. Section 8.06 Repair Where Tenant Necessitates: If the Leased Premises, or any part thereof, becomes out of repair or damaged or destroyed through the negligence, carelessness, lack of attention, repair, replacement or misuse of or by the Tenant, its subtenants, or those for whom it is in law responsible, the expense of the necessary repairs, replacements, or alterations, to the extent not recoverable from Landlord's insurance hereunder, shall be borne by the Tenant who shall pay the same to the Landlord forthwith on demand. Section 8.07 Fire or Other Destruction: In the event of the partial or total damage or destruction of the Building or any part thereof occasioned by a peril against which the Landlord is fully insured hereunder, such that, in the opinion of the Landlord, acting reasonably, the Leased Premises are rendered untenantable, Rent shall at once cease to accrue until the Building (excluding Tenant's Work), shall be rebuilt or repaired in a manner sufficient to again render the Leased Premises tenantable in the opinion of the Landlord, acting reasonably, but the Tenant shall forthwith pay to the Landlord the proportionate part of the then current Rent accruing up to the time of such partial or total damage or destruction. If the Building is partially damaged but, in the opinion of the Landlord, acting reasonably, the Tenant can use and occupy and obtain access to the remaining part, Rent shall abate proportionately (as designated by the Landlord, acting reasonably) to the extent of the unusable portion, from the date of the damage until the date of restoration excluding Tenant's Work. In case of total destruction of or any substantial damage to the Building by any cause whatsoever, which, in the opinion of the Landlord, reasonably arrived at, cannot be repaired within one hundred and eighty (180) days of the occurrence of such damage or destruction (or within one hundred (100) days if the damage or destruction occurs within the last two years of the Term) the Landlord may, within sixty (60) days after the occurrence of such damage or destruction, terminate this Lease by written notice to the Tenant, but in the absence of such notice, this Lease shall continue in full force and effect. Unless this Lease is terminated as aforesaid the Landlord will proceed with all reasonable diligence, to repair or restore damage or destruction referred to in this Section provided that Tenant shall proceed to repair, restore or replace Tenant Work. In doing so, the Landlord shall be entitled to make such changes to the Leased Premises as are required by relevant legislation or by-laws, and such other changes as the Landlord wishes provided they will not unreasonably and adversely affect Tenants' use and enjoyment of the Leased Premises. ARTICLE NINE TAXES Section 9.01 Payment of Rental Taxes and Tenant's Taxes: The Tenant covenants to pay all Rental Taxes and Tenant's Taxes, as and when the same become due and payable. Where any Rental Taxes or Tenant's Taxes are payable by the Landlord to the relevant taxing authorities, the Tenant covenants to pay the amount thereof to the Landlord within five (5) business days after written demand, or as otherwise required by the Landlord. Section 9.02 Leased Premises Taxes: The Tenant covenants to pay to the relevant taxing authorities the full amount of the Leased Premises Taxes, as and when the same become due and payable. If the Tenant wishes to contest the Leased Premises Taxes, it may do so provided that it either pays the contested taxes under protest, or deposits with the Landlord such security as the Landlord or its mortgagees may require to prevent default or jeopardy for penalty or loss. Where any of the Leased Premises Taxes are payable by the Landlord to the relevant taxing authorities, the Tenant covenants to pay the amount thereof to the Landlord within five (5) business days after written demand, or as otherwise required by the Landlord. Section 9.03 Evidence of Tax Payment: The Tenant shall furnish to the Landlord within five (5) days after written request by the Landlord from time to time, evidence reasonably required by the Landlord confirming payment of Tenant's Taxes, Leased Premises Taxes and Rental Taxes. Section 9.04 Payment by Landlord: The Landlord, may at its option, require the Tenant to pay Leased Premises Taxes and Rental Taxes to the Landlord as Additional Rent in accordance with the terms of this Lease, for repayment by the Landlord to the relevant taxing authorities. ARTICLE TEN LICENCES, ASSIGNMENTS AND SUBLETTINGS Section 10.01 Occupancy of Premises: The Tenant shall not permit any part of the Leased Premises to be used or occupied by any persons other than the Tenant, any subtenants permitted under this Lease, and the employees of the Tenant and any such permitted subtenant, or permit any part of the Leased Premises to be used or occupied by any licensee or concessionaire, or permit any persons to be upon the Leased Premises other than the Tenant, such permitted sub-tenants and their respective employees, customers and others having lawful business with them. Section 10.02 Assignments and Sub-lettings: The Tenant shall not assign, mortgage or charge this Lease or sublet the whole or any part of the Leased Premises unless: (1) it shall have procured a bona fide written offer therefore to take an assignment or sublease which is not inconsistent with, and the acceptance of which would not breach any provision of this Lease if this Section is complied with, and which the Tenant has determined to accept subject to this Section being complied with, and (2) it shall have first requested and obtained the consent in writing of the Landlord thereto. Any request for such consent shall be in writing and accompanied by a true copy of such offer and the Tenant shall furnish to the Landlord all information available to the Tenant and requested by the Landlord as to the responsibility, reputation, financial standing and business and use of the proposed assignee or subtenant. Within fifteen (15) days after the receipt by the Landlord of such request for consent and of all information which the Landlord shall have requested hereunder (and if no such information has been requested, within fifteen (15) days after receipt of such request for consent) the Landlord shall have the right upon written notice to the Tenant, if the request is to assign this Lease or sublet the whole of the Leased Premises, to cancel and terminate this Lease or if the request is to assign or sublet a part of the Leased Premises only, to cancel and terminate this Lease with respect to such part, in each case as of a termination date sixty (60) days following the giving of such notice, and in such event the Tenant shall surrender the whole or part, as the case may be, of the Leased Premises in accordance with such notice and Rent shall be apportioned and paid to the date of surrender and, if a part only of the Leased Premises is surrendered, Basic Rent shall thereafter abate proportionately. If the Landlord shall not exercise the foregoing right of cancellation then the Landlord's consent to the Tenant's request for consent to assign or sublet shall not be unreasonably withheld. The Tenant shall pay all reasonable costs and fees incurred by and administration fees of the Landlord in connection with the request for consent, including legal costs. The Tenant may assign or sublet, as the case may be, only upon the terms set out in the offer submitted to the Landlord as aforesaid and not otherwise and not later than three (3) months after the Landlord's consent, and in the case of an assignment, only if the assignee covenants directly with the Landlord to assume and perform each of the covenants, obligations and agreements of the Tenant in this Lease without releasing the assignor from liability therefore and only upon execution by any or all parties hereto, including the assignee, of such other documents as may be required by the Landlord's solicitors. In the event of such assignment or subletting all monies payable by the assignee, subtenant or transferee shall, at the option of the Landlord, be paid directly to the Landlord, who shall credit the same as and when received to payments required and reserved hereunder. The Landlord shall in addition thereto be entitled to receive any excess of such monies above those monies payable and reserved hereunder. No assignment or subletting hereunder shall relieve the Tenant from its obligations and agreements hereunder. Section 10.03 Sale of Shares: An assignment of lease shall be construed to include an amalgamation by the Tenant and the transfer of shares of the Tenant (in the event that it is a limited company) which transfer effectively transfers shareholder control of the Tenant. ARTICLE ELEVEN TITLE Section 11.01 Subordination: (a) The Tenant covenants that this Lease and everything herein contained shall be subordinate to any charge or charges from time to time created by the Landlord in respect of the Leased Premises or any part thereof by way of mortgage, including deeds of trust and instruments supplemental thereto. The Tenant hereby covenants and agrees that it will at any time from time to time, as required by the Landlord during the Term and any extension or renewal, give all such further assurances as may be reasonably required to evidence and effectuate this subordination of its rights and privileges hereunder to the holder or holders of any such charge or charges, provided however, that any such written subordination to any such charge created after the commencement of the Term shall be subject to the chargee agreeing to permit the Tenant to remain in possession of the Leased Premises during the Term, provided that it is not in default hereunder and further provided that the Tenant agrees to attorn to such chargee in possession of the Leased Premises, if and when required by such chargee. (b) Without limiting the general rights of the Landlord to assign this Lease, the Landlord shall be entitled to assign this Lease and/or the Rent as security for any charge upon the Leased Premises or any part thereof, and the Tenant covenants, if requested to do so, to acknowledge in writing any notice of such assignment by the Landlord. Section 11.02 Tenant Acknowledgements: The Tenant agrees that it will from time to time within five (5) days after written request, execute and deliver to the Landlord (and, if required by the Landlord, to any prospective or actual chargee or purchaser) a certificate in writing as to the status at that time of this Lease, including as to whether this Lease is unmodified and in full force and effect (or, if modified, stating the modification and that the same is in full force and effect as modified), the amount of the Rent then being paid hereunder, the dates to which the same, by instalments or otherwise, and other charges hereunder have been paid, whether there is any existing default on the part of the Landlord of which the Tenant has notice, whether there are any deposits or prepaid Rent, and any other matters pertaining to this Lease as to which the Landlord shall request a statement. Any statement delivered pursuant hereto may be conclusively relied upon by any prospective or actual purchaser or chargee except as to any default of the Landlord as to which the Tenant does not then have notice. Section 11.03 Charges Against Leasehold: The Tenant covenants not to permit any builders' or other liens, mortgages or conditional sales contracts to attach to this Lease, the Leased Premises or any Tenant's Work, and that whenever and so often as any such liens, mortgages or contracts shall attach or claims or notices of lien shall be filed, the Tenant shall, within fifteen (15) days after the Tenant has notice of the claim for lien, mortgage or contract, procure the discharge or withdrawal thereof by payment or by giving security or in such other manner as is or may be required or permitted by law. Section 11.04 No Registration: The Tenant covenants and agrees with the Landlord that it will not register a copy of this Lease. If the Tenant desires to make a registration for the purposes only of giving notice of this Lease, then the Tenant may at its cost register a caveat or notice only relating to this Lease. Section 11.05 Sale: If the Leased Premises are sold by the Landlord the purchaser shall assume, during its period of ownership, the Landlord's covenants and agreements hereunder and the Landlord shall following such sale be released from all its covenants, obligations and agreements under this Lease. ARTICLE TWELVE LIABILITIES Section 12.01 Responsibility of Landlord: The Tenant agrees that the Landlord shall have no obligation hereunder in respect of the supply or provision of any service or utility and the Tenant shall not be entitled to any compensation for any inconvenience, nuisance or discomfort occasioned by lack of any service or utility, or any defect in the Leased Premises. Section 12.02 Claims for Compensation: No claim for compensation shall be made by the Tenant by reason of inconvenience, damage or annoyance arising from the necessity of repairing or remediating any portion of the Leased Premises, howsoever the necessity may arise. Section 12.03 Theft: The Landlord shall not be liable for the theft of any property at any time in or about the Leased Premises. Section 12.04 Damage by Wind and Other Causes: The Landlord shall not be liable for any damage to any property, fixtures or improvements at any time in, on or about the Leased Premises nor injury to persons caused by wind, escape or leakage or presence of smoke, gas, water, (including water from sprinkler systems) rain, snow, steam, chemical substances, electrical or nuclear energy, the breaking of any drain, water pipe, gas pipe, electric wire, lamp, combustion chamber, nuclear conductor or reactor, nor for any accident to goods or property of the Tenant, nor for any injury to any person or persons in, on or about the Leased Premises, however any of the above may be caused. Section 12.05 Indemnification: Notwithstanding any other provisions of this Lease to the contrary, the Tenant shall: (a) be liable to the Landlord for; (b) indemnify and hold harmless the Landlord, and its respective officers, directors, shareholders, partners, agents, advisors and employees ("Others") from and against; any and all liabilities, claims, suits or actions costs, damages and expenses (and without limiting the generality of the foregoing, any direct losses, costs, damages and expenses of the Landlord including costs as between a solicitor and his own client) which may be brought or made against the Landlord or Others, or which the Landlord or Others may pay or incur as a result of or in connection with: (c) any breach, violation or non-performance of any covenant, condition or agreement in this Lease set forth and contained on the part of the Tenant to be fulfilled, kept, observed and performed; (d) any damage to property, including property of the Landlord, occasioned by the operations of the Tenant's business on, or the Tenant's occupation of, the Leased Premises; (e) any injury to person or persons, including death resulting at any time therefrom, occasioned by the operation of the Tenant's business on, or the Tenant's occupation of, the Leased Premises; (f) any costs or liability related to Hazardous Substances used, deposited, released, spilled, discharged, present on or left at the Leased Premises during the Term or any renewal or extension thereof; unless caused by the gross negligence of the Landlord or for whom the Landlord is at law responsible, such indemnity and hold harmless to survive the expiration of the Term. ARTICLE THIRTEEN ACCESS Section 13.01 Access by Landlord: The Landlord and parties authorized by the Landlord shall be permitted at any time and from time to time, to enter and to have their authorized agents, employees and contractors enter the Leased Premises for the purpose of inspection or making repairs, alterations, removals or improvement to the Leased Premises or to have access to utilities and service facilities therein contained, and the Tenant shall provide free and unhampered access for the purpose and shall not be entitled to compensation for any inconvenience, nuisance or discomfort caused thereby, but the Landlord or parties authorized by the Landlord in exercising their rights hereunder shall proceed to the extent reasonably possible so as to minimize interference with the Tenant's use and enjoyment of the Leased Premises. In the event of an emergency, the Landlord may, if the Leased Premises are unattended, enter by way of master key or forcibly, without rendering the Landlord or its agents liable therefore. Section 13.02 Exhibit: The Tenant will permit the Landlord or its representatives to exhibit the Leased Premises at all reasonable times during the Term to prospective purchasers or mortgagees and all other persons having written authority from the Landlord. The Landlord and agents of the Landlord shall also be permitted to view or conduct tests on the Leased Premises. The Landlord shall be entitled from time to time during the Term to place a notice or sign of reasonable dimensions, reasonably placed so as not to interfere with the Tenant's business, stating that the Leased Premises are for sale or, during the last Twelve (12) months of the Term, for rent. ARTICLE FOURTEEN OVERHOLDING Section 14.01 Tenancy after Expiration: If, at the expiration of the Term or sooner termination hereof, the Tenant shall remain in possession without any further written agreement but with the express or implied consent of the Landlord, and in circumstances where a tenancy would thereby be implied by law, a tenancy from year to year shall not be created by implication of law or otherwise, but the Tenant shall be deemed to be a monthly tenant only at a monthly Basic Rent equal to one-ninth of double the Basic Rent payable in the year immediately preceding the termination hereof, and otherwise upon and subject to the same terms and conditions contained in this Lease, excepting provisions for any options or renewal, if any are contained herein, and nothing, including the acceptance of any Rent by the Landlord, shall extend to the contrary except a specific agreement in writing between the Landlord and the Tenant and the Tenant hereby authorizes the Landlord to apply any monies received from the Tenant in payment of Rent. ARTICLE FIFTEEN LANDLORD'S RIGHTS AND REMEDIES Section 15.01 Default: If and whenever: (a) the Rent hereby reserved, or any part thereof, is not paid when due, or there is non-payment of any other sum which the Tenant is obligated to pay under any provision of this Lease, and such default in either case shall continue for two (2) days after notice by the Landlord requiring the Tenant to rectify same; or (b) the Term or any goods, chattels, equipment or other personal property of the Tenant, shall be taken or be exigible in execution or attachment, or if a writ of execution shall issue against the Tenant; or (c) the Tenant shall become insolvent or commit an act of bankruptcy or become bankrupt or take the benefit of any statute that may be in force for bankrupt or insolvent debtors, or become involved in a winding-up proceeding, voluntary or otherwise, or if a receiver shall be appointed for the business, property, affairs or revenues of the Tenant, or if any governmental authority should take possession of the business or property of the Tenant; or (d) the Tenant shall fail to commence business actively and diligently from and on the Leased Premises within sixty (60) days after commencement of the Term; or (e) the Tenant shall make a bulk sale of its goods or move or commence, attempt or threaten to move its goods, chattels and equipment out of the Leased Premises (other than in the routine course of business); or (f) the Tenant shall vacate or abandon the Leased Premises in whole or in part; or (g) the Tenant shall transfer or purport to transfer any portion or all of the Term or the Leased Premises without the written consent of the Landlord, in accordance with the terms of this Lease; or (h) the Tenant shall fail to remedy any condition giving rise to cancellation, threatened cancellation, reduction or threatened reduction of coverage under any insurance policy on the Leased Premises or any part thereof within twenty four (24) hours after notice thereof by the Landlord; or (i) the Tenant shall not observe, perform and keep any other of the covenants, agreements, provisions, stipulations and conditions herein to be observed, performed and kept by the Tenant and shall persist in such failure for ten (10) days after notice by the Landlord requiring that the Tenant remedy, correct, desist or comply (or in the case of any such breach which reasonably would require more than ten (10) days to rectify unless the Tenant shall commence rectification within the said ten (10) day period and thereafter promptly and diligently and continuously proceed with the rectification of the breach); (each of the foregoing subsections being an "Event of Default") then and in any of such cases at the option of the Landlord, the full amount of the current month's and the next ensuing three (3) month's Rent shall immediately become due and payable and the Landlord may immediately distrain for the same, together with any arrears then unpaid; and the Landlord may without notice or any form of legal process forthwith take possession of the Leased Premises or any part thereof in the name of the whole and remove and sell the Tenant's goods, chattels, equipment and any other property therefrom, any rule of law or equity to the contrary notwithstanding; and the Landlord may seize and sell such goods, chattels, equipment and other property of the Tenant as are in the Leased Premises or at any place to which the Tenant or any other person may have removed them in the same manner as if they had remained and been distrained upon the Leased Premises; and such sale may be effected in the discretion of the Landlord either by public auction or by private treaty, and either in bulk or by individual item, or partly by one means and partly by another, all as the Landlord in its entire discretion may decide, and the Tenant waives and renounces the benefit of any present or future Statute or amendments thereto taking away or limiting the Landlord's right of distress. Section 15.02 Consequences of Default: While any Event of Default under Section 15.01 remains unremedied the Landlord may terminate this Lease and the Term by giving written notice of termination to the Tenant or by posting notice of termination at the Leased Premises, and in such event the Tenant will forthwith vacate and surrender the Leased Premises. Alternatively, the Landlord may from time to time without terminating the Tenant's obligations under this Lease, make alterations and repairs considered by the Landlord necessary to facilitate a sub-letting and sub-let the Leased Premises or any part thereof as agent of the Tenant for such term or terms and at such rent or rents and upon such other terms and conditions as the Landlord in its sole discretion considers advisable. Upon each sub-letting all rent and other monies received by the Landlord from the sub-letting shall be applied first to the payment of indebtedness other than Rent due hereunder from the Tenant to the Landlord, second to the payment of costs and expenses of the sub-letting including brokerage fees and solicitors fees and the cost of alterations and repairs, and third to the payment of Rent due and unpaid hereunder. The residue, if any, shall be held by the Landlord and applied in payment of future Rent as it becomes due and payable. If the Rent received from the sub-letting during a month and any surplus then held by the Landlord to the credit of the Tenant is less than the Rent to be paid during that month by the Tenant, the Tenant will pay the deficiency to the Landlord. The deficiency will be calculated and paid monthly. No taking of possession by the Landlord will be construed as an election on its part to terminate this Lease unless a written notice of that termination is given to the Tenant or posted as aforesaid. Despite a sub-letting without termination, the Landlord may elect at any time to terminate this Lease for a previous breach. If the Landlord so terminates this Lease, the Tenant shall pay to the Landlord on demand therefore: (a) Basic Rent and Additional Rent accrued due up to the time of possession or termination, whichever is later, plus accelerated Rent as provided in Section 15.01; (b) all costs payable by the Tenant pursuant to the provisions of this Lease up until the date of possession or termination, whichever is later; (c) such expenses as the Landlord may incur or has incurred in connection with taking possession or terminating and re-letting, or collecting sums due or payable by the Tenant or realizing upon assets seized including without limitation brokerage expenses, legal fees and disbursements determined as between a solicitor and his own client, and including the expense of keeping the Leased Premises in good order and repairing or maintaining the same or preparing the Leased Premises for re-letting; and (d) as liquidated damages for the loss of Rent and other income of the Landlord expected to be derived from this Lease during the period which would have constituted the unexpired portion of the Term had the Lease not been so terminated, the amount, if any, by which the rental value of the Leased Premises for such period established by reference to the terms and provisions of this Lease, exceeds the rental value of the Leased Premises for such period established by reference to the terms and provisions upon which the Landlord re-lets them, if such re-letting is accomplished within a reasonable time after termination of this Lease, and otherwise with reference to all market and other relevant circumstances. Rental value is to be computed in each case by reducing to their present worth, at an assumed interest rate of ten (10%) per cent per annum, all Rent and other amounts to become payable for such period and where the ascertainment of amounts to become payable requires the same, the Landlord may make estimates and assumptions of fact which will govern unless shown to be unreasonable or erroneous; such obligations of the Tenant to survive the termination of this Lease. Section 15.03 Alternative Remedies: The Landlord may from time to time resort to any or all of the rights and remedies available to it in the event of any default hereunder by the Tenant, either by any provision of this Lease or by statute or the general law, all of which rights and remedies are intended to be cumulative and not alternative, and the express provisions hereof as to certain rights and remedies are not to be interpreted as excluding any other or additional rights and remedies available to the Landlord by statute or the general law. No waiver by the Landlord of any of its rights with respect to a default by the Tenant shall constitute a waiver of other rights with respect to that default or a waiver of any subsequent breach of that obligation. Section 15.04 Landlord's Right to Perform: In addition to all other remedies the Landlord may have by this Lease or by law, if the Tenant shall make default in any of its obligations hereunder, the Landlord may, at its option, perform any such obligation after five (5) days' written notice to the Tenant (or without notice in case of an emergency), and in such event the costs of performing such obligation and all reasonable Landlord overhead and related supervision charges shall be payable by the Tenant to the Landlord on demand, together with interest at the rate of six (6%) per cent per annum in excess of the minimum lending rate to prime commercial borrowers from time to time current at any Canadian bank designated by the Landlord from the date of the performance of such obligation by the Landlord until the date of payment to the Landlord. Section 15.05 Interest on Arrears of Rent: The Tenant covenants to pay interest computed at the rate specified in Section 15.04 upon all arrears of Rent. Such interest shall be computed from the due date(s) of such Rent until the date of payment to the Landlord. ARTICLE SIXTEEN GENERAL PROVISIONS Section 16.01 Lease Entire Agreement: It is hereby understood and agreed by and between the parties that the terms and conditions set forth herein, together with the terms and conditions set forth in any rules and regulations and exhibits, schedules and/or plans annexed hereto embrace the whole terms and conditions of the agreement entered into by the Landlord and Tenant with respect to the Leased Premises and supersede and take the place of any and all previous agreements or representations of any kind, written or verbal, heretofore made by anyone in reference to the Leased Premises or in any way affecting the Leased Premises and that any such rules and regulations and any exhibits, schedules and/or plans shall and do form a part of this Lease as fully as if the same were included in the main body hereof above the execution hereof by the parties. Each and every provision of this Lease shall be construed as a covenant and agreement. If any provision of this Lease is illegal or unenforceable, it shall be considered separate and severable from the remaining provisions of this Lease, which shall remain in force and be binding as though the said provision had never been included. This Lease may not be amended or altered except by instrument in writing formally executed by both parties, provided, however, that the Landlord shall be entitled to make and amend, and the Tenant covenants to abide by, such reasonable rules and regulations governing this Lease and the Leased Premises as are communicated to the Tenant. Section 16.02 Notices: Any notice, statement or request herein required or permitted to be given by either party to the other shall be in writing and shall be deemed to have been sufficiently and effectually given if signed by or on behalf of the party giving the notice and delivered or mailed by registered prepaid post (return receipt requested), in the case of notice to the Landlord, to it at the following address: c/o Greiner-Pacaud Management Associates 310 Front Street West, Suite 400 Toronto, Ontario M5V 3B5 as well as to Landlord's agents at the address at which Rent payments due hereunder are then being made, and in the case of notice to the Tenant, to it addressed to the Leased Premises or left at the Leased Premises or served personally on the Tenant or on one of the partners, officers, or employees of the Tenant. Any such notice given as aforesaid shall be conclusively deemed to have been given and received, if delivered, on the date of such delivery or, if mailed, on the third business day following the day upon which such notice is mailed. During periods of mail strike or stoppage all notices shall be delivered and not mailed. The Landlord may from time to time by notice to the Tenant change the address to which notices are to be mailed or delivered. Section 16.03 Headings: The headings in this Lease are for convenience only and are not to be considered a part of it and do not in any way limit or amplify its terms and provisions. Section 16.04 Agency: The Landlord may perform all or any of its obligations hereunder by or through such managing or other agency or agencies as it may from time to time determine and the Tenant shall, as from time to time directed by the Landlord, pay to any such agent any monies payable hereunder to the Landlord. Section 16.05 Tenants' Acceptance: The taking of possession of the Leased Premises by the Tenant shall be deemed to be conclusive evidence that any improvements or work required to be undertaken by the Landlord has been completed to the satisfaction of the Tenant and that the Tenant has inspected and accepts the Leased Premises. Section 16.06 Time of Essence: Time shall be of the essence of this Lease. Section 16.07 Applicable Law: This Lease shall be governed by and construed in accordance with the laws in force in the Province in which the Leased Premises are situate. Section 16.08 Joint and Several: Where the Tenant is comprised of more than one person the obligations of the Tenant shall be joint and several. Section 16.09 Railway Siding: Upon notification by the Landlord, the Tenant, in common with others entitled thereto, shall be entitled to the use and benefit of any industrial rail siding installed upon or serving the Leased Premises pursuant to a current rail siding agreement. The Tenant shall indemnify and save harmless the Landlord from any and all costs, liabilities, damages, claims, suits or actions arising out of such siding agreement or the use of such facility. The Tenant agrees to abide by the terms of the applicable rail siding agreement and to promptly pay all rental or other amounts required thereunder. Section 16.10 Schedules: The Schedule(s) which is/are attached hereto and which is/are incorporated into and form a part of this Lease is/are as follows: Schedule "A" - Sketch of Lands Schedule "B" - Lease Renewal Option Schedule "C" - Office Layout IN WITNESS WHEREOF the parties hereto have executed this Lease Agreement as of the day, month and year first above written. GPM REAL PROPERTY (7) LTD. Per: Per: (c/s) ENDOW (7) INC. Per: Per: (c/s) ULTIMA DISTRIBUION INC. Per: Per: (c/s) SCHEDULE "A" SKETCH OF LANDS SCHEDULE "B" SPECIAL CONDITIONS 1. BASIC RENT The Tenant shall pay to the Landlord for each and every year during the first three (3) years of the term a basic rent ("Basic Rent") in the sum of TWO HUNDRED ONE THOUSAND NINETY NINE DOLLARS AND NINETY SIX CENTS ($201,099.96) per annum, which has been calculated based on a rate of FIVE DOLLARS AND ZERO CENTS ($5.00) per square foot per annum of gross rentable area of the building, payable by equal consecutive monthly instalments in the sum of SIXTEEN THOUSAND SEVEN HUNDRED FIFTY EIGHT DOLLARS THIRTY THREE CENTS ($16,758.33) in advance on the first day of each and every month in each and every year during the first three (3) years of the term, the first of such monthly instalments to be paid on the Commencement Date; and The Tenant shall pay to the Landlord for each and every year during the fourth (4th) and fifth (5th) years of the term a Basic Rent in the sum of TWO HUNDRED ELEVEN THOUSAND ONE HUNDRED FIFTY FIVE DOLLARS AND ZERO CENTS ($211,155.00) per annum, which has been calculated based on a rate of FIVE DOLLARS AND TWENTY FIVE CENTS ($5.25) per square foot per annum of gross rentable area of the building, payable by equal consecutive monthly instalments in the sum of SEVENTEEN THOUSAND FIVE HUNDRED NINETY SIX DOLLARS AND TWENTY FIVE CENTS ($17,596.25) in advance on the first day of each and every month in each and every during the fourth (4th) and fifth (5th) years of the term, the first of such monthly instalments to be paid on the first day following expiry of the third (3rd) year of the term; and The Tenant shall pay to the Landlord for each and every year during the sixth (6th) and seventh (7th) years of the term a Basic Rent in the sum of TWO HUNDRED THIRTY ONE THOUSAND TWO HUNDRED SIXTY FOUR DOLLARS AND NINETY SIX CENTS ($231,264.96) per annum, which has been calculated based on a rate of FIVE DOLLARS AND WEVENTY FIVE CENTS ($5.75) per square foot per annum of gross rentable area of the building, payable by equal consecutive monthly instalments in the sum of NINETEEN THOUSAND TWO HUNDRED SEVENTY TWO DOLLARS AND EIGHT CENTS ($19,272.08) in advance on the first day of each and every month in each and every during the sixth (6th) and seventh (7th) years of the term, the first of such monthly instalments to be paid on the first day following expiry of the fifth (5th) year of the term; and The Tenant shall pay to the Landlord for each and every year during the last three (3) years of the term a Basic Rent in the sum of TWO HUNDRED FORTY ONE THOUSAND THREE HUNDRED TWENTY DOLLARS AND ZERO CENTS ($241,320.00) per annum, which has been calculated based on a rate of SIX DOLLARS AND ZERO CENTS ($6.00) per square foot per annum of gross rentable area of the building, payable by equal consecutive monthly instalments in the sum of TWENTY THOUSAND ONE HUNDRED TEN DOLLARS AND ZERO CENTS ($20,110.00) in advance on the first day of each and every month in each and every during the last three (3) years of the term, the first of such monthly instalments to be paid on the first day following expiry of the seventh (7th) year of the term; and 2. AREA REMEASUREMENT Unless otherwise determined from time to time at the initiative of the Landlord by an architect selected by the Landlord, for all purposes of this lease the Building shall contain a gross area of approximately 40,220 square feet. The Basic Rent stipulated in Section 3.01 shall be calculated using the area of the Building as determined pursuant to this paragraph. In the event that the area of the Building as determined by an architect selected by the Landlord is more or less than that set forth in this paragraph, the Basic Rent shall be increased or decreased accordingly. 3. CONFIMATORY NOTICE Upon substantial completion of the Landlord Work, the Landlord shall provide notice to the Tenant which shall include an Architect's Certificate determining and certifying the gross square footage area of the Building which measurement shall be determined in accordance with SIOR standards and shall include a copy of the notice publishing substantial completion of the Landlord Work which shall determine the date of substantial completion of such work. Such notice will be final and binding, except as otherwise determined herein, on the Landlord and Tenant. 4. PRIOR ENTRY The Tenant shall be permitted to enter upon the Leased Premises, at its own risk and peril, upon the later of the Tenant's execution of the Lease and the receipt of notice from the Landlord that floor area of the Building designated as warehouse has been prepared and is ready for the Tenant's intended use. Such entry shall be limited to exterior areas of the Building and that floor area of the Building interior designated as warehouse and shall solely be for the Tenant's preparation for moving in, including the installation of warehouse racking. The Tenant shall not be required to pay any Basic Rent or Additional rent, with the exception of utilities which the Landlord shall reasonably allocate to the Tenant, if any, from the date of such permitted entry upon the Leased Premises to the Commencement Date. 5. LANDLORD WORK Subject to force majeure, the Landlord shall at its own expense use reasonable efforts to complete the following improvements to the premises (the "Landlord Work") prior to July 31, 1998, provided however, that the Landlord shall not be obligated to commence the Landlord Work prior to execution of the Lease by the Tenant and the Landlord shall not be held liable for any costs, damages or other liabilities incurred by the Tenant due to a delay in the commencement of the Landlord Work by virtue of the Tenant's non execution of the Lease; a) Ensure that the premises at time of occupancy are free of any material structural defect and the roof, plumbing, heating, air-conditioning, electrical, drainage, sprinkler, lighting and in general all systems contained herein are in good working condition and fully operational; b) Install slab on grade 6" thick 25 Mpa concrete floor with polypropylene fibre reinforcing in warehouse area and install slab on grade 4" concrete floor with polypropylene fibre reinforcing in office area. Finished slab to be saw cut and filled with Loadflex or equal. Seal warehouse floor using standard industrial urethane concrete floor sealer. c) Install electrical service of no less than 600 volts @ 600 amps; d) Install metal halide lights in the warehouse to provide a minimum of 35 foot candle illumination at 30" working plane above floor based on minimum standard ceiling/wall/floor reflectance values for warehouse empty space of 30/30/20; e) Build out new offices of approximately 4,000 sq.ft. using the following criteria, as per the layout shown outlined in red on Schedule "C" attached hereto and forming part of this agreement: i) Suspended 2' x 4' ceiling tiles and T-Bar ceiling with recessed fluorescent lighting throughout, and heated and cooled by roof-mounted heating, ventilating and air-conditioning equipment; ii) Floor covering to be 28 oz. carpet, colour to be chosen by Tenant based on Landlord's samples; iii) Standard drywall finish complete with professional painting, color to be chosen by Tenant based on Landlord's samples; iv) Install eight (8) private offices; v) One boardroom approximately 300 sq.ft; vi) Men's and Women's washrooms in compliance with applicable building codes; vii) Quality of construction and finish shall be consistent with Landlord's standard office finish and shall meet all applicable fire and building codes; viii) Construct block (or block and drywall) demising wall between office areas and warehouse area as shown marked in blue on Schedule "C". f) Truck level docks to be equipped with Pentalift or equal hinged lip manual ramp boxed model 6'6" x 7'9" with lip extended, 25,000 lbs. capacity, and to be equipped with dock seals and dock bumpers. The Tenant shall be solely responsible for the cost of all alterations, improvements and upgrades to the Leased Premises in excess of the Landlord work, inclusive, but not limited to, the interior office demising wall and new exterior windows as shown marked in green on Schedule "C", and the Tenant shall contract directly with the general contractor or the sub-contractor for the completion of such work. 6. GUARANTEES AND WARRANTEES The Tenant shall have the right to the benefits of any warranty or guarantee, if any, granted by the General Contractor or its Sub-trades in connection with the construction of the Leased Premises. 7. LEASE RENEWAL OPTION (a) If the Tenant pays the Rent and other sums payable hereunder and performs each and every one of the covenants, provisos and agreements herein contained and on the part of the Tenant to be paid and performed, punctually and in accordance with the provisions of this Lease, then the Tenant shall have the option of renewing this Lease by notice in writing given to the Landlord at least one hundred and eighty (180) days prior to the expiry of the Term for an additional term of five (5) years on the same terms and conditions as set forth in the Lease save and except that there shall be no further right of renewal and save and except that the yearly Basic Rent during the renewal term shall be the greater of the yearly Basic Rent in effect during the last year of the Term of this Lease, and the "Market Rent" for the Leased Premises determined as of a date which is sixty (60) days prior to the commencement of the renewal term. If the parties are unable to agree upon such Market Rent, the dispute will be resolved in the manner set out in Section (b) hereof. (b) In this Lease "Market Rent" shall mean the yearly fair market net rental of the Leased Premises, at the date required for determination of same, having regard to annual net rents then normally being asked for and received for land, buildings and improvements of similar value, extent and quality in the general area of the Leased Premises under net leases having a similar term as the term for which Market Rent is being determined. If the Landlord and the Tenant have not agreed to Market Rent on or before the date required for determination of same, then Market Rent shall be determined in accordance with the following provisions: (i) a party wishing to have such determination shall designate a person to act as a valuer, who shall be an accredited member of the Appraisal Institute of Canada, and notify the other party of such nominee; (ii) within ten (10) business days after notification of the appointment of a person under Subsection (i) hereof, the other party shall appoint a similarly qualified person to act as a valuer; if it fails to do so, the first party shall be entitled to appoint the second valuer; (iii) the two valuers so appointed shall, within ten (10) business days thereafter, appoint a third similarly qualified person to act as a valuer, failing which either party shall be entitled to have such valuer appointed by a Judge of the appropriate court of the Province in which the Leased Premises are situated pursuant to the laws applicable in said Province; (iv) each valuer shall make such investigations as he or she deems fit, acting as a valuer and not an arbitrator, and within fifteen (15) business days after the appointment of the third valuer, each valuer shall submit in writing to the parties simultaneously his or her best estimate of the Market Rent as of the date it is to be determined; (v) the Market Rent shall be deemed to be the average of the two valuations which are numerically closest to one another; for example, assume Valuation A is $85,000.00 per annum, Valuation B is $88,000.00 per annum, and Valuation C is $87,000.00 per annum, the Market Rent shall be $87,500.00 per annum; provided however that, in the event two of the valuations are equidistant above and below the middle valuation, the middle valuation shall be the Market Rent; and (vi) each party shall pay the cost of the valuer or valuers appointed by it, and the parties shall share equally the cost of the third valuer. Pending the determination of Market Rent, the Tenant shall continue to pay an amount equivalent to the previous yearly Basic Rent and the parties shall readjust from the date when Market Rent becomes applicable upon such determination being made. SCHEDULE "C" OFFICE LAYOUT EX-10 7 SCHEDULE OF WARRANTHOLDERS
Exhibit 10.13 DAY RUNNER, INC Schedule of Warrants No. of Exercise Date Date of Holder Shares Price of Issue Expiration Vesting Schedule - ------ ------ -------- -------- ---------- ---------------- Higgins, James 50,000 $11.78125 12/04/96 12/03/03 60 equal monthly installments commencing 01/01/971 Higgins, Jill 50,000 $11.78125 12/04/96 12/03/03 60 equal monthly installments commencing 01/01/971 Miller, Charles 38,000(2) $11.78125 12/04/96 12/03/03 Original warrant covered 50,000 shares and vested in 60 equal monthly installments commencing 01/01/971 Rachlin, Alan 50,000 $6.00 03/09/93 01/22/03 4,166 on 03/09/93; 45,834 in 11 equal monthly installments commencing 03/20/93 Rachlin, Alan 50,000 $6.25 01/16/94 01/16/04 12 equal monthly installments commencing 02/14/94 Rachlin, Alan 50,000 $9.50 08/15/94 08/15/04 12 equal monthly installments commencing 08/29/94 Rachlin, Alan 50,000 $9.50 07/28/95 07/28/05 24 equal monthly installments commencing 08/28/95 Rachlin, Alan 50,000 $11.78125 12/04/96 12/03/03 60 equal monthly installments commencing 01/01/971 Rachlin, Alan 50,000 $12.8125 04/22/97 04/22/07 24 equal monthly installments commencing 05/22/97 Willat, Boyd 50,000 $11.78125 12/04/96 12/03/03 60 equal monthly installments commencing 01/01/971 (1)The Warrant also contains the following provision with respect to the right to exercise the Warrant: "Notwithstanding the foregoing, if [the Holder] shall cease to be a director of the Company for any reason or no reason ("Termination"), whether such Termination is permanent or temporary, then after the effective date of such Termination and through the end of the Warrant Term the Holder may exercise the Warrant to purchase only such number of Shares that the Holder would have been entitled to purchase on the effective date of such Termination in accordance with the foregoing. To the extent that the Holder shall not have been entitled to exercise any portion of the Warrant on the effective date of such Termination, such portion shall be deemed to have expired unexercised on such effective date." (2) The original warrant covered 50,000 shares and has been exercised with respect to 12,000 of such shares.
EX-10 8 WARRANT OF APRIL 20, 1998 DAY RUNNER, INC. Exhibit 10.16 WARRANT TO PURCHASE COMMON STOCK OF DAY RUNNER, INC. THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATING THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. Warrant to Purchase 5,000 Shares of Common Stock DAY RUNNER, INC. INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE Void after April 20, 2008 THE WARRANT evidenced by this Certificate has been issued for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged. THIS CERTIFICATE evidences the right of [name of director] (the "Holder") to purchase 5,000 shares of Common Stock, par value $0.001 per share (the "Shares"), of Day Runner, Inc., a Delaware corporation (the "Company"), at a price of $20.625 per Share, subject, however, to the terms and conditions hereinafter set forth. 1. Definitions. As used in this Certificate: (a) "Warrant" shall mean the rights evidenced by this Certificate. (b) "Warrant Price" shall mean $20.625, as adjusted in accordance with Section 5 hereof. 2. Term of Warrant. The Warrant may be exercised only during the period commencing on April 20, 1998 through the close of business on April 20, 2008 (the "Warrant Term") and may be exercised only in accordance with the terms and conditions hereinafter set forth. 3. Exercise of Warrant. The Warrant shall be exercisable as follows: (a) Right to Exercise. The Warrant shall vest and become exercisable cumulatively in four quarterly installments with the first installment vesting on July 1, 1998 and one additional installment vesting on the first day of each quarter thereafter so long as [name of director] remains a member of the Company's Board of Directors. Notwithstanding the foregoing, if [name of director] shall cease to be a director of the Company for any reason or no reason ("Termination"), whether such Termination is permanent or temporary, then after the effective date of such Termination and through the end of the Warrant Term the Holder may exercise the Warrant to purchase only such number of Shares that the Holder would have been entitled to purchase on the effective date of such Termination as determined in accordance with the immediately preceding sentence. To the extent that the Holder shall not have been entitled to exercise any portion of the Warrant on the effective date of such Termination, such portion shall be deemed to have expired unexercised on such effective date. (b) Method of Exercise; Payment; Issuance of New Warrant; Transfer and Exchange. The Warrant may be exercised by the Holder, in whole or in part, by the surrender of this Certificate, properly endorsed, with the form of subscription attached to this Certificate duly executed by the Holder, at the principal office of the Company, and by the payment to the Company by certified or cashier's check of the then applicable Warrant Price. In the event of any exercise of the Warrant, certificates for the Shares so purchased shall be delivered to the Holder within a reasonable time after the Warrant has been so exercised and, unless the Warrant has expired, a new certificate representing the right to purchase the number of Shares, if any, with respect to which this Warrant shall not then have been exercised shall also be issued to the Holder within such time. All such new certificates shall be dated the date hereof and shall be identical to this Certificate except as to the number of Shares issuable pursuant thereto. (c) Restrictions on Exercise. The Warrant may not be exercised if the issuance of the Shares upon such exercise would constitute a violation of any applicable federal or state securities laws or other laws or regulations. As a condition to the exercise of the Warrant, the Company may require the Holder to make such representations and warranties to the Company as may be required by applicable law or regulation. 4. Shares Fully Paid; Reservation of Shares. The Company covenants and agrees that all Shares will, upon issuance and payment in accordance herewith, be fully paid, validly issued and nonassessable. The Company further covenants and agrees that during the Warrant Term the Company will at all times have authorized and reserved for the purpose of issue upon exercise of the Warrant at least the maximum number of Shares as are issuable upon the exercise of the Warrant. 5. Adjustment of Purchase Price and Number of Shares. The number and kind of securities purchasable upon the exercise of the Warrant and the Warrant Price shall be subject to adjustment from time to time upon the happening of certain events, as follows: (a) Dissolution, Sale of Assets, Consolidation, Etc. In the event of the proposed dissolution or liquidation of the Company, or in the event of a proposed sale of all or substantially all of the assets or stock of the Company (other than in the ordinary course of business) or the merger or consolidation of the Company with or into another corporation (any of which shall constitute a "Reorganization"), as a result of which the Company is not the surviving and controlling corporation and in each case while the Warrant remains outstanding and unexpired, the Board of Directors of the Company shall (i) make provision for the assumption of the Warrant by the successor corporation whereby this Certificate shall thereafter evidence the right to purchase such number and kind of securities and other property as would have been issuable or distributable on account of such Reorganization upon or with respect to the securities which were purchasable or would have become purchasable under the Warrant immediately prior to such Reorganization or (ii) declare that the Warrant shall terminate as of a date fixed by the Board of Directors which is at least 30 days after the notice thereof to the Holder and shall give the Holder the right to exercise the Warrant as to all or any part of the Shares, including Shares covered by the Warrant as to which the Warrant would not otherwise be exercisable, provided such exercise does not violate Section 2 hereof. If the Company at any time while the Warrant remains outstanding and unexpired shall reclassify or in any manner change the securities then purchasable upon the exercise of the Warrant, then lawful and adequate provision shall be made whereby this Certificate shall thereafter evidence the right to purchase such number and kind of securities and other property as would have been issuable or distributable on account of such reclassification upon or with respect to the securities which were purchasable or would have become purchasable under the Warrant immediately prior to such reclassification. (b) Subdivision or Combination of Shares. If the Company at any time while the Warrant remains outstanding and unexpired shall subdivide or combine its Common Stock, the Warrant Price shall be adjusted to that price determined by multiplying the Warrant Price in effect immediately prior to such subdivision or combination by a fraction (i) the numerator of which shall be the total number of shares of Common Stock outstanding immediately prior to such subdivision or combination and (ii) the denominator of which shall be the total number of shares of Common Stock outstanding immediately after such subdivision or combination. (c) Certain Dividends and Distributions. If the Company at any time while the Warrant is outstanding and unexpired shall take a record of the holders of its Common Stock for the purpose of: (i) Stock Dividends. Entitling them to receive a dividend payable in, or other distribution without consideration of, Common Stock, then the Warrant Price shall be adjusted to that price determined by multiplying the Warrant Price in effect immediately prior to each dividend or distribution by a fraction (A) the numerator of which shall be the total number of shares of Common Stock outstanding immediately prior to such dividend or distribution and (B) the denominator of which shall be the total number of shares of Common Stock outstanding immediately after such dividend or distribution; or (ii) Distribution of Assets, Securities, etc. Making any distribution without consideration with respect to its Common Stock (other than a cash dividend) payable other than in its Common Stock, the Holder shall, upon the exercise hereof, be entitled to receive, in addition to the number of Shares receivable upon such exercise, and without payment of any additional consideration therefor, such assets or securities as would have been payable to the Holder as owner of that number of Shares receivable by exercise of the Warrant had the Holder been the holder of record of such Shares on the record date for such distribution, and an appropriate provision therefor shall be made a part of any such distribution. (d) Adjustment of Number of Shares. Upon each adjustment in the Warrant Price pursuant to Subsections (b) or (c)(i) of this Section 5, the number of Shares purchasable hereunder shall be adjusted to that number determined by multiplying the number of Shares purchasable upon the exercise of the Warrant immediately prior to such adjustment by a fraction, the numerator of which shall be the Warrant Price immediately prior to such adjustment and the denominator of which shall be the Warrant Price immediately following such adjustment. (e) Notice. In case at any time during the Warrant Term: (i) The Company shall pay any dividend payable in stock upon its Common Stock or make any distribution, excluding a cash dividend, to the holders of its Common Stock; (ii) The Company shall offer for subscription pro rata to the holders of its Common Stock any additional shares of stock of any class or other rights; (iii) There shall be any reclassification of the Common Stock of the Company, or consolidation or merger of the Company with, or sale of all or substantially all of its assets to, another corporation; or (iv) There shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in any one or more of such cases, the Company shall give to the Holder at least ten days' prior written notice (or, in the event of notice pursuant to Section 5(e)(iii), at least 30 days' prior written notice) of the date on which the books of the Company shall close or a record shall be taken for such dividend, distribution or subscription rights or for determining rights to vote in respect to any such reclassification, consolidation, merger, sale, dissolution, liquidation or winding up. Such notice shall also specify, in the case of any such dividend, distribution or subscription rights, the date on which the holders of Common Stock shall be entitled thereto, and such notice shall also specify the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, as the case may be. Each such written notice shall be given personally or by first-class, registered or certified mail or similar delivery service, postage prepaid, addressed to the Holder at the address of the Holder as shown on the books of the Company. (f) No Change in Certificate. The form of this Certificate need not be changed because of any adjustment in the Warrant Price or in the number of Shares purchasable upon exercise of any or all of the Warrant. The Warrant Price or the number of Shares shall be considered to have been so changed as of the close of business on the date of adjustment. 6. Fractional Shares. No fractional Shares will be issued in connection with any exercise of the Warrant, rather, in lieu of such fractional Shares, the Company shall make a cash payment therefor upon the basis of the fair market value of the Shares at the time of such exercise, as determined in good faith by the Company's Board of Directors. 7. Transfer and Exchange of Warrant. Subject to the terms hereof, including, without limitation, Section 8, the Warrant and all rights hereunder are transferable, in whole or in part, on the books of the Company maintained for such purpose at its principal office referred to above by the registered holder hereof in person or by its duly authorized attorney, upon surrender of the Warrant properly endorsed and upon payment of any necessary transfer tax or other governmental charge imposed upon such transfer. Upon any partial transfer, the Company will issue and deliver to such holder a new Warrant or Warrants with respect to the shares of Common Stock not so transferred. Each taker and holder of the Warrant, by taking or holding the same, consents and agrees that the Warrant when endorsed in blank shall be deemed negotiable and that when the Warrant shall have been so endorsed, the holder hereof may be treated by the Company and all other persons dealing with the Warrant, as the absolute owner hereof for any purpose and as the person entitled to exercise the rights represented hereby, or to the transfer hereof on the books of the Company, any notice to the contrary notwithstanding; but until such transfer on such books, the Company may treat the registered holder hereof as the owner for all purposes. The Warrant is exchangeable at such office for a Warrant or Warrants for the same aggregate number of shares of Common Stock, all new Warrants to represent the right to purchase such number of shares as the holder hereof shall designate at the time of such exchange. 8. Restrictions on Transfer of Warrant. The Holder of the Warrant, by acceptance hereof, agrees that, absent an effective notification under Regulation A or a registration statement, in either case under the Securities Act of 1933, covering the disposition of the Warrant or Common Stock issued, or issuable upon exercise hereof, such Holder will not sell, transfer, pledge or hypothecate any or all of such Warrant or Common Stock, as the case may be, unless such sale or transfer will be exempt from the registration and prospectus delivery requirements of the Securities Act of 1933 and applicable state securities laws, and such Holder consents to the Company making a notification on its records or giving instructions to any transfer agent of the Warrant or such Common Stock in order to implement such restriction on transferability. 9. No Rights as Stockholder. The holder of the Warrant, as such, shall not be entitled to vote or receive dividends or be considered a stockholder of the Company for any purpose, nor shall anything in the Warrant be construed to confer on such holder, as such, any rights of a stockholder of the Company or any right to vote, give or withhold consent to any corporate action, to receive notice of meetings of stockholders, to receive dividends or subscription rights or otherwise. 10. Miscellaneous Provisions. (a) Replacement. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of the Warrant and, in the case of loss, theft or destruction, on delivery of any indemnity agreement or bond reasonably satisfactory in form and amount to the Company or, in the case of mutilation, on surrender and cancellation of the Warrant, the Company at its expense will execute and deliver, in lieu of the Warrant, a new Warrant of like tenor. (b) Governing Law. The Warrant shall be governed by and construed and enforced in accordance with the internal laws, and not the laws pertaining to choice or conflicts of laws, of the State of Delaware. Dated as of April 20, 1998. DAY RUNNER, INC. By: Mark A. Vidovich, Chief Executive Officer ATTEST: Catherine F. Ratcliffe, Secretary SM01.303537.1 DAY RUNNER, INC. SUBSCRIPTION FORM (To be completed and signed only upon exercise of the Warrant) TO: Day Runner, Inc. 15295 Alton Parkway Irvine, CA 92618 Attention: Secretary The undersigned, the holder of the attached Warrant, hereby irrevocably elects to exercise the right of purchase represented by such Warrant for, and to purchase thereunder, _______* shares of Day Runner, Inc. Common Stock and herewith makes payment of $___________ for those shares, and requests that the certificate(s) for those shares be issued in the name of and delivered to: (Please print name and address) Dated: Signature Print Name Schedule of Warrantholders James P. Higgins Jill Tate Higgins Charles Miller Alan R. Rachlin Boyd I. Willat - -------- * Insert here the number of shares called for on the face of the Warrant (or in the case of partial exercise, that portion as to which the Warrant is being exercised), without making any adjustment for additional Common Stock or any other securities or property which, under the adjustment provisions of the Warrant, may be deliverable upon exercise. EX-21 9 SUBSIDIARIES OF THE REGISTRANT > DAY RUNNER, INC. SUBSIDIARIES ================================================= ============================== Subsidiary Jurisdiction ================================================= ============================== Day Runner Direct, Inc. Delaware ================================================= ============================== DRI International Holdings, Inc. Delaware ================================================= ============================== Day Runner International Limited United Kingdom ================================================= ============================== Day Runner Hong Kong Limited Hong Kong ================================================= ============================== Day Runner de Mexico, S.A. de C.V. Mexico ================================================= ============================== DR UK Holdings Limited United Kingdom - ------------------------------------------------- ============================== Day Runner UK plc United Kingdom - ------------------------------------------------- ============================== - ------------------------------------------------- ============================== Ultima Distribution Inc. Ontario, Canada Ontario Corp. # 1292456 - ------------------------------------------------- ============================== ================================================= ============================== Day Runner Australia PTY Ltd. New South Wales, Australia ACN 081 980 627 ================================================= ============================== EX-27 10 FDS --
5 This schedule contains summary financial information extracted from the consolidated balance sheet and the consolidated statement of income filed as part of the Annual Report on Form 10-K and is qualified in its entirety by reference to such report on Form 10-K. 0000853102 Day Runner, Inc. 1,000 Year Jun-30-1998 Jun-30-1997 Jun-30-1998 2,923 0 42,484 9,942 37,610 84,569 26,972 15,084 101,179 26,594 0 0 0 14 74,518 101,179 167,841 167,841 80,663 80,663 61,609 0 (172) 25,741 9,833 15,908 0 0 0 15,908 1.38 1.27
EX-23 11 CONSENT OF AUDITORS INDEPENDENT AUDITORS' REPORT ----------------------------- We consent to the incorporation by reference in Post-Effective Amendment No. 1 to Registration Statement Nos. 33-46969 and 33-53422 of Day Runner, Inc. on Form S-8, in Registration Statement No. 33-670792 of Day Runner, Inc. on Form S-8, in Post-Effective Amendment No.1 to Registration Statement No. 33-61186 of Day Runner, Inc. on Form S-3, and in Registration Statement Nos. 33-84036, 80819, 333-20247 and 333-34887 of Day Runner, Inc. on Form S-8 of our reports dated August 17, 1998 (September 25, 1998 as to Note 20), appearing in the Annual Report on Form 10-K of Day Runner, Inc. for the year ended June 30, 1998. /s/ DELOITTE & TOUCHE LLP Los Angeles, California September 30, 1998 -----END PRIVACY-ENHANCED MESSAGE-----