10-Q 1 a2038419z10-q.txt FORM 10-Q FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 (Mark One) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2000 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . --------------- --------------- Commission file number 0-19835 DAY RUNNER, INC. (Exact name of registrant as specified in its charter) DELAWARE 95-3624280 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 2750 WEST MOORE AVENUE FULLERTON, CALIFORNIA 92833 (Address and zip code of principal executive offices) (714) 680-3500 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate the number of shares outstanding of each of the registrant's classes of Common Stock, as of the latest practicable date:

DAY RUNNER, INC. AND SUBSIDIARIES INDEX

2 DAY RUNNER, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) ASSETS

See accompanying notes to consolidated financial statements. 3 DAY RUNNER, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

See accompanying notes to consolidated financial statements. 4 DAY RUNNER, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS)

See accompanying notes to consolidated financial statements. 5 DAY RUNNER, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (THREE AND SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999) 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES The accompanying condensed consolidated balance sheet as of December 31, 2000 and condensed consolidated statements of operations for the three and six months ended December 31, 2000 and 1999 and the condensed consolidated statements of cash flows for the six months ended December 31, 2000 and 1999 of Day Runner, Inc. and subsidiaries ("the Company") are unaudited but, in the opinion of management, include all adjustments consisting of normal, recurring accruals necessary for a fair presentation of the financial position and the results of operations for such periods. Certain information and footnote disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America have been omitted pursuant to the requirements of the Securities and Exchange Commission, although the Company believes that the disclosures included in the consolidated financial statements included herein are adequate to make the information therein not misleading. The consolidated financial statements included herein should be read in conjunction with the Company's audited consolidated financial statements for the year ended June 30, 2000, and the notes thereto, which are included in the Company's Annual Report on Form 10-K. The results of operations for the three and six months ended December 31, 2000 are not necessarily indicative of the results for a full year. The seasonality of the Company's financial results and the unpredictability of the factors affecting such seasonality make the Company's quarterly and yearly financial results difficult to predict and subject to significant fluctuation. Effective November 1, 2000, the Company and its lenders renegotiated and restructured the Company's debt and entered into a new loan agreement. The Company would not have been in compliance with certain terms of the new loan agreement had the Company and its lenders not entered into a waiver and amendment agreement as of January 31, 2001, waiving a requirement for an installment payment on a term loan and amending certain terms and conditions of the loan agreement. The existing waiver provided in the waiver and amendment agreement expires on February 28, 2001. The Company's bank debt is classified as short-term in its December 31, 2000 consolidated balance sheet because the waiver provided in the waiver and amendment agreement continues for less than a one-year period. The Company's difficulties in meeting its loan agreement covenants and financing needs, its recurring losses from operations and its negative working capital position raise substantial doubt about its ability to continue as a going concern. The Company is working with its lenders to extend its existing waiver agreement but has no commitment from its lenders after the expiration of the existing waiver on February 28, 2001. The Company's continued existence is dependent upon several factors including the Company's ability to negotiate an extension of the existing waiver agreement and there can be no assurance that the Company will succeed in these negotiations and/or obtain further waivers of the new loan agreement. 6 The Company's results have been adversely affected by lower sales levels primarily to the Company's customers in foreign markets and secondarily to its retail customers in the U.S. The Company believes that major factors causing lower sales include the Company's decision to de-emphasize sales of certain less profitable products and to certain less profitable channels, the reduction of certain kinds of promotional activity, increased competition from substitutes for paper-based organizers and the continuing efforts of the Company's U.S. retailers to minimize on-hand inventories and increase inventory turns. The Company's high degree of leverage coupled with its lower sales and profitability could have important consequences to the Company, including but not limited to the following: (i) the Company's ability to obtain necessary financing may be impaired in the future, (ii) a substantial portion of the Company's cash flow from operations must be used for debt service, thereby reducing the funds available for other purposes and (iii) the Company may be more vulnerable to economic or market downturns, be limited in its ability to withstand competitive pressures and be unable to attract and/or retain key personnel. The Company's near and long-term operating strategies are focused on stabilizing profitable sales volume in its retail markets, exploiting product innovation and promotions where appropriate profitability is achieved, and aggressively reducing costs to better position the Company to compete under current market conditions. The Company remains highly focused on providing products of recognizable value to the consumer, while removing any product and service costs not recognized or valued by the ultimate consumer. In addition, the Company is aggressively pursuing the disposal or sale of unproductive assets, as well as the potential sale of substantial assets, to reduce the Company's present debt burden. The Company is also continuing its exploration of possible strategic alternatives. These business conditions have been considered in evaluating the recoverability and classification of recorded asset and liability accounts. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or to amounts and classifications of liabilities that may be necessary should the entity be unable to continue as a going concern (see Note 5). NEW ACCOUNTING PRONOUNCEMENTS - Effective July 1, 2000, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which was amended by SFAS No. 137 and SFAS No. 138. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, collectively referred to as derivatives, and for hedging activities. SFAS No. 133 requires the recognition of all derivatives as either assets or liabilities in the statement of financial position and the measurement of those instruments at fair value. The adoption of SFAS 133 did not had an impact on the financial position or results of operations of the Company because the Company does not have any derivative activity. In December 1999, the Securities and Exchange Commission (the "SEC") published Staff Accounting Bulletin No. 101 ("SAB 101"), REVENUE RECOGNITION IN FINANCIAL STATEMENTS, effective for the fourth fiscal quarter of fiscal years beginning after December 15, 1999. SAB 101 provides guidance in applying generally accepted accounting principles to selected revenue recognition issues in financial statements. The Company is assessing the impact that this bulletin may have on the consolidated financial statements. 7 2. INVENTORIES Inventories consist of the following (in thousands):

3. LINE OF CREDIT On September 23, 1998, the Company entered into a $160,000,000 Revolving Loan Agreement (the "Loan Agreement") with Wells Fargo Bank, National Association ("Wells Fargo") as the sole bank and as agent (in its agency capacity, the "Agent"). The loan facility was syndicated with a group of lenders in December 1998. On October 12, 1999, the Company, the Agent and the lenders amended and restated the Loan Agreement (the "First Amended Loan Agreement"). The First Amended Loan Agreement converted the entire revolving loan availability into a term loan portion of $90,444,000 and a maximum revolving loan availability of $29,556,000. The term loan's maturity date was September 30, 2001 and the revolving credit loan facility matured on October 31, 2000. The maturity date of the revolving credit loan facility could have been automatically extended through September 30, 2001, if the Company, as of June 30, 2000, had complied with certain requirements, including a minimum EBITDA, a minimum fixed charge coverage ratio and a maximum funded senior debt ratio, as defined in the First Amended Loan Agreement. The Company did not satisfy these conditions. As a result of entering into the First Amended Loan Agreement, unamortized deferred financing fees incurred under the Loan Agreement of approximately $955,000 were charged to interest expense in October 1999. On December 8, 2000, the Company, the Agent and the lenders amended and restated the First Amended Loan Agreement effective as of November 1, 2000 (the "Second Amended Loan Agreement") and waived any Events of Default that had previously occurred and not been waived. The Second Amended Loan Agreement (i) converted the $87,164,000 then outstanding aggregate principal amount of term loans issued under the First Amended Loan Agreement into three loans: two term loans (in the principal amounts of $20,000,000 and $40,000,000, denoted as Term Loan A and Term Loan B, respectively) and a convertible term loan (in the principal amount of $27,164,000); and (ii) provided for a revolving credit facility that was initially $25,000,000 and adjusts periodically as follows: $25,000,000 to and including December 8, 2000; $19,500,000 from and including December 9, 2000 to and including December 31, 2000; $15,000,000 from and including January 1, 2001 to and including March 31, 2002; and $0 from and after April 1, 2002. The maximum amount that can be borrowed under the revolving credit facility is the lowest of (i) the amount of the revolving facility then in effect, (ii) "Available Amount," and (iii) from and after February 1, 2001, the Borrowing Base 8 as set forth in the most recent Borrowing Base Certificate submitted by the Company, as adjusted by the Agent. The "Available Amount" is defined in the Second Amended Loan Agreement as: October 1, 2000 through December 8, 2000, $25,000,000; December 9, 2000 through December 31, 2000, $19,500,000; January 1, 2001 through February 28, 2001, $12,000,000; March 1, 2001 through April 30, 2001, $8,000,000; May 1, 2001 through June 30, 2001, $10,000,000; July 1, 2001 through December 31, 2001, $15,000,000; January 1, 2002 through March 31, 2002, $10,000,000; and April 1, 2002 through July 31, 2002, $0. The maturity date for Term Loans A and B, the convertible term loan and the revolving loans issued under the Second Amended Loan Agreement is July 31, 2002. As a result of entering into the Second Amended Loan Agreement, unamortized deferred financing fees incurred under the First Amended Loan Agreement of approximately $762,000 were charged to interest expense in December 2000. At December 31, 2000, the Company had $100,678,000 outstanding under the Second Amended Loan Agreement. Term Loan B had a $30,000,000 installment due January 31, 2001 (to which installment any asset sales proceeds were to be applied). The Company was unable to make this installment payment and entered into a waiver and amendment agreement with its lenders that waives this payment requirement until February 28, 2001. The convertible term loan is convertible by the lenders, in whole or in part, into common stock of the Company from and after February 1, 2001 at the rate of $1.15 of the principal amount of the convertible term loan for each share of the Company's common stock. The maximum number of shares of the Company's common stock into which the convertible term loan can be converted is 23,200,000 shares. The rate of interest on the loans under the Second Amended Loan Agreement is as follows: on revolving credit loans and Term Loan A, the Agent's prime rate (9.5% at December 31, 2000) plus two percent per annum; on Term Loan B, prior to June 30, 2001, the Agent's prime rate plus four percent per annum (except for cash interest paid on the portion of Term Loan B denoted as Foreign Currency Loans), and on and following June 30, 2001, and for cash interest paid on Foreign Currency Loans, the Agent's prime rate plus two percent per annum; on the convertible term loan, the Agent's prime rate plus four percent per annum. Interest is payable monthly in cash except that, at the option of the Company, through and including June 30, 2001, interest accrued on Term Loan B may be paid in the form of a note having terms identical to Term Loan B (except for interest on the portion of Term Loan B denoted as Foreign Currency Loans which must be paid in cash), and interest accrued on the convertible term loan may at any time be paid in the form of a note having terms identical to the convertible term loan. There is a commitment fee of 0.675 percent (67.5 basis points) payable quarterly on the average daily amount by which the Available Amount exceeds the average daily principal amount of outstanding revolving loans. During the six months ended December 31, 2000, the weighted-average interest rate was 11.4%. The weighted-average interest rate at December 31, 2000 was 12.5%. The Second Amended Loan Agreement is secured by the Company's assets and includes, among other things, financial covenants requiring maintenance of (i) a minimum fixed charge coverage ratio (which becomes operative June 30, 2001), (ii) a minimum EBITDA (which became operative December 31, 2000), and a (iii) maximum funded senior debt coverage ratio (which becomes operative June 30, 2001), all as defined in the Second Amended Loan Agreement. The Second Amended Loan Agreement also limits, among other things, the incurrence of liens and other indebtedness, mergers, consolidations, the sales of assets, lease obligations, annual capital expenditures, advances, investments and loans by the Company and its subsidiaries, dividends, stock repurchases and certain transactions with affiliates. 9 The Company and its lenders entered into a waiver and amendment agreement as of January 31, 2001, that waives, until February 28, 2001, the requirement in the Second Amended Loan Agreement that the Company make a $30,000,000 installment payment on Term Loan B on January 31, 2001. The waiver and amendment agreement also amends certain other terms and conditions of the Second Amended Loan Agreement, including a reduction in the "Available Amount" to $8,000,000 for the period February 1, 2001 through February 28, 2001. The Company's bank debt is classified as short-term on its December 31, 2000 consolidated balance sheet because the existing waiver agreement expires on February 28, 2001. 4. LOAN NOTES In November 1998, loan notes in the amount of (pound)1,477,000 (US $2,201,000) were issued in connection with the Filofax acquisition. These loan notes are unsecured obligations of the Company's U.K. subsidiary and bear interest at LIBOR (6.8% at December 31, 2000) less 1%. Interest on the Loan Notes is paid annually in arrears beginning September 30, 1999. The Loan Notes are redeemable, in whole or in part, at the holder's option on each interest payment date. Unless they have previously been redeemed, all Loan Notes will be redeemed on September 30, 2003. As of December 31, 2000, (pound)1,447,000 (US $2,156,000) of the Loan Notes had been redeemed. 5. RESTRUCTURING AND IMPAIRMENT CHARGES AND RELATED ACCRUALS In response to disappointing results over a number of quarters, the Company implemented a restructuring plan in fiscal 2000. As part of its restructuring plan, the Company (i) reduced headcount; (ii) closed its Irvine, California headquarters and consolidated those activities into its Fullerton, California distribution center; (iii) closed its manufacturing facility in the United Kingdom and moved those activities to subcontractors; (iv) closed its Little Rock, Arkansas manufacturing plant and sold certain of the operating assets; (v) retained Crossroads, LLC, an interim management firm; (vi) discontinued approximately 600 products; (vii) closed its Australian subsidiary and began distributing its products through a third party distributor in Australia and (viii) closed its Mexican manufacturing plant and moved those activities to its Asian vendors. The Company is continuing its restructuring plan through fiscal 2001. During the six months ended December 31, 2000, the Company recorded $17,791,000 in restructuring and impairment charges. Included in such charge is $2,896,000 in restructuring charges relating primarily to the closure of the Company's manufacturing plant, which consist of $2,121,000 in facilities closure costs and related write down of inventories and $775,000 in severance costs. Of the restructuring charges, $2,860,000 is included in cost of goods sold and $36,000 is included in restructuring and impairment charges for the six months ended December 31, 2000. No restructuring charges were recorded during the six months ended December 31, 1999. The severance cost recorded during the six months ended December 31, 2000 were the results of 256 termination. The following table summarizes the restructuring activity that flowed through accrued expenses during the six months ended December 31, 2000 (in thousands): 10

In addition, during the fourth quarter of fiscal 2000, the Company decided to pursue the sale of substantial assets. As a result, the Company performed an impairment analysis and concluded that the carrying value of certain of these assets was in excess of their fair value. Due to a change in circumstances during the quarter ended December 31, 2000, the Company updated its impairment analysis and concluded that the carrying value of certain of these assets had been further impaired. Fair value was estimated based on estimated proceeds less related selling costs. The proceeds were estimated using a variety of assumptions, and there can be no assurance that the actual proceeds will not differ significantly from these estimates. As a result of the impairment analyses performed by the Company at fiscal year end June 30, 2000 and during the quarter ended December 31, 2000, the Company recorded impairment charges of $14,895,000 and $59,337,000 during the six months ended December 31, 2000 and the fiscal year ended June 30, 2000, respectively. Operations that may be eliminated due to the Company's pursuit of the sale of certain assets, as part of the restructuring of operations, which are included in the consolidated financial statements as of and for the six months ended December 31, are as follows (in thousands):

6. EARNINGS PER SHARE Basic earnings per share are computed by dividing net loss by the weighted-average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net loss by the sum of the weighted-average number of common shares outstanding for the period plus the assumed exercise of all dilutive securities. As the Company's stock price during the periods ended December 31, 2000 and 1999, was below the exercise prices of all options and warrants, basic weighted-average shares equals diluted weighted-average shares. 11 7. COMPREHENSIVE LOSS Comprehensive loss is summarized as follows (in thousands):

8. SEGMENT INFORMATION The Company's operating segments have similar economic characteristics and, as such, the Company has aggregated five (six during the six months ended December 31, 1999) operating segments into a single reportable segment in conformity with SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. During the six months ended December 31, 2000, the business activities of the Company's operating segment were the development, manufacturing and marketing of paper-based organizers for the retail market. In December 2000, the Company closed its primary manufacturing plant and moved those activities to its Asian vendors. In addition, the Company also develops, manufactures and markets a number of related organizing products including telephone/address books, business accessories, products for students and organizing and other wallboards. The Company groups its products into three categories: organizers and planners; their refills, which include calendars, other pages and accessories; and related organizing products. The following table sets forth, for the periods indicated, approximate net sales by product category (in thousands):

12 9. OPERATIONS IN FOREIGN COUNTRIES The following is a summary of the financial activity of the Company by geographical area (in thousands):

10. CONTINGENCIES The Company is not a party to any litigation that, in the opinion of management, would reasonably be expected to have a materially adverse effect on the consolidated financial statements. 13 11. STATEMENTS OF CASH FLOWS Supplemental disclosure of cash flow information (in thousands):

14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH, AND IS QUALIFIED IN ITS ENTIRETY BY, THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS QUARTERLY REPORT. HISTORICAL RESULTS AND PERCENTAGE RELATIONSHIPS AMONG ANY AMOUNTS INCLUDED IN THE CONSOLIDATED FINANCIAL STATEMENTS ARE NOT NECESSARILY INDICATIVE OF TRENDS IN OPERATING RESULTS FOR ANY FUTURE PERIOD. Since the Company's introduction of the first Day Runner System organizer in 1982, the Company's revenues have been generated by sales primarily of organizers and planners and secondarily of refills. For a number of years, the Company focused the majority of its product development, sales and marketing efforts on the U.S. office products channel and the U.S. mass market channel. With the October 30, 1998 acquisition of Filofax, the Company substantially increased its emphasis on markets outside the U.S. The office products channel, the mass market channel and sales to foreign customers accounted for 37.1%, 22.1% and 32.7%, respectively, and 40.6%, 18.9% and 32.3%, respectively, of net sales for the three and six months ended December 31, 2000, respectively. Effective November 1, 2000, the Company and its lenders renegotiated and restructured the Company's debt and entered into a new loan agreement. The Company would not have been in compliance with certain terms of the new loan agreement had the Company and its lenders not entered into a waiver and amendment agreement as of January 31, 2001, waiving a requirement for an installment payment on a term loan and amending certain terms and conditions of the loan agreement. The existing waiver provided in the waiver and amendment agreement expires on February 28, 2001. The Company's bank debt is classified as short-term in its December 31, 2000 consolidated balance sheet because the waiver provided in the waiver and amendment agreement continues for less than a one-year period. The Company's difficulties in meeting its loan agreement covenants and financing needs, its recurring losses from operations and its negative working capital position raise substantial doubt about its ability to continue as a going concern. The Company is working with its lenders to extend its existing waiver agreement but has no commitment from its lenders after the expiration of the existing waiver on February 28, 2001. The Company's continued existence is dependent upon several factors including the Company's ability to negotiate an extension of the existing waiver agreement and there can be no assurance that the Company will succeed in these negotiations and/or obtain further waivers of the new loan agreement. The Company's results have been adversely affected by lower sales levels primarily to the Company's customers in foreign markets and secondarily to its retail customers in the U.S. The Company believes that major factors causing lower sales include the Company's decision to de-emphasize sales of certain less profitable products and to certain less profitable channels, the reduction of certain kinds of promotional activity, increased competition from substitutes for paper-based organizers and the continuing efforts of the Company's U.S. retailers to minimize on-hand inventories and increase inventory turns. The Company's high degree of leverage coupled with its lower sales and profitability could have important consequences to the Company, including but not limited to the following: (i) the Company's ability to obtain necessary financing may be impaired in the future, (ii) a substantial portion of the Company's cash flow from operations must be used for debt service, thereby 15 reducing the funds available for other purposes and (iii) the Company may be more vulnerable to economic or market downturns, be limited in its ability to withstand competitive pressures and be unable to attract and/or retain key personnel. The Company's near and long-term operating strategies are focused on stabilizing profitable sales volume in its retail markets, exploiting product innovation and promotions where appropriate profitability is achieved, and aggressively reducing costs to better position the Company to compete under current market conditions. The Company remains highly focused on providing products of recognizable value to the consumer, while removing any product and service costs not recognized or valued by the ultimate consumer. In addition, the Company is aggressively pursuing the disposal or sale of unproductive assets, as well as the potential sale of substantial assets, to reduce the Company's present debt burden. The Company is also continuing its exploration of possible strategic alternatives. These business conditions have been considered in evaluating the recoverability and classification of recorded asset and liability accounts. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or to amounts and classifications of liabilities that may be necessary should the entity be unable to continue as a going concern (see Note 5). RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentages that selected statement of operations items bear to net sales and the percentage change in the dollar amounts of such items.

16 The following tables set forth, for the periods indicated, the Company's approximate net sales by product category and distribution channel and as a percentage of total net sales. DISTRIBUTION CHANNEL:

PRODUCT CATEGORY:

THREE MONTHS ENDED DECEMBER 31, 2000 COMPARED WITH THE THREE MONTHS ENDED DECEMBER 31, 1999 NET SALES. Net sales consist of revenues from gross product shipments net of allowances for returns, rebates and credits. In the second quarter of fiscal 2001, net sales decreased by $9,050,000, or 15.7%, compared with the second quarter of fiscal 2000 due to a decrease in net sales to foreign customers, a reduction of certain kinds of promotional activity and the Company's decision to de-emphasize sales of certain less profitable products and to certain less profitable customers. Net sales to foreign customers decreased by $7,669,000, or 32.6%, and net sales to miscellaneous customers grouped together as "other" decreased by $2,660,000, or 40.3%. These decreases were partially offset by an increase in net sales to mass market customers of $804,000, or 8.1%, and an increase in net sales to office products customers of $475,000, or 2.7%. Net sales of organizers and planners decreased by $10,268,000, or 38.5%, and net sales of refills decreased by $1,354,000, or 5.6%. Partially offsetting these decreases was an increase in net sales of related organizing products of $2,572,000, or 40.1%. 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 and other allowances, purchasing and manufacturing efficiencies, tariffs, duties and inventory carrying costs. Gross profit as a percentage of net sales increased from 45.3% in the second quarter of fiscal 2000 to 47.9% in the second quarter of fiscal 2001. Included in cost of goods sold in the second quarter of fiscal 2001 is $2,832,000 in restructuring charges related to the closure of the Company's Mexican manufacturing plant. Without such costs, the Company gross profit for the second quarter of fiscal 2001 would have increased to 53.7%. The improvement in the Company's gross margin, without the restructuring charges, is due primarily to a reduction in product returns and secondarily to a shift in the product mix. The decrease in product returns is due primarily to a more conservative sell-in approach and 17 secondarily to the reduction in promotional activities. The shift in the product mix is due primarily to the Company's decision to de-emphasize less profitable promotional sales and focus on higher margin product sales. OPERATING EXPENSES. Total operating expenses increased by $6,587,000, or 25.5%, in the second quarter of fiscal 2001 compared with the second quarter of fiscal 2000 and increased as a percentage of net sales from 44.9% to 66.9%. The increase in operating expenses resulted solely from restructuring and impairment charges of $14,847,000 recorded in the second quarter of fiscal 2001. Partially offsetting this increase is a decrease in selling, marketing and distribution expenses and general and administrative expenses. Excluding the restructuring and impairment charges, operating expenses would have decreased by $8,260,000, or 32.0%. Restructuring and impairment charges totaled $14,847,000 during the second quarter of fiscal 2001. As a result of the Company's restructuring activities in fiscal 2001, the Company recorded $2,784,000 in restructuring charges, which consist of $2,071,000 in facilities closure costs and the related write down of inventories and $713,000 in severance costs. Of the restructuring charges, $48,000 is included in restructuring and impairment charges as a benefit and $2,832,000 is included in cost of goods sold. Due to a change in circumstances during the quarter ended December 31, 2000, the Company updated the impairment analysis that was performed at the end of fiscal 2000, due to its decision to pursue the sale of substantial assets, and concluded that the carrying value of the assets held for sale had been further impaired. The fair value was estimated based on estimated proceeds less related selling costs. The amount in excess of fair value of $14,895,000 is recorded in restructuring and impairment charges. There were no restructuring and impairment charges recorded during the second quarter of fiscal 2000. Selling, marketing and distribution expenses decreased by $7,384,000, and from 31.0% to 21.6% as a percentage of net sales, primarily because of the decrease in sales and secondarily to a reduction in promotional activity. General and administrative expenses decreased by $876,000 but increased from 13.9% to 14.7% as a percentage of net sales. The increase in general and administrative expenses as a percentage of net sales is due to the increase in consulting, legal and related costs which is due to the Company's ongoing performance problems and the negotiations related to its credit facility. Consulting, legal and related costs for the quarter ended December 31, 2000 were $1,239,000 compared with $215,000 for the quarter ended December 31, 1999. NET INTEREST EXPENSE. Net interest expense increased by $444,000, or 11.6%, in the second quarter of fiscal 2001 compared with the second quarter of fiscal 2000 due to an increase in the average interest rate. During the quarter ended December 31, 2000, the weighted-average interest rate was 12.8% compared with 9.9% for the quarter ended December 31, 1999. INCOME TAXES. The Company's second quarter fiscal 2001 effective tax rate was 12.1%, compared with 25.1% for the second quarter of fiscal 2000. Although the Company's U.S. income will be offset by net operating losses, the tax provision represents taxes based on income earned in foreign tax jurisdictions. The effective tax rate is higher than may be expected due to the Company's inability to utilize these taxes as foreign tax credits. 18 SIX MONTHS ENDED DECEMBER 31, 2000 COMPARED WITH THE SIX MONTHS ENDED DECEMBER 31, 1999 NET SALES. During the six months ended December 31, 2000, net sales decreased by $19,079,000, or 17.4%, primarily due to a decrease in net sales to foreign customers, a reduction of certain kinds of promotional activity and the Company's decision to de-emphasize sales of certain less profitable products and to certain less profitable customers. Net sales to foreign customers decreased by $12,986,000, or 30.8%, net sales to mass market customers decreased by $4,126,000, or 19.4%, net sales to miscellaneous customers grouped together as "other" decreased by $1,164,000, or 13.6% and net sales to office products customers declined by $803,000, or 2.1%. Net sales of organizers and planners decreased by $9,528,000, or 19.9%, net sales of refills decreased by $6,626,000, or 15.5% and net sales of related organizing products decreased by $2,925,000, or 15.7%. GROSS PROFIT. Gross profit as a percentage of net sales increased from 47.5% in the first six months of fiscal 2000 to 50.1% in the first six months of fiscal 2001. Included in cost of goods sold in the first six months of fiscal 2001 is $2,860,000 in restructuring charges related to the closure of the Company's Mexican manufacturing plant. Without such costs, the Company gross profit for the first six months of fiscal 2001 would have increased to 53.2%. The improvement in the Company's gross margin, without the restructuring charges, is due primarily to a reduction in product returns and secondarily to a shift in the product mix. The decrease in product returns is due primarily to a more conservative sell-in approach and secondarily to the reduction in promotional activities. The shift in the product mix is due primarily to the Company's decision to de-emphasize less profitable promotional sales and focus on higher margin product sales. OPERATING EXPENSES. Total operating expenses increased by $1,977,000, or 4.1%, in the first six months of fiscal 2001 compared with the first six months of fiscal 2000 and increased as a percentage of net sales from 44.3% to 55.8%. The increase in operating expenses resulted solely from restructuring and impairment charges of $14,931,000 recorded in the first six months of fiscal 2001. Partially offsetting this increase is a decrease in selling, marketing and distribution expenses and general and administrative expenses. Excluding the restructuring and impairment charges, operating expenses would have decreased by $12,954,000, or 26.8%. Restructuring and impairment charges totaled $14,931,000 during the first six months of fiscal 2001. As a result of the Company's restructuring activities in fiscal 2001, the Company recorded $2,896,000 in restructuring charges, which consist of $2,121,000 in facilities closure costs and the related write down of inventories and $775,000 in severance costs. Of the restructuring charges, $36,000 is included in restructuring and impairment charges and $2,860,000 is included in cost of goods sold. Due to a change in circumstances during the quarter ended December 31, 2000, the Company updated the impairment analysis that was performed at the end of fiscal 2000, due to its decision to pursue the sale of substantial assets, and concluded that the carrying value of the assets held for sale had been further impaired. The fair value was estimated based on estimated proceeds less related selling costs. The amount in excess of fair value of $14,895,000 is recorded in restructuring and impairment charges. There were no restructuring and impairment charges recorded during the first six months of fiscal 2000. 19 Selling, marketing and distribution expenses decreased by $11,723,000, and from 30.6% to 24.1% as a percentage of net sales, primarily because of the decrease in sales and secondarily to a reduction in promotional activity. General and administrative expenses decreased by $1,231,000 but increased from 13.7% to 15.2% as a percentage of net sales. The increase in general and administrative expenses as a percentage of net sales is due to the increase in consulting, legal and related costs which is due to the Company's ongoing performance problems and the negotiations related to its credit facility. Consulting, legal and related costs for the first six months of fiscal 2001 were $2,649,000 compared with $415,000 for the first six months of fiscal 2000. NET INTEREST EXPENSE. Net interest expense increased by $1,189,000, or 19.9%, in the first six months of fiscal 2001 compared with the first six months of fiscal 2000 due to an increase in the average interest rate. During the six months ended December 31, 2000, the weighted-average interest rate was 11.4% compared with 8.7% for the six months ended December 31, 1999. INCOME TAXES. The Company's first six months of fiscal 2001 effective tax rate was 18.3% compared with 15.0% for the first six months of fiscal 2000. Although the Company's U.S. income will be offset by net operating losses, the tax provision represents taxes based on income earned in foreign tax jurisdictions. The effective tax rate is higher than may be expected due to the Company's inability to utilize these taxes as foreign tax credits. 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 March and June quarters 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 GENERAL. The Company's cash and cash equivalents at December 31, 2000 increased to $11,405,000 from $3,960,000 at June 30, 2000. During the six months ended December 31, 2000, net cash of $5,519,000 was provided by operating activities, net cash of $1,198,000 was provided by investing activities and net cash of $579,000 was provided by financing activities. Of the $5,519,000 net amount provided by the Company's operating activities, $14,895,000 was provided by impairment charges, $11,930,000 was provided by a decrease in inventories, $7,871,000 was provided by the provision for doubtful accounts and sales returns and 20 other allowances, $4,687,000 was provided by depreciation and amortization, $2,533,000 was provided by an increase in income taxes payable and $1,823,000 was provided by an decrease in income taxes receivable. These amounts were partially offset by an increase of $18,148,000 in accounts receivable and a decrease of $6,012,000 in accounts payable. Accounts receivable (net) at December 31, 2000 increased by 54.5% from the fiscal 2000 year-end amount due primarily to an increase in net sales for the quarter ended December 31, 2000 compared with the quarter ended June 30, 2000. Compared to the December 31, 1999 amount, accounts receivable (net) decreased by 31.8% due primarily to a decrease in net sales for the quarter ended December 31, 2000 compared with the quarter ended December 31, 1999. Inventories at December 31, 2000 decreased by 35.0% from the fiscal 2000 year-end amount and by 43.1% from the December 31, 1999 amount primarily because of a reduction in the number of products offered and secondarily because of the Company's concentrated efforts to control and manage inventories more efficiently. The $1,198,000 provided by the Company's investing activities was provided by proceeds of $1,676,000 received upon the disposition of property and equipment which amount was partially offset by $513,000 used to acquire property and equipment. The $579,000 net amount provided by the Company's financing activities was provided by net borrowings under the line of credit of $1,884,000 which was partially offset by $1,116,000 used for the payment of financing fees in connection with the renegotiated and amended loan agreement. BANK LOANS. On September 23, 1998, the Company entered into a $160,000,000 Revolving Loan Agreement (the "Loan Agreement") with Wells Fargo Bank, National Association ("Wells Fargo") as the sole bank and as agent (in its agency capacity, the "Agent"). The loan facility was syndicated with a group of lenders in December 1998. On October 12, 1999, the Company, the Agent and the lenders amended and restated the Loan Agreement (the "First Amended Loan Agreement"). The First Amended Loan Agreement converted the entire revolving loan availability into a term loan portion of $90,444,000 and a maximum revolving loan availability of $29,556,000. The term loan's maturity date was September 30, 2001 and the revolving credit loan facility matured on October 31, 2000. The maturity date of the revolving credit loan facility could have been automatically extended through September 30, 2001, if the Company, as of June 30, 2000, had complied with certain requirements, including a minimum EBITDA, a minimum fixed charge coverage ratio and a maximum funded senior debt ratio, as defined in the First Amended Loan Agreement. The Company did not satisfy these conditions. As a result of entering into the First Amended Loan Agreement, unamortized deferred financing fees incurred under the Loan Agreement of approximately $955,000 were charged to interest expense in October 1999. On December 8, 2000, the Company, the Agent and the lenders amended and restated the First Amended Loan Agreement effective as of November 1, 2000 (the "Second Amended Loan Agreement") and waived any Events of Default that had previously occurred and not been waived. The Second Amended Loan Agreement (i) converted the $87,164,000 then outstanding aggregate principal amount of term loans issued under the First Amended Loan Agreement into three loans: 21 two term loans (in the principal amounts of $20,000,000 and $40,000,000, denoted as Term Loan A and Term Loan B, respectively) and a convertible term loan (in the principal amount of $27,164,000); and (ii) provided for a revolving credit facility that was initially $25,000,000 and adjusts periodically as follows: $25,000,000 to and including December 8, 2000; $19,500,000 from and including December 9, 2000 to and including December 31, 2000; $15,000,000 from and including January 1, 2001 to and including March 31, 2002; and $0 from and after April 1, 2002. The maximum amount that can be borrowed under the revolving credit facility is the lowest of (i) the amount of the revolving facility then in effect, (ii) "Available Amount," and (iii) from and after February 1, 2001, the Borrowing Base as set forth in the most recent Borrowing Base Certificate submitted by the Company, as adjusted by the Agent. The "Available Amount" is defined in the Second Amended Loan Agreement as: October 1, 2000 through December 8, 2000, $25,000,000; December 9, 2000 through December 31, 2000, $19,500,000; January 1, 2001 through February 28, 2001, $12,000,000; March 1, 2001 through April 30, 2001, $8,000,000; May 1, 2001 through June 30, 2001, $10,000,000; July 1, 2001 through December 31, 2001, $15,000,000; January 1, 2002 through March 31, 2002, $10,000,000; and April 1, 2002 through July 31, 2002, $0. The maturity date for Term Loans A and B, the convertible term loan and the revolving loans issued under the Second Amended Loan Agreement is July 31, 2002. As a result of entering into the Second Amended Loan Agreement, unamortized deferred financing fees incurred under the First Amended Loan Agreement of approximately $762,000 were charged to interest expense in December 2000. At December 31, 2000, the Company had $100,678,000 outstanding under the Second Amended Loan Agreement. Term Loan B had a $30,000,000 installment due January 31, 2001 (to which installment any asset sales proceeds were to be applied). The Company was unable to make this installment payment and entered into a waiver and amendment agreement with its lenders that waives this payment requirement until February 28, 2001. The convertible term loan is convertible by the lenders, in whole or in part, into common stock of the Company from and after February 1, 2001 at the rate of $1.15 of the principal amount of the convertible term loan for each share of the Company's common stock. The maximum number of shares of the Company's common stock into which the convertible term loan can be converted is 23,200,000 shares. The rate of interest on the loans under the Second Amended Loan Agreement is as follows: on revolving credit loans and Term Loan A, the Agent's prime rate (9.5% at December 31, 2000) plus two percent per annum; on Term Loan B, prior to June 30, 2001, the Agent's prime rate plus four percent per annum (except for cash interest paid on the portion of Term Loan B denoted as Foreign Currency Loans), and on and following June 30, 2001, and for cash interest paid on Foreign Currency Loans, the Agent's prime rate plus two percent per annum; on the convertible term loan, the Agent's prime rate plus four percent per annum. Interest is payable monthly in cash except that, at the option of the Company, through and including June 30, 2001, interest accrued on Term Loan B may be paid in the form of a note having terms identical to Term Loan B (except for interest on the portion of Term Loan B denoted as Foreign Currency Loans which must be paid in cash), and interest accrued on the convertible term loan may at any time be paid in the form of a note having terms identical to the convertible term loan. There is a commitment fee of 0.675 percent (67.5 basis points) payable quarterly on the average daily amount by which the Available Amount exceeds the average daily principal amount of outstanding revolving loans. During the six months ended December 31, 2000, the weighted-average interest rate was 11.4%. The weighted-average interest rate at December 31, 2000 was 12.5%. 22 The Second Amended Loan Agreement is secured by the Company's assets and includes, among other things, financial covenants requiring maintenance of (i) a minimum fixed charge coverage ratio (which becomes operative June 30, 2001), (ii) a minimum EBITDA (which became operative December 31, 2000), and a (iii) maximum funded senior debt coverage ratio (which becomes operative June 30, 2001), all as defined in the Second Amended Loan Agreement. The Second Amended Loan Agreement also limits, among other things, the incurrence of liens and other indebtedness, mergers, consolidations, the sales of assets, lease obligations, annual capital expenditures, advances, investments and loans by the Company and its subsidiaries, dividends, stock repurchases and certain transactions with affiliates. The Company and its lenders entered into a waiver and amendment agreement as of January 31, 2001, that waives, until February 28, 2001, the requirement in the Second Amended Loan Agreement that the Company make a $30,000,000 installment payment on Term Loan B on January 31, 2001. The waiver and amendment agreement also amends certain other terms and conditions of the Second Amended Loan Agreement, including a reduction in the "Available Amount" to $8,000,000 for the period February 1, 2001 through February 28, 2001. The Company's bank debt is classified as short-term on its December 31, 2000 consolidated balance sheet because the existing waiver agreement expires on February 28, 2001. FOREIGN CURRENCY. Certain of the Company's international operations conduct business in whole or in part in foreign currencies, and this can result in significant gains or losses as a result of fluctuations in foreign currency exchange rates. The Company's exposure to the impact of foreign currency fluctuations increased as a result of the Filofax acquisition because the acquisition significantly expanded the Company's international operations. Included in general and administrative expenses in the consolidated statements of operations is $418,000 and $583,000 of net foreign exchange losses for the six months ended December 31, 2000 and 1999, respectively. A single currency called the Euro was introduced in certain countries in Europe on January 1, 1999, but will not, at least for the foreseeable future, be introduced in the United Kingdom. The use of a single currency may affect the ability of Day Runner and other companies to price their products differently in various European markets. The Company is evaluating the impact of the single currency in these markets. ADEQUACY OF CAPITAL. As a result of its losses in the last two fiscal years, the Company required waiver agreements to certain terms of the Amended Loan Agreement which led to the renegotiation and restructuring of its debt in the Second Amended Loan Agreement. The Second Amended Loan Agreement was effective as of November 1, 2000. The Company and its lenders entered into a waiver and amendment agreement as of January 31, 2001 for certain terms and conditions of Second Amended Loan Agreement, including an installment payment on a term loan. The existing waiver agreement expires on February 28, 2001. The Company's liquidity is dependent upon its ability to renegotiate or obtain additional waivers of certain terms and conditions of the Second Amended Loan Agreement and/or its ability to obtain financing from alternative sources. The Company is working with its lenders to renegotiate the Second Amended Loan Agreement but has no commitment from its lenders after the expiration of the existing waiver on February 28, 2001. There can be no assurance that the Company will be able to renegotiate its loan agreement or obtain financing from other sources. The failure to obtain future financing would have a material adverse effect on the Company's business, financial condition, results of operations and cash flow. 23 FORWARD-LOOKING STATEMENTS With the exception of actual reported financial results and other historical information, the statements contained in this Quarterly Report on Form 10-Q ("Quarterly Report") constitute "forward-looking statements" within the meaning of the federal securities laws and involve a number of risks and uncertainties that may cause actual events and results to differ materially from those described in the forward-looking statements. Such statements are based on current expectations and involve known and unknown risks and uncertainties and certain assumptions, referred to below, and are indicated by words or phrases such as "anticipate," "estimate," "project," "expect," "believes," "will," "intends" and similar words or phrases. These forward-looking statements are based on management's expectations as of the date set forth on the signature page of this document, and the Company does not undertake any obligation to update any of these statements. There can be no assurance that the Company's actual future performance will meet its expectations. The Company is subject to a number of risks and its future operating results are difficult to predict and subject to significant fluctuations. These include but are not limited to: (1) the Company's liquidity is dependent upon its ability to successfully renegotiate the terms of its bank loan agreement and/or obtain further waivers of such agreement and there can be no assurance that the Company will succeed in renegotiating and/or obtaining waivers of such agreement; (2) the Company has reported substantial losses over the last two fiscal years and there can be no assurance that the Company's substantial restructuring plans will be successful in returning the Company to profitability; (3) the Company's efforts to control costs may not prove sufficient to prevent future increases in operating expenses in dollars or as a percentage of sales; (4) the Company may not be able to counteract the effects of large customers' inventory tightening in any significant way which may result in lower than expected sales and/or higher than expected product returns; (5) the Company may not correctly anticipate the product mix of retailers' "just-in-time" inventory demands, resulting in the temporary unavailability of the products in demand by retailers and lower sales; and (6) there can be no assurance that the Company's new products will meet with market acceptance. Additional factors that may cause future events and results to differ materially from the Company's current expectations include, among others: the timing and size of orders from large customers; timing and size of orders for new products; competition from both paper-based and technology-based organizing products and services; consumer demand; market acceptance of new products; general economic conditions; the health of the retail environment; foreign exchange rate fluctuations; supply and manufacturing constraints; supplier performance; and changes in the Company's effective tax rate. Among the effects of these factors may be: lower than anticipated sales; higher than anticipated product returns and/or excess inventory; negative effects on consumer purchases; lower than anticipated gross profit; higher than anticipated operating expenses; and lower than anticipated net income. For additional risks and more detailed explanations of factors that may cause the Company's results of operations to vary materially from current expectations, see the Company's Form 10-K for the year ended June 30, 2000 filed with the SEC. 24 FOREIGN CURRENCY EXPOSURE The Company's reporting currency is the U.S. dollar, and interest and principal payments on its long-term debts will be in U.S. dollars and pounds Sterling. A portion of revenues and operating costs are derived from sales and operations outside the United States and are incurred in a number of different currencies. Accordingly, fluctuations in currency exchange rates may have a significant effect on the Company's results of operations and balance sheet data. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes regarding the Company's market risk position from the information provided in Form 10-K for the fiscal year ended June 30, 2000. PART II --OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) On December 14, 2000, the Company held its 2000 Annual Meeting of Stockholders (the "Annual Meeting"). 25 (b) At the Annual Meeting, the Company's stockholders elected the following persons as directors of the Company. The number of votes cast for each director, as well as the number of votes withheld, are listed opposite each director's name.

(c) At the Annual Meeting, the stockholders approved, with 1,522,038 votes cast in favor, 141,934 votes cast against, 9,847 abstentions and 0 broker nonvotes, the amendment to the Company's 1995 Stock Option Plan to increase the aggregate number of shares authorized for issuance thereunder from 480,000 to 555,000 shares. (d) At the Annual Meeting, with 1,660,757 votes cast in favor, 8,689 votes cast against and 4,373 abstentions, the stockholders ratified the appointment of Deloitte & Touche LLP as independent auditors for the Company for the fiscal year ending June 30, 2001. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3.1 Certificate of Incorporation of the Registrant, as amended(1) 3.2 Bylaws of the Registrant(2) 10.1 Fiscal 2001 Officer Bonus Plan (b) Reports on Form 8-K On December 15, 2000, the Company filed with the Commission a Current Report on Form 8-K. ---------------------------- (1) Incorporated by reference to the Registrant's Annual Report on Form 10-K (File No. 0-19835) filed with the Commission on September 27, 2000. (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. 26 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: February 14, 2001 DAY RUNNER, INC. By: /s/ JOHN F. AUSURA ------------------------ John F. Ausura Chief Executive Officer By: /s/ DAVID A. WERNER -------------------------- David A. Werner Executive Vice President & Chief Financial Officer 27

DAY RUNNER INC 10-Q