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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 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: 0-21878
CYRK, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3081657
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 EDGEWATER DRIVE
WAKEFIELD, MASSACHUSETTS 01880
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (781) 876-5800
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
COMMON STOCK, $0.01 THE NASDAQ STOCK MARKET
PAR VALUE PER SHARE
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. [ ]
At February 28, 2001, the aggregate market value of voting stock held by
non-affiliates of the registrant was $40,193,950.
At February 28, 2001, 16,112,791 shares of the registrant's common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S PROXY STATEMENT TO BE FILED PURSUANT TO SECTION
14(a) OF THE SECURITIES EXCHANGE ACT OF 1934 IN CONNECTION WITH THE REGISTRANT'S
2001 ANNUAL MEETING OF STOCKHOLDERS HAVE BEEN INCORPORATED BY REFERENCE IN PART
III OF THIS REPORT.
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PART I
ITEM 1. BUSINESS.
GENERAL DEVELOPMENT OF THE BUSINESS
Cyrk, Inc. (referred to herein as "Cyrk" or "the Company") is a full-service
promotional marketing company specializing in the design and development of
promotional products and sales promotions. Cyrk was founded in 1976 and is a
Delaware corporation. When founded, Cyrk was engaged primarily in the design,
manufacture and sale of custom screen printed sports apparel and accessories.
Cyrk also provided private label apparel and accessories to a wide variety of
established brands, and developed its own "Cyrk" brand of apparel that was sold
to sports and specialty retailers and resort-destination shops. In 1990, the
Company broadened its design and manufacturing expertise to include a focus on
custom-designed promotional products and the development of its international
production and worldwide sourcing capabilities.
Beginning in 1996 the Company extended its focus in the promotional product
industry by making a series of acquisitions of companies engaged in the
corporate catalog and advertising specialty segment of the promotion industry.
These acquired companies, operating within the Company's Corporate Promotions
Group ("CPG"), provide promotional products and services for inclusion in
corporate trade and employee catalog programs. Additionally, in 1997 Cyrk
expanded into the consumer promotion arena with its acquisition of Simon
Marketing, Inc. ("Simon"), a Los Angeles-based marketing and promotion agency
that specializes in kid and family marketing. Simon provides marketing programs,
promotional products and packaging and promotional games to clients including
McDonald's(R)(1) Corporation ("McDonald's"), Chevron Products Company, a
division of Chevron U.S.A. ("Chevron"), Toys "R" Us and Hallmark Cards, Inc.
("Hallmark").
Cyrk recently expanded its capabilities to include Internet business-to-business
brand marketing. Cyrk's comprehensive e-commerce solutions include Internet and
intranet electronic malls, point-based loyalty systems, electronic catalogs,
online promotional marketing programs and Web design.
In February 1998, the Company announced a restructuring plan to streamline its
business, thereby eliminating the majority of its screen print business, and its
private label and retail operations. In April 2000, the Company implemented a
realignment of its management team to enable the Company to maximize the value
of its promotions business and its new Internet subsidiary. In May 2000, the
Company announced that it would further restructure the Company by integrating
and streamlining the operations of its Custom Product and Licensing group,
("CP&L"), its division that provides custom designed product for large consumer
promotions, and its CPG division into one product-focused business unit.
In July 2000, the Company announced that it had retained investment bankers
Credit Suisse First Boston ("CS First Boston") (formerly Donaldson, Lufkin &
Jenrette) to advise the Company in exploring strategic alternatives. As a result
of these efforts, the Company completed the sale of its CPG business in February
2001.
Cyrk's promotional products and services are sold to consumer product and
services companies seeking to promote their brand names and corporate identities
and to build brand loyalty. Cyrk custom designs unique, high-impact product in a
broad spectrum of categories including apparel and accessories, hard goods, toys
and electronics, in materials ranging from fabrics and plastics to metals and
paper. Cyrk's customers include McDonald's (for its Happy Meal(R)(1) promotions,
among others), Philip Morris Incorporated ("Philip Morris") (for its
Marlboro(R)(2) brand, among others), and other companies with recognized brands.
The programs developed and managed by Cyrk typically reward the consumer with
promotional products that are distributed upon redemption of proofs of purchase
or as gifts with the purchase of other products . Cyrk believes that its
expertise in design, manufacturing and sourcing have allowed Cyrk to
successfully execute large, worldwide high-impact promotional programs.
(1) MCDONALD'S AND HAPPY MEAL are registered trademarks of McDonald's
Corporation.
(2) MARLBORO is a registered trademark of Philip Morris Incorporated.
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1998 CORPORATE RESTRUCTURING
In February 1998, the Company announced a plan to restructure its worldwide
operations. As a result of this restructuring plan, the Company consolidated
certain operating facilities, discontinued its private label and Cyrk brand
business, divested its investment in an apparel joint venture, and eliminated
approximately 450 positions worldwide.
1999 YUCAIPA INVESTMENT
In November 1999, The Yucaipa Companies ("Yucaipa"), a Los Angeles-based
investment firm, invested $25 million into Cyrk in exchange for 25,000 shares of
a new series A convertible preferred stock and a warrant to purchase an
additional 15,000 shares of series A convertible preferred stock. In connection
with the investment, which was approved by Cyrk's stockholders, Cyrk's board of
directors was increased to seven and three designees of Yucaipa, including
Yucaipa's managing partner, Ronald W. Burkle, were elected to Cyrk's board and
Mr. Burkle was elected chairman. In addition, effective as of the closing of
this investment, Patrick D. Brady and Allan I. Brown were each elected
Co-President and Co-Chief Executive Officer of Cyrk. Additionally, the Company
entered into a Management Agreement with Yucaipa whereby Yucaipa provides Cyrk
with management and consultation services in exchange for an annual fee of
$500,000 per year.
2000 MANAGEMENT REALIGNMENT
In April 2000, Cyrk reorganized its management team to better position the
Company to streamline the operations of its promotional products business and to
maximize the potential of the Company's new Internet subsidiary. Co-President
and Co-Chief Executive Officer Allan I. Brown was given responsibility for the
global operations of the Company's traditional promotional products business and
Simon. Co-President and Co-Chief Executive Officer Patrick D. Brady was named
head of the Company's new e-business subsidiary.
2000 CORPORATE RESTRUCTURING
In May 2000, the Company announced that it would implement a plan to restructure
its operations by integrating and streamlining its traditional promotional
products business into one product-focused business unit. As a result of the
restructuring plan, the Company eliminated 85 positions or 7% of its domestic
workforce. The restructuring plan was substantially complete by the end of 2000,
and was terminated with respect to the CPG business as a result of the February
2001 sale of CPG.
SALE OF CPG
In July 2000, the Company retained the services of investment bankers CS First
Boston to advise the Company in exploring strategic alternatives, a step the
Company saw as necessary to its efforts to maximize the value of the Company's
core businesses and to generate more consistent revenues and earnings growth. In
December 2000, the Company decided to sell its CPG division and, in February
2001, the Company announced that it had sold its CPG division, which was
comprised principally of two subsidiaries of Cyrk: Tonkin, Inc. ("Tonkin") and
Cyrk Acquisition Corp. The sale is described in the Company's report filed on
Form 8-K dated February 15, 2001 which is incorporated herein by reference. In
connection with the sale, the Company agreed not to compete in the CPG business
in the United States for a period of five years after the closing of the sale.
PRODUCTS AND SERVICES
Promotional Product Programs. Cyrk provides product-driven high-impact
promotional programs to its customers. The goal of the promotional programs is
to enhance corporate identity, develop brand awareness, and build customer or
employee loyalty. Cyrk has achieved this goal for many of its customers and
continues to develop and manage promotions that generate growth for customer
brands and further develop customer and employee loyalty.
Most of the promotional products used in a typical program are (1) distributed
to consumers in connection with the sale of another product, (2) issued upon
redemption of coupons evidencing the purchase of other products, (3) sold in
conjunction with the sale of another product or (4) sold as a complement to
other products. Promotional products are also frequently provided to retailers
that carry the brand name products to reward or incentivise sales efforts and
foster goodwill towards employees.
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The advertising and marketing campaigns of many companies include the
promotional product concept within the design of their overall corporate
development. Cyrk believes that increasing numbers of companies are seeking to
leverage and enhance the value of their brands by demanding promotional products
that are superior in quality and design, distinctive, contemporary, integrated
with their other products and marketing efforts, and immediately identifiable
with their primary product brands and services. Together, Cyrk and its customers
recognize that promotional programs are a vital component of a successful
marketing strategy. Increasingly, companies are turning to outside professionals
to provide the expertise required in complex areas outside their core
businesses, such as the design of custom promotional products, and the
development and implementation of promotional programs. Cyrk believes that
because of its ability to provide integrated services including product and
program design; loyalty and direct marketing services; licensing; market
research; direct manufacturing, sourcing and program fulfillment and its unique
creative approach, it is able to provide highly superior promotional products
that become integral components of an effective, impactful promotional program.
The promotional products industry is fragmented, consisting of designers, buying
agents, jobbers, manufacturers, importers and distribution companies.
Consequently, a company implementing a large promotional product program
generally must deal with multiple vendors. In addition, there are often numerous
intermediaries between such a company and the manufacturer of the promotional
products. As a result, a company may have only limited control over the design,
quality and delivery of the products. This lack of control over manufacturing
sources coupled with the use of multiple vendors may produce inefficiencies and
result in promotional products that are inconsistent with the company's other
products and brand image. Cyrk's promotional products and services are designed
to address these inefficiencies in the market and to provide a comprehensive,
professional program to major companies seeking to leverage their brand.
Cyrk has successfully custom designed and developed proprietary product
including toys, apparel and accessories for numerous successful consumer
promotional programs including the Marlboro Gear and Marlboro Unlimited(R)(3)
promotions.
In 1999, under its license arrangement with Ty Inc. ("Ty"), Cyrk developed and
marketed licensed Beanie Babies(R)(4) products to consumers. Effective January
1, 2000, the Company became a strategic marketing agent for Ty and provides Ty
with product and advisory, design, development and/or creative services on a
project by project basis.
Through its Simon subsidiary, the Company provides promotional agency services
and integrated marketing solutions including loyalty marketing, licensing,
strategic and calendar planning, game design and execution, premium development
and production management. Simon is one of the largest creators, developers and
procurers of promotional games and toys in the world. In addition to providing
its products and services to McDonald's, Simon's customer base includes Chevron,
Toys "R" Us and Hallmark.
Internet Capabilities. Cyrk recognized an opportunity to extend its promotional
success to the Internet, and in February 2000 announced its intention to create
an Internet subsidiary to service the changing needs of its customers. Cyrk
possesses technological expertise in the e-commerce area that includes Internet
and intranet electronic malls, point-based loyalty systems, electronic catalogs,
online promotional marketing programs and Web design.
Manufacturing and Sourcing. The quality and timely delivery of Cyrk's products
depend on Cyrk's ability to control the manufacturing process. Cyrk seeks to
maintain such control by maintaining a physical presence in the Far East to
oversee the offshore manufacturing of Cyrk's products by independent Asian
factories. Cyrk's Asian operations perform a variety of services for Cyrk, such
as selecting manufacturers, communicating product specifications and quality
control standards, monitoring the manufacturing process, performing on-site
quality control inspections, transferring letters of credit and coordinating
export clearance and shipping.
(3) MARLBORO UNLIMITED is a registered trademark of Philip Morris Incorporated.
(4) BEANIE BABIES is a registered trademark of Ty Inc.
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Cyrk has no long-term contracts with manufacturing sources and often competes
with other companies for production facilities and import quota capacity. In
addition, certain Asian manufacturers require that a letter of credit be posted
at the time a purchase order is placed. Cyrk believes that its policy of
outsourcing a substantial portion of its manufacturing requirements allows it to
achieve increased production flexibility while reducing Cyrk's capital
expenditures and costs of maintaining a substantial production work force. Cyrk
is required by certain of its customers to ensure that the independent
manufacturers that Cyrk contracts with are in compliance with codes of conduct
relating to minimum wage and hour guidelines, minimum worker age requirements
and health and safety requirements. Cyrk works with its customers and
independent auditing firms to monitor compliance with these codes. If Cyrk were
not able to contract with a sufficient number of manufacturers that are in
compliance with these codes, or if compliance with these codes were to
significantly increase the cost of production, Cyrk's business might be
adversely affected. Cyrk's business is subject to risks normally associated with
conducting business abroad, such as foreign government regulations, political
unrest, disruptions or delays in shipments, fluctuations in foreign currency
exchange rates and changes in the economic conditions in the countries in which
Cyrk's manufacturing sources are located. If any such factors were to render the
conduct of business in a particular country undesirable or impractical, or if
Cyrk's current foreign manufacturing sources were to cease doing business with
Cyrk for any reason, Cyrk's business and operating results could be adversely
affected. Cyrk's business is also subject to the risks associated with the
imposition of additional trade restrictions related to imported products,
including quotas, duties, taxes and other charges or restrictions.
SIGNIFICANT CUSTOMER RELATIONSHIPS
In recent years, Cyrk's business has been concentrated with McDonald's, Philip
Morris and Ty. Cyrk's business with promotional customer clients such as
McDonald's and Philip Morris is based upon purchase orders placed by the
customers. McDonald's, along with certain other customers, order a fixed
quantity of product to be delivered by an agreed date. While these orders may be
canceled prior to delivery of the product, the customer is responsible for any
costs associated with the canceled order. Philip Morris and certain other
customers place purchase orders from time to time during the course of a
promotion. These promotional product customers are not committed to making a
minimum number of purchases. For all promotional product customers, the actual
purchases depend upon a number of factors including, without limitation, the
duration of the promotion and expected consumer redemption rates. Consequently,
Cyrk's level of net sales is difficult to predict accurately and may fluctuate
greatly from quarter to quarter.
Cyrk conducts its business with McDonald's through its subsidiary, Simon. Simon
designs and implements marketing promotions for McDonald's, which include games,
sweepstakes, premiums, events, contests, coupon offers, sports marketing,
licensing and promotional retail items. Simon's net sales from its business with
McDonald's consist of a combination of sales of promotional products and various
service fees. In September 1999, the Company agreed with McDonald's that the
Company would no longer provide administrative services in connection with
McDonald's promotional programs in Europe effective January 1, 2000. As a result
of this action, the Company's total sales for 2000 declined by approximately 15%
from previous levels. The net profit contributed by the fees for these services
has historically not been material to the overall results of operations.
Therefore, the absence of these sales did not have a material adverse effect on
the Company's profitability. Net sales to McDonald's accounted for approximately
65%, 61% and 57% of Cyrk's consolidated net sales in fiscal 2000, 1999 and 1998,
respectively.
Philip Morris accounted for approximately 9%, 9% and 11% of Cyrk's consolidated
net sales in 2000, 1999 and 1998, respectively. A substantial majority of those
sales relate to Marlboro Unlimited promotions. The United States Food and Drug
Administration ("FDA") issued final regulations with respect to promotional
programs relating to tobacco products which, among other things, proposed to ban
gifts based on proof of purchase of tobacco products and the use of tobacco
brand names on non-tobacco products. In addition, on November 23, 1998, certain
tobacco companies, including Philip Morris, entered into a settlement agreement
with 46 states and five U.S. territories that, among other things, prohibits the
use of brand names by the tobacco companies in connection with their marketing,
distribution, licensing and sales of apparel and other merchandise. Each of the
regulations and the settlement could have a material adverse effect on Cyrk's
business with Philip Morris and on its results of operations. For a description
of the FDA regulations and the tobacco settlement, and their potential impact on
Cyrk's business with Philip Morris, please refer to Cyrk's Amended Cautionary
Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities
Litigation Reform Act of 1995.
Through its licensing arrangements with Ty, Cyrk developed and marketed licensed
Beanie Babies products in 1999 and 1998. Sales of Beanie Babies related products
accounted for approximately 11% and 7% of Cyrk's consolidated net sales for 1999
and 1998, respectively. Effective January 1, 2000, the Company became a
strategic marketing agent for Ty and provides Ty with product and advisory,
design,
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development and/or creative services on a project by project basis. Ty related
business accounted for approximately 1% of Cyrk's consolidated net sales for
2000. Given that the Company is providing these services on a project by project
basis, the Company's future revenues and earnings associated with the Ty
relationship are difficult to predict.
INTERNATIONAL SALES
International sales accounted for approximately 34%, 38% and 36% of Cyrk's
consolidated net sales in 2000, 1999 and 1998, respectively. International sales
are currently made through Cyrk's account representatives in the United States
as well as through Cyrk's German, United Kingdom and Hong Kong subsidiaries.
COMPETITION
The promotional products industry is highly fragmented and competitive, and some
of Cyrk's competitors have substantially greater financial and other resources
than Cyrk. Cyrk's promotional products and services compete with the services of
in-house advertising, promotional products and purchasing departments and with
designers and vendors of single or multiple product lines. The promotional
product services of Cyrk also compete for advertising dollars with other media
such as television, radio, newspapers, magazines and billboards. Entry into the
promotional product industry is not difficult and new competitors are
continually commencing operations.
The primary methods of competition are creativity in product design, quality and
style of products, prompt delivery, customer service, price, financial strength,
and an ability to provide a full range of innovative Web-based marketing
services. Cyrk believes that it currently competes favorably in each of the
foregoing areas and that its ability to provide a full range of integrated
services gives it a competitive advantage.
BACKLOG
At December 31, 2000, Cyrk had written purchase orders for $236.9 million as
compared to $312.1 million at December 31, 1999. Cyrk's purchase orders are
generally subject to cancellation with limited penalty and are also subject to
agreements with certain customers that limit gross margin levels. Therefore,
Cyrk cautions that the backlog amounts may not necessarily be indicative of
future revenues or earnings.
TESTING AND QUALITY CONTROL
Cyrk bears the risk of non-conforming goods sold to its customers and, in the
case of outsourced products, generally has recourse against the manufacturer.
Because many products are sourced in Asia, Cyrk relies primarily on monitoring
and inspection activities to ensure quality control rather than on any remedies
it may have for defective goods.
Cyrk, through independent laboratories, performs extensive tests to ensure that
materials and fabrics meet all applicable United States and foreign safety and
quality standards, including flammability and child safety laws. In some cases
additional tests are performed by or on behalf of Cyrk's customers.
IMPORTS AND IMPORT RESTRICTIONS
A substantial amount of net sales of Cyrk in 2000 was attributable to products
manufactured in Asia. The importation of such products is subject to the
constraints imposed by bilateral agreements between the United States and
substantially all of the countries from which Cyrk imports goods. These
agreements impose quotas that limit the quantity of certain types of goods,
including textile products imported by Cyrk, which can be imported into the
United States from those countries. Such agreements also allow the United States
to impose, under certain conditions, restraints on the importation of categories
of merchandise that, under the terms of the agreements, are not subject to
specified limits.
Cyrk's continued ability to source products that it imports may be adversely
affected by additional bilateral and multilateral agreements, unilateral trade
restrictions, significant decreases in import quotas, the disruption of trade
from exporting countries as a result of political instability or the imposition
of additional duties, taxes and other charges or restrictions on imports.
Products imported by Cyrk from China currently receive the same preferential
tariff treatment accorded goods from countries granted "normal trade relations"
status. However, the renewal of China's most favored nation treatment has been a
contentious political issue for several years and there can be no assurance that
such status will be continued. If China were to lose its "normal trade
relations" status, goods imported from China will be subject to significantly
higher duty rates which would increase the cost of goods from China. In 2000, a
substantial amount of Cyrk's net sales were from products manufactured in China.
EMPLOYEES
At December 31, 2000, Cyrk had approximately 1,306 full-time employees. Cyrk's
work force is not unionized and Cyrk believes that its relations with its
employees are good.
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ITEM 2. PROPERTIES.
In August 2000, Cyrk relocated its principal executive and certain sales and
administrative offices from its Gloucester, Massachusetts facilities to offices
in Wakefield, Massachusetts. At December 31, 2000, Cyrk occupied approximately
47,900 square feet under a lease with an unrelated party that expires in March
2005 and has an annual base rent of approximately $623,000. Pursuant to a six
month transition services agreement arising out of the February 2001 CPG sale,
Cyrk is subletting a portion of the Wakefield property to the buyer.
Cyrk also leases approximately 120,000 square feet of warehouse space in
Danvers, Massachusetts under the terms of a lease which expires in December 2011
and has an annual base rent of approximately $460,000. Cyrk uses the warehouse
for inventory storage and to perform fulfillment services for certain of its
customers. This facility is owned by a trust of which Patrick D. Brady, Cyrk's
Co-Chief Executive Officer and Co-President, is both a trustee and beneficiary.
As a result of the CPG sale in February 2001, the buyer became the primary
obligor under this lease, however, Cyrk remains liable under this lease to the
extent that the buyer does not perform any of its obligations under the lease.
Related to its Simon operations, Cyrk leases an aggregate of approximately
136,000 square feet of office space in Los Angeles, Chicago and Atlanta pursuant
to leases which expire in January 2002 through December 2010. The annual base
rent of these leases is approximately $2,689,000.
At December 31, 2000, Tonkin leased approximately 132,000 square feet of
warehouse, production and office space in Monroe, Washington attributable to its
Tonkin operations pursuant to a lease which expires in September 2007. The
annual base rent of this lease is approximately $623,000. Additionally, Cyrk
Acquisition Corp. leased approximately 20,800 square feet of warehouse and
office space in Norwood, Massachusetts which is used for certain of its
advertising specialty operations, pursuant to a lease which expires in July
2001. As a result of the CPG sale in February 2001, these leases were assumed by
the buyer.
Cyrk also leases approximately 12,000 square feet of office space in New York
City, pursuant to a lease which expires in July 2001.
In addition to its domestic lease facilities, Cyrk leases a total of
approximately 60,500 square feet of European office and warehouse space in
Frankfurt, London, Munich and Paris, and, leases an aggregate of approximately
52,600 square feet of Asian office and warehouse space in Hong Kong, Korea,
Taiwan and Tokyo under leases which expire in April 2001 through December 2007.
For a summary of Cyrk's minimum rental commitments under all noncancelable
operating leases as of December 31, 2000, see notes to the consolidated
financial statements.
ITEM 3. LEGAL PROCEEDINGS.
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
NONE
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EXECUTIVE OFFICERS OF THE REGISTRANT
The following are the names, ages, positions with Cyrk and a brief description
of the business experience during the last five years of the executive officers
of Cyrk, all of whom serve until they resign or are removed from such offices by
the Board of Directors:
PATRICK D. BRADY (45): Co-Chief Executive Officer and Co-President. Mr. Brady is a founder of Cyrk and has served as
one of its directors since its incorporation in 1990. Mr. Brady served as the Treasurer of
Cyrk from May 1990 until May 1993, and has also served as Cyrk's Chief Operating Officer from
May 1993 until November 1999 and its Chief Financial Officer from May 1993 to September 1994.
Mr. Brady was elected President in May 1993 and Chief Executive Officer in December 1998. In
November 1999, he was elected Co-Chief Executive Officer and Co-President.
ALLAN I. BROWN (60): Co-Chief Executive Officer and Co-President. Mr. Brown has been the Chief Executive Officer of
our Simon Marketing, Inc. subsidiary since 1975. In November 1999, he was elected Co-Chief
Executive Officer and Co-President and to Cyrk's Board of Directors
TED L. AXELROD (45): Executive Vice President. Mr. Axelrod joined Cyrk in July 1995 to direct Cyrk's corporate
strategy and development efforts. He was elected an Executive Vice President of Cyrk in
September 1997. From August 1987 to July 1995, he held various positions including Managing
Director and Head of Mergers and Acquisitions of BNY Associates, Incorporated, an investment
banking subsidiary of The Bank of New York Company, Inc. (formerly BNE Associates, Inc., a
subsidiary of The Bank of New England, N.A.).
DOMINIC F. MAMMOLA (45): Executive Vice President and Chief Financial Officer. Mr. Mammola was elected an Executive Vice
President of Cyrk in September 1997. He has served as Vice President and Chief Financial
Officer of Cyrk since September 1994.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's stock is traded on The Nasdaq Stock Market under the symbol CYRK.
The following table presents, for the periods indicated, the high and low sales
prices of the Company's common stock as reported by The Nasdaq Stock Market's
National Market.
2000 1999
High Low High Low
---- --- ---- ---
First Quarter $13.63 $7.00 $8.00 $5.38
Second Quarter 9.31 4.31 6.88 6.00
Third Quarter 7.50 2.94 5.88 4.63
Fourth Quarter 4.47 1.81 12.00 6.44
As of February 28, 2001, the Company had approximately 330 holders of record
(representing approximately 5,500 beneficial owners) of its common stock. The
last reported sale price of the Company's common stock on February 28, 2001 was
$2.91.
The Company has never paid cash dividends, other than series A preferred stock
distributions in 2000 and stockholder distributions of Subchapter S earnings
during 1993 and 1992, and none are contemplated in the foreseeable future (other
than the dividends required to be paid by the Company pursuant to the terms of
its redeemable preferred stock - see notes to consolidated financial statements)
as the Company currently intends to retain its earnings to finance future
growth. In addition, the Company's ability to pay cash dividends is limited
pursuant to the terms of its credit facilities.
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ITEM 6. SELECTED FINANCIAL DATA.
SELECTED INCOME For the Years Ended December 31,
STATEMENT DATA: 2000 1999 1998 1997(4) 1996
---- ---- ---- ---- ----
(In thousands, except per share data)
Net sales $768,450 $988,844 $757,853 $558,623 $250,901
Net income (loss) (69,715)(1) 11,136(2) (3,016)(3) 3,236 438
Earnings (loss) per
common share - basic (4.43)(1) 0.70(2) (0.20)(3) 0.26 0.04
Earnings (loss) per
common share - diluted (4.43)(1) 0.67(2) (0.20)(3) 0.25 0.04
SELECTED BALANCE December 31,
SHEET DATA: 2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In thousands)
Working capital $ 60,371 $110,823 $ 87,517 $ 61,314 $100,565
Total assets 252,435 369,148 337,341 313,845 190,239
Long-term obligations 6,587 9,156 12,099 9,611 --
Redeemable preferred
stock 25,500 25,000 -- -- --
Stockholders' equity 116,176 186,077 177,655 160,353 124,347
(1) Includes $50,103 of pre-tax loss on sale of business and $6,395 of pre-tax
restructuring and nonrecurring charges. See notes to consolidated financial
statements.
(2) Includes $1,675 of pre-tax nonrecurring charges. See notes to consolidated
financial statements.
(3) Includes $15,288 of pre-tax restructuring and nonrecurring charges. See
notes to consolidated financial statements.
(4) Includes the results of operations of acquired companies from the
acquisition dates.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
From time to time, the Company may provide forward-looking information such as
forecasts of expected future performance or statements about the Company's plans
and objectives, including certain information provided below. These
forward-looking statements are based largely on the Company's expectations and
are subject to a number of risks and uncertainties, certain of which are beyond
the Company's control. The Company wishes to caution readers that actual results
may differ materially from those expressed in any forward-looking statements
made by, or on behalf of, the Company including, without limitation, as a result
of factors described in the Company's Amended Cautionary Statement for Purposes
of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act
of 1995, filed as Exhibit 99.1 to the Company's second quarter 2000 Report on
Form 10-Q which is incorporated herein by reference.
GENERAL
The Company is a full-service promotional marketing company, specializing in the
design and development of high-impact promotional products and programs. The
majority of the Company's revenue is derived from the sale of products to
consumer product companies seeking to promote their brand and build customer
loyalty as well as products sold to consumers under certain license agreements.
The Company's business is heavily concentrated with McDonald's Corporation
("McDonald's") and, to a lesser extent, Philip Morris Incorporated ("Philip
Morris"). Net sales to McDonald's and Philip Morris accounted for 65% and 9%,
61% and 9% and 57% and 11% of total net sales in 2000, 1999 and 1998,
respectively.
The Company's business with McDonald's and Philip Morris (as well as other
promotional customers) is based upon purchase orders placed from time to time
during the course of promotions. Except for a two year agreement with McDonald's
in Europe which expires in December 2001 and guarantees certain minimum order
quantities, there are no written agreements which commit McDonald's or Philip
Morris to make a certain level of purchases. The actual level of purchases
depends on a number of factors, including the duration of the promotion and
consumer redemption rates. Consequently, the Company's level of net sales is
difficult to predict accurately and can fluctuate greatly from quarter to
quarter. The Company expects that a significant percentage of its net sales in
2001 will be to McDonald's.
Philip Morris solicits competitive bids for its promotional programs. The
Company's profit margin depends, to a great extent, on its competitive position
when bidding and its ability to manage its costs after being awarded bids.
Increased competition is expected to continue and may adversely impact the
Company's profit margin on Philip Morris promotions in the future. Beginning
July 1, 1999, a settlement agreement among 46 states and certain tobacco
companies, including Philip Morris, prohibits the use of brand names by tobacco
companies in connection with promotional programs relating to tobacco products.
The settlement agreement, however, does not prohibit the use of Philip Morris's
corporate name in promotional programs. Due to the restrictions on the use of
brand names, and the other limitations imposed by the settlement agreement on
the tobacco industry, the settlement agreement could have a material adverse
effect on the Company's business with Philip Morris and on its results of
operations.
In September 1999, the Company agreed with McDonald's that the Company would no
longer provide administrative services in connection with McDonald's promotional
programs in Europe effective January 1, 2000. The fees for these services have
historically not been material to the overall results of operations. This action
had an adverse impact of approximately $150 million to the Company's sales
levels for 2000. However, because the agreement with McDonald's related to these
services did not provide for significant gross margin on associated sales, the
Company believes that the absence of these sales did not have a material adverse
effect on the Company's profitability.
In December 1997, the Company entered into a license agreement ("the Agreement")
with Ty Inc. ("Ty") which granted the Company the exclusive right to develop and
market licensed Beanie Babies products in connection with the Beanie Babies
Official Club, a consumer membership kit. In May 1999, the parties mutually
agreed to modify the Agreement and to enter into a new arrangement in which the
Company's rights in connection with the Beanie Babies Official Club became
non-exclusive in order to enable Ty to market and distribute Beanie Babies
products in connection with the Club and in cooperation with the Company
commencing in July 1999. Under this arrangement,
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which extended through the end of 1999, the Company provided creative and
sourcing services for Ty in collaboration with Ty. In 1999, the Company's
seasonal pattern of sales and earnings, including a loss in the first quarter,
and significant revenues and profitability in the second half of the year, was
primarily attributed to the sale of Ty Beanie Babies product. Sales of Beanie
Babies related products accounted for 1%, 11% and 7% of total net sales in 2000,
1999 and 1998, respectively.
Effective January 1, 2000, the Company became a strategic marketing agent for Ty
and provides Ty with product and advisory, design, development and/or creative
services on a project by project basis. Given the nature and the timing of this
arrangement, the Company's future revenues and earnings associated with the Ty
relationship are difficult to predict. The Company expects that sales of Ty
related products will be minimal in 2001.
At December 31, 2000, the Company had written purchase orders for $236.9 million
as compared to $312.1 million at December 31, 1999. The Company's purchase
orders are generally subject to cancellation with limited penalty and are also
subject to agreements with certain customers that limit gross margin levels.
Therefore, the Company cautions that the backlog amounts may not necessarily be
indicative of future revenues or earnings.
SALE OF BUSINESS
Pursuant to its decision in December 2000, the Company sold its Corporate
Promotions Group ("CPG") business on February 15, 2001 to Cyrk Holdings, Inc.,
formerly known as Rockridge Partners, Inc. ("Rockridge"), an investor group led
by Gemini Investors LLC, a Wellesley, Massachusetts-based private equity
investment firm, pursuant to a Purchase Agreement entered into as of January 20,
2001 (as amended, the "Purchase Agreement") for approximately $14.0 million,
which included the assumption of approximately $3.7 million of Company debt.
$2.3 million of the purchase price was paid with a 10% per annum five-year
subordinated note from Rockridge, with the balance being paid in cash. The 2000
financial statements reflect this transaction and include a pre-tax charge of
$50.1 million due to the loss on the sale of the CPG business, $22.7 million of
which is associated with the write-off of goodwill attributable to CPG. This
charge had the effect of increasing the 2000 net loss available to common
stockholders by approximately $49.0 million or $3.07 per share. Net sales in
2000 attributable to the CPG business were $146.8 million, or 19% of
consolidated Company revenues.
CPG was engaged in the corporate catalog and specialty advertising segment of
the promotions industry. The group was formed as a result of Cyrk's acquisitions
of Marketing Incentives, Inc. ("MI") and Tonkin, Inc. ("Tonkin") in 1996 and
1997, respectively.
Pursuant to the Purchase Agreement, Rockridge purchased from the Company (i) all
of the outstanding capital stock of MI and Tonkin, each a wholly-owned
subsidiary of the Company, (ii) other certain assets of the Company, including
those assets of Cyrk's Danvers and Wakefield, Massachusetts facilities necessary
for the operation of the CPG business and (iii) all intellectual property and
assumed liabilities of CPG as specified in the Purchase Agreement. Additionally,
pursuant to the Purchase Agreement, Cyrk agreed to transfer its name to the
buyer upon obtaining all necessary customer, stockholder and stock exchange
approvals to change its name. Until such approvals are obtained, the Company
will provide the buyer with a non-exclusive, worldwide, royalty-free license to
use the name "Cyrk" and any other derivation thereof solely in connection with
the Cyrk CPG business. Rockridge extended employment offers to certain former
Cyrk employees who had performed various support activities, including
accounting, human resources, information technology, legal and other various
management functions. There is no material relationship between Rockridge and
the Company or any of its affiliates, directors or officers, or any associate
thereof, other than the relationship created by the Purchase Agreement and
related documents.
The sale of CPG effectively terminates the restructuring effort announced by the
Company in May 2000 with respect to the CPG business. See notes to consolidated
financial statements.
For additional information related to this transaction, reference is made to the
Company's Report on Form 8-K dated February 15, 2001.
2000 CORPORATE RESTRUCTURING
On May 11, 2000, the Company announced that, pursuant to a plan approved by its
Board of Directors, it was integrating and streamlining its traditional
promotional product divisions, Corporate Promotions Group and Custom Product &
Licensing, into one product-focused business unit. As a result of this action,
the Company recorded a 2000
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pre-tax charge to operations of approximately $5.7 million principally for
involuntary termination costs, asset write-downs and the settlement of lease
obligations. See notes to consolidated financial statements.
EQUITY INVESTMENT
In November 1999, The Yucaipa Companies ("Yucaipa"), a Los Angeles-based
investment firm, invested $25 million in the Company in exchange for convertible
preferred stock and a warrant to purchase an additional $15 million of
convertible preferred stock. Under the terms of the investment, which was
approved at a Special Meeting of Stockholders held on November 10, 1999,
Yucaipa, through an affiliate, purchased 25,000 shares of a new series of
Company convertible preferred stock (initially convertible into 3,030,303 shares
of Company common stock) and received a warrant to purchase an additional 15,000
shares of a new series of Company convertible preferred stock (initially
convertible into 1,666,666 shares of Company common stock). The net proceeds
($20.6 million) from this transaction are being used for general corporate
purposes.
As of December 31, 2000, assuming conversion of all of the convertible preferred
stock, Yucaipa would own approximately 16% of the then outstanding common
shares. Assuming the preceding conversion, and assuming the exercise of the
warrant and the conversion of the preferred stock issuable upon its exercise,
Yucaipa would own a total of approximately 23% of the then outstanding common
shares making it the Company's largest shareholder.
In connection with this transaction, Ronald W. Burkle, managing partner of
Yucaipa, was appointed chairman of Cyrk's Board of Directors, Patrick D. Brady
and Allan I. Brown were named Co-Chief Executive Officers and Co-Presidents of
Cyrk, and Mr. Brown was named to Cyrk's Board of Directors. In addition to Mr.
Burkle, Yucaipa is entitled to nominate two individuals to a seven-person Cyrk
Board of Directors. Additionally, the Company will pay Yucaipa an annual
management fee of $500,000 for a five-year term for which Yucaipa will provide
general business consultation and advice and management services. See notes to
consolidated financial statements.
For additional information related to this transaction, reference is made to the
Company's Report on Form 8-K and its proxy statement filed on Schedule 14A with
the Securities and Exchange Commission, dated September 1, 1999 and October 12,
1999, respectively.
1998 CORPORATE RESTRUCTURING
As a result of its 1998 corporate restructuring, the Company recorded a 1998
charge to operations of $11.8 million for asset write-downs, employee
termination costs, lease cancellations and other related exit costs associated
with the restructuring. The restructuring plan was fully executed by the end of
1998. See notes to consolidated financial statements.
OUTLOOK
The Company believes that the February 2001 sale of the CPG business enables it
to proceed with a more rationalized, cost-efficient business model. The Company
is currently evaluating its remaining businesses with the objective of restoring
consistent profitability. The Company intends to initiate further restructuring
action during the first half of 2001. The Company's ability to achieve its
financial objective is subject to risks including, without limitation, all the
risk factors described in the Company's Amended Cautionary Statement for
Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation
Reform Act of 1995, filed as Exhibit 99.1 to the Company's second quarter 2000
Report on Form 10-Q which is incorporated herein by reference.
RESULTS OF OPERATIONS
2000 Compared to 1999
Net sales decreased $220.4 million, or 22%, to $768.4 million in 2000 from
$988.8 million in 1999. The decrease in net sales was primarily attributable to
a decrease in revenues associated with McDonald's and Beanie Babies related
product sales in 2000.
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Gross profit decreased $28.3 million, or 16%, to $144.0 million in 2000 from
$172.3 million in 1999. As a percentage of net sales, gross profit increased to
18.7% in 2000 from 17.4% in 1999. The increase in the gross margin percentage
was due principally to a more favorable sales mix in which sales volume
associated with certain promotional programs that have gross margin limitations
were less than the levels of a year ago.
Selling, general and administrative expenses totaled $162.2 million in 2000 as
compared to $155.0 million in 1999. As a percentage of net sales, selling,
general and administrative costs totaled 21.1% as compared to 15.7% in 1999. The
Company's increased spending was due principally to an increase in client
service costs and a $1.2 million charge for a contingent payment of cash and
stock which was associated with the acquisition of a previously acquired
company.
In connection with its May 2000 announcement to restructure its promotional
product divisions, the Company recorded a nonrecurring pre-tax restructuring
charge of $5.7 million (including the $1.7 million inventory write-down charged
against gross profit) attributable to employee termination costs, asset
write-downs and lease cancellations costs. See notes to consolidated financial
statements.
The Company also recorded a nonrecurring pre-tax charge to operations of $.7
million in 2000 associated with the settlement of a change in control agreement
with an employee of the Company who was formerly an executive officer. See notes
to consolidated financial statements. The Company recorded a 1999 nonrecurring
pre-tax charge to operations of $1.7 million associated with the settlement of
previously issued incentive stock options in a subsidiary which were issued to
principals of a previously acquired company. The settlement was reached to
facilitate the integration of the acquired company into other operations within
the Company's CPG division.
Other expense in 2000 includes a $4.5 million charge related to an
other-than-temporary investment impairment associated with its venture portfolio
which was partially offset by a $3.2 million gain realized on the sale of an
investment. See notes to consolidated financial statements. Other income of $2.8
million in 1999 represents a gain realized on the sale of an investment.
In connection with the February 2001 sale of its CPG business, the Company
recognized a 2000 pre-tax loss of $50.1 million, $22.7 million of which is
associated with the write-off of goodwill attributable to CPG. See notes to
consolidated financial statements.
For an analysis of the change in the effective tax rates from 1998 to 2000 and a
discussion of the valuation allowance recorded by the Company, see notes to
consolidated financial statements.
1999 Compared to 1998
Net sales increased $231.0 million, or 30%, to $988.8 million in 1999 from
$757.9 million in 1998. The increase in net sales was primarily attributable to
revenues associated with McDonald's, Beanie Babies related products and Philip
Morris.
Gross profit increased $34.5 million, or 25%, to $172.3 million in 1999 from
$137.9 million in 1998. As a percentage of net sales, gross profit decreased to
17.4% in 1999 from 18.2% in 1998. The decrease in the gross margin percentage
was primarily the result of a higher concentration of sales volume associated
with certain promotional programs that are subject to agreements with certain
customers that limit gross margin levels.
As a percentage of net sales, selling, general and administrative expenses
totaled 15.7% in 1999 as compared to 17.9% in 1998. Selling, general and
administrative expenses totaled $155.0 million in 1999 as compared to $135.5
million in 1998. The Company's increased spending was attributable to an
increase in the commissions paid to field sales representatives associated with
sales increases generated from the Company's premium incentives and licensed
product businesses, as well as to increased client management and support costs.
The Company recorded a 1999 nonrecurring pre-tax charge to operations of $1.7
million associated with the settlement of previously issued incentive stock
options in a subsidiary which were issued to principals of a previously
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acquired company. The settlement was reached to facilitate the integration of
the acquired company into other operations within the Company's CPG division.
Restructuring and nonrecurring charges totaled $15.3 million in 1998. In
connection with its February 1998 announcement to restructure worldwide
operations, the Company recorded a restructuring charge of $11.8 million
attributable to asset write-downs, employee termination costs, lease
cancellations and other related exit costs. In addition, the Company recorded a
$2.3 million nonrecurring charge associated with a December 1998 severance
agreement between the Company and its former chief executive officer, and also
recorded a $1.1 million nonrecurring charge associated with the Company's plan
to relocate its corporate facilities. See notes to consolidated financial
statements.
Other income of $2.8 million in 1999 and $7.1 million in 1998 represents the
gains realized on the sale of an investment. See notes to consolidated financial
statements.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at December 31, 2000 was $60.4 million compared to $110.8
million at December 31, 1999. Net cash used in operating activities during 2000
was $11.8 million, due principally to a net loss of $69.7 million and a $34.9
million decrease in accrued expenses, which were partially offset by the loss on
sale of business of $47.9 million, a $20.1 million decrease in inventories, a
$10.7 million decrease in accounts receivable and $9.6 million of depreciation
and amortization. Net cash provided by operating activities during 1999 was
$31.1 million, due principally to net income and depreciation and amortization
of $20.1 million and an increase in accrued expenses of $15.7 million.
Net cash used in investing activities in 2000 was $13.9 million, which was
primarily attributable to $12.8 million of purchases of property and equipment.
In 1999, net cash used in investing activities was $16.9 million, which was
primarily attributable to $12.5 million in investments made by the Company and
$5.5 million of purchases of property and equipment.
The Company entered into a lease arrangement in December 1999 to relocate its
corporate offices from Gloucester, Massachusetts to Wakefield, Massachusetts in
August 2000. The Company expended approximately $3.5 million to construct and
furnish this move.
Net cash used in financing activities in 2000 was $5.9 million which was
primarily attributable to $5.9 million of repayments of short-term borrowings
and long-term obligations. In 1999, net cash provided by financing activities
was $10.1 million which was primarily attributable to $20.6 million of net
proceeds received from an equity investment in the Company (see notes to
consolidated financial statements) which was partially offset by $8.0 million of
repayments of short-term borrowings.
In February 2001, the Company sold its CPG business for approximately $14.0
million, which included approximately $3.7 million of Company debt that was
assumed by the buyer. $2.3 million of the purchase price was paid with a 10% per
annum five-year subordinated note, with the balance being paid in cash. See
notes to consolidated financial statements.
Since inception, the Company has financed its working capital and capital
expenditure requirements through cash generated from operations, public and
private sales of common and preferred stock, bank borrowings and capital
equipment leases.
The Company currently has available several worldwide bank letters of credit and
revolving credit facilities which expire at various dates beginning in May 2001.
In December 2000, the Company secured a new facility with a lender for its
primary domestic line of credit. Pursuant to the provisions of its primary
domestic line of credit, the Company had commitments for letter of credit and
other borrowings as of December 31, 2000 of up to an aggregate amount of $35.0
million for the purpose of financing the importation of various products from
Asia, for issuing standby letters of credit and for working capital purposes. In
February 2001, the facility agreement was amended through May 15, 2001 as a
result of the sale of the Company's CPG business. See notes to consolidated
financial statements. Under the amended agreement, the
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Company has commitments for letters of credit and other borrowings to May 15,
2001 of up to an aggregate amount of $16.2 million. As a result of the CPG sale,
the Company is assessing its overall management and organizational structure and
in conjunction with that assessment, is reassessing its financing strategy prior
to the expiration of its primary domestic facility. As of December 31, 2000,
based on the borrowing base formulas prescribed by these credit facilities, the
Company's borrowing capacity was $61.0 million, of which $5.5 million of
short-term borrowings and $11.6 million in letters of credit were outstanding.
In addition, bank guarantees totaling $.3 million were outstanding at December
31, 2000. Borrowings under these facilities are collateralized by all assets of
the Company.
Management believes that the Company's existing cash position and credit
facilities combined with internally generated cash flow will satisfy its
liquidity and capital needs through the first half of 2001. The Company intends
to initiate further restructuring action during the first half of 2001 and,
subject to such final plan, expects to incur significant restructuring charges
that may adversely impact the Company's cash position. The Company's ability to
generate internal cash flow is highly dependent upon its continued relationships
with McDonald's and Philip Morris. Any material adverse change from the
Company's revenues and related contribution from McDonald's and Philip Morris
could adversely affect the Company's cash position and capital availability. The
Company's ability to renew its credit facilities is subject to finalizing its
management and organizational plan and is further subject to acceptance and
approval of such plan by the Company's lenders.
In July 2000, the Company announced that it had retained an investment banker to
explore strategic alternatives. The objective of seeking strategic alternatives
is to maximize shareholder value including, without limitation, by examining
ways to enhance the Company's ability to generate more consistent revenue and
earnings growth. Pursuant to its decision in December 2000, the Company sold its
CPG business in February 2001. See notes to consolidated financial statements.
As of December 31, 2000, the investment banker was exploring further strategic
alternatives. The Company has not made a decision as to any additional specific
alternatives and there can be no assurance that any additional transactions will
result from this process.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
PAGE
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Report of Independent Accountants 23
Consolidated Balance Sheets as of December 31, 2000 and 1999 24
Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998 25
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999
and 1998 26
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 27
Notes to Consolidated Financial Statements 28-40
Schedule II: Valuation and Qualifying Accounts 41
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
NONE
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item regarding the Company's directors is
included in the Company's Proxy Statement to be filed pursuant to Schedule 14A
in connection with the Company's 2001 Annual Meeting of Stockholders under the
section captioned "Election of Directors" and is incorporated herein by
reference thereto. Information regarding the Company's executive officers is set
forth in Part I hereof, above, under the caption "Executive Officers of the
Registrant" and is incorporated herein by reference thereto.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is included in the Company's Proxy
Statement to be filed pursuant to Schedule 14A in connection with the Company's
2001 Annual Meeting of Stockholders under the sections captioned "Directors'
Compensation" and "Executive Compensation" and is incorporated herein by
reference thereto.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is included in the Company's Proxy
Statement to be filed pursuant to Schedule 14A in connection with the Company's
2001 Annual Meeting of Stockholders under the section captioned "Security
Ownership of Certain Beneficial Owners and Management" and is incorporated
herein by reference thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is included in the Company's Proxy
Statement to be filed pursuant to Schedule 14A in connection with the Company's
2001 Annual Meeting of Stockholders under the sections captioned "Certain
Relationships and Related Transactions" and "Indebtedness of Management" and is
incorporated herein by reference thereto.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) DOCUMENTS FILED AS PART OF THIS REPORT.
1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES FOR THE FISCAL YEARS ENDED
DECEMBER 31, 2000, 1999 AND 1998:
Schedule II: Valuation and Qualifying Accounts.
All other schedules for which provision is made in the
applicable accounting regulations of the Securities
and Exchange Commission are not required under the
related instructions or are inapplicable, and
therefore have been omitted.
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3. EXHIBITS
EXHIBIT NO. DESCRIPTION
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2.1 (10) Securities Purchase Agreement dated September 1, 1999, between the Registrant and Overseas Toys, L.P.
2.2 (15) Purchase Agreement between Cyrk, Inc. and Rockridge Partners, Inc., dated January 20, 2001 as amended by
Amendment No. 1 to the Purchase Agreement, dated February 15, 2001
3.1 (4) Restated Certificate of Incorporation of the Registrant
3.2 (2) Amended and Restated By-laws of the Registrant
3.3 (12) Certificate of Designation for Series A Senior Cumulative Participating Convertible Preferred Stock
4.1 (2) Specimen certificate representing Common Stock
10.1 (3)(11) 1993 Employee Stock Purchase Plan, as amended
10.2 (3)(4) 1993 Omnibus Stock Plan, as amended
10.3 (1) Tax Allocation and Indemnity Agreement dated July 6, 1993, among Cyrk, Inc., the Registrant, Gregory P.
Shlopak and Patrick D. Brady
10.4 (3)(5) Life Insurance Agreement dated as of November 15, 1994 by and between the Registrant and
Patrick D. Brady as Trustee under a declaration of trust dated November 7, 1994 between Gregory P.
Shlopak and Patrick D. Brady, Trustee, entitled "The Shlopak Family 1994 Irrevocable Insurance Trust"
10.4.1 (3)(5) Assignments of Life Insurance policies as Collateral, each dated November 15, 1994
10.5 (3)(5) Life Insurance Agreement dated as of November 15, 1994 by and between the Registrant and Patrick D. Brady
as Trustee under a declaration of trust dated November 7, 1994 between Gregory P. Shlopak and Patrick D.
Brady, Trustee, entitled "The Gregory P. Shlopak 1994 Irrevocable Insurance Trust"
10.5.1 (3)(5) Assignments of Life Insurance policies as Collateral, each dated November 15, 1994
10.6 (3)(5) Life Insurance Agreement dated as of November 15, 1994 by and between the Registrant and Walter E.
Moxham, Jr. as Trustee under a declaration of trust dated November 7, 1994 between Patrick D. Brady and
Walter E. Moxham, Jr., Trustee, entitled "The Patrick D. Brady 1994 Irrevocable Insurance Trust"
10.6.1 (3)(5) Assignments of Life Insurance policies as Collateral, each dated November 15, 1994
10.7 (3)(6) 1997 Acquisition Stock Plan
10.8 (7) Securities Purchase Agreement dated February 12, 1998 by and between Cyrk, Inc. and Ty Warner
10.9 (8) Severance Agreement between Cyrk, Inc. and Gregory P. Shlopak
10.10 (3)(9) Severance Agreement between Cyrk, Inc. and Ted L. Axelrod dated November 20, 1998
10.11 (3)(9) Severance Agreement between Cyrk, Inc. and Dominic F. Mammola dated November 20, 1998
10.11.1 (3)(9) Amendment No. 1 to Severance Agreement between Cyrk, Inc. and Dominic F. Mammola dated March 29, 1999
10.12 (12) Registration Rights Agreement between Cyrk, Inc. and Overseas Toys, L.P.
10.13 (12) Management Agreement between Cyrk, Inc. and The Yucaipa Companies
10.14 (3)(10) Employment Agreement between Cyrk, Inc. and Allan Brown, dated September 1, 1999
10.15 (3)(10) Employment Agreement between Cyrk, Inc. and Patrick Brady, dated September 1, 1999
10.16 (12) Lease agreement dated as of July 29, 1999, between TIAA Realty, Inc. and Cyrk, Inc.
10.17 (3)(12) Life Insurance Agreement dated as of September 29, 1997 by and between Simon Marketing, Inc. and Frederic
N. Gaines, Trustee of the Allan I. Brown Insurance Trust, under Declaration of Trust dated September 29,
1997
10.18 (3)(14) Promissory Note and Pledge Agreement by Allan Brown in favor of Cyrk, Inc., dated July 10, 2000
10.19 (3) Promissory Note and Pledge Agreement by Allan Brown in favor of Cyrk, Inc., dated October 18, 2000, filed
herewith
10.20 (15) Subordinated Promissory Note by Rockridge Partners, Inc. in favor of Cyrk, Inc., dated February 15, 2001
10.21 Amended and Restated Loan and Security Agreement by and among, Cyrk, Inc., Foothill Capital Corporation
and the other signatories thereto, dated as of February 15, 2001, filed herewith
21.1 List of Subsidiaries, filed herewith
23.1 Consent of PricewaterhouseCoopers LLP - Independent Accountants, filed herewith
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99.1 (13) Amended Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities
Litigation Reform Act of 1995
99.2 (3)(10) Termination Agreement among Cyrk, Inc., Patrick Brady, Allan Brown, Gregory Shlopak, Eric Stanton, and
Eric Stanton Self-Declaration of Revocable Trust
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(1) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(Registration No. 33-75320) or an amendment thereto and incorporated herein
by reference.
(2) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(Registration No. 33-63118) or an amendment thereto and incorporated herein
by reference.
(3) Management contract or compensatory plan or arrangement.
(4) Filed as an exhibit to the Annual Report on Form 10-K for the year ended
December 31, 1994 and incorporated herein by reference.
(5) Filed as an exhibit to the Registrant's Registration Statement on Form 10-Q
dated March 31, 1995 and incorporated herein by reference.
(6) Filed as an exhibit to the Registrant's Registration Statement on Form S-8
(Registration No. 333-45655) and incorporated herein by reference.
(7) Filed as an exhibit to the Annual Report on Form 10-K for the year ended
December 31, 1997 and incorporated herein by reference.
(8) Filed as an exhibit to the Registrant's Report on Form 8-K dated December
31, 1998 and incorporated herein by reference.
(9) Filed as an exhibit to the Annual Report on Form 10-K for the year ended
December 31, 1998 and incorporated herein by reference.
(10) Filed as an exhibit to the Registrant's Report on Form 8-K dated September
1, 1999 and incorporated herein by reference.
(11) Filed as an exhibit to the Registrant's Registration Statement on Form S-8
dated February 1, 2000 and incorporated herein by reference.
(12) Filed as an exhibit to the Annual Report on Form 10-K for the year ended
December 31, 1999 and incorporated herein by reference.
(13) Filed as an exhibit to the Registrant's Registration Statement on Form 10-Q
dated June 30, 2000 and incorporated herein by reference.
(14) Filed as an exhibit to the Registrant's Registration Statement on Form 10-Q
dated September 30, 2000 and incorporated herein by reference.
(15) Filed as an exhibit to the Registrant's Report on Form 8-K dated February
15, 2001 and incorporated herein by reference.
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the last quarter of
the fiscal year ended December 31, 2000.
21
22
SIGNATURES
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.
CYRK, INC.
Date: March 29, 2001 By: /s/Dominic F. Mammola
------------------------
Dominic F. Mammola
Executive Vice President and Chief
Financial Officer (principal
financial and accounting officer)
Pursuant to the requirements of the Securities Exchange 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.
/s/Ronald W. Burkle Chairman March 29, 2001
- -------------------
RONALD W. BURKLE
/s/Patrick D. Brady Co-Chief Executive Officer March 29, 2001
- -------------------
PATRICK D. BRADY Co-President
(Co-principal executive officer)
/s/Allan I. Brown Co-Chief Executive Officer March 29, 2001
- -----------------
ALLAN I. BROWN Co-President
(Co-principal executive officer)
/s/Joseph W. Bartlett Director March 29, 2001
- ---------------------
JOSEPH W. BARTLETT
/s/J. Anthony Kouba Director March 29, 2001
- -------------------
J. ANTHONY KOUBA
/s/George G. Golleher Director March 29, 2001
- ---------------------
GEORGE G. GOLLEHER
/s/Erika Paulson Director March 29, 2001
- ---------------------
ERIKA PAULSON
22
23
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Cyrk, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Cyrk, Inc.
and its subsidiaries at December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America. In addition, in our opinion, the financial
statement schedule listed in the accompanying index presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
schedule based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and schedule are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements and schedule,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement and schedule
presentation. We believe that our audits provide a reasonable basis for our
opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 15, 2001
23
24
CYRK, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
2000 1999
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 68,162 $ 99,698
Investment 7,969 2,423
Accounts receivable:
Trade, less allowance for doubtful accounts of $2,074
at December 31, 2000 and $4,243 at December 31, 1999 48,877 91,782
Officers, stockholders and related parties 4,340 3,121
Inventories 10,175 45,193
Prepaid expenses and other current assets 5,120 7,056
Deferred and refundable income taxes 11,537 10,465
Net assets held for sale 8,363 --
--------- ---------
Total current assets 164,543 259,738
Property and equipment, net 12,510 13,140
Excess of cost over net assets acquired, net 48,033 73,961
Investments 12,500 12,500
Deferred income taxes 4,734 1,778
Other assets 7,815 8,031
Net assets held for sale 2,300 --
--------- ---------
$ 252,435 $ 369,148
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 5,523 $ 8,888
Accounts payable:
Trade 36,035 41,795
Affiliates 281 141
Accrued expenses and other current liabilities 53,265 97,137
Investment payable 7,875 --
Deferred income taxes -- 954
Accrued restructuring expenses 1,193 --
--------- ---------
Total current liabilities 104,172 148,915
Long-term obligations 6,587 9,156
--------- ---------
Total liabilities 110,759 158,071
--------- ---------
Commitments and contingencies
Mandatorily redeemable preferred stock, Series A1 senior cumulative
participating convertible, $.01 par value, 25,500 shares issued and
outstanding at December 31, 2000 and 25,000 shares issued and outstanding at
December 31, 1999, stated at redemption value of $1,000 per share 25,500 25,000
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized; 25,500 Series A1
shares issued at December 31, 2000 and 25,000 Series A1 shares issued at
December 31, 1999 -- --
Common stock, $.01 par value; 50,000,000 shares authorized;
16,059,130 shares issued and outstanding at December 31, 2000 and
15,740,850 shares issued and outstanding at December 31, 1999 161 157
Additional paid-in capital 138,978 137,035
Retained (deficit) earnings (22,128) 48,587
Accumulated other comprehensive income (loss):
Unrealized gain on investment 94 1,336
Cumulative translation adjustment (929) (1,038)
--------- ---------
Total stockholders' equity 116,176 186,077
--------- ---------
$ 252,435 $ 369,148
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
24
25
CYRK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2000 1999 1998
--------- --------- ---------
Net sales $ 768,450 $ 988,844 $ 757,853
Cost of sales:
Related parties -- -- 9,211
Other 622,730 816,507 610,758
Write-down of inventory in connection
with restructuring 1,695 -- --
--------- --------- ---------
624,425 816,507 619,969
--------- --------- ---------
Gross profit 144,025 172,337 137,884
--------- --------- ---------
Selling, general and administrative expenses:
Goodwill amortization 3,547 3,568 3,324
Related parties 1,265 1,002 1,264
Other 157,429 150,425 130,863
Restructuring and other nonrecurring charges 4,700 1,675 15,288
--------- --------- ---------
166,941 156,670 150,739
--------- --------- ---------
Operating income (loss) (22,916) 15,667 (12,855)
Interest income (4,269) (3,232) (3,569)
Interest expense 1,315 2,115 2,579
Equity in loss of affiliates -- -- 418
Other (income) expense 1,255 (2,752) (7,100)
Loss on sale of business 27,387 -- --
Write-off of goodwill attributable to
business sold 22,716 -- --
--------- --------- ---------
Income (loss) before income taxes (71,320) 19,536 (5,183)
Income tax provision (benefit) (1,605) 8,400 (2,167)
--------- --------- ---------
Net income (loss) (69,715) 11,136 (3,016)
Preferred stock dividends 1,000 142 --
--------- --------- ---------
Net income (loss) available to common stockholders $ (70,715) $ 10,994 $ (3,016)
========= ========= =========
Earnings (loss) per common share - basic $ (4.43) $ 0.70 $ (0.20)
========= ========= =========
Earnings (loss) per common share - diluted $ (4.43) $ 0.67 $ (0.20)
========= ========= =========
Weighted average shares outstanding - basic 15,972 15,624 14,962
========= ========= =========
Weighted average shares outstanding - diluted 15,972 16,631 14,962
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
25
26
CYRK, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS)
Accumulated
Common Additional Retained Other Total
Stock Paid-in (Deficit) Comprehensive Comprehensive Stockholders'
($.01 Par Value) Capital Earnings Income (Loss) Income (Loss) Equity
-------------- ------------ --------- ------------- ------------- -------------
Balance, December 31, 1997 $ 137 $ 119,840 $ 40,609 $ (233) $ 160,353
Comprehensive loss:
Net loss (3,016) $(3,016) (3,016)
--------
Other comprehensive income (loss),
net of income taxes:
Net unrealized gains on
available-for-sale securities 1,442 1,442
Translation adjustment (86) (86)
--------
Other comprehensive income 1,356 1,356
--------
Comprehensive loss $(1,660)
========
Issuance of shares under employee
stock option and stock purchase
plans, net of tax benefit 2 1,609 1,611
Issuance of shares for businesses
acquired 6 7,345 7,351
Issuance of shares for private
placement 10 9,990 10,000
------ --------- -------- ------ ---------
Balance, December 31, 1998 155 138,784 37,593 1,123 177,655
Comprehensive income:
Net income 11,136 $ 11,136 11,136
--------
Other comprehensive loss, net of
income taxes:
Net unrealized loss on
available-for-sale securities (106) (106)
Translation adjustment (719) (719)
--------
Other comprehensive loss (825) (825)
--------
Comprehensive income $ 10,311
========
Dividends on preferred stock (142) (142)
Stock compensation 775 775
Mandatorily redeemable preferred
stock issuance costs (4,447) (4,447)
Issuance of shares under employee
stock option and stock purchase
plans 1 512 513
Issuance of shares for businesses
acquired 1 1,411 1,412
------ --------- -------- ------ ---------
Balance, December 31, 1999 157 137,035 48,587 298 186,077
Comprehensive loss:
Net loss (69,715) $(69,715) (69,715)
--------
Other comprehensive loss, net of
income taxes:
Net unrealized loss on
available-for-sale securities (1,242) (1,242)
Translation adjustment 109 109
--------
Other comprehensive loss (1,133) (1,133)
--------
Comprehensive loss $(70,848)
========
Dividends on preferred stock (1,000) (1,000)
Issuance of shares under employee
stock option and stock purchase plans 2 533 535
Issuance of shares for businesses
acquired 2 1,410 1,412
------ --------- -------- ------ ---------
Balance, December 31, 2000 $ 161 $ 138,978 $(22,128) $ (835) $ 116,176
====== ========= ======== ====== =========
The accompanying notes are an integral part of the consolidated financial
statements.
26
27
CYRK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS)
2000 1999 1998
-------- -------- --------
Cash flows from operating activities:
Net income (loss) $(69,715) $ 11,136 $ (3,016)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 9,625 8,988 8,988
Write-down of leasehold improvements -- -- 1,143
(Gain) loss on sale of property and equipment 103 130 (244)
Realized gain on sale of investments (3,245) (2,752) (7,100)
Provision for doubtful accounts 3,423 2,578 1,485
Loss on sale of business 47,876 -- --
Deferred income taxes 389 2,575 1,286
Charge for impaired investments 4,500 -- --
Issuance of common stock related to acquisition agreement 575 -- --
Equity in loss of affiliates -- -- 418
Tax benefit from stock option plans -- -- 56
Non-cash restructuring charges 684 854 8,555
Stock compensation -- 775 --
Increase (decrease) in cash from changes
in working capital items:
Accounts receivable 10,731 (10,033) 6,382
Inventories 20,132 5,161 (6,050)
Prepaid expenses and other current assets (105) 161 3,417
Refundable income taxes (4,417) -- (1,232)
Accounts payable 2,483 (4,199) (11,925)
Accrued expenses and other current liabilities (34,868) 15,738 16,263
-------- -------- --------
Net cash provided by (used in) operating activities (11,829) 31,112 18,426
-------- -------- --------
Cash flows from investing activities:
Purchase of property and equipment (12,828) (5,461) (5,254)
Proceeds from sale of property and equipment 277 45 928
Repayments from affiliates, net -- -- 1,556
Purchase of investments (4,500) (12,500) --
Proceeds from sale of investments 3,378 3,086 10,759
Additional consideration related to acquisitions -- (730) (1,624)
Other, net (202) (1,375) (1,038)
-------- -------- --------
Net cash provided by (used in) investing activities (13,875) (16,935) 5,327
-------- -------- --------
Cash flows from financing activities:
Repayments of short-term borrowings, net (3,346) (8,041) (3,897)
Proceeds from (repayments of) long-term obligations (2,569) (2,943) 1,888
Proceeds from issuance of preferred stock, net -- 20,553 --
Proceeds from issuance of common stock 534 513 11,554
Dividends paid (500) -- --
-------- -------- --------
Net cash provided by (used in) financing activities (5,881) 10,082 9,545
-------- -------- --------
Effect of exchange rate changes on cash 49 (380) 8
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (31,536) 23,879 33,306
Cash and cash equivalents, beginning of year 99,698 75,819 42,513
-------- -------- --------
Cash and cash equivalents, end of year $ 68,162 $ 99,698 $ 75,819
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 1,167 $ 1,981 $ 2,301
======== ======== ========
Income taxes $ 5,262 $ 6,026 $ 2,863
======== ======== ========
Supplemental non-cash investing activities:
Issuance of additional stock related to acquisitions $ 1,413 $ 1,412 $ 7,351
======== ======== ========
Dividends paid in kind on mandatorily redeemable preferred stock $ 500 $ -- $ --
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
27
28
CYRK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
1. Nature of Business
Cyrk, Inc. is a full-service promotional marketing company, specializing in the
design and development of high-impact promotional products and programs.
2. Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Cyrk,
Inc. and its subsidiaries (the "Company"). All material intercompany accounts
and transactions have been eliminated in consolidation.
Revenue Recognition
Sales are generally recognized when products are shipped or services are
provided to customers. Sales of certain imported goods are recognized at the
time shipments are received at the customer's designated location. Deferred
revenue includes deposits related to merchandise for which the Company has
received payment but for which title and risk of loss have not passed.
Use of Estimates
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 during the reporting period.
Actual results could differ from those estimates.
Concentration of Credit Risk
The Company places its cash in what it believes to be credit-worthy financial
institutions. However, cash balances exceed FDIC insured levels at various times
during the year. In addition, the Company has significant receivables from
certain customers (see Note 18).
Financial Instruments
The carrying amounts of cash equivalents, investments, short-term borrowings and
long-term obligations approximate their fair values.
Cash Equivalents
Cash equivalents consist of short-term, highly liquid investments which have
original maturities at date of purchase to the Company of three months or less.
Investments
Investments are stated at fair value. Current investments are designated as
available-for-sale in accordance with the provisions of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities", and as such unrealized gains and losses are reported in a
separate component of stockholders' equity. Long-term investments, for which
there are no readily available market values, are carried at the lower of
estimated fair value or cost.
28
29
Inventories
Inventories are valued at the lower of cost (specific identification, first-in,
first-out and average methods) or market.
Property and Equipment
Property and equipment are stated at cost and are depreciated primarily using
the straight-line method over the estimated useful lives of the assets or over
the terms of the related leases, if such periods are shorter. The estimated
useful lives range from two to seven years for machinery and equipment and three
to ten years for furniture and fixtures. The cost and accumulated depreciation
for property and equipment sold, retired or otherwise disposed of are relieved
from the accounts, and resulting gains or losses are reflected in income.
Excess of Cost Over Net Assets Acquired, Net
The excess of cost over the net assets acquired ("goodwill") is being amortized
on a straight-line basis over a period of thirty years. Accumulated amortization
amounted to $6,788 at December 31, 2000 and $8,694 at December 31, 1999. (See
Note 3.)
Impairment of Long-Lived Assets
Periodically, the Company assesses, based on undiscounted cash flows, if there
has been a permanent impairment in the carrying value of its long-lived assets
and, if so, the amount of any such impairment by comparing anticipated
undiscounted future operating income with the carrying value of the related
long-lived assets. In performing this analysis, management considers such
factors as current results, trends and future prospects, in addition to other
economic factors.
Income Taxes
The Company determines deferred taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), which
requires that deferred tax assets and liabilities be computed based on the
difference between the financial statement and income tax bases of assets and
liabilities using the enacted marginal tax rate. Deferred income tax expenses or
credits are based on the changes in the asset or liability from period to
period.
Foreign Currency Translation
The Company translates financial statements denominated in foreign currency by
translating balance sheet accounts at the balance sheet date exchange rate and
income statement accounts at the average monthly rates of exchange. Translation
gains and losses are recorded in stockholders' equity, and transaction gains and
losses are reflected in income.
Earnings (Loss) per Common Share
Earnings (loss) per common share have been determined in accordance with the
provisions of Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("SFAS 128").
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
29
30
3. Sale of Business
Pursuant to its decision in December 2000, the Company sold its Corporate
Promotions Group ("CPG") business on February 15, 2001 to Cyrk Holdings, Inc.,
formerly known as Rockridge Partners, Inc. ("Rockridge"), an investor group led
by Gemini Investors LLC, a Wellesley, Massachusetts-based private equity
investment firm, pursuant to a Purchase Agreement entered into as of January 20,
2001 (as amended, the "Purchase Agreement") for approximately $14,000, which
included the assumption of approximately $3,700 of Company debt. $2,300 of the
purchase price was paid with a 10% per annum five-year subordinated note from
Rockridge, with the balance being paid in cash. The 2000 financial statements
reflect this transaction and include a pre-tax charge of $50,103 due to the loss
on the sale of the CPG business, $22,716 of which is associated with the
write-off of goodwill attributable to CPG. This charge had the effect of
increasing the 2000 net loss available to common stockholders by approximately
$48,975 or $3.07 per share. Net sales in 2000 attributable to the CPG business
were $146,773, or 19% of consolidated Company revenues.
CPG was engaged in the corporate catalog and specialty advertising segment of
the promotions industry. The group was formed as a result of Cyrk's acquisitions
of Marketing Incentives, Inc. ("MI") and Tonkin, Inc. ("Tonkin") in 1996 and
1997, respectively.
Pursuant to the Purchase Agreement, Rockridge purchased from the Company (i) all
of the outstanding capital stock of MI and Tonkin, each a wholly-owned
subsidiary of the Company, (ii) other certain assets of the Company, including
those assets of Cyrk's Danvers and Wakefield, Massachusetts facilities necessary
for the operation of the CPG business and (iii) all intellectual property and
assumed liabilities of CPG as specified in the Purchase Agreement. Additionally,
pursuant to the Purchase Agreement, Cyrk agreed to transfer its name to the
buyer upon obtaining all necessary customer, stockholder and stock exchange
approvals to change its name. Until such approvals are obtained, the Company
will provide the buyer with a non-exclusive, worldwide, royalty-free license to
use the name "Cyrk" and any other derivation thereof solely in connection with
the Cyrk CPG business. Rockridge extended employment offers to certain former
Cyrk employees who had performed various support activities, including
accounting, human resources, information technology, legal and other various
management functions. There is no material relationship between Rockridge and
the Company or any of its affiliates, directors or officers, or any associate
thereof, other than the relationship created by the Purchase Agreement and
related documents.
The sale of CPG effectively terminates the restructuring effort announced by the
Company in May 2000 with respect to the CPG business. (See Note 11.)
4. Inventories
Inventories consist of the following:
December 31,
2000 1999
---- ----
Raw materials $ 178 $10,181
Work in process 3,099 14,887
Finished goods 6,898 20,125
------- ------
$10,175 $45,193
======= =======
5. Property and Equipment
Property and equipment consist of the following:
December 31,
2000 1999
---- ----
Machinery and equipment $ 8,157 $22,139
Furniture and fixtures 12,943 7,209
Leasehold improvements 7,445 6,205
------- -------
28,545 35,553
Less - accumulated depreciation and amortization (16,035) (22,413)
------- -------
$12,510 $13,140
======= =======
Depreciation and amortization expense on property and equipment totaled $6,078,
$5,420 and $5,664 in 2000, 1999 and 1998, respectively.
30
31
6. Investments
Current
In December 2000, the Company purchased 1,500,000 shares of a marketable
security at $5.25 per share. As of December 31, 2000, these shares are stated at
fair value of $7,969.
In April 1998, the Company exchanged its then 50% interest (with a net book
value of $2,589) in Grant & Partners Limited Partnership ("GPLP"), a
Boston-based firm specializing in improving the returns on marketing
investments, in return for GPLP's rights, title and interest to 1,150,000 shares
of common stock of GPLP's Exchange Applications ("EXAP"), a company specializing
in software that helps businesses raise profits by targeting marketing
campaigns. In December 1998, EXAP completed its initial public offering and the
Company sold 1,000,000 shares of its EXAP holdings and realized a gain on the
sale of this stock of $7,100. The Company sold an additional 106,630 and 43,370
shares in 1999 and 2000, respectively, and realized gains on the sales of $2,752
and $3,245, respectively. As of December 31, 1999, the shares of EXAP stock
owned by the Company were stated at fair value of $2,423.
Long-term
The Company has made strategic and venture investments in a portfolio of
privately-held companies that are being accounted for under the cost method.
These investments are in Internet-related companies that are at varying stages
of development, including startups, and are intended to provide the Company with
expanded Internet presence, to enhance the Company's position at the leading
edge of e-business and to provide venture investment returns. These companies in
which the Company has invested are subject to all the risks inherent in the
Internet, including their dependency upon the widespread acceptance and use of
the Internet as an effective medium for commerce. In addition, these companies
are subject to the valuation volatility associated with the investment community
and the capital markets. The carrying value of the Company's investments in
these Internet-related companies is subject to the aforementioned risks inherent
in Internet business.
Periodically, the Company performs a review of the carrying value of all its
investments in these Internet-related companies, and considers such factors as
current results, trends and future prospects, capital market conditions and
other economic factors. Based on its reviews in 2000, the Company has recorded a
charge to other expense of $4,500 for an other-than-temporary investment
impairment associated with its venture portfolio. While the Company will
continue to periodically evaluate its Internet investments, there can be no
assurance that its investment strategy will be successful, and thus the Company
might not ever realize any benefits from its portfolio of investments.
7. Borrowings
The Company maintains worldwide credit facilities with several banks. As of
December 31, 2000, the facilities provided the Company with approximately
$78,090 in total short-term borrowing capacity which consisted of (i) the
Company's $35,000 primary domestic line of credit, (ii) an additional $19,000
domestic line of credit and (iii) a foreign line of credit in the amount of
$24,090. As of December 31, 2000, the Company had approximately $61,023
available under these bank facilities. The total outstanding short-term
borrowings at December 31, 2000 and 1999 were $5,523 and $8,888, respectively.
In December 2000, the Company secured a new facility with a lender for its
primary domestic line of credit. Pursuant to the provisions of this line of
credit, the Company had commitments for letter of credit and other borrowings as
of December 31, 2000 of up to an aggregate amount of $35,000 for the purpose of
financing the importation of various products from Asia, for issuing standby
letters of credit and for working capital purposes. At December 31, 2000, the
Company's borrowing capacity under this facility was $35,000, of which $11,581
in letters of credit were outstanding. The letters of credit expire at various
dates through October 2002. Borrowings under the facility bear interest at the
lesser of the bank's prime rate plus .5% (10.0% at December 31, 2000) or LIBOR
plus 2.25% (8.81% at December 31, 2000), and are collateralized by all of the
assets of the Company. The facility contains certain earnings, net worth, equity
and capital expenditure covenants. In February 2001, the facility agreement was
amended through May 15, 2001 as a result of the sale of the Company's CPG
business (see Note 3). Under the amended agreement, the Company has commitments
for letter of credit and other borrowings to May 15, 2001 of up to an aggregate
amount of $16,228. As a result of the CPG sale, the Company is assessing its
overall management and organizational structure and in conjunction with this
assessment, is reassessing its financing strategy prior to the expiration of its
primary domestic facility.
31
32
In addition to the facility described above, there is another domestic credit
facility which provides for borrowings of up to an aggregate amount of $19,000
for working capital requirements. This credit facility, which expires in May
2001, bears interest at the bank's prime rate (9.5% at December 31, 2000) or
LIBOR plus 2% (8.56% at December 31, 2000). At December 31, 2000, there were no
short-term borrowings or letters of credit outstanding under this facility.
The Company has a $24,090 (Deutsche Marks 50,000) working capital line of credit
for certain of its European subsidiaries. At December 31, 2000, there were no
letters of credit outstanding under this credit facility and no short-term
borrowings outstanding. The Company also has bank guarantees in the amounts of
$1,792 (British Pounds 1,200) and $293 (Belgian Francs 12,500) to cover future
duties and customs in the United Kingdom. Bank guarantees totaling $340 were
outstanding at December 31, 2000.
The weighted average interest rate on short-term borrowings was 8.81% and 8.24%
at December 31, 2000 and 1999, respectively.
8. Lease Commitments
The Company leases warehouse, production and administrative facilities and
certain machinery and equipment, furniture and fixtures, and motor vehicles
under noncancelable operating leases expiring at various dates through December
2010. The approximate minimum rental commitments under all noncancelable leases
as of December 31, 2000, adjusted to reflect the February 2001 sale of the CPG
business (see Note 3), were as follows:
2001 $ 6,758
2002 5,227
2003 4,845
2004 4,608
2005 3,234
Thereafter 8,996
-------
Total minimum lease payments $33,668
=======
Rental expense for all operating leases was $10,893, $11,286 and $11,719 for the
years ended December 31, 2000, 1999 and 1998, respectively. Rent is charged to
operations on a straight-line basis for certain leases.
9. Income Taxes
The components of the provision (benefit) for income taxes are as follows:
For the Years Ended December 31,
2000 1999 1998
---- ---- ----
Current:
Federal $(4,544) $3,710 $(2,818)
State 465 1,074 (2,100)
Foreign 2,086 1,041 1,465
------- ------ -------
(1,993) 5,825 (3,453)
------- ------ -------
Deferred:
Federal (258) 2,226 1,298
State 646 349 (12)
------- ------ -------
388 2,575 1,286
------- ------ -------
$(1,605) $8,400 $(2,167)
======= ====== =======
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33
As required by SFAS 109, the Company annually evaluates the positive and
negative evidence bearing upon the realizability of its deferred tax assets. The
Company has considered the recent and historical results of operations and
concluded, in accordance with the applicable accounting methods, that it is more
likely than not that a certain portion of the deferred tax assets will not be
realizable. To the extent that an asset will not be realizable, a valuation
allowance is established. The tax effects of temporary differences giving rise
to deferred tax assets and liabilities as of December 31, are as follows:
2000 1999
---- ----
Deferred tax assets
Receivable reserves $ 536 $ 1,329
Inventory capitalization and reserves 179 2,760
Other asset reserves 2,671 2,297
Deferred compensation 1,100 2,778
Capital losses 2,725 --
Foreign tax credits 1,881 3,141
Alternative minimum tax credits 637 --
Net operating losses 7,213 451
Depreciation 469 739
Valuation allowance (5,557) (1,252)
------- -------
$11,854 $12,243
======= =======
Deferred tax liabilities $ -- $ 954
======= =======
As of December 31, 2000, the Company has federal and state net operating loss
carryforwards of approximately $10,100 and $35,819, respectively. The federal
net operating loss carryforward will begin to expire in 2020 and the state net
operating loss carryforwards will begin to expire in 2002. As of December 31,
2000, the Company also has foreign tax credit carryforwards of $1,881 that will
begin to expire in 2002 and alternative minimum tax credits of $637 which
carryforward indefinitely.
The following is a reconciliation of the statutory federal income tax rate to
the actual effective income tax rate:
2000 1999 1998
---- ---- ----
Federal tax (benefit) rate (35)% 35% (34)%
Increase (decrease) in taxes resulting from:
State income taxes, net of federal benefit 1 5 (27)
Effect of foreign tax rates and non-utilization
of losses (1) 7 (6) (7)
Goodwill 1 5 19
Non-deductible loss on sale of business 22 -- --
Meals and entertainment 1 1 4
Other, net 1 3 3
--- --- ---
Effective tax (benefit) rate (2)% 43% (42)%
=== === ===
(1) 1999 and 1998 include utilization of prior year foreign losses.
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34
10. Accrued Expenses and Other Current Liabilities
At December 31, 2000 and 1999, accrued expenses and other current liabilities
consisted of the following:
2000 1999
------- -------
Inventory purchases $19,535 $38,663
Accrued payroll and related and
deferred compensation 12,501 15,142
Deferred revenue 4,425 11,578
Royalties 1,833 12,281
Other 14,971 19,473
------- -------
$53,265 $97,137
======= =======
11. Nonrecurring Charges
A summary of the nonrecurring charges for the years ended December 31, 2000,
1999 and 1998 are as follows:
2000 1999 1998
------ ------- -------
Restructuring charge $5,735 $ -- $11,813
Settlement charge 660 1,675 --
Severance expense -- -- 2,332
Write-down of long-lived assets -- -- 1,143
------ ------- -------
$6,395 $1,675 $15,288
====== ======= =======
2000 Restructuring
On May 11, 2000, the Company announced that, pursuant to a plan approved by its
Board of Directors, it was integrating and streamlining its traditional
promotional product divisions, Corporate Promotions Group and Custom Product &
Licensing, into one product focused business unit. In association with the
consolidation of its product divisions, the Company eliminated a substantial
number of inventory SKUs from its product offering. As a result of this action
the Company recorded a 2000 pre-tax charge of $6,360 for restructuring expenses.
This charge was based on the Company's intentions and best estimates at the time
of the restructuring announcement. The original restructuring charge was revised
downward to $5,735, or a reversal of $625 of the original accrual, as a result
of the sale of the CPG business (see Note 3).
The restructuring charge relates principally to involuntary termination costs
($2,970), asset write-downs ($1,965, including $1,695 of inventory write-downs)
and the settlement of lease obligations ($800). The Company eliminated
approximately 85 positions, or 7% of its domestic workforce. This charge had the
effect of increasing the 2000 net loss available to common stockholders by
approximately $5,606 or $0.35 per share. The restructuring plan was
substantially complete by the end of 2000. A summary of activity in the
restructuring accrual is as follows:
Balance at January 1, 2000 $ --
Restructuring provision 6,360
Employee termination costs
and other cash payments (2,858)
Non-cash asset write-downs (1,684)
Accrual reversal (625)
-------
Balance at December 31, 2000 $ 1,193
=======
1998 Restructuring
As a result of its 1998 corporate restructuring, the Company recorded a
nonrecurring pre-tax charge to operations of $11,813 for asset write-downs,
employee termination costs, lease cancellations and other related exit costs
associated with the restructuring. The restructuring charge had the effect of
reducing 1998 after tax earnings by $6,875 or $0.46 per share. The restructuring
plan was fully executed by the end of 1998.
34
35
2000 Settlement Charge
The Company recorded a 2000 nonrecurring pre-tax charge to operations of $660
associated with the settlement of a change in control agreement with an employee
of the Company who was formerly an executive officer.
1999 Settlement Charge
The Company recorded a 1999 nonrecurring pre-tax charge to operations of $1,675
associated with the settlement of previously issued incentive stock options in a
subsidiary which were issued to principals of a previously acquired company. The
settlement was reached to facilitate the integration of the acquired company
into other operations within one of the Company's divisions.
Severance Expense
Effective December 31, 1998, Gregory P. Shlopak, former chief executive officer,
resigned from the Company. Pursuant to an agreement entered into with Mr.
Shlopak, the Company recorded a 1998 pre-tax charge to operations of $2,332. The
agreement provides for payments and benefits to Mr. Shlopak payable over a three
year period.
Write-down of Long-lived Assets
In connection with the Company's plan to relocate from its Gloucester,
Massachusetts facilities, the Company recorded a 1998 pre-tax charge to
operations of $1,143. This charge represented the estimated net book value of
leasehold improvements at the anticipated abandonment date.
12. Redeemable Preferred Stock
In November 1999, The Yucaipa Companies ("Yucaipa"), a Los Angeles-based
investment firm, invested $25,000 in the Company in exchange for preferred stock
and a warrant to purchase additional preferred stock. Under the terms of the
investment, which was approved at a Special Meeting of Stockholders on November
10, 1999, the Company issued 25,000 shares of a newly authorized senior
cumulative participating convertible preferred stock ("preferred stock") to
Yucaipa for $25,000. Yucaipa is entitled, at their option, to convert each share
of preferred stock into common stock equal to the sum of $1,000 per share plus
all accrued and unpaid dividends, divided by $8.25 (3,108,049 shares as of
December 31, 2000 and 3,047,431 shares as of December 31, 1999).
In connection with the issuance of the preferred stock, the Company also issued
a warrant to purchase 15,000 shares of a newly authorized series of preferred
stock at a purchase price of $15,000. Each share of this series of preferred
stock issued upon exercise of the warrant is convertible, at Yucaipa's option,
into common stock equal to the sum of $1,000 per share plus all accrued and
unpaid dividends, divided by $9.00 (1,666,666 shares as of December 31, 2000 and
December 31, 1999, respectively). The warrant expires on November 10, 2004.
Assuming conversion of all of the convertible preferred stock, Yucaipa would own
approximately 16% of the then outstanding common shares at December 31, 2000 and
December 31, 1999, respectively. Assuming the preceding conversion, and assuming
the exercise of the warrant and the conversion of the preferred stock issuable
upon its exercise, Yucaipa would own a total of approximately 23% of the then
outstanding common shares at December 31, 2000 and December 31, 1999,
respectively, making it the Company's largest shareholder.
Yucaipa has voting rights equivalent to the number of shares of common stock
into which their preferred stock is convertible on the relevant record date.
Also, Yucaipa is entitled to receive a quarterly dividend equal to 4% of the
base liquidation preference of $1,000 per share outstanding, payable in cash or
in-kind at the Company's option.
In the event of liquidation, dissolution or winding up of the affairs of the
Company, Yucaipa, as holders of the preferred stock, will be entitled to
receive the redemption price of $1,000 per share plus all accrued dividends plus
(1) (a) 7.5% of the amount that the Company's retained earnings exceeds $75,000
less (b) the aggregate amount of any cash dividends paid on common stock which
are not in excess of the amount of dividends paid on the preferred stock,
divided by (2) the total number of preferred shares outstanding as of such date
(the "adjusted liquidation preference"), before any payment is made to other
stockholders.
The Company may redeem all or a portion of the preferred stock at a price equal
to the adjusted liquidation preference of each share, if the average closing
prices of the Company's common stock have exceeded $12.00 for sixty consecutive
trading days on or after November 10, 2002, or, any time on or after November
10, 2004. The preferred stock is subject to mandatory redemption if a change in
control of the Company occurs.
35
36
In connection with this transaction, the managing partner of Yucaipa was
appointed chairman of the Company's board of directors and Yucaipa was entitled
to nominate two additional individuals to a seven-person board. Additionally,
the Company will pay Yucaipa an annual management fee of $500 for a five-year
term for which Yucaipa will provide general business consultation and advice and
management services.
13. Stock Plans
At December 31, 2000, the Company had three stock-based compensation plans,
which are described below. The Company adopted the disclosure provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") and has applied APB Opinion 25 and related
Interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized related to such plans. Had compensation cost for the
Company's 2000, 1999 and 1998 grants for stock-based compensation plans been
determined consistent with SFAS 123, the Company's net income (loss) and
earnings (loss) per common share would have been reduced (increased) to the pro
forma amounts indicated below:
2000 1999 1998
---------- ---------- ---------
Net income (loss) - as reported $(69,715) $11,136 $(3,016)
Net income (loss) - pro forma (71,143) 9,159 (6,395)
Earnings (loss) per common share - basic - as reported (4.43) 0.70 (0.20)
Earnings (loss) per common share - diluted - as reported (4.43) 0.67 (0.20)
Earnings (loss) per common share - basic - pro forma (4.52) 0.58 (0.43)
Earnings (loss) per common share - diluted - pro forma (4.52) 0.55 (0.43)
1993 Omnibus Stock Plan
Under its 1993 Omnibus Stock Plan (the "Omnibus Plan"), as amended in May 1997,
the Company has reserved up to 3,000,000 shares of its common stock for issuance
pursuant to the grant of incentive stock options, nonqualified stock options or
restricted stock. The Omnibus Plan is administered by the Compensation Committee
of the Board of Directors. Subject to the provisions of the Omnibus Plan, the
Compensation Committee has the authority to select the optionees or restricted
stock recipients and determine the terms of the options or restricted stock
granted, including: (i) the number of shares; (ii) the exercise period (which
may not exceed ten years); (iii) the exercise or purchase price (which in the
case of an incentive stock option cannot be less than the market price of the
common stock on the date of grant); (iv) the type and duration of options or
restrictions, limitations on transfer and other restrictions; and (v) the time,
manner and form of payment. Generally, an option is not transferable by the
option holder except by will or by the laws of descent and distribution. Also,
generally, no incentive stock option may be exercised more than 60 days
following termination of employment. However, in the event that termination is
due to death or disability, the option is exercisable for a maximum of 180 days
after such termination. Options granted under this plan generally become
exercisable in three equal installments commencing on the first anniversary of
the date of grant.
1997 Acquisition Stock Plan
The 1997 Acquisition Stock Plan (the "1997 Plan") is intended to provide
incentives in connection with the acquisitions of other businesses by the
Company. The 1997 Plan is identical in all material respects to the Omnibus
Plan, except that the number of shares available for issuance under the 1997
Plan is 1,000,000 shares.
The fair value of each option grant under the above plans was estimated using
the Black-Scholes option pricing model with the following weighted average
assumptions for 2000, 1999 and 1998, respectively: expected dividend yield of
zero % for all years; expected life of 4.5 years for 2000, 4.4 years for 1999
and 4.5 years for 1998; expected volatility of 70% for 2000, 63% for 1999 and
65% for 1998; and, a risk-free interest rate of 6.7% for 2000, 5.2% for 1999 and
5.6% for 1998.
36
37
The following summarizes the status of the Company's stock options as of
December 31, 2000, 1999 and 1998 and changes during the year ended on those
dates:
2000 1999 1998
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------------------------- ---------------------------- ----------------------------
Outstanding at beginning of year 2,322,121 $10.17 2,175,927 $11.35 2,343,762 $11.31
Granted 336,931 6.41 462,651 5.67 317,750 10.98
Exercised (19,008) 6.02 -- -- (97,717) 10.53
Canceled (792,596) 10.35 (316,457) 11.68 (387,868) 11.05
---------- ---------- ----------
Outstanding at end of year 1,847,448 9.45 2,322,121 10.17 2,175,927 11.35
========== ========== ==========
Options exercisable at year-end 1,290,702 10.75 1,390,761 11.26 1,057,031 11.30
========== ========== ==========
Options available for future grant 1,915,140 1,459,475 1,605,669
========== ========== ==========
Weighted average fair value of
options granted during the year $ 3.88 $ 3.12 $ 5.97
========== ========== ==========
The following table summarizes information about stock options outstanding at
December 31, 2000:
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------- ----------- ---- ------- ----------- ---------
$ 5.38 - $ 8.00 598,564 8.7 years $ 5.82 116,997 $ 5.60
8.75 - 12.88 1,153,217 6.2 10.82 1,078,038 10.87
14.30 - 18.13 90,267 4.4 14.86 90,267 14.86
23.25 - 28.75 5,400 3.3 28.34 5,400 28.34
--------- ---------
$ 5.38 - $28.75 1,847,448 6.9 9.45 1,290,702 10.75
========= =========
Employee Stock Purchase Plan
Pursuant to its 1993 Employee Stock Purchase Plan (the "Stock Purchase Plan"),
as amended in November 1999, the Company is authorized to issue up to an
aggregate of 600,000 shares of its common stock to substantially all full-time
employees electing to participate in the Stock Purchase Plan. Eligible employees
may contribute, through payroll withholdings or lump sum cash payment, up to 10%
of their base compensation during six-month participation periods beginning in
January and July of each year. At the end of each participation period, the
accumulated deductions are applied toward the purchase of Company common stock
at a price equal to 85% of the market price at the beginning or end of the
participation period, whichever is lower. Employee purchases amounted to 80,284
shares in 2000, 88,132 shares in 1999 and 61,349 shares in 1998 at prices
ranging from $4.72 to $8.71 per share. At December 31, 2000, 248,619 shares were
available for future purchases. The fair value of the employees' purchase rights
was estimated using the Black-Scholes option pricing model with the following
weighted average assumptions for 2000, 1999 and 1998, respectively: expected
dividend yield of zero % for all years; expected life of six months for all
years; expected volatility of 70% for 2000, 63% for 1999 and 65% for 1998; and,
a risk-free interest rate of 5.6%, 4.8% and 5.4% for 2000, 1999 and 1998,
respectively. The weighted average fair value of those purchase rights per share
granted in 2000, 1999 and 1998 was $1.77, $1.91 and $2.97, respectively.
37
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Common Stock Purchase Warrants
In February 1998, the Company issued 975,610 shares of its common stock and a
warrant to purchase up to 100,000 shares of its common stock in a private
placement, resulting in net proceeds of approximately $10,000 which will be used
for general corporate purposes. The warrant is exercisable at any time from the
grant date of February 12, 1998 to February 12, 2003 at an exercise price of
$10.25 per share, which represented the fair market value on the grant date.
Additionally, in June 1998, the Company issued a warrant to purchase 200,000
shares of the Company's common stock as part of settling a preacquisition
contingency of Simon. The warrant is exercisable at any time from the grant date
of June 30, 1998 to July 31, 2002 at an exercise price of $11.00 per share,
which represented the fair market value on the grant date.
14. Comprehensive Income
The Company's comprehensive income consists of net income (loss), foreign
currency translation adjustments and unrealized holding gains (losses) on
available-for-sale securities, and is presented in the Consolidated Statements
of Stockholders' Equity.
Components of other comprehensive income (loss) consist of the following:
2000 1999 1998
------- ----- -------
Change in unrealized gains
and losses on investments $(2,196) $(189) $ 2,477
Foreign currency translation
adjustments 109 (719) (86)
Income tax benefit (expense) related to
unrealized gains and losses on investments 954 83 (1,035)
------- ----- -------
Other comprehensive income (loss) $(1,133) $(825) $ 1,356
======= ===== =======
15. Profit-Sharing Retirement Plan
The Company has a qualified profit-sharing plan under Section 401(k) of the
Internal Revenue Code that is available to substantially all employees. Under
this plan the Company matches one-half of employee contributions up to six
percent of eligible payroll. Employees are immediately fully vested for their
contributions and vest in the Company contribution ratably over a three-year
period. The Company's contribution expense for the years ended December 31,
2000, 1999 and 1998 was $1,194, $1,101 and $988, respectively.
16. Commitments and Contingencies
On or about February 15, 1997, Montague Corporation ("Montague") filed an action
in Middlesex Superior Court, Commonwealth of Massachusetts, Montague Corporation
v. Cyrk, Inc. (Civil Action No. 97-00888) ("Montague action"), alleging a breach
of a May 17, 1995 Exclusive Distribution Agreement naming the Company as the
exclusive USA distributor for the sale of Montague bicycles in connection with
promotional programs. On March 10, 1999, the Company and Montague entered into a
Settlement and Joint Venture Agreement ("Settlement"), terminating the Montague
action and establishing a joint venture to sell corporate logoed bicycles for
use in various corporate sales programs and promotions. Under the terms of the
Settlement, the Company may be obligated to pay Montague up to $900 in cash if
the joint venture does not achieve certain financial results within three years
from the Settlement date.
The Company is also involved in other litigation and various legal matters which
have arisen in the ordinary course of business. The Company does not believe
that the resolution of the above described litigation matters or the ultimate
resolution of any other currently pending litigation or other legal matters will
have a material adverse effect on its financial condition, results of operations
or net cash flows.
As a result of the Company's recent restructuring and other events, the Company
may be required to make severance payments to two executive officers of the
Company pursuant to existing severance agreements with the Company for the
aggregate amount of approximately $3,500.
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17. Related Party Transactions
The Company leases warehouse facilities under a fifteen-year operating lease
agreement which expires December 31, 2011 from a limited liability company which
is jointly owned by an officer and a former director of the Company. The
agreement provides for annual rent of $462 and for the payment by the Company of
all utilities, taxes, insurance and repairs. As a result of the February 2001
sale of the CPG business (see Note 3), the buyer became the primary obligor
under this lease, however, the Company remains liable under this lease to the
extent that the buyer does not perform any of its obligations under the lease.
In accordance with the provisions of an employment agreement between an officer
of the Company and the Company, the officer exercised his option in 2000 to
borrow $2,000 under a line of credit available to the officer. As of December
31, 2000, the Company had two $1,000 notes receivable from the officer. The
notes bear interest at an annual rate of 6.6% and 6.3%, respectively, and are
due and payable no later than six months after the Company's annual meeting in
2001.
A former director of the Company is chairman of the executive committee of a
corporation which supplies certain promotional products to the Company.
Purchases from this corporation amounted to $9,027 for the year ended December
31, 1998.
18. Segments and Related Information
The Company operates in one industry: the promotional marketing industry. The
Company's business in this industry encompasses the design, development and
marketing of high-impact promotional products and programs.
A significant percentage of the Company's sales is attributable to a small
number of customers. In addition, a significant portion of trade accounts
receivable relates to these customers. The following summarizes the
concentration of sales and trade receivables for customers with sales in excess
of 10% of total sales for any of the years ended December 31, 2000, 1999 and
1998, respectively:
% of Sales % of Trade Receivables
---------- ----------------------
2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ----
Company A 65 61 57 73 35 32
Company B 9 9 11 15 6 9
The Company conducts its promotional marketing business on a global basis. The
following summarizes the Company's net sales for the years ended December 31,
2000, 1999 and 1998, respectively, by geographic area:
2000 1999 1998
--------- -------- --------
United States $505,209 $608,613 $482,200
Asia 106,380 54,661 44,077
Germany 76,015 111,231 35,351
United Kingdom 25,962 153,976 60,524
Other foreign 54,884 60,363 135,701
-------- -------- --------
Consolidated $768,450 $988,844 $757,853
======== ======== ========
The following summarizes the Company's long-lived assets as of December 31,
2000, 1999 and 1998, respectively, by geographic area:
2000 1999 1998
------- -------- --------
United States $79,861 $104,073 $ 99,611
Foreign 3,297 3,559 3,101
------- -------- --------
Consolidated $83,158 $107,632 $102,712
======= ======== ========
Geographic areas for net sales are based on customer locations. Long-lived
assets include property and equipment, excess of cost over net assets acquired
and other non-current assets.
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19. Earnings Per Share Disclosure
The following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computation for "income (loss) available to common
stockholders" and other related disclosures required by SFAS 128:
For the Years Ended December 31,
2000 1999 1998
----------------------------------- ------------------------------------ ------------------------------------
Income Shares Per Share Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------------------------------- ------------------------------------ ------------------------------------
Basic EPS:
Income (loss)
available to
common
stockholders $(70,715) 15,971,537 $(4.43) $10,994 15,624,366 $0.70 $(3,016) 14,962,362 $(0.20)
====== ===== ======
Preferred stock
dividends 1,000 142 --
Effect of Dilutive
Securities:
Common stock
equivalents -- 95,444 --
Convertible
preferred stock -- 428,195 --
Contingently and
non-contingently
issuable shares
related to
acquired companies -- 483,402 --
---------------------- ----------------------- ----------------------
Diluted EPS:
Income (loss)
available to
common stockholders
and assumed
conversions $(69,715) 15,971,537 $(4.43) $11,136 16,631,407 $0.67 $(3,016) 14,962,362 $(0.20)
====================== ====== ======================= ===== ====================== ======
For the years ended December 31, 2000 and December 31, 1998,
3,499,226 of convertible preferred stock, common stock equivalents and
contingently and non-contingently issuable shares related to acquired companies
and 695,317 of common stock equivalents and contingently and non-contingently
issuable shares related to acquired companies, respectively, were not included
in the computation of diluted EPS because to do so would have been antidilutive.
20. Quarterly Results of Operations (Unaudited)
The following is a tabulation of the quarterly results of operations for the
years ended December 31, 2000 and 1999, respectively:
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
2000
Net sales $177,303 $224,333 $178,702 $188,112
Gross profit 32,934 32,353 37,402 41,336
Net income (loss) (668) (9,523) (1,434) (58,090)
Earnings (loss) per common share - basic (0.06) (0.61) (0.10) (3.63)
Earnings (loss) per common share - diluted (0.06) (0.61) (0.10) (3.63)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
1999
Net sales $159,077 $313,523 $258,823 $257,421
Gross profit 29,754 39,696 51,376 51,511
Net income (loss) (3,223) 2,483 7,761 4,115
Earnings (loss) per common share - basic (0.21) 0.16 0.49 0.25
Earnings (loss) per common share - diluted (0.21) 0.15 0.48 0.23
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CYRK, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS)
ADDITIONS
CHARGED TO DEDUCTIONS
ACCOUNTS RECEIVABLE, BALANCE AT COSTS AND (CHARGED AGAINST BALANCE AT
ALLOWANCE FOR BEGINNING EXPENSES ACCOUNTS END
DOUBTFUL ACCOUNTS OF PERIOD (BAD DEBT EXPENSES) RECEIVABLE) OF PERIOD
- ----------------- ----------- ------------------ ----------------- ---------
2000 $4,243 $3,423 $5,592 $2,074
1999 2,682 2,578 1,017 4,243
1998 3,801 1,485 2,604 2,682
DEFERRED INCOME ADDITIONS
TAX ASSET BALANCE AT CHARGED TO BALANCE AT
VALUATION BEGINNING COSTS AND END
ALLOWANCE OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
- ---------- ---------- -------- ------------ ---------
2000 $1,252 $4,305 $ -- $5,557
1999 8,193 -- 6,941(1) 1,252
1998 8,193 -- -- 8,193
(1) Represents the tax benefit from adjusting the valuation allowance of the
acquired deferred assets.
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ---------- -----------
2.1 (10) Securities Purchase Agreement dated September 1, 1999, between the Registrant and Overseas Toys, L.P.
2.2 (15) Purchase Agreement between Cyrk, Inc. and Rockridge Partners, Inc., dated January 20, 2001 as amended by
Amendment No. 1 to the Purchase Agreement, dated February 15, 2001
3.1 (4) Restated Certificate of Incorporation of the Registrant
3.2 (2) Amended and Restated By-laws of the Registrant
3.3 (12) Certificate of Designation for Series A Senior Cumulative Participating Convertible Preferred Stock
4.1 (2) Specimen certificate representing Common Stock
10.1 (3)(11) 1993 Employee Stock Purchase Plan, as amended
10.2 (3)(4) 1993 Omnibus Stock Plan, as amended
10.3 (1) Tax Allocation and Indemnity Agreement dated July 6, 1993, among Cyrk, Inc., the Registrant, Gregory P.
Shlopak and Patrick D. Brady
10.4 (3)(5) Life Insurance Agreement dated as of November 15, 1994 by and between the Registrant and
Patrick D. Brady as Trustee under a declaration of trust dated November 7, 1994 between Gregory P.
Shlopak and Patrick D. Brady, Trustee, entitled "The Shlopak Family 1994 Irrevocable Insurance Trust"
10.4.1(3)(5) Assignments of Life Insurance policies as Collateral, each dated November 15, 1994
10.5 (3)(5) Life Insurance Agreement dated as of November 15, 1994 by and between the Registrant and Patrick D. Brady
as Trustee under a declaration of trust dated November 7, 1994 between Gregory P. Shlopak and Patrick D.
Brady, Trustee, entitled "The Gregory P. Shlopak 1994 Irrevocable Insurance Trust"
10.5.1 (3)(5) Assignments of Life Insurance policies as Collateral, each dated November 15, 1994
10.6 (3)(5) Life Insurance Agreement dated as of November 15, 1994 by and between the Registrant and Walter E.
Moxham, Jr. as Trustee under a declaration of trust dated November 7, 1994 between Patrick D. Brady and
Walter E. Moxham, Jr., Trustee, entitled "The Patrick D. Brady 1994 Irrevocable Insurance Trust"
10.6.1 (3)(5) Assignments of Life Insurance policies as Collateral, each dated November 15, 1994
10.7 (3)(6) 1997 Acquisition Stock Plan
10.8 (7) Securities Purchase Agreement dated February 12, 1998 by and between Cyrk, Inc. and Ty Warner
10.9 (8) Severance Agreement between Cyrk, Inc. and Gregory P. Shlopak
10.10 (3)(9) Severance Agreement between Cyrk, Inc. and Ted L. Axelrod dated November 20, 1998
10.11 (3)(9) Severance Agreement between Cyrk, Inc. and Dominic F. Mammola dated November 20, 1998
10.11.1 (3)(9) Amendment No. 1 to Severance Agreement between Cyrk, Inc. and Dominic F. Mammola dated March 29, 1999
10.12 (12) Registration Rights Agreement between Cyrk, Inc. and Overseas Toys, L.P.
10.13 (12) Management Agreement between Cyrk, Inc. and The Yucaipa Companies
10.14 (3)(10) Employment Agreement between Cyrk, Inc. and Allan Brown, dated September 1, 1999
10.15 (3)(10) Employment Agreement between Cyrk, Inc. and Patrick Brady, dated September 1, 1999
10.16 (12) Lease agreement dated as of July 29, 1999, between TIAA Realty, Inc. and Cyrk, Inc.
10.17 (3)(12) Life Insurance Agreement dated as of September 29, 1997 by and between Simon Marketing, Inc. and Frederic
N. Gaines, Trustee of the Allan I. Brown Insurance Trust, under Declaration of Trust dated September 29,
1997
10.18 (3)(14) Promissory Note and Pledge Agreement by Allan Brown in favor of Cyrk, Inc., dated July 10, 2000
10.19 (3) Promissory Note and Pledge Agreement by Allan Brown in favor of Cyrk, Inc., dated October 18, 2000, filed
herewith
10.20 (15) Subordinated Promissory Note by Rockridge Partners, Inc. in favor of Cyrk, Inc., dated February 15, 2001
10.21 Amended and Restated Loan and Security Agreement by and among, Cyrk, Inc., Foothill Capital Corporation
and the other signatories thereto, dated as of February 15, 2001, filed herewith
21.1 List of Subsidiaries, filed herewith
23.1 Consent of PricewaterhouseCoopers LLP - Independent Accountants, filed herewith
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99.1 (13) Amended Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities
Litigation Reform Act of 1995
99.2 (3)(10) Termination Agreement among Cyrk, Inc., Patrick Brady, Allan Brown, Gregory Shlopak, Eric Stanton, and
Eric Stanton Self-Declaration of Revocable Trust
(1) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(Registration No. 33-75320) or an amendment thereto and incorporated herein
by reference.
(2) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(Registration No. 33-63118) or an amendment thereto and incorporated herein
by reference.
(3) Management contract or compensatory plan or arrangement.
(4) Filed as an exhibit to the Annual Report on Form 10-K for the year ended
December 31, 1994 and incorporated herein by reference.
(5) Filed as an exhibit to the Registrant's Registration Statement on Form 10-Q
dated March 31, 1995 and incorporated herein by reference.
(6) Filed as an exhibit to the Registrant's Registration Statement on Form S-8
(Registration No. 333-45655) and incorporated herein by reference.
(7) Filed as an exhibit to the Annual Report on Form 10-K for the year ended
December 31, 1997 and incorporated herein by reference.
(8) Filed as an exhibit to the Registrant's Report on Form 8-K dated December
31, 1998 and incorporated herein by reference.
(9) Filed as an exhibit to the Annual Report on Form 10-K for the year ended
December 31, 1998 and incorporated herein by reference.
(10) Filed as an exhibit to the Registrant's Report on Form 8-K dated September
1, 1999 and incorporated herein by reference.
(11) Filed as an exhibit to the Registrant's Registration Statement on Form S-8
dated February 1, 2000 and incorporated herein by reference.
(12) Filed as an exhibit to the Annual Report on Form 10-K for the year ended
December 31, 1999 and incorporated herein by reference.
(13) Filed as an exhibit to the Registrant's Registration Statement on Form 10-Q
dated June 30, 2000 and incorporated herein by reference.
(14) Filed as an exhibit to the Registrant's Registration Statement on Form 10-Q
dated September 30, 2000 and incorporated herein by reference.
(15) Filed as an exhibit to the Registrant's Report on Form 8-K dated
February 15, 2001 and incorporated herein by reference.
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