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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, 1997
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.)
3 POND ROAD
GLOUCESTER, MASSACHUSETTS 01930
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (978) 283-5800
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 27, 1998, the aggregate market value of voting stock held by
non-affiliates of the registrant was $135,904,938.
At February 27, 1998, 14,693,390 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
1998 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 which provides promotional products and agency
services in the design and development of high-impact promotional programs.
Cyrk was founded as a Massachusetts corporation in 1976 and was engaged
primarily in the design, manufacture and sale of custom screen-printed sports
apparel and accessories. In 1990, Cyrk broadened its product design and
manufacturing expertise to include a focus on the promotional products business
and the further development of its international production and worldwide
sourcing capabilities. Cyrk's acquisition in 1997 of Simon Marketing, Inc.
("Simon") and Tonkin, Inc. ("Tonkin"), described below, have significantly
strengthened the Company's position as a leader in the promotion industry.
Cyrk's promotional products and services are sold to consumer products and
services companies seeking to promote their brand names and corporate
identities and to build brand loyalty. Cyrk's customers include McDonald's
Corporation ("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 Pepsi-Cola Company ("Pepsi") (for its "Pepsi
Stuff"(R)3 national promotion, 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 comprehensive marketing services, which address all aspects
of a customer's promotional products program, and its expertise in design,
manufacturing and sourcing have allowed the Company to successfully execute
large, worldwide high-impact promotional programs.
ACQUISITIONS
The Company made two key acquisitions in 1997. On April 7, 1997, the Company
acquired Tonkin, a twenty-five year old, privately held promotional products
company employing approximately 275 employees primarily in its Monroe,
Washington headquarters. Tonkin develops and implements corporate identity
programs for major domestic and international clients including Caterpillar,
Inc., Consolidated Freightways, Inc. and Peterbilt Motors Company.
On June 9, 1997, the Company acquired Simon, a privately held Los Angeles-based
marketing and promotion agency which was founded in 1976 and employs
approximately 400 people in the United States, Asia, Europe and Canada. Simon
provides marketing programs, promotional products and packaging to clients which
include McDonald's, Blockbuster Entertainment Inc. and Chevron Products Company,
a division of Chevron U.S.A. Inc. Simon's long-standing relationship with
McDonald's has produced premiums and promotions which include Happy Meal
premiums, national games and other promotions.
RESTRUCTURING
On February 13, 1998, the Company announced a plan to restructure its worldwide
operations. The plan reflects the Company's strategy to focus on its core
business in the promotional marketing industry. The Company intends to
consolidate certain operating facilities, discontinue certain divisions of its
apparel business and eliminate approximately 450 positions or 28% of its
worldwide work force. The majority of the eliminated positions will affect the
screen printing and embroidery business in Gloucester, Massachusetts.
1 HAPPY MEAL is a registered trademark of McDonald's Corporation.
2 MARLBORO is a registered trademark of Philip Morris Incorporated.
3 PEPSI STUFF is a registered trademark of Pepsi-Cola Company.
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PRODUCTS AND SERVICES
Promotional Product Programs. The goal of a High-Impact Promotional Program TM 4
("HIPP" TM 4) is to enhance corporate identity or brand awareness and build
customer or employee loyalty. Cyrk has achieved this goal and continues to
develop and manage promotions that generate tremendous growth for customer
brands and for customer loyalty.
Most of the promotional products used in a HIPP are issued upon redemption of
coupons evidencing the purchase of other products (a "coupon redemption" or
"continuity" program), distributed to consumers in connection with the sale of
another product (a "gift-with-purchase" program), sold in conjunction with the
sale of another product (a "purchase-with-purchase" program) or 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.
The advertising and marketing campaigns of many companies include the
promotional product concept within the design of their overall corporate
development. 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.
Increasing numbers of 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 the demand for
superior promotional services is not currently being met by the traditional
suppliers of corporate, brand and logoed products, such as advertising specialty
vendors, many of which are small, have insufficient resources and are limited to
offering the standard products such as pens, mugs and key chains on which a
brand or corporate name or logo is imprinted. Cyrk's custom designed and
proprietary products are integral components of a high-impact 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.
Many of the company's large-scale consumer promotions include custom product
which was conceived, designed and produced by the Company's Custom Product and
Licensing Group ("CP&L"). CP&L has successfully custom designed and developed
proprietary product including toys, apparel and accessories for numerous
promotions for McDonald's and other successful consumer promotional programs
including the Marlboro Gear and Pepsi Stuff promotions. The Company expects to
expand its licensing activities in 1998. The Company has entered into licensing
agreements with customers such as Ty, Inc. ("Ty") and Mars, Incorporated
("Mars"). Under its licensing arrangement with Ty, the Company has obtained the
right to serve as Ty's strategic alliance supplier for the Beanie Babies(R)5
Official Club TM 6 program. Under its licensing arrangement with Mars, the
Company has been granted a license to use certain Mars' trademarks, symbols and
designs in connection with the manufacture, sale and distribution of certain
merchandise.
The Company, through its Corporate Promotions Group, creates corporate identity
programs and trade and employee catalogue programs for its customers. The
programs typically incorporate a range of promotional products bearing the
customer's company name or logo. These products are varying in type, value and
appeal and may include T-shirts, fleece pullovers, sports bags, caps, watches
and a variety of other products and apparel items. With the Company's recent
acquisitions in the promotional product arena, most notably the acquisition of
Tonkin, the Company now offers a comprehensive range of promotional products
and catalogue program services for its customers.
Through its Integrated Marketing Solutions Group, the Company provides a
complete range of agency services to its customers. The Company will create a
promotion concept, advise as to the selection, cost and availability of
products to be included in a program, assist in the development of program
participation rules, forecast participation levels and product demand as well
as execute the creative development and production of the program.
4 HIGH-IMPACT PROMOTIONAL PROGRAM and HIPP are trademarks of Cyrk, Inc.
5 BEANIE BABIES is a registered trademark of Ty, Inc.
6 BEANIE BABIES OFFICIAL CLUB is a trademark of Ty, Inc.
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Fulfillment Services. Cyrk also offers warehouse fulfillment services and
fulfillment consulting services to its promotional product customers.
Fulfillment is the process by which promotional products are distributed, often
through a product catalogue. The Company charges separately for its fulfillment
services but derives substantially all of its revenue from the sale of products.
Design, Merchandising and Product Development. The Company believes that one of
its most important competitive advantages is the strong design and merchandising
capability that it has developed over the last 22 years. The Company maintains a
staff of graphic designers and product designers who not only design products
and catalogues, but also provide direction as to the most effective types of
products to include in a promotional program. Cyrk's extensive design capability
enables the Company to furnish customers with product samples and prototypes
quickly. In addition, the merchandising experience of the Company's designers
allows them to assemble integrated collections of custom products for its
customers. Finally, the Company's designers work closely with the production
staff and understand production methods which allows the Company's designs to
move efficiently from the design to the production stage.
Manufacturing and Sourcing. The quality and timely delivery of the Company's
products depend on the Company's ability to control the manufacturing process.
The Company seeks to maintain such control by maintaining a physical presence in
the Far East to oversee the offshore manufacturing of the Company's products by
independent Asian factories. The Company's Asian operations perform a variety of
services for the Company, 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. The Company has expanded
its manufacturing and sourcing activities into Europe and the Middle East.
The Company 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. The Company believes
that its policy of outsourcing a majority of its manufacturing requirements
allows it to achieve increased production flexibility while reducing the
Company's capital expenditures and costs of maintaining a substantial production
work force. The Company'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
the Company'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 the Company's current foreign manufacturing sources were to
cease doing business with the Company for any reason, the Company's business and
operating results could be adversely affected. The Company'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.
MCDONALD'S, PHILIP MORRIS AND PEPSI RELATIONSHIPS
The Company's business has been concentrated with McDonald's, Philip Morris and
Pepsi. The Company's business with these promotional customers (as well as its
other promotional product customers) 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, Pepsi and certain
other customers are allowed to 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, the Company's level of net sales is difficult to predict
accurately and may fluctuate greatly from quarter to quarter.
The Company conducts its business with McDonald's through Simon, which was
acquired by the Company in June 1997. 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. Net sales
to McDonald's accounted for 36% of the Company's consolidated net sales in
fiscal 1997.
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Net sales to Philip Morris accounted for 16%, 30% and 57% of the Company's
consolidated net sales in 1997, 1996 and 1995, respectively. A substantial
majority of those sales relate to Philip Morris' Marlboro Adventure Team TM 7,
Marlboro Country Store(R)8 and Marlboro Unlimited(R)8 promotions. Final
regulations issued by the United States Food and Drug Administration with
respect to tobacco products could have a material adverse effect on the
Company's business with Philip Morris and on its results of operations. For a
description of those regulations and their potential impact on the Company's
business with Philip Morris, please refer to the Company's Amended Cautionary
Statement for purposes of the "Safe Harbor" Provisions of the Private Securities
Litigation Reform Act of 1995, filed herewith as Exhibit 99.3.
Net sales to Pepsi accounted for 21% and 38% of the Company's consolidated net
sales in 1997 and 1996, respectively. A substantial majority of those sales
related to the "Pepsi Stuff" national promotion and other similar Pepsi
promotions. The Company's agreements with Pepsi were terminated in December 1997
and the Company expects sales to Pepsi in 1998 to be minimal.
SALES AND DISTRIBUTION
The Company sells its promotional products and services through an employee
sales force composed of approximately 225 persons.
In addition to the Company's sales force, members of senior management are
actively involved in both selling the Company's promotional product services and
in managing large customer accounts. The Company's sales efforts on the
promotional products and services side focus on identifying prospective
customers, making sales presentations and managing the client relationship as
well as the client's promotional program from start to finish. These efforts are
targeted both at companies whose products and brands the Company is currently
helping to promote and at other large companies which tend to rely heavily on
promotional product advertising.
International sales accounted for approximately 27%, 8% and 3% of the Company's
consolidated net sales in 1997, 1996 and 1995, respectively. International sales
are currently made through the Company's account representatives in the United
States as well as through the Company's Germany, United Kingdom and Hong Kong
subsidiaries.
COMPETITION
The promotional products industry is highly fragmented and competitive, and some
of the Company's competitors have substantially greater financial and other
resources than the Company. The Company'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 the Company 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 bases for competition are creativity in product design, quality and
style of products, prompt delivery, customer service, price and financial
strength. The Company 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, 1997, the Company had written purchase orders for $204.2
million as compared to $97.6 million at December 31, 1996. The comparative
increase in the Company's backlog is the result of the Simon and Tonkin
acquisitions. The Company's purchase orders are generally subject to
cancellation with limited penalty and are therefore not necessarily indicative
of future revenues and earnings.
TESTING AND QUALITY CONTROL
The Company 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,
the Company relies primarily on monitoring and inspection activities to ensure
quality control rather than on any remedies it may have for defective goods.
7 MARLBORO ADVENTURE TEAM is a trademark of Philip Morris
Incorporated.
8 MARLBORO COUNTRY STORE and MARLBORO UNLIMITED are registered trademarks of
Philip Morris Incorporated.
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The Company, 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 the Company's
customers.
IMPORTS AND IMPORT RESTRICTIONS
A substantial amount of net sales of the Company in 1997 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 the Company imports goods. These
agreements impose quotas that limit the quantity of certain types of goods,
including textile products imported by the Company, 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.
The Company'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 the Company from China currently receive the same
preferential tariff treatment accorded goods from countries granted "most
favored nation" 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 "most favored nation" status, goods imported from China will be subject to
significantly higher duty rates which would increase the cost of goods from
China. In 1997, a substantial amount of the Company's net sales were from
products manufactured in China.
EMPLOYEES
At December 31, 1997, the Company had approximately 1,425 full-time employees.
The Company's work force is not unionized and the Company believes that its
relations with its employees are good. Pursuant to the restructuring plan
announced in February 1998, the Company will consolidate certain operating
facilities, discontinue certain divisions of its apparel business and eliminate
approximately 450 positions of its worldwide work force.
ITEM 2. PROPERTIES.
The Company leases its principal executive offices, certain manufacturing
operations and warehouse space in Gloucester, Massachusetts. At December 31,
1997, the Company occupied approximately 100,100 square feet (of which
approximately one-half was allocated to manufacturing operations) under leases
that expire in April 1999 through December 1999 and have an annual base rent of
approximately $760,000. All of the Gloucester facilities are owned by a trust of
which Mr. Shlopak, the Company's Chairman of the Board of Directors and Chief
Executive Officer, is both a trustee and beneficiary.
The Company 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. The warehouse is used by
the Company for inventory storage and to perform fulfillment services for
certain of its customers. This facility is owned by a trust of which Mr. Shlopak
and Mr. Brady, the Company's President and Chief Operating Officer, are both
trustees and beneficiaries.
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Additionally, the Company leases approximately 60,000 square feet of warehouse
and office space in Milford, Connecticut which is used for fulfillment
operations pursuant to a lease which expires in March 2006. The Company also
leases 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 September 2001. The Company
also leases approximately 12,000 square feet of office space in New York City,
pursuant to a lease which expires in July 1999 and leases approximately 14,000
square feet of additional office space in various US cities.
The Company's English subsidiary leases approximately 24,000 square feet of
warehouse and office space in three London suburbs pursuant to leases which
expire at various dates beginning in March 1998 through December 2007. The
Company's Hong Kong subsidiary leases approximately 3,800 square feet of office
space in Kowloon, Hong Kong, pursuant to a lease which expires in December 1999.
The Company's Taiwanese branch leases approximately 6,000 square feet of office
space in Taipei, Taiwan, pursuant to a lease which expires in February 1999. The
Company's Korean branch leases approximately 2,400 square feet of office space
in Seoul, Korea, pursuant to a lease which expires in April 1998.
Related to its Simon operations, the Company leases an aggregate of
approximately 120,000 square feet of office space in Los Angeles, Chicago and
Atlanta pursuant to leases which expire in December 2000 through November 2006.
The annual base rent of these leases is approximately $2,400,000. In addition to
its domestic lease facilities, Simon leases a total of approximately 34,100
square feet of European office space in Frankfurt, London, Munich and Paris,
and, leases an aggregate of approximately 29,300 square feet of Asian office and
warehouse space in Hong Kong and Tokyo under leases which expire in April 1998
through March 2000.
The Company leases approximately 175,000 square feet of warehouse, production
and office space in Monroe, Washington attributable to its acquisition of Tonkin
pursuant to a lease which expires in September 2007. The annual base rent of
this lease is approximately $504,000. In addition to this facility, Tonkin
leases approximately 22,900 square feet of office and warehouse space in Costa
Mesa, California under a lease which expires in November 2001.
For a summary of the Company's minimum rental commitments under all
noncancelable operating leases as of December 31, 1997, see notes to the
consolidated financial statements.
In connection with the February 1998 announced plan to restructure its worldwide
operations, the Company expects to consolidate certain of its operating
facilities. As a result of the restructuring, the Company will incur a first
quarter 1998 charge to its operations for lease cancellation costs and asset
write-offs associated with exiting certain leased facilities.
ITEM 3. LEGAL PROCEEDINGS.
The Company and certain of its officers and directors have been named as
defendants in a putative class action filed on October 18, 1995 in the United
States District Court for the Southern District of New York ( BARRY HALLET, JR.
V. LI & FUNG, ET AL., Docket No. 95 Civ. 8917). Additional defendants include
the managing underwriter of the Company's previous public securities offerings
and a former principal stockholder of the Company. The plaintiff in the action
alleges that, in violation of the securities laws, the Company and its officers
made false and misleading statements concerning the Company's business which
artificially inflated the price of the Company's stock and that, as a result,
the plaintiff and other putative class members were damaged when they purchased
the Company's stock. The Company's motion to dismiss the complaint was denied
and a class of purchasers certified. Subsequently, the plaintiff voluntarily
dismissed his claims against the managing underwriter, without prejudice. The
parties began discovery proceedings. On March 4, 1998, with the assistance of a
professional mediator, all parties to this litigation reached an agreement in
principle to settle the case. The agreement is subject to preparation of
definitive settlement documents mutually agreeable to the parties and
preliminary and final approval, after notice to class members, by the Federal
District Court. If a definitive settlement is reached, in addition to payments
by other defendants and certain insurance companies, the Company will make a
cash contribution of $4 million.
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On or about February 15, 1997, Montague Corporation ("Montague") filed a
complaint against the Company in the Middlesex County Superior Court of the
Commonwealth of Massachusetts (Civil Action No. 97-00888). The complaint arises
out of an alleged distribution agreement ("Agreement") between the Company and
Montague's exclusive distributor for the sale of its bicycles in connection with
promotional programs in the United States. The complaint alleges that the
Company breached the purported Agreement, made negligent misrepresentations
concerning its performance of the Agreement and engaged in unfair and deceptive
trade practices in violation of Massachusetts General Law Chapter 93A. Montague
seeks actual and punitive damages with interest, attorneys' fees and costs. The
Company has vigorously defended the action and there has been extensive
discovery to date. As a result of court ordered mediation, the parties began
settlement discussions, which are ongoing. The Company is unable to express an
opinion as to the outcome of either the settlement discussions or the
litigation.
On February 11, 1993, Simon filed a complaint against Promotional Concept Group,
Inc. ("PCG") in the United States District Court for the Central District of
California (Case No. SA-CV 93-156 AHS (EEx)). On April 30, 1993, PCG filed its
answer, denying liability, as well as a counterclaim against Simon. Simon
alleges that PCG materially breached a contract between Simon and PCG dated
January 27, 1992 ("Contract"), under which Simon and PCG agreed to sell video
cassette movies to supermarkets. In its complaint, Simon seeks, actual and
exemplary damages, as well as an accounting from PCG. PCG denies liability and
has counterclaimed alleging, among other things, that Simon wrongfully
terminated the Contract, breached the Contract by failing to perform according
to the terms of the Contract, engaged in unfair competition in violation of
state law, and violated the Lanham Act, 11 U.C.C. ss. 1125. PCG seeks actual and
exemplary damages, as well as an accounting from Simon. The Court has under
submission certain motions, including a motion by Simon to strike the PCG
damages claim, which, if granted would have a material effect on the litigation.
Simon has, over the course of a number of months, engaged in settlement
discussions with Interpublic Group, Inc., a corporate affiliate of PCG, which is
negotiating on behalf of itself and PCG. At this time no acceptable settlement
proposal has emerged and the Company is unable to express an opinion as to the
outcome of either the settlement or the litigation. If the matter is not
settled, trial will be to the court sitting without a jury, and is currently set
for July 21, 1998.
In the opinion of management, the anticipated outcomes of the foregoing pending
actions are not expected, in the aggregate, to have a material adverse effect on
the Company's financial condition, results of operations or net cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's security holders during the
fourth quarter of the fiscal year ended December 31, 1997.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The following are the names, ages, positions with the Company and a brief
description of the business experience during the last five years of the
executive officers of the Company, all of whom serve until they resign or are
removed from such offices by the Board of Directors:
GREGORY P. SHLOPAK (51): Chairman of the Board of Directors and Chief
Executive Officer. Mr. Shlopak is a founder of
Cyrk and has served as one of its directors since
its incorporation in 1990. From May 1990 to May
1993, Mr. Shlopak served as the Company's
President and Secretary and was elected Chairman
of the Board and Chief Executive Officer in May
1993. Mr. Shlopak was also the founder, President
and a director of a company engaged in the
manufacture of custom screen-printed and
embroidered apparel and accessories that was
incorporated in 1976 and was merged into the
Company in July 1993.
PATRICK D. BRADY (42): President and Chief Operating Officer. Mr. Brady
is a founder of the Company and has served as one
of its directors since its incorporation in 1990.
Mr. Brady was the Chief Operating Officer and
Treasurer of the Company from May 1990 until May
1993 and served as Chief Financial Officer from
May 1993 to September 1994. Mr. Brady was elected
President and Chief Operating Officer in May 1993.
TERRY B. ANGSTADT (44): Executive Vice President. Mr. Angstadt has been a
General Manager of the Company since January 1992.
Mr. Angstadt was elected an Executive Vice
President of the Company in May 1993.
TED L. AXELROD (42): Executive Vice President. Mr. Axelrod joined the
Company in July 1995 to direct the Company's
corporate strategy and development efforts. He was
elected an Executive Vice President of the Company
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 (41): Excecutive Vice President and Chief
Financial Officer. Mr.Mammola was elected an
Executive Vice President of the Company in
September 1997. He has served as Vice President
and Chief Financial Officer of the Company since
September 1994. From April 1987 to June 1994, he
was Chief Financial Officer of Papa Gino's, Inc.,
a restaurant chain.
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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 National 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 National
Market.
1997 1996
High Low High Low
---- --- ---- ---
First Quarter $13.00 $11.00 $16.75 $10.25
Second Quarter 12.88 10.50 16.25 11.38
Third Quarter 11.50 9.75 13.88 9.75
Fourth Quarter 13.00 9.63 13.00 10.00
As of February 27, 1998, the Company had approximately 106 holders of record
(representing approximately 2,700 beneficial owners) of its common stock. The
last reported sale price of the Company's common stock on February 27, 1998 was
$13.00.
The Company has never paid cash dividends, other than stockholder distributions
of Subchapter S earnings during 1993 and 1992, and none are contemplated in the
foreseeable future 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.
10
11
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED INCOME Year Ended December 31,
STATEMENT DATA: 1997(1) 1996 1995 1994 1993
------- ---- ---- ---- ----
(In thousands, except per share data)
Net sales $558,623 $250,901 $135,842 $401,936 $165,708
Net income (loss) 3,236 438 (2,338) 30,409 8,650
Earnings (loss) per
common share - basic 0.26 0.04 (0.22) 3.20 1.18
Earnings (loss) per
common share - diluted 0.25 0.04 (0.22) 3.20 1.18
SELECTED BALANCE December 31,
SHEET DATA: 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
Working capital $ 61,314 $100,565 $106,188 $115,939 $ 25,101
Total assets 313,845 190,239 137,598 147,029 67,221
Long-term debt 9,611 -- -- -- 53
Cash dividends -- -- -- -- 3,900
Stockholders' equity 160,003 124,347 123,600 125,659 27,523
(1) Includes the results of operations of acquired companies from the
acquisition dates. See notes to consolidated financial statements.
11
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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. 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 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 herewith as Exhibit 99.3.
GENERAL
The Company is a full-service, integrated provider of marketing and promotional
products and services. As such, the Company generates revenue from the sale of
promotional products and the development of marketing programs. The majority of
the Company's revenue is derived from the sale of promotional products to
consumer product companies seeking to promote their brand and build customer
loyalty.
Historically, the Company's business has been heavily concentrated with two
customers, Pepsi-Cola Company ("Pepsi") and Philip Morris Incorporated ("Philip
Morris"). In 1995, sales to Philip Morris accounted for 57% of the Company's
total net sales. Purchases of promotional products by Pepsi and Philip Morris in
1996 accounted for 38% and 30% of net sales, respectively. In 1997, net sales to
Pepsi accounted for 21% of total net sales, while Philip Morris accounted for
16% of total net sales.
As a part of its continuing effort to diversify its customer base and broaden
its capability, the Company completed the acquisition of two providers of
promotional services and products during the second quarter of 1997. These
transactions were completed through mergers of these providers with and into
wholly-owned subsidiaries of the Company. On April 7, 1997, the Company acquired
Tonkin, Inc. ("Tonkin"), a Monroe, Washington provider of custom promotional
programs and licensed promotional products. On June 9, 1997, the Company
acquired Simon Marketing, Inc. ("Simon"), a Los Angeles-based global marketing
and promotion agency and provider of custom promotional products. Simon's
business is heavily concentrated with McDonald's Corporation ("McDonald's"). Net
sales to McDonald's accounted for 36% of the Company's total net sales in 1997.
The Company's business with McDonald's, Philip Morris and Pepsi (as well as
other promotional customers) is based upon purchase orders placed from time to
time during the course of promotions. There are no written agreements which
commit them 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
1998 will be to McDonald's and Philip Morris. The Company's agreements with
Pepsi were terminated in December 1997 and the Company expects sales to Pepsi in
1998 to be minimal.
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. Recent
negotiations between state attorneys general and certain tobacco companies,
including Philip Morris, as well as recent federal regulations, would result in
a ban on promotional programs relating to tobacco products and would have a
material adverse effect on the Company's business with Philip Morris and its
results of operations.
12
13
At December 31, 1997, the Company had written purchase orders for $204.2 million
as compared to $97.6 million at December 31, 1996. The comparative increase in
the Company's backlog is the result of the Simon and Tonkin acquisitions. The
Company's purchase orders are generally subject to cancellation with limited
penalty and are therefore not necessarily indicative of future revenues or
earnings.
On February 13, 1998, the Company announced a plan to restructure its worldwide
operations. The plan reflects the Company's strategy to focus on its core
business in the promotional marketing industry. The Company intends to
consolidate certain operating facilities, discontinue certain divisions of its
apparel business and eliminate approximately 450 positions or 28% of its
worldwide work force. The majority of the eliminated positions will affect the
screen printing and embroidery business in Gloucester, Massachusetts. The
Company estimates that a pre-tax charge of approximately $12 to $15 million will
be recorded in the first quarter of 1998. The charge will consist of asset
write-downs, employee termination costs, lease cancellations and other related
exit costs.
RESULTS OF OPERATIONS
1997 Compared to 1996
Net sales increased $307.7 million, or 123%, to $558.6 million in 1997 from
$250.9 million in 1996. The increase in net sales was primarily attributable to
revenues associated with Simon and Tonkin. Promotional product sales in 1997
totaled $523.6 million, or an increase of 158%, as compared to $202.7 million in
1996. Net sales related to the Company's private label and Cyrk brand apparel
business in 1997 totaled $35.0 million, or a decrease of 27%, as compared to
$48.2 million in 1996 as a result of an overall softer retail apparel market.
Gross profit increased $66.1 million, or 179%, to $103.1 million in 1997 from
$37.0 million in 1996. As a percentage of net sales, gross profit increased to
18.5% in 1997 from 14.7% in 1996. This increase was due principally to more
favorable margins associated with the Company's diversified customer base and
the increased sales mix in the promotional industry segments characterized by
higher gross margins.
Selling, general and administrative expenses totaled $94.0 million as compared
to $37.0 million in 1996. As a percentage of net sales, selling, general and
administrative costs totaled 16.8% as compared to 14.8% in 1996. The Company's
increased spending was primarily attributable to its expanded global sales and
operations.
Interest income in 1997 was attributable to interest earned on short-term
investments of excess cash, primarily in investment grade securities.
Interest expense increased to $2.1 million in 1997 from $.3 million in 1996 as a
result of higher debt levels incurred in connection with the Company's
acquisitions of Simon and Tonkin.
Equity in loss of affiliates of $1.4 million in 1997 and $1.1 million in 1996
represents the Company's proportionate share of investments being accounted for
under the equity method.
For an analysis of the change in the effective tax rates from 1995 to 1997 and a
discussion of the valuation allowance recorded by the Company, see notes to
consolidated financial statements.
1996 Compared to 1995
Net sales increased $115.1 million, or 85%, to $250.9 million in 1996 from
$135.8 million in 1995. The increase in net sales was directly attributable to
the success of the Company's customer diversification effort. Promotional
product sales in 1996 totaled $202.7 million, or an increase of 108%, as
compared to $97.3 million in 1995. Net sales related to the Company's private
label and Cyrk brand business in 1996 totaled $48.2 million, or an increase of
25%, as compared to $38.5 million in 1995.
Gross profit increased $13.6 million, or 58%, to $37.0 million in 1996 from
$23.4 million in 1995. As a percentage of net sales, gross profit decreased to
14.7% in 1996 from 17.2% in 1995 primarily as a result of the continued
concentration of sales volume and lower margins associated with the large
promotional programs.
13
14
Selling, general and administrative expenses increased $7.4 million, or 25%, to
$37.0 million in 1996 from $29.7 million in 1995, but decreased as a percentage
of net sales to 14.8% in 1996 from 21.8% in 1995. The Company's increased
spending was primarily attributable to its expanded global sales, sourcing and
fulfillment capabilities. The decrease in selling, general and administrative
expenses as a percentage of net sales was attributable to the comparative
increase in net sales.
Interest income in 1996 was attributable to interest earned on short-term
investments of excess cash, primarily in investment grade securities.
Equity in loss of affiliates of $1.1 million in 1996 and $.5 million in 1995
represents the Company's proportionate share of investments being accounted for
under the equity method.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at December 31, 1997 was $61.3 million compared to $100.6
million at December 31, 1996. This $39.3 million decrease in working capital was
primarily attributable to the Simon and Tonkin acquisitions. Net cash provided
by operating activities, net of acquisitions, during 1997 was $31.5 million. The
primary sources of cash provided by operations were principally related to a
decrease in accounts receivable and inventories totaling $38.2 million which was
partially offset by a reduction in accounts payable of $11.8 million.
Trade accounts receivable grew to $95.4 million at December 31, 1997 from $57.3
million at December 31, 1996, primarily as a result of increased sales in the
fourth quarter of 1997 compared to the fourth quarter of 1996. Days sales
outstanding were 47 days and 60 days at December 31, 1997 and December 31, 1996,
respectively.
Net cash used in investing activities was $27.9 million, which was primarily
attributable to $16.6 million of net cash used to acquire Simon and Tonkin in
the second quarter of 1997. Additionally, the Company purchased $6.0 million of
equipment and invested $7.5 million in an apparel joint venture. As part of its
plan to restructure operations and focus on the promotional marketing industry,
the Company does not anticipate further significant investments in the apparel
joint venture. In 1996, net cash provided by investing activities was
$6.2 million, which included $16.8 million of net sales of investments, offset
by $3.4 million of additions to property and equipment, $1.8 million of acquired
intangible assets, a $1.7 million investment in the apparel joint venture and
$2.3 million of loans made to an affiliate.
The Company currently anticipates that its 1998 purchases of property and
equipment will not change significantly from the 1997 levels. The Company
expects to make cash payments of approximately $3.0 to $4.0 million for employee
termination costs, lease buyouts and other exit costs associated with its plan
to restructure its operations.
Since inception, the Company has financed its working capital and capital
expenditure requirements through cash generated from operations, public sales of
common stock, bank borrowings and capital equipment leases. Such cash
requirements for 1997 were provided principally by operating activities.
The Company currently has available several worldwide bank letters of credit and
revolving credit facilities which expire at various dates beginning in March
1998. As of December 31, 1997, based on the borrowing base formulas prescribed
by these credit facilities, the Company's borrowing capacity was $104.8 million,
of which $20.6 million of short-term borrowings and $18.9 million in letters of
credit were outstanding. Borrowings under these facilities are collateralized by
all assets of the Company.
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 $10.0 million which will
be used for general corporate purposes.
Management believes that the Company's existing cash position, credit
facilities, and its ability to obtain additional financing, combined with
internally generated cash flow, will be adequate for its liquidity and capital
needs at least through the end of 1998.
14
15
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
Based on a recent assessment, the Company determined that it will be required to
modify or replace significant portions of its software so that its computer
systems will properly utilize dates beyond December 31, 1999. The Company
presently believes that with modifications to existing software and conversions
to new software, the Year 2000 Issue can be mitigated. As a result of
discussions with its computer software program suppliers, the Company has been
assured that all of its current software will be modified or replaced to be Year
2000 compliant. Further, the Company has initiated a formal Year 2000 compliance
document whereby the Company's software suppliers will certify their plans and
action steps for modification or replacement of existing Company software to
ensure timely Year 2000 compliance. However, if such modifications and
conversions are not made, or are not completed timely, the Year 2000 Issue could
have a material impact on the operations of the Company.
The Company will also initiate formal communications with its major customers
and suppliers to determine the extent to which the Company may be vulnerable to
the failure of those third parties to address their own Year 2000 issues. There
can be no guarantee that the systems of other companies upon which the Company's
systems rely will be timely converted, or that a failure to convert by another
company, or a conversion that is incompatible with the Company's systems, would
not have a material adverse effect on the Company.
Currently, the Company does not expect that the costs associated with becoming
Year 2000 compliant will be material. The Company expects to complete its Year
2000 assessments, modifications and conversions by the end of 1998.
15
16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
PAGE
Report of Independent Accountants 23
Consolidated Balance Sheets as of December 31, 1997 and 1996 24
Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995 25
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996
and 1995 26
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 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
16
17
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 1998 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
1998 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
1998 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
1998 Annual Meeting of Stockholders under the section captioned "Compensation
Committee Interlocks and Insider Participation" and is incorporated herein by
reference thereto.
17
18
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, 1997 and 1996
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES FOR THE FISCAL YEARS ENDED
DECEMBER 31, 1997, 1996 AND 1995:
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.
18
19
EXHIBITS
EXHIBIT NO. DESCRIPTION
2.1 (1) Agreement of Merger dated July 6, 1993 between the Registrant and
Cyrk, Inc.
3.1 (6) Restated Certificate of Incorporation of the Registrant
3.2 (2) Amended and Restated By-laws of the Registrant
4.1 (2) Specimen certificate representing Common Stock
10.1 (2) 1993 Non-Employee Director Stock Option Plan
10.2 (3)(2) 1993 Employee Stock Purchase Plan
10.3 (3)(6) 1993 Omnibus Stock Plan, as amended
10.4 (4) First Amended and Restated Marlboro Adventure Team Products Trade
Financing Arrangement Agreement dated as of January 10, 1994,
between the Registrant and Philip Morris Incorporated
10.5 (2) Subscription and Registration Rights Agreement dated as of May 1,
1990, between Li & Fung (B.V.I.) Limited, Patrick D. Brady,
Gregory P. Shlopak and the Registrant
10.6 (6) Letter agreement dated November 30, 1994 among Li & Fung
(Trading) Ltd., Li & Fung (B.V.I.) Ltd. and the Registrant
10.7 (2) Lease dated as of April 19, 1989, between Gregory P. Shlopak and
Paul M. Butman, Jr., as Trustees of PG Realty Trust, and Cyrk,
Inc.
10.8 (2) Lease dated as of April 19, 1989, between Gregory P. Shlopak and
Paul M. Butman, Jr., as Trustees of LPG Realty Trust, and Cyrk,
Inc.
10.9 (8) Lease dated April 17, 1986 between Spaulding and Slye Company and
Parker Brothers Division of Kenner-Parker Toys Inc., with
Assignment of Lessee's Interest in Lease dated as of June 11,
1995 between Tonka Corporation and the Registrant
10.10 (1) Letter Agreement dated October 19, 1993, between the Registrant
and The Hongkong and Shanghai Banking Corporation Limited
10.11 (1) Revolving Credit Agreement dated as of December 1, 1993, between
the Registrant and The Hongkong and Shanghai Banking Corporation
Limited
10.12 (1) Letter Agreement dated January 5, 1994, between the Registrant
and The Hongkong and Shanghai Banking Corporation Limited
10.13 (1) Amendment No. 1 to Revolving Credit Agreement dated as of January
12, 1994, between the Registrant and The Hongkong and Shanghai
Banking Corporation Limited
10.14 (1) Security Agreement dated as of December 1, 1993, between the
Registrant and The Hongkong and Shanghai Banking Corporation
Limited
10.15 (5) Revolving Credit Agreement dated May 9, 1994 between the
Registrant and Fleet Bank of Massachusetts, N.A.
10.16 (5) Security Agreement dated May 9, 1994 between the Registrant and
Fleet Bank of Massachusetts, N.A.
10.17 (5) Security and Loan Agreement dated May 12, 1994 between the
Registrant and The Pacific Bank
10.18 (5) Security Agreement dated May 12, 1994 between the Registrant and
The Pacific Bank
10.19 (5) Letter Agreement dated May 5, 1994 between the Registrant and The
Hongkong and Shanghai Banking Corporation Limited
10.20 (5) Intercreditor Agreement dated May 12, 1994 among the Registrant,
Fleet Bank of Massachusetts, N.A., The Pacific Bank, and The
Hongkong and Shanghai Banking Corporation Limited
10.21 (8) Letter agreement dated February 7, 1996, between the Registrant
and The Wells Fargo HSBC Trade Bank, N.A.
10.21.1 (10)Letter agreement dated March 26, 1997, between the Registrant and
The Wells Fargo HSBC Trade Bank, N.A.
19
20
EXHIBITS - continued
EXHIBIT NO. DESCRIPTION
10.22(1) Tax Allocation and Indemnity Agreement dated July 6, 1993,
among Cyrk, Inc., the Registrant, Gregory P. Shlopak and
Patrick D. Brady
10.23(3)(2) Restricted Stock Purchase Agreement dated May 10, 1993,
between the Registrant and Terry B. Angstadt
10.24(3)(7) 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"
10.24.1(3)(7) Assignments of Life Insurance policies as Collateral, each
dated November 15, 1994
10.25(3)(7) 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"
10.25.1(3)(7) Assignments of Life Insurance policies as Collateral, each
dated November 15, 1994
10.26(3)(7) Consulting Agreement dated as of November 15, 1994 by and
between the Registrant and Gregory P. Shlopak
10.27(3)(7) 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"
10.27.1(3)(7) Assignments of Life Insurance policies as Collateral, each
dated November 15, 1994
10.28(3)(7) Consulting Agreement dated as of November 15, 1994 by and
between the Registrant and Patrick D. Brady
10.29(7) First Amended and Restated Agreement of Limited Partnership
dated as of March 28, 1995 by and between the Registrant and
Grant & Partners Limited Partnership
10.30(7) Revolving Credit Agreement dated as of March 28, 1995 by and
between the Registrant and Grant & Partners Limited
Partnership
10.30.1(10) Agreement dated October 11, 1996, between the Registrant and
Grant & Partners Limited Partnership
10.31(7) Option Agreement dated as of March 28, 1995 by and among the
Registrant, Grant & Partners, Inc., Alan Grant and Grant &
Partners Limited Partnership
10.32(2)(7) Non-Qualified Stock Option Agreement dated as of February
10, 1995 by and between the Registrant and Alan Grant
10.33(2)(7) Non-Qualified Stock Option Agreement dated as of March 28,
1995 by and between the Registrant and Alan Grant
10.34(10) Loan agreement dated April 30, 1996, between the Registrant,
125 Water Street, LLC, Gregory P. Shlopak and Patrick D.
Brady
10.34.1(10) Promissory Note dated April 30, 1996, between the Registrant
and 125 Water Street, LLC
10.35(3)(13) 1997 Acquisition Stock Plan
10.36(11) Securities Purchase Agreement dated as of March 18, 1997, by
and among Exchange Applications, Inc., Grant & Partners
Limited Partnership, Cyrk, Inc., Insight Ventures Partners
I, L.P. and certain other parties
10.37 Securities Purchase Agreement dated February 12, 1998 by and
between Cyrk, Inc. and Ty Warner, filed herewith
21.1 List of Subsidiaries, filed herewith
23.1 Consent of Coopers & Lybrand L.L.P. - Independent
Accountants, filed herewith
27.96 Restated Financial Data Schedule, Filed herewith
27.97 Financial Data Schedule, filed herewith
99.1(9) Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act
of 1995
99.2(10) Amended Cautionary Statement for Purposes of the "Safe
Harbor" Provisions of the Private Securities Litigation
Reform Act of 1995
20
21
EXHIBITS - continued
EXHIBIT NO. DESCRIPTION
99.2(12) Amended Cautionary Statement for Purposes of the "Safe
Harbor" Provisions of the Private Securities Litigation
Reform Act of 1995
99.3 Amended Cautionary Statement for Purposes of the "Safe
Harbor" Provisions of the Private Securities Litigation
Reform Act of 1995, filed herewith
- --------------------------------------------------------------------------------
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 Registrant's Registration
Statement on Form S-1 (Registration No. 33-75320) or an
amendment thereto accompanied by a request for confidential
treatment as to certain portions and incorporated herein by
reference.
5 Filed as an exhibit to the Registrant's Registration
Statement on Form 10-Q dated March 31, 1994 and incorporated
herein by reference.
6 Filed as an exhibit to the Annual Report on Form 10-K for
the year ended December 31, 1994 and incorporated herein by
reference.
7 Filed as an exhibit to the Registrant's Registration
Statement on Form 10-Q dated March 31, 1995 and incorporated
herein by reference.
8 Filed as an exhibit to the Annual Report on Form 10-K for
the year ended December 31, 1995 and incorporated herein by
reference.
9 Filed as an exhibit to the Registrant's Registration
Statement on Form 10-Q dated September 30, 1996 and
incorporated herein by reference.
10 Filed as an exhibit to the Annual Report on Form 10-K for
the year ended December 31, 1996 and incorporated herein by
reference.
11 Filed as an exhibit to the Registrant's Registration
Statement on Form 10-Q dated March 31, 1997 and incorporated
herein by reference.
12 Filed as an exhibit to the Registrant's Report on Form 8-K/A
dated June 9, 1997 and incorporated herein by reference.
13 Filed as an exhibit to the Registrant's Registration
Statement on Form S-8 (Registration No.333-45655) 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, 1997.
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 27, 1998 By: /s/PATRICK D. BRADY
-------------------
Patrick D. Brady
President
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/Gregory P. Shlopak Chairman of the Board March 27, 1998
- --------------------- Chief Executive Officer
GREGORY P. SHLOPAK (principal executive officer)
Director
/S/Patrick D. Brady President March 27, 1998
- ------------------- Chief Operating Officer
PATRICK D. BRADY Director
/S/Dominic F. Mammola Chief Financial Officer March 27, 1998
- --------------------- (principal financial and
DOMINIC F. MAMMOLA accounting officer)
/S/Joseph W. Bartlett Director March 27, 1998
- ---------------------
JOSEPH W. BARTLETT
/S/J. Anthony Kouba Director March 27, 1998
- -------------------
J. ANTHONY KOUBA
/S/Louis Marx, Jr. Director March 27, 1998
- ------------------
LOUIS MARX, JR.
22
23
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Cyrk, Inc.:
We have audited the consolidated financial statements and the financial
statement schedule of Cyrk, Inc. and subsidiaries listed in Items 14a(1) and (2)
of this Form 10-K. These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and the financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion the financial statements referred to above, present fairly, in
all material respects, the consolidated financial position of Cyrk, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information required to be included therein.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
February 13, 1998, except as to the information
presented in Note 18, for which the date is
March 4, 1998
23
24
CYRK, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
(In thousands, except share data)
ASSETS
1997 1996
-------- --------
Current assets:
Cash and cash equivalents $ 42,513 $44,224
Investments -- 2,420
Accounts receivable:
Trade, less allowance for doubtful accounts of $3,801 in
1997 and $3,191 in 1996 95,388 57,340
Officers, stockholders and related parties 228 3,466
Inventories 46,317 45,904
Prepaid expenses and other current assets 10,649 6,114
Deferred income taxes 9,746 6,186
-------- --------
Total current assets 204,841 165,654
Property and equipment, net 16,268 10,407
Excess of cost over net assets acquired, net 77,483 4,970
Investments in and advances to affiliates 9,506 4,352
Other assets 5,747 4,856
======== ========
$313,845 $190,239
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 20,826 $ 18,749
Accounts payable:
Trade 57,690 8,834
Affiliates 180 992
Accrued expenses and other current liabilities 64,831 36,514
-------- --------
Total current liabilities 143,527 65,089
Long-term obligations 9,611 --
Deferred income taxes 704 803
-------- --------
Total liabilities 153,842 65,892
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized;
none issued -- --
Common stock, $.01 par value; 50,000,000 shares authorized;
13,688,038 shares issued and outstanding in 1997 and
10,790,876 shares issued and outstanding in 1996 137 108
Additional paid-in capital 119,840 87,402
Retained earnings 40,609 37,373
Net unrealized loss on available-for-sale securities -- (56)
Cumulative translation adjustment (583) (480)
-------- --------
Total stockholders' equity 160,003 124,347
-------- --------
$313,845 $190,239
======== ========
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, 1997, 1996 and 1995
(In thousands, except per share data)
1997 1996 1995
-------- -------- --------
Net sales $558,623 $250,901 $135,842
Cost of sales:
Related parties 10,094 2,064 7,974
Other 445,434 211,851 104,489
-------- -------- --------
455,528 213,915 112,463
-------- -------- --------
Gross profit 103,095 36,986 23,379
-------- -------- --------
Selling, general and administrative expenses:
Goodwill amortization 2,226 304 156
Related parties 1,198 787 587
Other 90,529 35,944 28,909
-------- -------- --------
93,953 37,035 29,652
-------- -------- --------
Operating income (loss) 9,142 (49) (6,273)
Interest income (2,413) (2,679) (3,344)
Interest expense 2,102 256 70
Equity in loss of affiliates 1,363 1,111 543
-------- -------- --------
Income (loss) before income taxes 8,090 1,263 (3,542)
Income tax provision (benefit) 4,854 825 (1,204)
======== ======== ========
Net income (loss) $ 3,236 $ 438 $ (2,338)
======== ======== ========
Earnings (loss) per common share - basic $ 0.26 $ 0.04 $ (0.22)
======== ======== ========
Earnings (loss) per common share - diluted $ 0.25 $ 0.04 $ (0.22)
======== ======== ========
Weighted average shares outstanding - basic 12,593 10,768 10,720
======== ======== ========
Weighted average shares outstanding - diluted 13,025 10,909 10,720
======== ======== ========
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, 1997, 1996 and 1995
(In thousands)
Net
Unrealized
Loss on
Common Additional Available- Cumulative Total
Stock Paid-in Retained For-Sale Translation Stockholders'
($.01 Par Value) Capital Earnings Securities Adjustment Equity
---------------- ---------- -------- ---------- ------------ -------------
Balance, December 31, 1994 $107 $ 86,279 $39,273 $ -- $ -- $125,659
Issuance of shares under employee stock option
and stock purchase plans, net of tax benefit -- 583 -- -- -- 583
Net unrealized losses on
available-for-sale securities -- -- -- (74) -- (74)
Translation adjustment -- -- -- -- (230) (230)
Net loss -- -- (2,338) -- -- (2,338)
---- -------- ------- -------- -------- --------
Balance, December 31, 1995 107 86,862 36,935 (74) (230) 123,600
Issuance of shares under employee stock option
and stock purchase plans 1 540 -- -- -- 541
Net unrealized gains on
available-for-sale securities -- -- -- 18 -- 18
Translation adjustment -- -- -- -- (250) (250)
Net income -- -- 438 -- -- 438
---- -------- ------- -------- -------- ---------
Balance, December 31, 1996 108 87,402 37,373 (56) (480) 124,347
Issuance of shares under employee stock option
and stock purchase plans 1 466 -- -- -- 467
Issuance of shares for businesses acquired 28 31,972 -- -- -- 32,000
Net unrealized gains on
available-for-sale securities -- -- -- 56 -- 56
Translation adjustment -- -- -- -- (103) (103)
Net income -- -- 3,236 -- -- 3,236
---- -------- ------- --------- -------- --------
Balance, December 31, 1997 $137 $119,840 $40,609 $ - $ (583) $160,003
==== ======== ======= ========= ======== ========
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, 1997, 1996 and 1995
(In thousands)
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ 3,236 $ 438 $ (2,338)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 6,438 2,875 1,956
Gain on sale of property and equipment (32) - -
Realized loss on sale of investments 32 352 13
Provision for doubtful accounts 390 152 120
Deferred income taxes (422) (1,303) (220)
Equity in loss of affiliates 1,363 1,111 543
Tax benefit from stock option plans - - 16
Increase (decrease) in cash from changes
in working capital items, net of acquisitions:
Accounts receivable 17,972 (40,267) 51,977
Inventories 20,272 (18,905) (8,291)
Prepaid expenses and other current assets (2,616) (2,187) (1,429)
Refundable income taxes - 1,069 3,130
Accounts payable (11,841) 6,385 (3,031)
Accrued expenses and other current liabilities (3,243) 26,513 (4,400)
--------- -------- --------
Net cash provided by (used in) operating activities 31,549 (23,767) 38,046
--------- -------- --------
Cash flows from investing activities:
Purchase of property and equipment (6,028) (3,441) (3,890)
Proceeds from sale of property and equipment 243 - -
Acquisitions, net of cash acquired * (16,581) - -
Advances to affiliates, net (6,511) (3,956) (2,050)
Purchase of investments (3,815) (37,913) (35,639)
Proceeds from sale of investments 6,259 54,714 15,997
Acquisition of intangible assets (1,577) (1,789) (3,636)
Other, net 110 (1,378) (674)
--------- -------- --------
Net cash provided by (used in) investing activities (27,900) 6,237 (29,892)
--------- -------- --------
Cash flows from financing activities:
Proceeds from (repayments of) short-term borrowings, net (5,365) 18,749 -
Payments of long-term obligations (333) - -
Proceeds from issuance of common stock 467 541 567
--------- -------- --------
Net cash provided by (used in) financing activities (5,231) 19,290 567
--------- -------- --------
Effect of exchange rate changes on cash (129) (119) -
--------- -------- --------
Net increase (decrease) in cash and cash equivalents (1,711) 1,641 8,721
Cash and cash equivalents, beginning of year 44,224 42,583 33,862
--------- -------- --------
Cash and cash equivalents, end of year $ 42,513 $ 44,224 42,583
========= ======== ========
* Details of acquisitions:
Fair value of assets acquired $ 104,257 $ - $ -
Cost in excess of net assets of companies acquired, net 73,162 - -
Liabilities assumed (107,069) - -
Stock issued (32,000) - -
--------- -------- --------
Cash paid 38,350 - -
Less: cash acquired (21,769) - -
--------- -------- --------
Net cash paid for acquisitions $ 16,581 $ - $ -
========= ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 2,214 $ 149 $ 71
========= ======== ========
Income taxes $ 4,075 $ 208 $ 836
========= ======== ========
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 which provides
promotional products and agency services in the design and development of
high-impact promotional 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 15).
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 as reported by the investment custodian.
All security 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.
Inventories
Inventories are valued at the lower of cost (specific identification, first-in,
first-out and average methods) or market.
28
29
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 three to seven years for machinery and equipment, three
to seven years for furniture and fixtures and three to fifteen years for
leasehold improvements. 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 is being amortized on a
straight-line basis over a period of five to thirty years. Accumulated
amortization amounted to $2,686 at December 31, 1997 and $460 at December 31,
1996.
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
discounted 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.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income."
This Statement requires that changes in comprehensive income be shown in a
financial statement that is displayed with the same prominence as other
financial statements. The Statement will become effective for fiscal years
beginning after December 15, 1997. The Company will adopt the new standard
beginning in the first quarter of the fiscal year ending December 31, 1998.
In June 1997, the FASB also issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 specifies new guidelines for determining a company's
operating segments and related requirements for disclosure. The Company is in
the process of evaluating the impact of the new standard on the presentation of
the financial statements and the disclosures therein. The Statement will become
effective for fiscal years beginning after December 15, 1997. The Company will
adopt the new standard for the fiscal year ending December 31, 1998.
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"). All prior period earnings per share data has been restated
to conform with the provisions of this Statement.
29
30
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
3. Acquisitions
On June 9, 1997, the Company acquired Simon Marketing, Inc. ("Simon"), a Los
Angeles-based global marketing and promotion agency and provider of custom
promotional products, for $58.0 million, composed of $33.5 million in cash and
$24.5 million in shares of the Company's common stock of which $28.4 million in
cash and $20.0 million in shares of the Company's common stock (1,840,138
shares) was paid at the closing with an additional $5.1 million payable in cash
and $4.5 million payable in shares of the Company's common stock to be paid
within four years of the closing. If certain performance targets are achieved,
the purchase price may be increased by an additional $5.0 million in shares of
the Company's common stock which would be issued to former Simon stockholders.
The acquisition has been accounted for as a purchase and, accordingly, the
results of operations of Simon have been included in the consolidated financial
statements from the date of the acquisition. The excess of cost over the fair
value of net assets acquired ($53.7 million) is being amortized on a
straight-line basis over thirty years.
On April 7, 1997, the Company acquired Tonkin, Inc. ("Tonkin"), a Washington
corporation which provides custom promotional programs and licensed promotional
products for an aggregate purchase price of $22 million of which $12 million was
paid in shares of the Company's common stock (1,007,345 shares) and $10 million
in cash. The purchase price may be increased by an additional $2.7 million (half
in cash, half in Company common stock) over the next three years if certain
performance targets are achieved by Tonkin. The acquisition has been accounted
for as a purchase and, accordingly, the results of operations of Tonkin have
been included in the consolidated financial statements from the date of the
acquisition. The excess of cost over the fair value of net assets acquired
($19.5 million) is being amortized on a straight-line basis over twenty years.
The following unaudited pro forma results of operations assume the Simon and
Tonkin acquisitions occurred on January 1, 1996 and include certain adjustments
related to the acquisitions such as: goodwill amortization expense, reduction of
interest income, non-recurring compensation related transaction adjustments,
one-time transaction costs, the related income tax effect of combining the
acquired companies and the issuance of all applicable Company common stock:
For the Years Ended December 31,
1997 1996
---- ----
Net sales $778,292 $677,529
Net income 5,047 3,682
Earnings per common share - basic and diluted 0.36 0.26
The pro forma results are not necessarily indicative of the operating results
that would have occurred had the Simon and Tonkin acquisitions occurred on
January 1, 1996, nor are they necessarily indicative of future operations.
4. Inventories
Inventories consist of the following:
December 31,
1997 1996
---- ----
Raw materials $10,807 $12,009
Work in process 5,033 --
Finished goods 30,477 33,895
------- -------
$46,317 $45,904
======= =======
30
31
5. Property and Equipment
Property and equipment consist of the following:
December 31,
1997 1996
---- ----
Machinery and equipment $19,300 $ 11,497
Furniture and fixtures 8,414 2,749
Leasehold improvements 4,388 2,742
------- ---------
32,102 16,988
Less - accumulated depreciation and amortization (15,834) (6,581)
------ -----
$16,268 $ 10,407
======= ========
Depreciation and amortization expense on property and equipment totaled $4,212,
$2,571 and $1,800 in 1997, 1996 and 1995, respectively.
6. Investments in and Advances to Affiliates
The Company has a 50% interest in Grant & Partners Limited Partnership, a
Boston-based firm specializing in improving the returns on marketing
investments, and, a 39% joint venture equity interest in NewModel, Inc. d/b/a
T.W.IsM., a Compton, California-based manufacturer and distributor of men's
sports apparel and accessories. In addition to its initial equity investment,
the Company has periodically made advances to fund the operations of its equity
investees, particularly during the early stages of the joint venture. Advances
to affiliates totaled $10,457 and $5,956 at December 31, 1997 and 1996,
respectively. During 1997, a portion of these advances were repaid in shares of
preferred stock valued at $2,070. Investments in and advances to these
unconsolidated affiliates amounted to $9,506 and $4,352 at December 31, 1997 and
1996, respectively.
The combined summarized financial position and results of operations of the
Company's equity-basis affiliates are as follows:
December 31,
1997 1996
---- ----
Summarized Balance Sheet Information:
Current assets $ 6,737 $ 4,377
Other assets 1,559 2,363
------- -------
8,296 6,740
------- -------
Current liabilities 4,430 3,672
Other liabilities 9,181 6,019
------- -------
13,611 9,691
------- -------
Net liabilities $(5,315) $(2,951)
======= =======
For the Years Ended December 31,
1997 1996
---- ----
Summarized Statement of Operations:
Revenue $ 8,489 $10,631
Costs and operating expenses 11,835 12,697
------- -------
Net loss $(3,346) $(2,066)
======= =======
7. Short-Term Borrowings
The Company maintains worldwide credit facilities with several banks which
provide the Company with approximately $104,821 in total borrowing capacity
which consists of (i) the Company's $75,000 primary domestic line of credit,
(ii) several additional domestic lines of credit which aggregate $22,240 and
(iii) two foreign lines of credit in the aggregate amount of $7,581. As of
December 31, 1997, the Company had approximately $65,330 available under these
bank facilities.
31
32
Pursuant to the provisions of its primary domestic line of credit, the Company
has commitments for letter of credit and revolving credit borrowings through
April 1998 of up to an aggregate amount of $75,000, subject to borrowing base
formulas, for the purpose of financing the importation of various products from
Asia and supporting the Company's working capital requirements. Borrowings under
the facility bear interest at the lesser of the bank's prime rate (8.5% at
December 31, 1997) or LIBOR plus 1.75% (7.5% at December 31, 1997), and are
collateralized by all of the assets of the Company. The facility contains
covenants which require the Company to maintain a minimum net worth level and
minimum current and debt to net worth ratios through the term of the commitment.
Additionally, during any consecutive four quarters, the Company is required to
achieve certain minimum operating results. As of December 31, 1997, the Company
was in violation of certain financial covenants which have been waived by the
bank. At December 31, 1997, the Company's borrowing capacity under this facility
was $75,000, of which $9,110 of short-term borrowings and $16,044 in letters of
credit were outstanding. The letters of credit expire at various dates through
September 1998. The facility provides for a fee of 3/8% per annum on the unused
portion of the commitment.
In addition to the facility described above, other domestic credit facilities
provide for borrowings of up to an aggregate amount of $22,240 for working
capital requirements subject to borrowing base formulas. These credit lines,
which expire at various dates beginning in March 1998, bear interest at the
bank's prime rate or LIBOR plus a margin, and are generally subject to standard
covenants related to financial ratios and profitability as to which the Company
was in compliance at December 31, 1997. At December 31, 1997, $8,907 of
short-term borrowings and $886 of letters of credit were outstanding under these
facilities.
The Company has a $5,600 (DM10,000) working capital line of credit for certain
of its European subsidiaries. At December 31, 1997, $2,563 of short-term
borrowings and $1,981 of letters of credit were outstanding under this credit
facility. The Company also has a bank guarantee in the amount of $1,981
(GBP1,200) to cover future duties and customs in the United Kingdom. No amounts
were outstanding under this guarantee at December 31, 1997.
The weighted average interest rate on short-term borrowings was 8.02% and 7.25%
at December 31, 1997 and December 31,1996, 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 November
2006 (see Note 14). The approximate minimum rental commitments under all
noncancelable leases as of December 31, 1997, were as follows:
1998 $10,075
1999 8,276
2000 5,683
2001 3,362
2002 2,631
Thereafter 11,463
-------
Total minimum lease payments $41,490
=======
Rental expense for all operating leases was $7,208, $3,080 and $2,655 for the
years ended December 31, 1997, 1996 and 1995, respectively. Rent is charged to
operations on a straight-line basis for certain leases.
32
33
9. Income Taxes
The components of the provision (benefit) for income taxes are as follows:
For the Years Ended December 31,
1997 1996 1995
------ ------ -------
Current:
Federal $2,842 $1,393 $(1,330)
State 1,227 222 125
Foreign 1,207 513 221
------ ------ -------
5,276 2,128 (984)
------ ------ -------
Deferred:
Federal (331) (1,223) 10
State ( 91) ( 80) (230)
------ ------ -------
(422) (1,303) (220)
------ ------ -------
$4,854 $ 825 $(1,204)
====== ====== =======
As required by SFAS 109, the Company has evaluated 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 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 Company reevaluates the positive and negative evidence on an
annual basis. The tax effects of temporary differences giving rise to deferred
tax assets and liabilities as of December 31, are as follows:
1997 1996
---- ----
Deferred tax assets
Receivable reserves $1,550 $1,491
Inventory capitalization and reserves 4,863 3,488
Other asset reserves 4,638 1,207
Deferred compensation 4,157 --
Foreign tax credits 2,731 --
Valuation allowance (8,193) --
----- ------
$9,746 $6,186
====== ======
Deferred tax liabilities (depreciation) $ 704 $ 803
====== ======
The following is a reconciliation of the statutory federal income tax rate to
the actual effective income tax rate:
1997 1996 1995
---- ---- ----
Federal tax (benefit) rate 34% 34% (34)%
Increase (decrease) in taxes resulting from:
State income taxes, net of federal benefit 9 7 3
Effect of foreign tax rates and non-utilization
of losses 19 35 5
Tax exempt dividends -- (16) --
Goodwill 7 -- --
Foreign tax credit (12) -- --
Meals and entertainment 1 6 --
State net operating loss carryforward -- -- (6)
Other, net 2 (1) (2)
--- --- ---
Effective tax (benefit) rate 60% 65% (34)%
== == ====
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34
10. Accrued Expenses and Other Current Liabilities
At December 31, 1997 and 1996, accrued expenses and other current liabilities
consisted of the following:
1997 1996
---- ----
Inventory purchases $19,946 $24,286
Deferred revenue 10,683 1,451
Accrued payroll and related and
deferred compensation 11,088 2,840
Other 23,114 7,937
------- -------
$64,831 $36,514
======= =======
11. Stock Plans
At December 31, 1997, the Company had three stock-based compensation plans,
which are described below. In 1996, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 requires that companies either recognize
compensation expense for grants of stock, stock options, and other equity
instruments based on fair value, or provide pro forma disclosure of net income
and earnings per share in the notes to the financial statements. The Company
adopted the disclosure provisions of 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 1997, 1996 and 1995 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:
1997 1996 1995
---- ---- ----
Net income (loss) - as reported $3,236 $438 $(2,338)
Net income (loss) - pro forma 1,828 (570) (3,306)
Earnings (loss) per common share - basic - as reported 0.26 0.04 ( 0.22)
Earnings (loss) per common share - diluted - as reported 0.25 0.04 ( 0.22)
Earnings (loss) per common share - basic - pro forma 0.15 (0.05) ( 0.31)
Earnings (loss) per common share - diluted - pro forma 0.14 (0.05) ( 0.31)
The effects of applying SFAS 123 in this pro forma are not indicative of future
amounts. SFAS 123 does not apply to awards prior to 1995, and additional awards
in future years are anticipated.
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. Effective September 1, 1995, the Company granted all
employees (except executive officers) with outstanding options the right to
exchange their existing options for new options with an exercise price of $10.00
per share (the fair market value on September 1, 1995). Stock options to acquire
an aggregate of 499,293 shares of common stock were canceled and regranted under
this program. The vesting period of these options commenced September 1, 1995.
34
35
1997 Acquisition Stock Plan
On May 8, 1997, the stockholders approved the 1997 Acquisition Stock Plan (the
"1997 Plan") which 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 1997, 1996 and 1995, respectively: expected dividend yield of
zero percent for all years; expected life of 3.5 years for 1997 and 1996 and 4.6
years for 1995; expected volatility of 52 percent for 1997 and 56 percent for
1996 and 1995; and, a risk-free interest rate of 6.5 percent for 1997, 5.2
percent for 1996 and 6.6 percent for 1995.
The following summarizes the status of the Company's stock options as of
December 31, 1997, 1996 and 1995 and changes during the year ended on those
dates:
1997 1996 1995
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------------------- ---------------------- -----------------------
Outstanding at beginning of year 975,255 $11.47 1,138,628 $15.71 621,696 $21.74
Granted 1,433,600 11.24 417,500 12.57 1,059,293 15.21
Exercised ( 9,386) 10.00 (12,281) 10.02 (1,418) 16.97
Canceled ( 55,707) 12.49 (568,592) 20.81 (540,943) 21.65
-------- ------- -------
Outstanding at end of year 2,343,762 11.31 975,255 11.47 1,138,628 15.71
========= ======= =========
Options exercisable at year-end 563,788 214,852 44,356
======= ======= ======
Options available for future grant 1,535,551 913,444 762,352
========= ======= =======
Weighted average fair value of
options granted during the year $4.69 $6.36 $8.14
===== ===== =====
The following table summarizes information about stock options outstanding at
December 31, 1997:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding at Contractual Exercise Exercisable at Exercise
Prices December 31, 1997 Life Price December 31, 1997 Price
- ----------- ----------------- ----------- -------- ----------------- --------
$ 8.75 - $10.87 864,523 8.4 years $10.25 378,132 $9.98
10.87 - 11.25 898,605 9.1 10.88 35,000 10.87
11.50 - 28.75 580,634 7.5 13.51 150,656 14.45
--------- -------
$ 8.75 - $28.75 2,343,762 8.5 11.31 563,788 11.23
========= =======
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Employee Stock Purchase Plan
Pursuant to its 1993 Employee Stock Purchase Plan (the "Stock Purchase Plan"),
as amended in May 1997, the Company is authorized to issue up to an aggregate of
300,000 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. The first offering under the Stock
Purchase Plan commenced in January 1994. Employee purchases amounted to 40,293
shares in 1997, 41,385 shares in 1996 and 33,903 shares in 1995 at prices
ranging from $8.93 to $20.08 per share. At December 31, 1997, 178,384 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 1997, 1996 and 1995, respectively:
expected dividend yield of zero percent for all years; expected life of six
months for all years; expected volatility of 52 percent for 1997 and 56 percent
for 1996 and 1995; and, a risk-free interest rate of 5.4 percent, 5.3 percent
and 5.8 percent for 1997, 1996 and 1995 respectively. The weighted-average fair
value of those purchase rights per share granted in 1997, 1996 and 1995 was
$3.14, $4.28 and $4.07, respectively.
12. 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,
1997, 1996 and 1995 was $709, $439 and $353, respectively.
13. Litigation
The Company and certain of its officers and directors have been named as
defendants in a putative class action filed on October 18, 1995 in the United
States District Court for the Southern District of New York (BARRY HALLET, JR.
V. LI & FUNG, ET AL., Docket No. 95 Civ. 8917). Additional defendants include
the managing underwriter of the Company's previous public securities offerings
and a former principal stockholder of the Company. The plaintiff in the action
alleges that, in violation of the securities laws, the Company and its officers
made false and misleading statements concerning the Company's business which
artificially inflated the price of the Company's stock and that, as a result,
the plaintiff and other putative class members were damaged when they purchased
the Company's stock. The Company's motion to dismiss the complaint was denied
and a class of purchasers certified. Subsequently, the plaintiff voluntarily
dismissed his claims against the managing underwriter, without prejudice. (See
Note 18.)
On or about February 15, 1997, Montague Corporation ("Montague") filed a
complaint against the Company in the Middlesex County Superior Court of the
Commonwealth of Massachusetts (Civil Action No. 97-00888). The complaint arises
out of an alleged distribution agreement ("Agreement") between the Company and
Montague's exclusive distributor for the sale of its bicycles in connection with
promotional programs in the United States. The complaint alleges that the
Company breached the purported Agreement, made negligent misrepresentations
concerning its performance of the Agreement and engaged in unfair and deceptive
trade practices in violation of Massachusetts General Law Chapter 93A. Montague
seeks actual and punitive damages with interest, attorneys' fees and costs. The
Company has vigorously defended the action and there has been extensive
discovery to date. As a result of court ordered mediation, the parties began
settlement discussions which are ongoing. The Company is unable to express an
opinion as to the outcome of either the settlement discussions or the
litigation.
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37
On February 11, 1993, Simon filed a complaint against Promotional Concept Group,
Inc. ("PCG") in the United States District Court for the Central District of
California (Case No. SA-CV 93-156 AHS (EEx)). On April 30, 1993, PCG filed its
answer, denying liability, as well as its counterclaim against Simon. Simon
alleges that PCG materially breached a contract between Simon and PCG dated
January 27, 1992 ("Contract"), under which Simon and PCG engaged in a program
designed to sell video cassette movies to supermarkets. By its complaint, Simon
seeks actual and exemplary damages, as well as an accounting from PCG. PCG
denies liability and has counterclaimed alleging, among other things, that Simon
wrongfully terminated the Contract, breached the Contract by failing to perform
according to the terms of the Contract, engaged in unfair competition in
violation of state law, and violated the Lanham Act, 11 U.C.C. ss. 1125. PCG
seeks actual and exemplary damages, as well as an accounting from Simon. The
Court has under submission certain motions, including a motion by Simon to
strike the PCG damages claim, which, if granted would have a material effect on
the litigation. Simon has, over the course of a number of months, engaged in
settlement discussions with Interpublic Group, Inc., a corporate affiliate of
PCG, which is negotiating on behalf of itself and PCG. At this time no
acceptable settlement proposal has emerged and the Company is unable to express
an opinion as to the outcome of either the settlement or the litigation. If the
matter is not settled, trial will be to the court sitting without a jury, and is
currently set for July 21, 1998.
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 ultimate resolution of the above described litigation matters
or any other litigation or other legal matters will have a material adverse
effect on its financial condition, results of operations or net cash flows.
14. Related Party Transactions
The Company leases production facilities and a portion of its administrative
offices under a ten-year operating lease agreement expiring April 19, 1999 from
a real estate trust of which one of the Company's officers is a trustee and
beneficiary. The agreement provides for annual rent of $354 and for the payment
by the Company of all utilities, taxes, insurance and repairs.
The Company leases administrative offices and warehouse facilities under a
three-year operating lease agreement expiring December 31, 1999 from a real
estate trust of which one of the Company's officers is a trustee and
beneficiary. The agreement provides for annual rent of $171 and for the payment
by the Company of all utilities, taxes, insurance and repairs.
The Company leases production facilities under a ten-year operating lease
agreement which expires April 19, 1999 from a trust of which one of the trustees
and beneficiaries is an officer of the Company. The agreement provides for
annual rent of $182 and for the payment by the Company of all utilities, taxes,
insurance and repairs.
The Company leases warehouse facilities under a fifteen-year operating lease
agreement which expires December 31, 2011 from a limited liability company which
is owned by two officers 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.
A 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 $9,904, $2,064 and $7,974 for the
years ended December 31, 1997, 1996 and 1995, respectively. The amounts due to
this corporation were $180 and $992 at December 31, 1997 and 1996, respectively.
15. Significant Customers and Geographical Area Information
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, 1997, 1996 and
1995, respectively:
% of Sales % of Trade Receivables
---------------------- ----------------------
1997 1996 1995 1997 1996 1995
---- ---- ---- ---- ---- ----
Company A 16 30 57 12 19 42
Company B 2 10 11 1 6 11
Company C 21 38 2 15 57 6
Company D 36 -- -- 40 -- --
37
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The Company conducts its promotional marketing business on a global basis. The
following summarizes the Company's operations in different geographical areas
for the years ended December 31, 1997, 1996 and 1995, respectively:
United Other
1997 States Europe Foreign Eliminations Consolidated
- ---- -------- -------- ------- ------------ ------------
Sales to unaffiliated
customers $412,142 $107,874 $38,607 $ -- $558,623
Transfers between
geographical areas 2,403 1,654 9,268 (13,325) --
---------------------------------------------------------
$414,545 $109,528 $47,875 $(13,325) $558,623
=========================================================
Operating income (loss) $ 4,590 $ 700 $ 4,000 $ (148) $ 9,142
=========================================================
Identifiable assets at
December 31, 1997 $268,690 $ 49,630 $30,140 $(34,615) $313,845
=========================================================
United Other
1996 States Europe Foreign Eliminations Consolidated
- ---- -------- -------- ------- ------------ ------------
Sales to unaffiliated
customers $234,158 $ 8,877 $ 7,866 $ -- $250,901
Transfers between
geographical areas -- -- 3,826 (3,826) --
---------------------------------------------------------
$234,158 $ 8,877 $11,692 $ (3,826) $250,901
=========================================================
Operating income (loss) $ (125) $ (1,031) $ 1,107 $ -- $ (49)
=========================================================
Identifiable assets at
December 31, 1996 $191,154 $ 4,279 $ 8,266 $(13,460) $190,239
=========================================================
United Other
1995 States Europe Foreign Eliminations Consolidated
- ---- -------- -------- ------- ------------ ------------
Sales to unaffiliated
customers $134,294 $ 1,548 $ -- $ -- $135,842
Transfers between
geographical areas 50 -- 3,674 (3,724) --
---------------------------------------------------------
$134,344 $ 1,548 $ 3,674 $ (3,724) $135,842
=========================================================
Operating income (loss) $ (7,136) $ (411) $ 1,274 $ -- $ (6,273)
=========================================================
Identifiable assets at
December 31, 1995 $135,722 $ 652 $ 2,661 $ (1,437) $137,598
=========================================================
Transfers between the geographic areas represent intercompany revenues which are
accounted for based on established sales prices between the related companies.
38
39
16. 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,
1997 1996 1995
-------------------------------- -------------------------------- -------------------------------
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 $3,236 12,592,333 $0.26 $438 10,768,147 $0.04 $(2,338) 10,719,761 $(0.22)
===== ===== =======
Effect of Dilutive
Securities:
Common stock equivalents 95,835 140,482 --
Contingently and
non-contingently
issuable shares related
to acquired companies 336,406 -- --
---------- ----------- ----------
Diluted EPS:
Income (loss) available to
common stockholders and
assumed conversions $3,236 13,024,574 $0.25 $438 10,908,629 $0.04 $(2,338) 10,719,761 $(0.22)
===================== ===== =================== ===== ==================== =======
For the year ended December 31, 1995, 26,428 of common stock equivalents were
not included in the computation of diluted EPS because to do so would have been
antidilutive.
17. Quarterly Results of Operations (Unaudited)
The following is a tabulation of the quarterly results of operations for the
years ended December 31, 1997 and 1996, respectively:
First Second Third Fourth
Quarter Quarter Quarter Quarter
1997 ------- ------- ------- --------
- ----
Net sales $97,188 $106,567 $170,813 $184,055
Gross profit 16,865 19,873 31,334 35,023
Net income 2,243 624 124 245
Earnings per common share - basic and diluted 0.21 0.05 0.01 0.02
1996
- ----
Net sales $65,101 $44,144 $55,556 $86,100
Gross profit 10,734 6,864 8,378 11,010
Net income (loss) 1,624 (974) (524) 312
Earnings (loss) per common share - basic and diluted 0.15 (0.09) (0.05) 0.03
18. Subsequent Events
On February 13, 1998, the Company announced a plan to restructure its worldwide
operations. The plan reflects the Company's strategy to focus on its core
business in the promotional marketing industry. The Company intends to
consolidate certain operating facilities, discontinue certain divisions of its
apparel business and eliminate approximately 450 positions or 28% of its
worldwide work force. The majority of the eliminated positions will affect the
screen printing and embroidery business in Gloucester, Massachusetts. The
Company estimates that a pre-tax charge of approximately $12 to $15 million will
be recorded in the first quarter of 1998. The charge will consist of asset
write-downs, employee termination costs, lease cancellations and other related
exit costs.
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 $10.0 million which will
be used for general corporate purposes.
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40
The Company and certain of its officers and directors have been named as
defendants in a putative class action filed on October 18, 1995 in the United
States District Court for the Southern District of New York (BARRY HALLET, JR.
V. LI & FUNG, ET AL., Docket No. 95 Civ. 8917). On March 4, 1998, with the
assistance of a professional mediator, all parties to the litigation reached an
agreement in principle to settle the case. The agreement is subject to
preparation of definitive settlement documents mutually agreeable to the parties
and preliminary and final approval, after notice to class members, by the
Federal District Court. The agreement in principle calls for a cash contribution
by the Company of $4 million; other parties and various insurance carriers will
also be contributing to the contemplated settlement. In the opinion of
management, after consideration of amounts accrued, this settlement will not
have a material adverse effect on the Company's financial condition, results of
operations or net cash flows.
40
41
CYRK, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
ADDITIONS
CHARGED to DEDUCTIONS
ACCOUNTS RECEIVABLE, BALANCE AT COSTS AND (CHARGED AGAINST BALANCE AT
ALLOWANCE FOR BEGINNING EXPENSES OTHER ACCOUNTS END
DOUBTFUL ACCOUNTS OF PERIOD (BAD DEBT EXPENSES) ADDITIONS RECEIVABLE) OF PERIOD
- ------------------- ---------- ------------------- --------- --------------- ----------
1997 $3,191 $390 $358(1) $138 $3,801
1996 3,039 152 -- -- 3,191
1995 3,102 120 -- 183 3,039
(1) Represents addition to reserve as a result of acquired companies.
DEFERRED INCOME ADDITIONS
TAX ASSET BALANCE AT CHARGED to BALANCE AT
VALUATION BEGINNING COSTS AND OTHER END
ALLOWANCE OF PERIOD EXPENSES ADDITIONS DEDUCTIONS OF PERIOD
- -------------- ---------- ----------- --------- ----------- ----------
1997 $ -- $ -- $8,193(2) $ -- $8,193
(2) Represents addition to reserve as a result of an acquisition.