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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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ____________
Commission file number: 0-21878
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 26, 1999, the aggregate market value of voting stock held by
non-affiliates of the registrant was $69,546,410.
At February 26, 1999, 15,494,204 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
1999 ANNUAL MEETING OF STOCKHOLDERS HAVE BEEN INCORPORATED BY REFERENCE IN PART
III OF THIS REPORT.
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PART I
ITEM 1. BUSINESS.
GENERAL DEVELOPMENT OF THE BUSINESS
Cyrk, Inc. (referred to herein as "Cyrk" or the "Company") is a full-service
promotional marketing company, specializing in the design and development of
high-impact promotional products and 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
acquisitions in 1997 of Simon Marketing, Inc. ("Simon") and Tonkin, Inc.
("Tonkin") have significantly strengthened the Company's position as a leader in
the promotion industry. In 1998, the Company completed a corporate
restructuring, described below, which reflects the Company's strategy to focus
on its core business in the promotional marketing 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 also sells promotional products directly to
consumers through licensing arrangements with its clients seeking to promote
their brand names and build brand loyalty. Cyrk's customers include
McDonald's(R)1 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 other companies with recognized brands.
Additionally, the Company has a license agreement with Ty, Inc. ("Ty") (for whom
Cyrk is the exclusive licensed provider of Beanie Babies(R)3 Official Club(TM)4
kits and Beanie Babies licensed products to consumers). 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.
1997 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 340 employees primarily in its Monroe,
Washington headquarters. Tonkin develops and implements corporate identity
programs for major domestic and international clients including Caterpillar(R)5,
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 460 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. As a result of the restructuring
plan, the Company consolidated certain operating facilities, discontinued its
private label and Cyrk brand business, divested its investment in an apparel
joint venture and eliminated approximately 450 positions or 28% of its worldwide
work force. The majority of the eliminated positions affected the screen
printing and embroidery business in Gloucester, Massachusetts.
1 McDonald's and Happy Meal are registered trademarks of McDonald's
Corporation.
2 Marlboro is a registered trademark of Philip Morris Incorporated.
3 Beanie Babies is a registered trademark of Ty, Inc.
4 Beanie Babies Official Club is a trademark of Ty, Inc.
5 Caterpillar is a registered trademark of Caterpillar, Inc.
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MANAGEMENT CHANGES
On December 31, 1998, the Company announced that Patrick D. Brady, Cyrk's
president and chief operating officer, had been named chief executive officer,
replacing Gregory P. Shlopak, who resigned effective December 31, 1998. Mr.
Shlopak continues as a director of Cyrk and has agreed to provide consulting
services to the Company. Pursuant to an agreement entered into with Mr. Shlopak,
the Company recorded a nonrecurring fourth quarter pre-tax charge to operations
of $2.3 million. The agreement provides for payments and benefits to Mr. Shlopak
payable over a three year period.
PRODUCTS AND SERVICES
Promotional Product Programs. Cyrk provides High-Impact Promotional
Programs(TM)6 ("HIPP"(TM)6) to its customers. The goal of a High-Impact
Promotional Program is to enhance corporate identity, develop brand awareness,
and build customer or employee loyalty. Cyrk has achieved this goal for many of
its customers and continues to develop and manage promotions that generate
tremendous growth for customer brands and further develop customer and employee
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 Marlboro Unlimited(R)7 promotions. The Company
has licensing agreements with companies such as Ty, Mars, Incorporated ("Mars"),
and The Coca-Cola(R)8 Company ("Coke"(R)8). Under its licensing arrangement with
Ty, the Company has the exclusive right to develop and market licensed Beanie
Babies products to consumers. Under its licensing arrangements with Mars and
Coke, the Company has been granted a license to use certain Mars' trademarks,
symbols and designs and certain of Coke's trademarks, symbols and designs in
connection with the manufacture, sale and distribution of certain merchandise.
6 High-Impact Promotional Program and HIPP are trademarks of Cyrk, Inc.
7 Marlboro Unlimited is a registered trademark of Philip Morris Incorporated.
8 Coca-Cola and Coke are registered trademarks of The Coca-Cola Company.
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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. The Company 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. The Company charges
separately for these services but derives substantially all of its revenue from
the sale of products.
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 23 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 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.
SIGNIFICANT CUSTOMER RELATIONSHIPS
In recent years, the Company's business has been concentrated with McDonald's,
Philip Morris and Pepsi-Cola Company ("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 and certain other customers are
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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 its subsidiary, Simon.
Simon designs and implements marketing promotions for McDonald's, which include
games, sweepstakes, premiums, events, contests, coupon offers, sports marketing,
licensing and promotional retail items. Simon's net sales from its business with
McDonald's consist of a combination of sales of promotional products and various
service fees. Net sales to McDonald's accounted for 57% and 36% of the Company's
consolidated net sales in fiscal 1998 and 1997, respectively.
Philip Morris accounted for 11%, 16% and 30% of the Company's consolidated net
sales in 1998, 1997 and 1996, respectively. A substantial majority of those
sales relate to Philip Morris' Marlboro Adventure Team(TM)9, Marlboro Country
Store(R)10 and Marlboro Unlimited promotions. The United States Food and Drug
Administration ("FDA") issued final regulations with respect to promotional
programs relating to tobacco products which could have a material adverse effect
on the Company's business with Philip Morris and on its results of operations.
In addition, on November 23, 1998, certain tobacco companies, including Philip
Morris, entered into a settlement agreement with 46 states and five U.S.
territories that, among other things, prohibits the use of brand names by the
tobacco companies in connection with their marketing, distribution, licensing
and sales of apparel and other merchandise. The settlement could have a material
adverse effect on the Company's business with Philip Morris and on its results
of operations. For a description of the FDA regulations and the tobacco
settlement, and their potential impact on 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.
Pepsi accounted for 1%, 21% and 38% of the Company's consolidated net sales in
1998, 1997 and 1996, respectively. The decrease in net sales to Pepsi in 1998
resulted from the winding down of existing programs. The Company's agreements
with Pepsi were terminated in December 1997.
Through its licensing agreement with Ty, the Company has the exclusive right to
develop and market licensed Beanie Babies products. During 1998, the Company
created and marketed the premier edition of the Beanie Babies Official Club, a
consumer membership kit which included authentic Beanie Babies merchandise and
marketed various other Beanie Babies licensed products. Sales of Beanie Babies
related products accounted for approximately 7% of the Company's consolidated
net sales for 1998 and it is expected that 1999 revenues and profitability will
be significantly benefited by the sales of Beanie Babies products, of which the
majority will be derived in the second half of the year.
SALES AND DISTRIBUTION
The Company sells its promotional products and services through an employee
sales force composed of approximately 200 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 36%, 27% and 7% of the Company's
consolidated net sales in 1998, 1997 and 1996, respectively. International sales
are currently made through the Company's account representatives in the United
States as well as through the Company's German, United Kingdom and Hong Kong
subsidiaries.
9 Marlboro Adventure Team is a trademark of Philip Morris Incorporated.
10 Marlboro Country Store is a registered trademark of Philip Morris
Incorporated.
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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 methods of 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, 1998, the Company had written purchase orders for $247.6 million
as compared to $204.2 million at December 31, 1997. The Company's purchase
orders are generally subject to cancellation with limited penalty and are also
subject to agreements with certain customers that limit gross margin levels.
Therefore, the Company cautions that the backlog amounts may not necessarily be
indicative of future revenues or earnings.
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.
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 1998 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 1998, a substantial amount of the Company's net sales were from
products manufactured in China.
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EMPLOYEES At December 31, 1998, the Company had approximately 1,300 full-time
employees. The Company's work force is not unionized and the Company believes
that its relations with its employees are good. Consistent with the Company's
focus in its core business in the promotional marketing industry, the Company
added approximately 300 employees worldwide in 1998. The additional employees
were in support of an expanded global business development and operational
effort. Pursuant to the restructuring plan announced in February 1998, the
Company consolidated certain operating facilities, discontinued its private
label and Cyrk brand business and eliminated approximately 450 positions of its
worldwide work force.
ITEM 2. PROPERTIES.
The Company leases its principal executive and certain sales and administrative
offices in Gloucester, Massachusetts. At December 31, 1998, the Company occupied
approximately 71,100 square feet under leases that expire in December 1999 and
have an annual base rent of approximately $583,000. All of the Gloucester
facilities are owned by a trust of which Gregory P. Shlopak, a member of the
Company's Board of Directors and its former Chief Executive Officer, is both a
trustee and beneficiary. The Company plans to relocate from its Gloucester
facilities in 1999.
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 Patrick D. Brady, the Company's President, Chief Executive Officer, and
Chief Operating Officer are both trustees and beneficiaries.
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 $2,500,000.
The Company leases approximately 131,000 square feet of warehouse, production
and office space in Monroe, Washington attributable to its Tonkin operations
pursuant to a lease which expires in September 2007. The annual base rent of
this lease is approximately $564,000. 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 and approximately
20,000 square feet of office and warehouse space in Peoria, Illinois under a
lease that expires in March 2003.
Additionally, the Company 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 10,000 square feet of additional office space in various US
cities.
In addition to its domestic lease facilities, the Company leases a total of
approximately 58,800 square feet of European office and warehouse space in
Frankfurt, London, Munich and Paris, and, leases an aggregate of approximately
42,300 square feet of Asian office and warehouse space in Hong Kong, Korea,
Taiwan, and Tokyo under leases which expire in April 1999 through December 2007.
For a summary of the Company's minimum rental commitments under all
noncancelable operating leases as of December 31, 1998, see notes to the
consolidated financial statements.
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ITEM 3. LEGAL PROCEEDINGS.
The Company and certain of its officers and directors were 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 HALLETT, 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 to
settle the case which was approved by the Federal District Court on June 26,
1998. The settlement agreement called for a cash contribution by the Company of
$4.0 million; other parties and various insurance carriers have also contributed
to the settlement. After consideration of amounts previously accrued, this
settlement had an immaterial impact on the Company's 1998 financial condition
and results of operations.
On or about February 15, 1997, Montague Corporation ("Montague") filed an action
in Middlesex Superior Court, Commonwealth of Massachusetts, MONTAGUE CORPORATION
V. CYRK, INC. (Civil Action No. 97-00888) ("Montague action"), alleging a breach
of a May 17, 1995 Exclusive Distribution Agreement naming the Company as the
exclusive USA distributor for the sale of Montague bicycles in connection with
promotional programs. On March 10, 1999, the Company and Montague entered into a
Settlement and Joint Venture Agreement ("Settlement"), terminating the Montague
action and establishing a joint venture to sell corporate logoed bicycles for
use in various corporate sales programs and promotions. Under the terms of the
Settlement, the Company may be obligated to pay Montague up to $.9 million in
cash if the joint venture does not achieve certain financial results within
three years from the Settlement date.
On February 11, 1993, Simon Marketing, Inc. ("Simon"), a wholly-owned subsidiary
of the Company, 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. On June
30, 1998, Simon and PCG entered into a settlement agreement and, subsequently,
entered a dismissal of the lawsuit with the court. As part of settling this
preacquisition contingency of Simon, the Company made an upfront payment of $.6
million to a third party, Interpublic Group of Companies, Inc. ("IPG"). The
Company also agreed to pay IPG a total of $2.9 million in additional
consideration, comprised of warrants to purchase 200,000 shares of the Company's
common stock and cash based on the difference between $2.9 million, certain
amounts received by IPG under a separate business arrangement with the Company,
and the value of the warrant shares as of different measurement dates. The
Company recorded the maximum $3.5 million liability as an increase to excess of
cost over net assets acquired.
In the opinion of management, the resolution of the foregoing actions will not
have, in the aggregate, 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, 1998.
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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:
Patrick D. Brady (43): President, Chief Executive Officer 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 and Chief Executive Officer in December
1998.
Terry B. Angstadt (45): 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 (43): 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. Mr. Axelrod was elected to the Board
of Directors in November 1998. 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 (42): Executive Vice President and Chief Financial Officer.
Mr. Mammola was elected an Executive Vice President
of the Company in September 1997 and elected to the
Board of Directors in November 1998. 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 Stock Market under the symbol CYRK.
The following table presents, for the periods indicated, the high and low sales
prices of the Company's common stock as reported by The Nasdaq Stock Market's
National Market.
1998 1997
High Low High Low
---- --- ---- ---
First Quarter $17.25 $ 9.50 $13.00 $11.00
Second Quarter 20.38 10.06 12.88 10.50
Third Quarter 13.25 6.75 11.50 9.75
Fourth Quarter 10.25 6.50 13.00 9.63
As of February 26, 1999, the Company had approximately 328 holders of record
(representing approximately 3,500 beneficial owners) of its common stock. The
last reported sale price of the Company's common stock on February 26, 1999 was
$6.44.
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.
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Item 6. Selected Financial Data.
SELECTED INCOME: For the Years Ended December 31,
STATEMENT DATA: 1998 1997(2) 1996 1995 1994
---- ---- ---- ---- ----
(In thousands, except per share data)
Net sales $757,853 $558,623 $250,901 $135,842 $401,936
Net income (loss) (3,016)(1) 3,236 438 (2,338) 30,409
Earnings (loss) per
common share - basic (0.20)(1) 0.26 0.04 (0.22) 3.20
Earnings (loss) per
common share - diluted (0.20)(1) 0.25 0.04 (0.22) 3.20
SELECTED BALANCE December 31,
SHEET DATA: 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands)
Working capital $ 87,517 $ 61,314 $100,565 $106,188 $115,939
Total assets 337,341 313,845 190,239 137,598 147,029
Long-term obligations 12,099 9,611 -- -- --
Stockholders' equity 177,655 160,353 124,347 123,600 125,659
(1) Includes $15,288 of pre-tax restructuring and nonrecurring charges. See
notes to consolidated financial statements.
(2) Includes the results of operations of acquired companies from the
acquisition dates. See notes to consolidated financial statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
From time to time, the Company may provide forward-looking information such as
forecasts of expected future performance or statements about the Company's plans
and objectives, including certain information provided below. These
forward-looking statements are based largely on the Company's expectations and
are subject to a number of risks and uncertainties, certain of which are beyond
the Company's control. The Company wishes to caution readers that actual results
may differ materially from those expressed in any forward-looking statements
made by, or on behalf of, the Company as a result of factors described in the
Company's Amended Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act of 1995, filed as
Exhibit 99.1 to the Company's Form 8-K dated December 31, 1998 and which is
incorporated herein by reference.
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, Philip Morris Incorporated ("Philip Morris") and Pepsi-Cola Company
("Pepsi"). In 1996, Philip Morris and Pepsi accounted for 30% and 38% of net
sales, respectively. Purchases of promotional products by Philip Morris and
Pepsi in 1997 accounted for 16% and 21% of net sales, respectively. In 1998,
Philip Morris and Pepsi accounted for 11% and 1% of total net sales,
respectively. The decrease in net sales to Pepsi in 1998 resulted from the
winding down of existing programs. The Company's agreements with Pepsi were
terminated in December 1997.
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").
McDonald's accounted for 36% of the Company's total net sales in 1997 and 57% of
the Company's total net sales in 1998.
The Company's business with McDonald's and Philip Morris (as well as
other promotional customers) is based upon purchase orders placed from time to
time during the course of promotions. 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
1999 will be to McDonald's and Philip Morris.
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. A recent
settlement agreement between 46 states and certain tobacco companies, including
Philip Morris, prohibits the use of brand names by tobacco companies in
connection with promotional programs relating to tobacco products beginning on
July 1, 1999. The settlement agreement, however, does not prohibit the use of
Philip Morris's corporate name in promotional programs. Due to the restrictions
on the use of brand names, and the other limitations imposed by the settlement
agreement on the tobacco industry, the settlement could have a material adverse
effect on the Company's business with Philip Morris and on its results of
operations.
12
13
In December 1997, the Company entered into a license agreement with Ty, Inc.
("Ty"), the world's largest manufacturer and marketer of plush toys (sold under
the name Beanie Babies(R)), which granted the Company the exclusive right to
develop and market licensed Beanie Babies products. The agreement was for an
original period through December 1998, with automatic additional one year
renewal periods thereafter. During 1998, the Company created and marketed the
premier edition of the Beanie Babies Official Club(TM), a consumer membership
kit which included authentic Beanie Babies merchandise, and marketed various
other Beanie Babies licensed products. Sales of Beanie Babies related products
accounted for approximately 7% of the Company's consolidated net sales for 1998.
The Company expects that 1999 revenues and profitability will be significantly
benefited by sales of Beanie Babies products, of which the majority will be
derived in the second half of the year. Accordingly, the Company announced that
it expects to incur an operating loss in the first quarter of 1999.
At December 31, 1998, the Company had written purchase orders for $247.6 million
as compared to $204.2 million at December 31, 1997. The Company's purchase
orders are generally subject to cancellation with limited penalty and are also
subject to agreements with certain customers that limit gross margin levels.
Therefore, the Company cautions that the backlog amounts may not necessarily be
indicative of future revenues or earnings.
CORPORATE 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. As a result of the restructuring
plan, the Company consolidated certain operating facilities, discontinued its
private label and Cyrk brand business, divested its investment in an apparel
joint venture and eliminated approximately 450 positions or 28% of its worldwide
work force. The majority of the eliminated positions affected the screen
printing and embroidery business in Gloucester, Massachusetts. The Company
recorded a 1998 charge to operations of $11.8 million for asset write-downs,
employee termination costs, lease cancellations and other related exit costs
associated with the restructuring. As of December 31, 1998, the restructuring
plan has been fully executed and the remaining restructuring accrual of
approximately $1 million is primarily related to the liquidation of certain
assets which are expected to be completed during the first half of 1999. The
Company expects the restructuring to yield annualized cost savings of
approximately $9 million. See notes to consolidated financial statements.
MANAGEMENT CHANGES
On December 31, 1998, the Company announced that Patrick D. Brady, Cyrk's
president and chief operating officer, had been named chief executive officer,
replacing Gregory P. Shlopak, who resigned effective December 31, 1998. Mr.
Shlopak continues as a director of Cyrk and has agreed to provide consulting
services to the Company. Pursuant to an agreement entered into with Mr. Shlopak,
the Company recorded a nonrecurring fourth quarter pre-tax charge to operations
of $2.3 million. The agreement provides for payments and benefits to Mr. Shlopak
payable over a three year period.
RESULTS OF OPERATIONS
1998 Compared to 1997
Net sales increased $199.2 million, or 36%, to $757.9 million in 1998 from
$558.6 million in 1997. The increase in net sales was primarily attributable to
revenues associated with Simon and Tonkin, which was partially offset by the
decrease in sales associated with the termination of the Pepsi agreements.
Promotional product sales accounted for substantially all of the Company's
revenue in 1998 as compared to $523.6 million in 1997. Net sales related to the
Company's private label and Cyrk brand business in 1998 were minimal as compared
to $35.0 million in 1997 which reflects the Company's restructuring strategy to
focus on its core business in the promotional marketing industry.
Gross profit increased $34.8 million, or 34%, to $137.9 million in 1998 from
$103.1 million in 1997. As a percentage of net sales, gross profit decreased to
18.2% in 1998 from 18.5% in 1997. This decrease was primarily the result of a
concentration of sales volume and lower margins associated with the large
promotional programs, which was partially offset by cost and operational
improvements associated with the restructuring announced in February 1998, as
well as the effect of a more favorable product sales mix in the second half of
1998.
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Selling, general and administrative expenses totaled $135.5 million in 1998 as
compared to $94.0 million in 1997. As a percentage of net sales, selling,
general and administrative costs totaled 17.9% as compared to 16.8% in 1997. The
Company's increased spending was primarily attributable to its expanded global
sales and operations associated with its 1997 acquisitions.
Restructuring and nonrecurring charges totaled $15.3 million in 1998. In
connection with its February 1998 announcement to restructure worldwide
operations, the Company recorded a restructuring charge of $11.8 million
attributable to asset write-downs, employee termination costs, lease
cancellations and other related exit costs. In addition, the Company recorded a
$2.3 million nonrecurring charge associated with a December 1998 severance
agreement between the Company and its former chief executive officer, and also
recorded a $1.1 million nonrecurring charge associated with the Company's plan
to relocate its corporate facilities. See notes to consolidated financial
statements.
Interest income increased in 1998 over 1997 primarily as a result of a higher
level of short-term investments of excess cash.
Interest expense increased in 1998 over 1997 as a result of increased borrowings
associated with financing inventory purchases.
Other income of $7.1 million in 1998 represents the gain realized on the sale of
an investment. See notes to consolidated financial statements.
Equity in loss of affiliates of $.4 million in 1998 and $1.4 million in 1997
represents the Company's proportionate share of investments being accounted for
under the equity method. $.2 million and $.8 million of the equity in loss of
affiliates in 1998 and 1997, respectively, related to the Company's investment
in an apparel joint venture which was liquidated as part of the restructuring
plan.
For an analysis of the change in the effective tax rates from 1996 to 1998 and a
discussion of the valuation allowance recorded by the Company, see notes to
consolidated financial statements.
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 decreased in 1997 from 1996 primarily as a result of a decrease
in short-term investments of excess cash.
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 which were being
accounted for under the equity method.
14
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LIQUIDITY AND CAPITAL RESOURCES
Working capital at December 31, 1998 was $87.5 million compared to $61.3 million
at December 31, 1997. Net cash provided by operating activities during 1998 was
$18.4 million, due principally to $9.0 million of depreciation and amortization
expense, $8.6 million of non-cash asset write-downs related to the restructuring
and a net increase in working capital items of $6.9 million which were partially
offset by a $7.1 million realized gain on the sale of an investment.
Net cash provided by investing activities was $5.3 million, which was primarily
attributable to $10.8 million in proceeds from the sale of investments which was
partially offset by $5.3 million of purchases of property and equipment. In
1997, 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 in
1997. In connection with the 1998 restructuring of its operations, the Company
no longer has an investment in the apparel joint venture.
As a result of the Company's decision to embark on the implementation of an
enterprise resource planning ("ERP") system in 1999, the Company anticipates
that its 1999 purchases of property and equipment will be substantially higher
than the 1998 levels. The cost of the ERP system is expected to approximate $4.5
million and the Company anticipates seeking external financing for this capital
investment.
Net cash provided by financing activities was $9.5 million, which was primarily
attributable to $11.6 million of proceeds from the issuance of common stock. 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 is
being used for general corporate purposes.
Since inception, the Company has financed its working capital and capital
expenditure requirements through cash generated from operations, public and
private sales of common stock, bank borrowings and capital equipment leases.
Such cash requirements for 1998 were provided principally by operating and
financing activities.
The Company currently has available several worldwide bank letters of credit and
revolving credit facilities which expire at various dates beginning in March
1999. The Company's primary domestic line of credit, amounting to $50 million,
expires in September 1999. The Company is currently negotiating with the bank
for a revised credit facility which it expects to secure in the second quarter
of 1999. As of December 31, 1998, based on the borrowing base formulas
prescribed by these credit facilities, the Company's borrowing capacity was
$97.0 million, of which $16.4 million of short-term borrowings and $23.3 million
in letters of credit were outstanding. Borrowings under these facilities are
collateralized by all assets of the Company.
Management believes that the Company's existing cash position and credit
facilities combined with internally generated cash flow will satisfy its
liquidity and capital needs through the end of 1999. Consistent with its
announcement of an expected first quarter operating loss, the Company
anticipates the majority of its internal cash flow will be derived in the second
half of 1999. The Company's ability to generate internal cash flow is highly
dependent upon its continued relationships with McDonald's, Philip Morris and
Ty. Any material adverse change from the Company's current expectations of its
ability to secure a revised credit facility or of its current expectations of
1999 revenues attributable to its major business relationships could adversely
affect the Company's cash position and capital availability.
IMPACT OF THE YEAR 2000 ISSUE
General
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 an assessment conducted
in 1997, the Company determined that it was necessary to modify or replace
portions of its software so that its computer systems will properly utilize
dates beyond December 31, 1999. To address these problems, the Company initiated
a Year 2000 Compliance Program which is described below.
15
16
The Company does not anticipate that the addressing of the Year 2000 problem for
its internal information systems and current and future products will have a
material impact on its operations or financial results. However, there can be no
assurance that these costs will not be greater than anticipated, or that
corrective actions undertaken will be completed before any Year 2000 problems
occur. The Year 2000 issue could lower demand for the Company's products while
increasing the Company's costs. These combining factors, while not quantified,
could have a material adverse impact on the Company's financial results.
State of Readiness
To manage its Year 2000 program, the Company has divided its efforts into three
program areas--Information Technology (computer hardware, software, and
electronic data interchange (EDI) interfaces), Physical Plant (manufacturing
equipment and facilities) and Extended Enterprise (suppliers and customers). For
each of these program areas, the Company is using a four-step approach:
Ownership (creating awareness, assigning tasks); Inventory (listing items to be
assessed for Year 2000 readiness); Assessment (prioritizing the inventoried
items, assessing their Year 2000 readiness, planning corrective actions, making
initial contingency plans); and, Corrective Action Deployment (implementing
corrective actions, verifying implementation, finalizing and executing
contingency plans).
In December 1998, the Ownership, Inventory and Assessment steps were essentially
complete for all program areas. The target completion date for Corrective Action
Deployment is July 1999.
To date, the Company has achieved approximately 90 percent of its Corrective
Action Deployment goals for its three program areas. The Company expects to
complete its Year 2000 assessments, modifications and conversions by July 1999.
The status for each program area is as follows:
* Information Technology: Substantially all of the Company's business
strategic information systems (financial, distribution and marketing)
have been assessed, corrected and verified, and corrected systems are
on schedule to be completed by July 1999.
* Physical Plant: Manufacturing equipment assessment has been completed
with no corrective action necessary. Facilities assessment is in
process and on schedule to be completed by July 1999.
* Extended Enterprise: 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. In addition, the Company has initiated a formal Year 2000
compliance document where 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. The
Company has initiated formal communications with its key 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. At this time, the Company cannot determine the impact
the Year 2000 will have on its key customers or suppliers. If the
Company's customers or suppliers do not convert their systems to become
Year 2000 compliant, the Company may be materially adversely affected.
Costs to Address Year 2000 Issues
Currently, the Company expects that the costs associated with becoming Year 2000
compliant will not exceed $.3 million, of which approximately $.1 million has
been expended to date.
Risks of Year 2000 Issues and Contingency Plans
The Company continues to assess the Year 2000 issues relating to its physical
plant, suppliers and customers. The Company is developing, and will continue to
develop, contingency plans for dealing with any adverse effect that becomes
likely in the event the Company's remediation plans are not successful or third
parties fail to remediate their own Year 2000 issues. The Company's contingency
planning process is intended to mitigate worst-case business disruptions.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
PAGE
----
Report of Independent Accountants 23
Consolidated Balance Sheets as of December 31, 1998 and 1997 24
Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996 25
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997
and 1996 26
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 27
Notes to Consolidated Financial Statements 28-39
Schedule II: Valuation and Qualifying Accounts 40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
NONE
17
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item regarding the Company's directors is
included in the Company's Proxy Statement to be filed pursuant to Schedule 14A
in connection with the Company's 1999 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
1999 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
1999 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
1999 Annual Meeting of Stockholders under the section captioned "Compensation
Committee Interlocks and Insider Participation" and is incorporated herein by
reference thereto.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) DOCUMENTS FILED AS PART OF THIS REPORT.
1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 1998
and 1997
Consolidated Statements of Operations for the years
ended December 31, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES FOR THE FISCAL YEARS
ENDED DECEMBER 31, 1998, 1997 AND 1996:
Schedule II: Valuation and Qualifying Accounts.
All other schedules for which provision is made in
the applicable accounting regulations of the
Securities and Exchange Commission are not required
under the related instructions or are inapplicable,
and therefore have been omitted.
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3. EXHIBITS
Exhibit No. Description
- ---------- -----------
2.1 (1) Agreement of Merger dated July 6, 1993 between the Registrant
and Cyrk, Inc.
3.1 (5) 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)(3) 1993 Employee Stock Purchase Plan
10.2 (3)(5) 1993 Omnibus Stock Plan, as amended
10.3 (5) 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.
10.3.1 Lease extension agreement dated March 16, 1999 by and between
Gregory P. Shlopak and Paul M. Butman, Jr., as Trustees of PG
Realty Trust and Cyrk, Inc., filed herewith
10.4 (1) Revolving Credit Agreement dated as of December 1, 1993,
between the Registrant and The Hongkong and Shanghai Banking
Corporation Limited
10.5 (1) Letter Agreement dated January 5, 1994, between the Registrant
and The Hongkong and Shanghai Banking Corporation Limited
10.6 (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
10.7 (1) Security Agreement dated as of December 1, 1993, between the
Registrant and The Hongkong and Shanghai Banking Corporation
Limited
10.8 (4) Letter Agreement dated May 5, 1994 between the Registrant and
The Hongkong and Shanghai Banking Corporation Limited
10.9 (7) Letter agreement dated February 7, 1996, between the
Registrant and The Wells Fargo HSBC Trade Bank, N.A.
10.10 (8) Letter agreement dated March 26, 1997, between the Registrant
and The Wells Fargo HSBC Trade Bank, N.A.
10.11 Letter agreement dated November 20, 1998, between the
Registrant and the Wells Fargo HSBC Trade Bank, N.A., filed
herewith
10.12 Amendment No. 4 to Revolving Credit Agreement dated as of
January 8, 1999, between the Registrant and the Wells Fargo
HSBC Trade Bank, N.A., filed herewith
10.13 Amendment No. 5 to Revolving Credit Agreement dated as of
February 4, 1999, between the Registrant and the Wells Fargo
HSBC Trade Bank, N.A., filed herewith
10.14 (1) Tax Allocation and Indemnity Agreement dated July 6, 1993,
among Cyrk, Inc., the Registrant, Gregory P. Shlopak and
Patrick D. Brady
10.15 (2)(3) Restricted Stock Purchase Agreement dated May 10, 1993,
between the Registrant and Terry B. Angstadt
10.16 (3)(6) 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"
10.16.1 (3)(6) Assignments of Life Insurance policies as Collateral, each
dated November 15, 1994
10.17 (3)(6) 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"
10.17.1 (3)(6) Assignments of Life Insurance policies as Collateral, each
dated November 15, 1994
10.18 (3)(6) 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"
10.18.1 (3)(6) Assignments of Life Insurance policies as Collateral, each
dated November 15, 1994
10.19 (3)(10) 1997 Acquisition Stock Plan
10.20 (9) 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
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21
10.21 (11) Securities Purchase Agreement dated February 12, 1998 by and
between Cyrk, Inc. and Ty Warner
10.22 (12) Severance Agreement between Cyrk, Inc. and Gregory P. Shlopak
10.23 (3) Change of Control Agreement between Cyrk, Inc. and Terry B.
Angstadt dated November 2, 1997, filed herewith
10.24 (3) Severance Agreement between Cyrk, Inc. and Ted L. Axelrod dated
November 20, 1998, filed herewith
10.25 (3) Severance Agreement between Cyrk, Inc. and Dominic F. Mammola
dated November 20, 1998, filed herewith
10.25.1 (3) Amendment No. 1 to Severance Agreement between Cyrk, Inc. and
Dominic F. Mammola dated March 29, 1999, filed herewith
21.1 List of Subsidiaries, filed herewith
23.1 Consent of PricewaterhouseCoopers LLP - Independent Accountants,
filed herewith
27.97 Restated Financial Data Schedule, filed herewith
27.98 Financial Data Schedule, filed herewith
99.1 (12) Amended Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act of
1995
- --------------------------------------------------------------------------------
(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 10-Q dated March 31, 1994 and incorporated herein by
reference.
(5) Filed as an exhibit to the Annual Report on Form 10-K for the
year ended December 31, 1994 and incorporated herein by
reference.
(6) Filed as an exhibit to the Registrant's Registration Statement
on Form 10-Q dated March 31, 1995 and incorporated herein by
reference.
(7) Filed as an exhibit to the Annual Report on Form 10-K for the
year ended December 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, 1996 and incorporated herein by
reference.
(9) Filed as an exhibit to the Registrant's Registration Statement
on Form 10-Q dated March 31, 1997 and incorporated herein by
reference.
(10) Filed as an exhibit to the Registrant's Registration Statement
on Form S-8 (Registration No. 333-45655) and incorporated
herein by reference.
(11) Filed as an exhibit to the Annual Report on Form 10-K for the
year ended December 31, 1997 and incorporated herein by
reference.
(12) Filed as an exhibit to the Registrant's Report on Form 8-K dated
December 31, 1998 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, 1998.
21
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CYRK, INC.
Date: March 29, 1999 By: /s/Patrick D. Brady
-----------------------------------
Patrick D. Brady
President, Chief Executive Officer
and Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/Patrick D. Brady Chairman of the Board March 29, 1999
- --------------------- Chief Executive Officer
Patrick D. Brady President
Chief Operating Officer
(principal executive officer)
/s/Dominic F. Mammola Executive Vice President March 29, 1999
- --------------------- Chief Financial Officer
Dominic F. Mammola (principal financial and
accounting officer)
Director
/s/Ted L. Axelrod Executive Vice President March 29, 1999
- --------------------- Director
Ted L. Axelrod
/s/Joseph W. Bartlett Director March 29, 1999
- ---------------------
Joseph W. Bartlett
/s/J. Anthony Kouba Director March 29, 1999
- ---------------------
J. Anthony Kouba
/s/Gregory P. Shlopak Director March 29, 1999
- ---------------------
Gregory P. Shlopak
22
23
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Cyrk, Inc.:
In our opinion the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Cyrk, Inc.
and its subsidiaries at December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
In addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 11, 1999, except as to the
information presented in Note 15,
for which the date is March 10, 1999
23
24
CYRK, INC
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
(In thousands, except share data)
1998 1997
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 75,819 $ 42,513
Investment 2,944 --
Accounts receivable:
Trade, less allowance for doubtful accounts of $2,682
at December 31, 1998 and $3,801 at December 31, 1997 87,372 95,388
Officers, stockholders and related parties 204 228
Inventories 51,250 46,317
Prepaid expenses and other current assets 7,227 10,649
Deferred and refundable income taxes 9,813 9,746
-------- --------
Total current assets 234,629 204,841
Property and equipment, net 13,285 16,268
Excess of cost over net assets acquired, net 82,771 77,483
Investments in and advances to affiliates -- 9,506
Other assets 6,656 5,747
-------- --------
$337,341 $313,845
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 16,929 $ 20,826
Accounts payable:
Trade 43,907 57,690
Affiliates 2,043 180
Accrued expenses and other current liabilities 83,280 64,831
Accrued restructuring expenses 953 --
-------- --------
Total current liabilities 147,112 143,527
Long-term obligations 12,099 9,611
Deferred income taxes 475 354
-------- --------
Total liabilities 159,686 153,492
-------- --------
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;
15,453,058 shares issued and outstanding at December 31, 1998 and
13,688,038 shares issued and outstanding at December 31, 1997 155 137
Additional paid-in capital 138,784 119,840
Retained earnings 37,593 40,609
Accumulated other comprehensive income (loss):
Unrealized gain on investment 1,442 --
Cumulative translation adjustment (319) (233)
-------- --------
Total stockholders' equity 177,655 160,353
-------- --------
$337,341 $313,845
======== ========
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, 1998, 1997 and 1996
(In thousands, except per share data)
1998 1997 1996
---- ---- ----
Net sales $757,853 $558,623 $250,901
Cost of sales:
Related parties 9,211 10,094 2,064
Other 610,758 445,434 211,851
-------- -------- --------
619,969 455,528 213,915
-------- -------- --------
Gross profit 137,884 103,095 36,986
-------- -------- --------
Selling, general and administrative expenses:
Goodwill amortization 3,324 2,226 304
Related parties 1,264 1,198 787
Other 130,863 90,529 35,944
Restructuring and nonrecurring charges 15,288 - -
-------- -------- --------
150,739 93,953 37,035
-------- -------- --------
Operating income (loss) (12,855) 9,142 (49)
Interest income (3,569) (2,413) (2,679)
Interest expense 2,579 2,102 256
Equity in loss of affiliates 418 1,363 1,111
Other income (7,100) - -
-------- -------- --------
Income (loss) before income taxes (5,183) 8,090 1,263
Income tax provision (benefit) (2,167) 4,854 825
-------- -------- --------
Net income (loss) $ (3,016) $ 3,236 $ 438
======== ======== ========
Earnings (loss) per common share - basic $ (0.20) $ 0.26 $ 0.04
======== ======== ========
Earnings (loss) per common share - diluted $ (0.20) $ 0.25 $ 0.04
======== ======== ========
Weighted average shares outstanding - basic 14,962 12,592 10,768
======== ======== ========
Weighted average shares outstanding - diluted 14,962 13,025 10,909
======== ======== ========
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, 1998, 1997 and 1996
(In thousands)
Accumulated
Common Additional Other Total
Stock Paid-in Retained Comprehensive Comprehensive Stockholders'
($.01 Par Value) Capital Earnings Income(Loss) Income(Loss) Equity
---------------- ---------- -------- ------------- ------------- -------------
Balance, December 31, 1995 $107 $ 86,862 $36,935 $ (304) $123,600
Comprehensive income:
Net income 438 $ 438 438
-------
Other comprehensive income
(loss), net of income taxes:
Net unrealized gains on
available-for-sale securities 18 18
Translation adjustment (250) (250)
-------
Other comprehensive loss (232) (232)
-------
Comprehensive income $ 206
=======
Issuance of shares under employee
stock option and stock purchase
plans 1 540 541
---- -------- ------- ------ --------
Balance, December 31, 1996 108 87,402 37,373 (536) 124,347
Comprehensive income:
Net income 3,236 $ 3,236 3,236
-------
Other comprehensive income,
net of income taxes:
Net unrealized gains on
available-for-sale securities 56 56
Translation adjustment 247 247
-------
Other comprehensive income 303 303
-------
Comprehensive income $ 3,539
=======
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
---- -------- ------- ------ --------
Balance December 31, 1997 137 119,840 40,609 (233) 160,353
Comprehensive loss:
Net loss (3,016) $(3,016) (3,016)
-------
Other comprehensive income
(loss), net of income taxes:
Net unrealized gains on
available-for-sale securities 1,442 1,442
Translation adjustment (86) (86)
-------
Other comprehensive income 1,356 1,356
-------
Comprehensive loss $(1,660)
=======
Issuance of shares under employee
stock option and stock purchase
plans, net of tax benefit 2 1,609 1,611
Issuance of shares for businesses
acquired 6 7,345 7,351
Issuance of shares for private
placement 10 9,990 10,000
---- -------- ------- ------ --------
Balance, December 31, 1998 $155 $138,784 $37,593 $1,123 $177,655
==== ======== ======= ====== ========
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, 1998, 1997 and 1996
(In thousands)
1998 1997 1996
-------- --------- --------
Cash flows from operating activities:
Net income (loss) $ (3,016) $ 3,236 $ 438
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 8,988 6,438 2,875
Write-down of leasehold improvements 1,143 -- --
Gain on sale of property and equipment (244) (32) --
Realized (gain) loss on sale of investments (7,100) 32 352
Provision for doubtful accounts 1,485 390 152
Deferred income taxes 1,286 (772) (1,303)
Equity in loss of affiliates 418 1,363 1,111
Tax benefit from stock option plans 56 -- --
Non-cash restructuring charges 8,555 -- --
Increase (decrease) in cash from changes
in working capital items, net of acquisitions:
Accounts receivable 6,382 17,972 (40,267)
Inventories (6,050) 20,272 (18,905)
Prepaid expenses and other current assets 3,417 (2,616) (2,187)
Refundable income taxes (1,232) -- 1,069
Accounts payable (11,925) (11,841) 6,385
Accrued expenses and other current liabilities 16,263 (2,893) 26,513
-------- --------- --------
Net cash provided by (used in) operating activities 18,426 31,549 (23,767)
-------- --------- --------
Cash flows from investing activities:
Purchase of property and equipment (5,254) (6,028) (3,441)
Proceeds from sale of property and equipment 928 243 --
Acquisitions, net of cash acquired* -- (16,581) --
Repayments from (advances to) affiliates, net 1,556 (6,511) (3,956)
Purchase of investments -- (3,815) (37,913)
Proceeds from sale of investments 10,759 6,259 54,714
Additional consideration related to acquisitions (1,624) (1,577) (1,789)
Other, net (1,038) 110 (1,378)
-------- --------- --------
Net cash provided by (used in) investing activities 5,327 (27,900) 6,237
-------- --------- --------
Cash flows from financing activities:
Proceeds from (repayments of) short-term
borrowings, net (3,897) (5,365) 18,749
Proceeds from (repayments of) long-term obligations 1,888 (333) --
Proceeds from issuance of common stock 11,554 467 541
-------- --------- --------
Net cash provided by (used in) financing activities 9,545 (5,231) 19,290
-------- --------- -------
Effect of exchange rate changes on cash 8 (129) (119)
-------- --------- --------
Net increase (decrease) in cash and cash equivalents 33,306 (1,711) 1,641
Cash and cash equivalents, beginning of year 42,513 44,224 42,583
-------- --------- --------
Cash and cash equivalents, end of year $ 75,819 $ 42,513 $ 44,224
======== ========= ========
*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 $ 2,301 $ 2,214 $ 149
======== ========= ========
Income taxes $ 2,863 $ 4,075 $ 208
======== ========= ========
Supplemental non-cash investing activities:
Issuance of additional stock related to acquisitions $ 7,351 $ -- $ --
======== ========= ========
The accompanying notes are an integral part of the
consolidated financial statements.
27
28
CYRK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
1. Nature of Business
Cyrk, Inc. is a full-service promotional marketing company, specializing in the
design and development of high-impact promotional products and programs.
2. Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Cyrk,
Inc. and its subsidiaries (the "Company"). All material intercompany accounts
and transactions have been eliminated in consolidation.
Revenue Recognition
Sales are generally recognized when products are shipped or services are
provided to customers. Sales of certain imported goods are recognized at the
time shipments are received at the customer's designated location. Deferred
revenue includes deposits related to merchandise for which the Company has
received payment but for which title and risk of loss have not passed.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Concentration of Credit Risk
The Company places its cash in what it believes to be credit-worthy financial
institutions. However, cash balances exceed FDIC insured levels at various times
during the year. In addition, the Company has significant receivables from
certain customers (see Note 17).
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. 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 two to seven years for machinery and equipment and three
to ten years for furniture and fixtures. The cost and accumulated depreciation
for property and equipment sold, retired or otherwise disposed of are relieved
from the accounts, and resulting gains or losses are reflected in income.
Excess of Cost Over Net Assets Acquired, Net
The excess of cost over the net assets acquired is being amortized on a
straight-line basis over a period of fifteen to thirty years. Accumulated
amortization amounted to $5,126 at December 31, 1998 and $2,686 at December 31,
1997.
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.
Earnings (Loss) per Common Share
Earnings (loss) per common share have been determined in accordance with the
provisions of Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("SFAS 128").
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
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 $57,950, composed of $33,450 in cash and $24,500 in
shares of the Company's common stock of which $28,350 in cash and $20,000 in
shares of the Company's common stock (1,840,138 shares) was paid at the closing
with an additional $5,100 payable in cash and $4,500 payable in shares of the
Company's common stock within four years of the closing. As a result of
achieving certain performance targets, the purchase price was increased in 1998
by an additional $5,000 in shares of the Company's common stock (475,908
shares). During 1998, additions to excess of cost over net assets acquired were
recorded for the settlement of preacquisition contingencies amounting to $3,500
(see Note 15). 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 ($61,762, as adjusted) is
being amortized on a straight-line basis over thirty years.
29
30
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 $22,000 of which $12,000 was paid in
shares of the Company's common stock (1,007,345 shares) and $10,000 in cash. In
1998, the purchase price was increased by an additional $1,800 ($300 in cash and
$1,500 in Company common stock, of which $1,200 of Company common stock will be
issued half in April 1999 and half in April 2000) as a result of Tonkin
achieving certain performance targets. 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
($21,295, as adjusted) is being amortized on a straight-line basis over twenty
years.
4. Inventories
Inventories consist of the following:
December 31,
1998 1997
------- -------
Raw materials $13,622 $10,807
Work in process 9,034 5,033
Finished goods 28,594 30,477
------- -------
$51,250 $46,317
======= =======
5. Property and Equipment
Property and equipment consist of the following:
December 31,
1998 1997
-------- --------
Machinery and equipment $ 20,848 $ 19,300
Furniture and fixtures 8,050 8,414
Leasehold improvements 5,425 4,388
-------- --------
34,323 32,102
Less - accumulated depreciation and amortization (21,038) (15,834)
-------- --------
$ 13,285 $ 16,268
======== ========
Depreciation and amortization expense on property and equipment totaled $5,664,
$4,212 and $2,571 in 1998, 1997 and 1996, respectively.
6. Investments in and Advances to Affiliates
In April 1998, the Company exchanged its 50% interest (with a net book value of
$2,589) in Grant & Partners Limited Partnership ("GPLP"), a Boston-based firm
specializing in improving the returns on marketing investments, in return for
GPLP's rights, title and interest to 1,150,000 shares of common stock of GPLP's
Exchange Applications ("EXAP"), a company specializing in software that helps
businesses raise profits by targeting marketing campaigns. In December 1998,
EXAP completed its initial public offering and the Company sold 1,000,000 shares
of its EXAP holdings and realized a gain on the sale of this stock of $7,100. As
of December 31, 1998, the remaining 150,000 shares of EXAP stock owned by the
Company is stated at fair value of $2,944.
In connection with its restructuring plan, as announced in February 1998, the
Company divested itself of its 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 (see Note 11).
7. Borrowings
The Company maintains worldwide credit facilities with several banks which
provide the Company with approximately $96,967 in total short-term borrowing
capacity which consists of (i) the Company's $50,000 primary domestic line of
credit, (ii) several additional domestic lines of credit which aggregate $31,130
and (iii) two foreign lines of credit in the aggregate amount of $15,837.
30
31
As of December 31, 1998, the Company had approximately $57,269 available under
these bank facilities. The total outstanding short-term borrowings at
December 31, 1998 and December 31, 1997 were $16,929 and $20,826, respectively.
Pursuant to the provisions of its primary domestic line of credit, the Company
has commitments for letter of credit and revolving credit borrowings through
September 1999 of up to an aggregate amount of $50,000, 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 (7.75%
at December 31, 1998) or LIBOR plus 1.75% (6.8% at December 31, 1998), and are
collateralized by all of the assets of the Company. The facility contains
covenants which require the Company to maintain a minimum tangible 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 a result of the
Company's 1997 acquisitions accounted for as a purchase, the Company has
subsequently been in violation of certain of its facility covenants. The Company
secured bank approval for its acquisition transactions as required by its
facility agreement and the bank has issued waivers on a quarterly basis since
the completion of the acquisitions. The Company is in discussions with the bank
for a revised facility which will include modifying its existing covenants. The
Company expects to secure a revised facility in the second quarter of 1999.
Accordingly, the Company expects to be in violation of its existing covenants in
the first quarter of 1999 and expects to receive a waiver from the lender. At
December 31, 1998, the Company's borrowing capacity under this facility was
$50,000, of which $3,603 of short-term borrowings and $6,535 in letters of
credit were outstanding. The letters of credit expire at various dates through
July 1999. 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 $31,130 for working
capital requirements subject to borrowing base formulas. These credit lines,
which expire at various dates beginning in March 1999, 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, 1998. At December 31, 1998, $12,802 of
short-term borrowings and $7,203 of letters of credit were outstanding under
these facilities.
The Company has a $13,484 (Deutsche Marks 22,500) working capital line of credit
for certain of its European subsidiaries. At December 31, 1998, there were
$9,554 (Deutsche Marks 15,942) of letters of credit outstanding under this
credit facility and no short-term borrowings outstanding. The Company also has
bank guarantees in the amounts of $1,991 (British Pounds 1,200) and $362
(Belgian Francs 12,500) to cover future duties and customs in the United
Kingdom. No amounts were outstanding under these guarantees at December 31,
1998.
The weighted average interest rate on short-term borrowings was 7.54% and 8.02%
at December 31, 1998 and December 31,1997, respectively.
In addition to the above facilities, one of the Company's domestic subsidiaries
has a $2,000 long-term promissory note payable to a bank. The note bears
interest at a fixed rate of 7.8% per annum and matures in June 2003. At December
31, 1998, $1,849 of this note was outstanding, of which $339 was included in
short-term borrowings and $1,510 was included in long-term obligations. Payments
of the long-term portion of this obligation will be made ratably over the
remaining term of the note.
8. Lease Commitments
The Company leases warehouse, production and administrative facilities and
certain machinery and equipment, furniture and fixtures, and motor vehicles
under noncancelable operating leases expiring at various dates through December
2011 (see Note 16). The approximate minimum rental commitments under all
noncancelable leases as of December 31, 1998, were as follows:
1999 $10,354
2000 6,937
2001 4,800
2002 3,753
2003 3,114
Thereafter 12,048
-------
Total minimum lease payments $41,006
=======
Rental expense for all operating leases was $11,719, $7,208 and $3,080 for the
years ended December 31, 1998, 1997 and 1996, respectively. Rent is charged to
operations on a straight-line basis for certain leases.
31
32
9. Income Taxes
The components of the provision (benefit) for income taxes are as follows:
For the Years Ended December 31,
1998 1997 1996
------- ------ -------
Current:
Federal $(2,818) $3,192 $ 1,393
State (2,100) 1,227 222
Foreign 1,465 1,207 513
------- ------ -------
(3,453) 5,626 2,128
------- ------ -------
Deferred:
Federal 1,298 (681) (1,223)
State (12) (91) (80)
------- ------ -------
1,286 (772) (1,303)
------- ------ -------
$(2,167) $4,854 $ 825
======= ====== =======
As required by SFAS 109, the Company annually evaluates the positive and
negative evidence bearing upon the realizability of its deferred tax assets. The
Company has considered the recent and historical results of operations and
concluded, in accordance with the applicable accounting methods, that it is more
likely than not that a portion of the deferred tax assets will not be
realizable. To the extent that an asset will not be realizable, a valuation
allowance is established. The tax effects of temporary differences giving rise
to deferred tax assets and liabilities as of December 31, are as follows:
1998 1997
------- -------
Deferred tax assets
Receivable reserves $ 890 $ 1,550
Inventory capitalization and reserves 2,874 4,863
Other asset reserves 4,796 4,638
Deferred compensation 2,323 4,157
Foreign tax credits 4,298 2,731
Net operating losses 1,593 --
Valuation allowance (8,193) (8,193)
------- -------
$ 8,581 $ 9,746
======= =======
Deferred tax liabilities (depreciation) $ 475 $ 354
======= =======
At December 31, 1998, the Company had $3,983 of net operating loss carryforwards
available to offset future taxable income. These loss carryforwards expire in
2018.
The following is a reconciliation of the statutory federal income tax rate to
the actual effective income tax rate:
1998 1997 1996
---- ---- ----
Federal tax (benefit) rate (34)% 34% 34%
Increase (decrease) in taxes resulting from:
State income taxes, net of federal benefit (27) 9 7
Effect of foreign tax rates and
non-utilization of losses (1) (7) 19 35
Tax exempt dividends -- -- (16)
Goodwill 19 7 --
Foreign tax credit -- (12) --
Meals and entertainment 4 1 6
Other, net 3 2 (1)
--- --- ---
Effective tax (benefit) rate (42)% 60% 65%
=== === ===
(1) 1998 includes utilization of prior year foreign losses.
32
33
10. Accrued Expenses and Other Current Liabilities
At December 31, 1998 and 1997, accrued expenses and other current liabilities
consisted of the following:
1998 1997
------- -------
Inventory purchases $13,778 $13,375
Deferred revenue 16,909 10,683
Accrued payroll and related and
deferred compensation 13,466 11,088
Royalties 7,655 1,068
Other 31,472 28,617
------- -------
$83,280 $64,831
======= =======
11. Restructuring and Nonrecurring Charges
A summary of the restructuring and nonrecurring charges for the year ended
December 31, 1998 is as follows:
Restructuring charge $11,813
Severance expense 2,332
Write-down of long-lived assets 1,143
-------
$15,288
=======
Restructuring Charge
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. As a result of the restructuring
plan, the Company consolidated certain operating facilities, discontinued its
private label and Cyrk brand business, divested its investment in an apparel
joint venture and eliminated approximately 450 positions or 28% of its worldwide
work force. The majority of the eliminated positions affected the screen
printing and embroidery business in Gloucester, Massachusetts. As of December
31, 1998, the restructuring has been completed and the remaining restructuring
accrual of $953 is primarily related to the liquidation of certain assets which
are expected to take place during the first half of 1999.
In the first quarter of 1998, the Company recorded a charge to operations of
$15,486 primarily related to asset write-downs ($11,277), employee termination
costs ($2,847), lease cancellations ($1,079) and other related exit
costs ($283). This charge was based on the Company's intentions and best
estimates at the time of the restructuring announcement. Subsequent to the first
quarter of 1998, the Company adjusted these estimates to the actual scope and
extent of the exit costs of various operating facilities and activities. In the
majority of instances the actual costs of the numerous components of the
restructuring plan were below management's expectations at the time of the
announcement, and the original restructuring charge was revised downward to
$11,813, or a reversal of $3,673 of the original accrual.
Specifically, employee termination and lease cancellation costs were lower than
initially estimated by approximately $1,711. In addition, the Company
made a decision to keep an offshore facility open which was originally scheduled
to be closed. This decision, driven by emerging new business developments in
Europe, along with the fact that the net realizable value of certain assets
expected to be written off in connection with the restructuring was greater than
expected, resulted in a further reduction of the original charge to operations
of approximately $1,962.
The overall restructuring charge of $11,813 had the effect of reducing
1998 after tax earnings by $6,875 or $0.46 per share. A summary of
activity in the restructuring accrual for the year is as follows:
Balance at January 1, 1998 $ --
Restructuring provision 15,486
Employee termination costs
and other cash payments (2,305)
Non-cash asset write-downs (8,555)
Accrual reversal (3,673)
-------
Balance at December 31, 1998 $ 953
=======
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34
Severance Expense
Effective December 31, 1998, Gregory P. Shlopak, former chief executive officer,
resigned from the Company. Mr. Shlopak will continue as a director of Cyrk and
provide consulting services to the Company. Pursuant to an agreement entered
into with Mr. Shlopak, the Company recorded a nonrecurring fourth quarter
pre-tax charge to operations of $2,332. The agreement provides for payments and
benefits to Mr. Shlopak payable over a three year period.
Write-down of Long-lived Assets
In connection with the Company's plan to relocate from its Gloucester,
Massachusetts facilities, the Company recorded a nonrecurring fourth quarter
pre-tax charge to operations of $1,143. This charge represents the estimated net
book value of leasehold improvements at the anticipated abandonment date.
12. Stock Plans
At December 31, 1998, the Company had three stock-based compensation plans,
which are described below. The Company adopted the disclosure provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") and has applied APB Opinion 25 and related
Interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized related to such plans. Had compensation cost for the
Company's 1998, 1997 and 1996 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:
1998 1997 1996
------- ------ ------
Net income (loss) - as reported $(3,016) $3,236 $ 438
Net income (loss) - pro forma (6,395) 1,828 (570)
Earnings (loss) per common share - basic - as reported (0.20) 0.26 0.04
Earnings (loss) per common share - diluted - as reported (0.20) 0.25 0.04
Earnings (loss) per common share - basic - pro forma (0.43) 0.15 (0.05)
Earnings (loss) per common share - diluted - pro forma (0.43) 0.14 (0.05)
1993 Omnibus Stock Plan
Under its 1993 Omnibus Stock Plan (the "Omnibus Plan"), as amended in May 1997,
the Company has reserved up to 3,000,000 shares of its common stock for issuance
pursuant to the grant of incentive stock options, nonqualified stock options or
restricted stock. The Omnibus Plan is administered by the Compensation Committee
of the Board of Directors. Subject to the provisions of the Omnibus Plan, the
Compensation Committee has the authority to select the optionees or restricted
stock recipients and determine the terms of the options or restricted stock
granted, including: (i) the number of shares; (ii) the exercise period (which
may not exceed ten years); (iii) the exercise or purchase price (which in the
case of an incentive stock option cannot be less than the market price of the
common stock on the date of grant); (iv) the type and duration of options or
restrictions, limitations on transfer and other restrictions; and (v) the time,
manner and form of payment. Generally, an option is not transferable by the
option holder except by will or by the laws of descent and distribution. Also,
generally, no incentive stock option may be exercised more than 60 days
following termination of employment. However, in the event that termination is
due to death or disability, the option is exercisable for a maximum of 180 days
after such termination. Options granted under this plan generally become
exercisable in three equal installments commencing on the first anniversary of
the date of grant.
1997 Acquisition Stock Plan
The 1997 Acquisition Stock Plan (the "1997 Plan") is intended to provide
incentives in connection with the acquisitions of other businesses by the
Company. The 1997 Plan is identical in all material respects to the Omnibus
Plan, except that the number of shares available for issuance under the 1997
Plan is 1,000,000 shares.
The fair value of each option grant under the above plans was estimated using
the Black-Scholes option pricing model with the following weighted average
assumptions for 1998, 1997 and 1996, respectively: expected dividend yield of
zero percent for all years; expected life of 4.5 years for 1998 and 3.5 years
for 1997 and 1996; expected volatility of 65 percent for 1998, 52 percent for
1997 and 56 percent for 1996; and, a risk-free interest rate of 5.6 percent for
1998, 6.5 percent for 1997 and 5.2 percent for 1996.
34
35
The following summarizes the status of the Company's stock options as of
December 31, 1998, 1997 and 1996 and changes during the year ended on those
dates:
1998 1997 1996
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------------------- -------------------- --------------------
Outstanding at beginning of year 2,343,762 $11.31 975,255 $11.47 1,138,628 $15.71
Granted 317,750 10.98 1,433,600 11.24 417,500 12.57
Exercised (97,717) 10.53 (9,386) 10.00 (12,281) 10.02
Canceled (387,868) 11.05 (55,707) 12.49 (568,592) 20.81
--------- --------- --------
Outstanding at end of year 2,175,927 11.35 2,343,762 11.31 975,255 11.47
========= ========= ========
Options exercisable at year-end 1,057,031 563,788 214,852
========= ========= ========
Options available for future grant 1,605,669 1,535,551 913,444
========= ========= ========
Weighted average fair value of
options granted during the year $5.97 $4.69 $6.36
===== ===== =====
The following table summarizes information about stock options outstanding at
December 31, 1998:
Options Outstanding Options Exercisable
---------------------------------------- ---------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- --------------- ---------------------------------------- ---------------------------
$ 8.75 - $10.87 1,016,781 7.9 years $10.34 578,282 $10.14
10.88 - 12.25 669,022 7.8 11.03 218,112 11.17
12.50 - 18.13 479,624 6.8 13.53 250,137 13.38
23.25 - 28.75 10,500 5.3 28.49 10,500 28.49
--------- ---------
$ 8.75 - $28.75 2,175,927 7.6 11.35 1,057,031 11.30
========= =========
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. Employee purchases amounted to 61,349
shares in 1998, 40,293 shares in 1997 and 41,385 shares in 1996 at prices
ranging from $8.39 to $10.63 per share. At December 31, 1998, 117,035 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 1998, 1997 and 1996, respectively:
expected dividend yield of zero percent for all years; expected life of six
months for all years; expected volatility of 65 percent for 1998, 52 percent for
1997 and 56 percent for 1996; and, a risk-free interest rate of 5.4 percent, 5.4
percent and 5.3 percent for 1998, 1997 and 1996 respectively. The weighted
average fair value of those purchase rights per share granted in 1998, 1997 and
1996 was $2.97, $3.14 and $4.28, respectively.
35
36
Stock Purchase Warrants
In February 1998, the Company issued 975,610 shares of its common stock and a
warrant to purchase up to 100,000 shares of its common stock in a private
placement, resulting in net proceeds of approximately $10,000 which will be used
for general corporate purposes. The warrant is exercisable at any time from the
grant date of February 12, 1998 to February 12, 2003 at an exercise price of
$10.25 per share, which represented the fair market value on the grant date.
Additionally, in June 1998 , the Company issued a warrant to purchase 200,000
shares of the Company's common stock as part of settling a preacquisition
contingency of Simon (see Note 15). The warrant is exercisable at any time from
the grant date of June 30, 1998 to July 31, 2002 at an exercise price of $11.00
per share, which represented the fair market value on the grant date.
13. Comprehensive Income
In 1998, the Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130"). This Statement establishes
standards for reporting and display of comprehensive income and its components.
The Company's comprehensive income consists of net income (loss), foreign
currency translation adjustments and unrealized holding gains (losses) on
available-for-sale securities, and is presented in the Consolidated Statements
of Stockholders' Equity. Prior year statements have been reclassified to conform
to the SFAS 130 requirements.
Components of other comprehensive income (loss) consist of the following:
1998 1997 1996
------- ---- -----
Change in unrealized gains
and losses on investments $ 2,477 $140 $ 51
Foreign currency translation
adjustments (148) 618 (714)
Income tax expense related to unrealized
gains and losses on investments (1,035) (84) (33)
Income tax (expense) benefit related to foreign
currency translation adjustments 62 (371) 464
------- ---- -----
Other comprehensive income (loss) $ 1,356 $303 $(232)
======= ==== =====
14. 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,
1998, 1997 and 1996 was $988, $709 and $439, respectively.
15. Litigation
The Company and certain of its officers and directors were 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 HALLETT, 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 to
settle the case which was approved by the Federal District Court on June 26,
1998. The settlement agreement called for a cash contribution by the Company of
$4,000; other parties and various insurance carriers have also contributed to
the settlement. After consideration of amounts previously accrued, this
settlement had an immaterial impact on the Company's 1998 financial condition
and results of operations.
36
37
On or about February 15, 1997, Montague Corporation ("Montague") filed an action
in Middlesex Superior Court, Commonwealth of Massachusetts, MONTAGUE CORPORATION
V. CYRK, INC. (Civil Action No. 97-00888) ("Montague action"), alleging a breach
of a May 17, 1995 Exclusive Distribution Agreement naming the Company as the
exclusive USA distributor for the sale of Montague bicycles in connection with
promotional programs. On March 10, 1999, the Company and Montague entered into a
Settlement and Joint Venture Agreement ("Settlement"), terminating the Montague
action and establishing a joint venture to sell corporate logoed bicycles for
use in various corporate sales programs and promotions. Under the terms of the
Settlement, the Company may be obligated to pay Montague up to $900 in cash if
the joint venture does not achieve certain financial results within three years
from the Settlement date.
On February 11, 1993, Simon Marketing, Inc. ("Simon"), a wholly-owned subsidiary
of the Company, 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. On June
30, 1998, Simon and PCG entered into a settlement agreement and, subsequently,
entered a dismissal of the lawsuit with the court. As part of settling this
preacquisition contingency of Simon, the Company made an upfront payment of $600
to a third party, Interpublic Group of Companies, Inc. ("IPG"). The Company also
agreed to pay IPG a total of $2,900 in additional consideration, comprised of
warrants to purchase 200,000 shares of the Company's common stock and cash based
on the difference between $2,900, certain amounts received by IPG under a
separate business arrangement with the Company, and the value of the warrant
shares as of different measurement dates. The Company recorded the maximum
$3,500 liability as an increase to excess of cost over net assets acquired.
The Company is also involved in other litigation and various legal matters which
have arisen in the ordinary course of business. The Company does not believe
that the resolution of the above described litigation matters or the ultimate
resolution of any other currently pending litigation or other legal matters will
have a material adverse effect on its financial condition, results of operations
or net cash flows.
16. Related Party Transactions
The Company leases a portion of its sales and administrative offices under a
ten-year operating lease agreement expiring December 31, 1999 from a real estate
trust of which one of the Company's directors 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 directors 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 warehouse facilities under a fifteen-year operating lease
agreement which expires December 31, 2011 from a limited liability company which
is jointly owned by an officer and director of the Company. The agreement
provides for annual rent of $462 and for the payment by the Company of all
utilities, taxes, insurance and repairs.
A former director of the Company is chairman of the executive committee of a
corporation which supplies certain promotional products to the Company.
Purchases from this corporation amounted to $9,027, $9,904 and $2,064 for the
years ended December 31, 1998, 1997 and 1996, respectively. The amounts due to
this corporation were $2,043 and $180 at December 31, 1998 and 1997,
respectively.
17. Segments and Related Information
For the fiscal year ended December 31, 1998, the Company adopted 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 operates in one industry: the
promotional marketing industry. The Company's business in this industry
encompasses the design, development and marketing of high-impact promotional
products and programs.
37
38
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, 1998, 1997 and
1996, respectively:
% of Sales % of Trade Receivables
----------------------- ------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
Company A 11 16 30 9 12 19
Company B 57 36 -- 32 40 --
Company C 1 21 38 -- 15 57
Company D 1 2 10 -- 1 6
The Company conducts its promotional marketing business on a global basis. The
following summarizes the Company's net sales for the years ended December 31,
1998, 1997 and 1996, respectively, and long-lived assets as of December 31,
1998, 1997 and 1996, respectively, by geographic area:
1998 1997 1996
--------------------- --------------------- -------------------
Long- Long- Long-
Net lived Net lived Net lived
Sales Assets Sales Assets Sales Assets
-------- -------- -------- -------- -------- -------
United States $482,200 $ 99,611 $408,764 $106,677 $232,784 $24,119
Foreign 275,653 3,101 149,859 2,327 18,117 466
-------- -------- -------- -------- -------- -------
Consolidated $757,853 $102,712 $558,623 $109,004 $250,901 $24,585
======== ======== ======== ======== ======== =======
Geographic areas for net sales are based on customer locations. Long-lived
assets include property and equipment, excess of cost over net assets acquired
and other non-current assets.
18. 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,
1998 1997 1996
----------------------------------- ----------------------------------- -----------------------------------
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 $(3,016) 14,962,362 $(0.20) $3,236 12,592,333 $0.26 $438 10,768,147 $0.04
====== ===== =====
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 $(3,016) 14,962,362 $(0.20) $3,236 13,024,574 $0.25 $438 10,908,629 $0.04
======= ========== ====== ====== ========== ===== ==== ========== =====
For the year ended December 31, 1998, 695,317 of common stock equivalents were
not included in the computation of diluted EPS because to do so would have been
antidilutive.
38
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19. Quarterly Results of Operations (Unaudited)
The following is a tabulation of the quarterly results of operations for the
years ended December 31, 1998 and 1997, respectively:
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
1998
- ----
Net sales $169,142 $212,609 $163,669 $212,433
Gross profit 30,308 31,799 32,570 43,207
Net income (loss) (9,851) (415) (245) 7,495
Earnings (loss) per common share - basic (0.69) (0.03) (0.02) 0.49
Earnings (loss) per common share - diluted (0.69) (0.03) (0.02) 0.46
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
39
40
CYRK, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(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
- -------------------- --------- ------------------- --------- ---------------- ----------
1998 $3,801 $1,485 $ -- $2,604 $2,682
1997 3,191 390 358(1) 138 3,801
1996 3,039 152 -- -- 3,191
(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
- --------------- ---------- ---------- -------- ---------- ---------
1998 $8,193 -- -- -- $8,193
1997 -- -- 8,193(2) -- 8,193
(2) Represents addition to reserve as a result of an acquisition.
40
41
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
2.1 (1) Agreement of Merger dated July 6, 1993 between the Registrant
and Cyrk, Inc.
3.1 (5) 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)(3) 1993 Employee Stock Purchase Plan
10.2 (3)(5) 1993 Omnibus Stock Plan, as amended
10.3 (5) 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.
10.3.1 Lease extension agreement dated March 16, 1999 by and between
Gregory P. Shlopak and Paul M. Butman, Jr., as Trustees of PG
Realty Trust and Cyrk, Inc., filed herewith
10.4 (1) Revolving Credit Agreement dated as of December 1, 1993,
between the Registrant and The Hongkong and Shanghai Banking
Corporation Limited
10.5 (1) Letter Agreement dated January 5, 1994, between the Registrant
and The Hongkong and Shanghai Banking Corporation Limited
10.6 (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
10.7 (1) Security Agreement dated as of December 1, 1993, between the
Registrant and The Hongkong and Shanghai Banking Corporation
Limited
10.8 (4) Letter Agreement dated May 5, 1994 between the Registrant and
The Hongkong and Shanghai Banking Corporation Limited
10.9 (7) Letter agreement dated February 7, 1996, between the
Registrant and The Wells Fargo HSBC Trade Bank, N.A.
10.10 (8) Letter agreement dated March 26, 1997, between the Registrant
and The Wells Fargo HSBC Trade Bank, N.A.
10.11 Letter agreement dated November 20, 1998, between the
Registrant and the Wells Fargo HSBC Trade Bank, N.A., filed
herewith
10.12 Amendment No. 4 to Revolving Credit Agreement dated as of
January 8, 1999, between the Registrant and the Wells Fargo
HSBC Trade Bank, N.A., filed herewith
10.13 Amendment No. 5 to Revolving Credit Agreement dated as of
February 4, 1999, between the Registrant and the Wells Fargo
HSBC Trade Bank, N.A., filed herewith
10.14 (1) Tax Allocation and Indemnity Agreement dated July 6, 1993,
among Cyrk, Inc., the Registrant, Gregory P. Shlopak and
Patrick D. Brady
10.15 (2)(3) Restricted Stock Purchase Agreement dated May 10, 1993,
between the Registrant and Terry B. Angstadt
10.16 (3)(6) 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"
10.16.1 (3)(6) Assignments of Life Insurance policies as Collateral, each
dated November 15, 1994
10.17 (3)(6) 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"
10.17.1 (3)(6) Assignments of Life Insurance policies as Collateral, each
dated November 15, 1994
10.18 (3)(6) 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"
10.18.1 (3)(6) Assignments of Life Insurance policies as Collateral, each
dated November 15, 1994
10.19 (3)(10) 1997 Acquisition Stock Plan
10.20 (9) 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
41
42
10.21 (11) Securities Purchase Agreement dated February 12, 1998 by and
between Cyrk, Inc. and Ty Warner
10.22 (12) Severance Agreement between Cyrk, Inc. and Gregory P. Shlopak
10.23 (3) Change of Control Agreement between Cyrk, Inc. and Terry B.
Angstadt dated November 2, 1997, filed herewith
10.24 (3) Severance Agreement between Cyrk, Inc. and Ted L. Axelrod
dated November 20, 1998, filed herewith
10.25 (3) Severance Agreement between Cyrk, Inc. and Dominic F. Mammola
dated November 20, 1998, filed herewith
10.25.1 (3) Amendment No.1 to Severance Agreement between Cyrk, Inc. and
Dominic F. Mammola dated March 29, 1999, filed herewith.
21.1 List of Subsidiaries, filed herewith
23.1 Consent of PricewaterhouseCoopers LLP - Independent
Accountants, filed herewith
27.97 Restated Financial Data Schedule, filed herewith
27.98 Financial Data Schedule, filed herewith
99.1 (12) Amended Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act of
1995
- --------------------------------------------------------------------------------
(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 10-Q dated March 31, 1994 and incorporated herein by
reference.
(5) Filed as an exhibit to the Annual Report on Form 10-K for the
year ended December 31, 1994 and incorporated herein by
reference.
(6) Filed as an exhibit to the Registrant's Registration Statement
on Form 10-Q dated March 31, 1995 and incorporated herein by
reference.
(7) Filed as an exhibit to the Annual Report on Form 10-K for the
year ended December 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, 1996 and incorporated herein by
reference.
(9) Filed as an exhibit to the Registrant's Registration Statement
on Form 10-Q dated March 31, 1997 and incorporated herein by
reference.
(10) Filed as an exhibit to the Registrant's Registration Statement
on Form S-8 (Registration No. 333-45655) and incorporated
herein by reference.
(11) Filed as an exhibit to the Annual Report on Form 10-K for the
year ended December 31, 1997 and incorporated herein by
reference.
(12) Filed as an exhibit to the Registrant's Report on Form 8-K
dated December 31, 1998 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, 1998.
42