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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, 1999
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 29, 2000, the aggregate market value of voting stock held by
non-affiliates of the registrant was $130,572,508.
At February 29, 2000, 15,786,247 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
2000 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 in 1976 and is a
Delaware corporation. When founded, Cyrk was engaged primarily in the design,
manufacture and sale of custom screen-printed sports apparel and accessories.
Cyrk also provided private label apparel and accessories to a wide variety of
established brands. The Company also developed its own "Cyrk" brand of apparel
that was sold to sports and specialty retailers and resort-destination shops.
Since its inception, Cyrk has broadened its product design and manufacturing
expertise to include a focus on the promotional products business, and has made
a number of acquisitions of promotion product companies to further develop this
focus. These acquisitions have enabled Cyrk to grow its Corporate Promotions
Group ("CPG"), the Company's division that provides promotional products and
programs for corporate and trade promotions. Through acquisition, the Company
also expanded its capabilities in the consumer promotions arena, with a
specialty in kid and family marketing. With its growth, Cyrk has developed
its international production and worldwide sourcing capabilities. The Company
now also provides a wide range of promotional marketing services to support its
corporate clients and complement its product capabilities.
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 custom designs unique, high-impact products in
a broad spectrum of categories including apparel and accessories, hard goods,
toys and electronics, in materials ranging from fabrics and plastics to metals
and paper. In addition to providing products and services to companies, 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"), The Coca-Cola(R)(2) Company,
("Coke"(R)(2)) and other companies with recognized brands. The programs
developed and managed by Cyrk typically reward the consumer with promotional
products that are distributed upon redemption of proofs of purchase or as gifts
with the purchase of other products. Cyrk believes that its comprehensive
marketing services, which address all aspects of a customer's promotional
products program, and its expertise in design, manufacturing and sourcing, have
allowed Cyrk to successfully execute large, worldwide high-impact promotional
programs.
Additionally, through Cyrk's relationship with Ty Inc. ("Ty"), Cyrk designed,
developed, manufactured and distributed to the retail marketplace the Beanie
Babies(R)(3) Official Club(TM)(4) kits and other Beanie Babies licensed
products.
Cyrk recently expanded its capabilities to include Internet business-to-business
brand marketing. Cyrk's comprehensive e-commerce solutions include Internet and
intranet electronic malls, point-based loyalty systems, electronic catalogs,
online promotional marketing programs and Web design.
ACQUISITIONS
In November 1996, Cyrk acquired Marketing Incentives, Inc. ("MI"), a Norwood,
Massachusetts-based company engaged in the sale of advertising specialty and
promotional products. This acquisition was Cyrk's first step in its strategic
plan to grow its CPG division which provides trade catalogs and promotional
products to corporate clients used primarily in business-to-business
promotions.
(1) MCDONALD'S AND HAPPY MEAL are registered trademarks of McDonald's
Corporation.
(2) COCA-COLA AND COKE are registered trademarks of The Coca-Cola Company.
(3) BEANIE BABIES is a registered trademark of Ty Inc.
(4) BEANIE BABIES OFFICIAL CLUB is a trademark of Ty Inc.
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In 1997 Cyrk made two key acquisitions. On April 7, 1997, Cyrk acquired Tonkin,
Inc. ("Tonkin"), a then twenty-five year old, privately held promotional
products company which currently employs approximately 400 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., Enterprise Rent-A-Car Company and Mars, Incorporated.
On June 9, 1997, Cyrk acquired Simon Marketing, Inc. ("Simon"), a then
twenty-one year old privately held Los Angeles-based marketing and promotion
agency which currently employs approximately 520 people in the United States,
Asia and Europe. Simon provides marketing programs, promotional products and
packaging to clients which include McDonald's, Chevron Products Company
("Chevron"), a division of Chevron U.S.A. Inc. and Toys "R" Us, Inc. ("Toys "R"
Us"). Simon's dominant, long-standing relationship with McDonald's has produced
premiums and promotions which include Happy Meal premiums, national games and
other promotions.
1998 RESTRUCTURING
As a result of its 1998 corporate restructuring, Cyrk 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 restructuring was fully executed by the end of 1998.
1999 YUCAIPA INVESTMENT
In November 1999, The Yucaipa Companies ("Yucaipa"), a Los Angeles-based
investment firm, invested $25 million into Cyrk in exchange for 25,000 shares of
a new series A convertible preferred stock and a warrant to purchase an
additional 15,000 shares of a new series A convertible preferred stock. The
proceeds of the investment will be used to fund Cyrk's internal growth and
strategic investment and acquisition efforts. In connection with the investment,
which was approved by Cyrk's stockholders, Cyrk's board of directors was
increased to seven and three designees of Yucaipa, including Cyrk's Chairman,
Ronald W. Burkle, were elected to Cyrk's board. In addition, effective as of the
closing of this investment, Patrick D. Brady and Allan I. Brown were each
elected Co-Chief Executive Officer and Co-President of Cyrk.
PRODUCTS AND SERVICES
Promotional Product Programs. Cyrk provides product-driven 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 (1) distributed to consumers
in connection with the sale of another product, (2) issued upon redemption of
coupons evidencing the purchase of other products, (3) sold in conjunction with
the sale of another product or (4) sold as a complement to other products.
Promotional products are also frequently provided to retailers that carry the
brand name products to reward or incentivise sales efforts and foster goodwill
towards employees.
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.
Increasingly, companies are turning to outside professionals to provide
the expertise required in complex areas outside their core businesses, such as
the design of custom promotional products, and the development and
implementation of promotional programs. Cyrk believes that because of its
ability to provide integrated services including product and program design;
loyalty and direct marketing services; licensing;
(5) CATERPILLAR is a registered trademark of Caterpillar, Inc.
(6) HIGH-IMPACT PROMOTIONAL PROGRAM AND HIPP are trademarks of Cyrk, Inc.
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market research; direct manufacturing, sourcing and program fulfillment; its
unique creative approach; and its collection of proprietary apparel and
accessories, it is able to provide highly superior promotional products that
become integral components of an effective, 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 Cyrk's large-scale consumer promotions include custom product which were
conceived, designed and produced by Cyrk's Custom Product and Licensing Group
("CP&L"). CP&L has successfully custom designed and developed proprietary
product including toys, apparel and accessories for successful consumer
promotional programs including the Marlboro Gear and Marlboro Unlimited(R)(7)
promotions.
Under its licensing arrangement with Coke, Cyrk has been granted a license to
use certain of Coke's trademarks, symbols and designs in connection with the
manufacture, sale and distribution of certain merchandise. In 1999, under its
license arrangement with Ty, Cyrk developed and marketed licensed Beanie Babies
products to consumers. Effective January 1, 2000, the Company is a strategic
marketing agent for Ty and will provide Ty advisory, design, development and/or
creative services on a project by project basis.
Cyrk, through its CPG division, provides a comprehensive range of services to
its corporate clients. These services include the creation and implementation of
off-line and on-line brand identity programs, paper and Web-based catalogs,
special events marketing, sales incentives and employee recognition programs,
safety and service awards, sports sponsorship programs and more. These
promotional programs typically incorporate a wide variety 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.
Through its Simon subsidiary, the Company provides agency services and
integrated marketing solutions including loyalty marketing, licensing,
strategic and calendar planning, game design and execution, premium development
and production management. Simon is one of the largest creators, developers and
procurers of promotional print packaging, contests, games, sweepstakes and toys
in the world. In addition to providing its products and services to McDonald's,
Simon's customer base includes Chevron and Toys "R" Us.
Design, Merchandising and Product Development. Cyrk believes that one of its
most important competitive advantages is the strong design and merchandising
capability that it has developed over the last 24 years. Cyrk maintains a staff
of graphic designers and product designers who not only design product and
catalogs, but also perform trends analysis that enables them to provide
direction as to the most effective types of products to include in a promotional
program. Cyrk's design team also designs an exclusive, proprietary collection of
apparel, accessories and luggage for use in corporate brand identity programs.
Cyrk's extensive design capability enables Cyrk to furnish customers with
product samples and prototypes quickly. In addition, the merchandising
experience of Cyrk's designers allows them to assemble integrated collections of
custom products for its customers. Finally, Cyrk's designers work closely with
the production staff and understand production methods which allows Cyrk's
designs to move efficiently from the design to the production stage.
Internet Capabilities. Cyrk recognized an opportunity to extend its promotional
success to the Internet, and in February 2000 announced its intentions to create
an Internet subsidiary to service the changing needs of its customers. Cyrk
possesses technological expertise in the e-commerce area that includes Internet
and intranet electronic malls, point-based loyalty systems, electronic catalogs,
online promotional marketing programs and Web design.
(7) Marlboro Unlimited is a registered trademark of Philip Morris Incorporated.
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Manufacturing and Sourcing. The quality and timely delivery of Cyrk's products
depend on Cyrk's ability to control the manufacturing process. Cyrk seeks to
maintain such control by maintaining a physical presence in the Far East to
oversee the offshore manufacturing of Cyrk's products by independent Asian
factories. Cyrk's Asian operations perform a variety of services for Cyrk, such
as selecting manufacturers, communicating product specifications and quality
control standards, monitoring the manufacturing process, performing on-site
quality control inspections, transferring letters of credit and coordinating
export clearance and shipping.
Cyrk has no long-term contracts with manufacturing sources and often competes
with other companies for production facilities and import quota capacity. In
addition, certain Asian manufacturers require that a letter of credit be posted
at the time a purchase order is placed. Cyrk believes that its policy of
outsourcing a substantial portion of its manufacturing requirements allows it to
achieve increased production flexibility while reducing Cyrk's capital
expenditures and costs of maintaining a substantial production work force.
Cyrk's business is subject to risks normally associated with conducting business
abroad, such as foreign government regulations, political unrest, disruptions or
delays in shipments, fluctuations in foreign currency exchange rates and changes
in the economic conditions in the countries in which Cyrk's manufacturing
sources are located. If any such factors were to render the conduct of business
in a particular country undesirable or impractical, or if Cyrk's current foreign
manufacturing sources were to cease doing business with Cyrk for any reason,
Cyrk's business and operating results could be adversely affected. Cyrk's
business is also subject to the risks associated with the imposition of
additional trade restrictions related to imported products, including quotas,
duties, taxes and other charges or restrictions.
Fulfillment Services. Cyrk offers worldwide 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 catalog. Cyrk charges separately for its fulfillment services
but derives substantially all of its revenue from the sale of products. Cyrk's
knowledgeable supply chain management, business-to-business e-commerce systems
and tracking systems and warehouses ensure a timely and coordinated execution of
a program.
SIGNIFICANT CUSTOMER RELATIONSHIPS
In recent years, Cyrk's business has been concentrated with McDonald's, Philip
Morris, Ty and, until 1998, with the Pepsi-Cola Company ("Pepsi"). Cyrk's
business with promotional customer clients such as McDonalds and Philip Morris
(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 place purchase orders from time to time during the
course of a promotion. These promotional product customers are not committed to
making a minimum number of purchases. For all promotional product customers, the
actual purchases depend upon a number of factors including, without limitation,
the duration of the promotion and expected consumer redemption rates.
Consequently, Cyrk's level of net sales is difficult to predict accurately and
may fluctuate greatly from quarter to quarter.
Cyrk conducts its business with McDonald's through its subsidiary, Simon. Simon
designs and implements marketing promotions for McDonald's, which include games,
sweepstakes, premiums, events, contests, coupon offers, sports marketing,
licensing and promotional retail items. Simon's net sales from its business with
McDonald's consist of a combination of sales of promotional products and various
service fees. In September 1999, the Company agreed with McDonald's that the
Company would no longer provide administrative services in connection with
McDonald's promotional programs in Europe effective January 1, 2000. As a result
of this action, the Company's total sales will decline by approximately 15% from
current levels. The net profit contributed by the fees for these services has
historically not been material to the overall results of operations. Therefore,
the Company believes that the absence of these sales will have no material
adverse effect on the Company's profitability. Net sales to McDonald's accounted
for 61%, 57% and 36% of Cyrk's consolidated net sales in fiscal 1999, 1998 and
1997, respectively.
Philip Morris accounted for 9%, 11% and 16% of Cyrk's consolidated net sales in
1999, 1998 and 1997, respectively. A substantial majority of those sales relate
to Marlboro Unlimited promotions. The United States Food and Drug Administration
("FDA") issued final regulations with respect to promotional programs relating
to tobacco products which could have a material adverse effect on Cyrk'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
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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 Cyrk's
business with Philip Morris and on its results of operations. For a description
of the FDA regulations and the tobacco settlement, and their potential impact on
Cyrk's business with Philip Morris, please refer to Cyrk's Amended Cautionary
Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities
Litigation Reform Act of 1995.
Through its licensing arrangements with Ty, Cyrk developed and marketed licensed
Beanie Babies products in 1998 and 1999. Sales of Beanie Babies related products
accounted for approximately 11% and 7% of Cyrk's consolidated net sales for 1999
and 1998, respectively. Effective January 1, 2000, the Company is a strategic
marketing agent for Ty and will provide Ty advisory, design, development and/or
creative services on a project by project basis. Given that the Company is
providing these services on a project by project basis, the Company's future
revenues and earnings associated with the Ty relationship are difficult to
predict. The Company, however, expects sales of Ty related products in 2000 to
be significantly less than the 1999 volume, and that such sales will be heavily
weighted to the latter half of the year.
Pepsi accounted for 21% of Cyrk's consolidated net sales in 1997. Cyrk's
agreements with Pepsi were terminated in December 1997.
BUSINESS DEVELOPMENT AND ACCOUNT MANAGEMENT
Cyrk has approximately 260 employees working on the Company's business
development efforts, selling the Company's promotional products and services and
providing account management services. These efforts include identifying
potential new customers and their promotional needs, making sales presentations
and soliciting orders. The business development efforts also include identifying
and developing new business opportunities with existing customers, managing
client relationships and monitoring the progress of customer programs. These
efforts focus on companies seeking to promote their brand names and corporate
identities and to build brand loyalty through promotional product advertising.
Members of senior management are also actively involved in the business
development and sales efforts.
International sales accounted for approximately 38%, 36% and 27% of Cyrk's
consolidated net sales in 1999, 1998 and 1997, respectively. International sales
are currently made through Cyrk's account representatives in the United States
as well as through Cyrk's German, United Kingdom and Hong Kong subsidiaries.
COMPETITION
The promotional products industry is highly fragmented and competitive, and some
of Cyrk's competitors have substantially greater financial and other resources
than Cyrk. Cyrk's promotional products and services compete with the services of
in-house advertising, promotional products and purchasing departments and with
designers and vendors of single or multiple product lines. The promotional
product services of Cyrk also compete for advertising dollars with other media
such as television, radio, newspapers, magazines and billboards. Entry into the
promotional product industry is not difficult and new competitors are
continually commencing operations.
The primary methods of competition are creativity in product design, quality and
style of products, prompt delivery, customer service, price, financial strength,
and an ability to provide a full range of innovative Web-based marketing
services. Cyrk believes that it currently competes favorably in each of the
foregoing areas and that its ability to provide a full range of integrated
services gives it a competitive advantage.
BACKLOG
At December 31, 1999, Cyrk had written purchase orders for $312.1 million as
compared to $247.6 million at December 31, 1998. Cyrk's purchase orders are
generally subject to cancellation with limited penalty and are also subject to
agreements with certain customers that limit gross margin levels. Therefore,
Cyrk cautions that the backlog amounts may not necessarily be indicative of
future revenues or earnings.
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TESTING AND QUALITY CONTROL
Cyrk bears the risk of non-conforming goods sold to its customers and, in the
case of outsourced products, generally has recourse against the manufacturer.
Because many products are sourced in Asia, Cyrk relies primarily on monitoring
and inspection activities to ensure quality control rather than on any remedies
it may have for defective goods.
Cyrk, through independent laboratories, performs extensive tests to ensure that
materials and fabrics meet all applicable United States and foreign safety and
quality standards, including flammability and child safety laws. In some cases
additional tests are performed by or on behalf of Cyrk's customers.
IMPORTS AND IMPORT RESTRICTIONS
A substantial amount of net sales of Cyrk in 1999 was attributable to products
manufactured in Asia. The importation of such products is subject to the
constraints imposed by bilateral agreements between the United States and
substantially all of the countries from which Cyrk imports goods. These
agreements impose quotas that limit the quantity of certain types of goods,
including textile products imported by Cyrk, which can be imported into the
United States from those countries. Such agreements also allow the United States
to impose, under certain conditions, restraints on the importation of categories
of merchandise that, under the terms of the agreements, are not subject to
specified limits.
Cyrk's continued ability to source products that it imports may be adversely
affected by additional bilateral and multilateral agreements, unilateral trade
restrictions, significant decreases in import quotas, the disruption of trade
from exporting countries as a result of political instability or the imposition
of additional duties, taxes and other charges or restrictions on imports.
Products imported by Cyrk from China currently receive the same preferential
tariff treatment accorded goods from countries granted "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 1999, a substantial
amount of Cyrk's net sales were from products manufactured in China.
EMPLOYEES
At December 31, 1999, Cyrk had approximately 1,425 full-time employees. Cyrk's
work force is not unionized and Cyrk believes that its relations with its
employees are good.
ITEM 2. PROPERTIES.
In 1999, Cyrk leased its principal executive and certain sales and
administrative offices in Gloucester, Massachusetts. At December 31, 1999, Cyrk
occupied approximately 71,100 square feet under leases that expire in April 2000
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 is both a trustee
and beneficiary. Mr. Shlopak is one of Cyrk's founders and is a former Chief
Executive Officer and former member of its Board of Directors. Cyrk will
relocate from its Gloucester facilities in 2000 to offices in Wakefield,
Massachusetts. Cyrk will occupy approximately 47,900 square feet under a lease
with an unrelated party that expires in March 2005 and will have an annual base
rent of approximately $623,000.
Cyrk also leases approximately 120,000 square feet of warehouse space in
Danvers, Massachusetts under the terms of a lease which expires in December 2011
and has an annual base rent of approximately $460,000. Cyrk uses the warehouse
for inventory storage and to perform fulfillment services for certain of its
customers. This facility is owned by a trust of which Mr. Shlopak and Patrick D.
Brady, Cyrk's Co-Chief Executive Officer and Co-President, are both trustees and
beneficiaries.
Related to its Simon operations, Cyrk leases an aggregate of approximately
122,000 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 $2,517,000.
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Cyrk leases approximately 132,000 square feet of warehouse, production and
office space in Monroe, Washington attributable to its Tonkin operations
pursuant to a lease which expires in September 2007. The annual base rent of
this lease is approximately $623,000. In addition to this facility, Tonkin
leases approximately 22,000 square feet of office and warehouse space in Peoria,
Illinois under a lease that expires in December 2003.
Additionally, Cyrk 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 July
2001. Cyrk also leases approximately 12,000 square feet of office space in New
York City, pursuant to a lease which expires in July 2001 and leases
approximately 52,500 square feet of additional office space in various US
cities.
In addition to its domestic lease facilities, Cyrk leases a total of
approximately 60,500 square feet of European office and warehouse space in
Frankfurt, London, Munich and Paris, and, leases an aggregate of approximately
56,300 square feet of Asian office and warehouse space in Hong Kong, Korea,
Taiwan and Tokyo under leases which expire in April 2000 through December 2007.
For a summary of Cyrk's minimum rental commitments under all noncancelable
operating leases as of December 31, 1999, see notes to the consolidated
financial statements.
ITEM 3. LEGAL PROCEEDINGS.
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On November 10, 1999, Cyrk held a Special Meeting in lieu of Annual Meeting of
Stockholders. Following are the matters considered at the meeting. For
additional information related to these matters, reference is made to the
Company's Report on Form 8-K and its proxy statement filed on Schedule 14A with
the Securities and Exchange Commission, dated September 1, 1999 and October 12,
1999, respectively.
1. The approval of the issuance of 25,000 shares of series A
senior cumulative participating convertible preferred stock
and a warrant to purchase 15,000 shares of series A senior
cumulative participating convertible preferred stock to
Yucaipa. The results of the voting were as follows:
For Against Votes Withheld Broker Non-Votes
--- ------- -------------- ----------------
9,926,650 1,093,020 39,460 2,817,050
2. The election of six directors to serve for terms of either
one, two or three years. The results of the voting were as
follows:
Nominee For Votes Withheld Broker Non-Votes
------- ---- --------------- ----------------
Patrick D. Brady 12,913,962 962,218 0
Allan I. Brown 12,915,046 961,134 0
Ronald W. Burkle 12,914,393 961,787 0
George G. Golleher 12,913,993 962,187 0
Joseph Anthony Kouba 12,913,793 962,387 0
Richard Wolpert 12,913,858 962,322 0
3. The approval and ratification of an amendment to Cyrk's 1993
Employee Stock Purchase Plan to increase the number of shares
of common stock available under the plan from 300,000 to
600,000. The results of the voting were as follows:
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
13,263,442 489,893 46,666 76,179
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4. The ratification of the appointment of PricewaterhouseCoopers
LLP as Cyrk's independent auditors for the 1999 fiscal year.
The results of the voting were as follows:
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
13,808,056 20,886 46,558 680
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EXECUTIVE OFFICERS OF THE REGISTRANT
The following are the names, ages, positions with Cyrk and a brief description
of the business experience during the last five years of the executive officers
of Cyrk, all of whom serve until they resign or are removed from such offices by
the Board of Directors:
PATRICK D. BRADY (44): Co-Chief Executive Officer and Co-President. Mr. Brady is a founder of Cyrk and has
served as one of its directors since its incorporation in 1990. Mr. Brady served as the
Treasurer of Cyrk from May 1990 until May 1993, and has also served as Cyrk's Chief
Operating Officer from May 1993 until November 1999 and its Chief Financial Officer from
May 1993 to September 1994. Mr. Brady was elected President in May 1993 and Chief
Executive Officer in December 1998. In November 1999, he was elected Co-Chief Executive
Officer and Co-President.
ALLAN I. BROWN (59): Co-Chief Executive Officer and Co-President. Mr. Brown has been the Chief Executive
Officer of our Simon Marketing, Inc. subsidiary since 1975. In November 1999, he was
elected Co-Chief Executive Officer and Co-President and to Cyrk's Board of Directors
TERRY B. ANGSTADT (46): Executive Vice President. Mr. Angstadt has served in various management positions at
Cyrk since January 1992. Mr. Angstadt was elected an Executive Vice President of Cyrk
in May 1993.
TED L. AXELROD (44): Executive Vice President. Mr. Axelrod joined Cyrk in July 1995 to direct Cyrk's
corporate strategy and development efforts. He was elected an Executive Vice President
of Cyrk in September 1997. From August 1987 to July 1995, he held various positions
including Managing Director and Head of Mergers and Acquisitions of BNY Associates,
Incorporated, an investment banking subsidiary of The Bank of New York Company, Inc.
(formerly BNE Associates, Inc., a subsidiary of The Bank of New England, N.A.).
DOMINIC F. MAMMOLA (44): Executive Vice President and Chief Financial Officer. Mr. Mammola was elected an
Executive Vice President of Cyrk in September 1997. He has served as Vice President and
Chief Financial Officer of Cyrk since September 1994.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's stock is traded on The Nasdaq Stock Market under the symbol CYRK.
The following table presents, for the periods indicated, the high and low sales
prices of the Company's common stock as reported by The Nasdaq Stock Market's
National Market.
1999 1998
High Low High Low
---- --- ---- ---
First Quarter $8.00 $ 5.38 $17.25 $9.50
Second Quarter 6.88 6.00 20.38 10.06
Third Quarter 5.88 4.63 13.25 6.75
Fourth Quarter 12.00 6.44 10.25 6.50
As of February 29, 2000, the Company had approximately 338 holders of record
(representing approximately 4,400 beneficial owners) of its common stock. The
last reported sale price of the Company's common stock on February 29, 2000 was
$9.69.
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 (other than the dividends required to be paid by the Company
pursuant to the terms of its redeemable preferred stock - see notes to
consolidated financial statements) as the Company currently intends to retain
its earnings to finance future growth. In addition, the Company's ability to pay
cash dividends is limited pursuant to the terms of its credit facilities.
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ITEM 6. SELECTED FINANCIAL DATA.
SELECTED INCOME For the Years Ended December 31,
STATEMENT DATA: 1999 1998 1997(3) 1996 1995
---- ---- ---- ---- ----
(In thousands, except per share data)
Net sales $988,844 $757,853 $558,623 $250,901 $135,842
Net income (loss) 11,136 (1) (3,016) (2) 3,236 438 (2,338)
Earnings (loss) per
common share - basic 0.70 (1) (0.20) (2) 0.26 0.04 (0.22)
Earnings (loss) per
common share - diluted 0.67 (1) (0.20) (2) 0.25 0.04 (0.22)
SELECTED BALANCE December 31,
SHEET DATA: 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands)
Working capital $110,823 $ 87,517 $ 61,314 $100,565 $106,188
Total assets 369,148 337,341 313,845 190,239 137,598
Long-term obligations 9,156 12,099 9,611 -- --
Redeemable preferred
stock 20,553 -- -- -- --
Stockholders' equity 190,524 177,655 160,353 124,347 123,600
(1) Includes $1,675 of pre-tax nonrecurring charges. See notes to
consolidated financial statements.
(2) Includes $15,288 of pre-tax restructuring and nonrecurring charges. See
notes to consolidated financial statements.
(3) Includes the results of operations of acquired companies from the
acquisition dates.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
From time to time, the Company may provide forward-looking information such as
forecasts of expected future performance or statements about the Company's plans
and objectives, including certain information provided below. These
forward-looking statements are based largely on the Company's expectations and
are subject to a number of risks and uncertainties, certain of which are beyond
the Company's control. The Company wishes to caution readers that actual results
may differ materially from those expressed in any forward-looking statements
made by, or on behalf of, the Company 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 first quarter 1999 Report on Form 10-Q which is
incorporated herein by reference.
GENERAL
The Company is a full-service promotional marketing company, specializing in the
design and development of high-impact promotional products and programs. The
majority of the Company's revenue is derived from the sale of products to
consumer product companies seeking to promote their brand and build customer
loyalty as well as products sold to consumers under certain license agreements.
The Company's business is heavily concentrated with McDonald's Corporation
("McDonald's") and Philip Morris Incorporated ("Philip Morris"), as well as
sales associated with its license arrangement with Ty Inc. ("Ty"), the world's
largest manufacturer and marketer of plush toys (sold under the name Beanie
Babies). Net sales to McDonald's and Philip Morris accounted for 61% and 9%, 57%
and 11% and 36% and 16% of total net sales in 1999, 1998 and 1997, respectively.
Sales of Beanie Babies related products accounted for 11% and 7% of total net
sales in 1999 and 1998, respectively. Sales to Pepsi-Cola Company ("Pepsi")
accounted for 21% of 1997 net sales. The Company's agreements with Pepsi were
terminated in December 1997.
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 2000 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. Beginning
July 1, 1999, a settlement agreement among 46 states and certain tobacco
companies, including Philip Morris, prohibits the use of brand names by tobacco
companies in connection with promotional programs relating to tobacco products.
The settlement agreement, however, does not prohibit the use of Philip Morris's
corporate name in promotional programs. Due to the restrictions on the use of
brand names, and the other limitations imposed by the settlement agreement on
the tobacco industry, the settlement agreement could have a material adverse
effect on the Company's business with Philip Morris and on its results of
operations.
In September 1999, the Company agreed with McDonald's that the Company would no
longer provide administrative services in connection with McDonald's promotional
programs in Europe effective January 1, 2000. The fees for these services have
historically not been material to the overall results of operations. As a result
of this action, the Company's total sales will decline by approximately 15% from
current levels. However, because the agreement with McDonald's related to these
services did not provide for significant gross margin on associated sales, the
Company believes that the absence of these sales will have no material adverse
effect on the Company's profitability.
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In December 1997, the Company entered into a license agreement ("the Agreement")
with Ty which granted the Company the exclusive right to develop and market
licensed Beanie Babies products in connection with the Beanie Babies Official
Club, a consumer membership kit. In May 1999, the parties mutually agreed to
modify the Agreement and to enter into a new arrangement in which the Company's
rights in connection with the Beanie Babies Official Club are non-exclusive in
order to enable Ty to market and distribute Beanie Babies products in connection
with the Club and in cooperation with the Company commencing in July 1999. Under
the new arrangement which extended through the end of 1999, the Company would
provide creative and sourcing services for Ty in collaboration with Ty. In 1999,
the Company's seasonal pattern of sales and earnings, including a loss in the
first quarter, and significant revenues and profitability in the second half of
the year, was primarily attributed to the sale of Ty Beanie Babies product.
Effective January 1, 2000, the Company is a strategic marketing agent for Ty and
will provide Ty advisory, design, development and/or creative services on a
project by project basis. Given that the Company is providing these services on
a project by project basis, the Company's future revenues and earnings
associated with the Ty relationship are difficult to predict. The Company,
however, expects sales of Ty related products in 2000 to be substantially less
than the 1999 volume, and that such sales will be heavily weighted to the latter
half of the year.
As a result of timing associated with potential Ty activity and consistent with
the seasonal nature of other client promotional activity, the Company announced
in February 2000 that it would incur an operating loss in the first quarter of
2000.
At December 31, 1999, the Company had written purchase orders for $312.1 million
as compared to $247.6 million at December 31, 1998. 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.
EQUITY INVESTMENT
In November 1999, The Yucaipa Companies ("Yucaipa"), a Los Angeles-based
investment firm, invested $25 million in the Company in exchange for convertible
preferred stock and a warrant to purchase an additional $15 million of
convertible preferred stock. Under the terms of the investment, which was
approved at a Special Meeting of Stockholders held on November 10, 1999,
Yucaipa, through an affiliate, purchased 25,000 shares of a new series of
Company convertible preferred stock (initially convertible into 3,030,303 shares
of Company common stock) and received a warrant to purchase an additional 15,000
shares of a new series of Company convertible preferred stock (initially
convertible into 1,666,666 shares of Company common stock). The net proceeds
($20.6 million) from this transaction will be used for general corporate
purposes and to fund the Company's growth and strategic investment and
acquisition efforts.
As of November 10, 1999, assuming conversion of all of the convertible preferred
stock, Yucaipa would own approximately 16% of the then outstanding common
shares. Assuming the preceding conversion, and assuming the exercise of the
warrant and the conversion of the preferred stock issuable upon its exercise,
Yucaipa would own a total of approximately 23% of the then outstanding common
shares making it the Company's largest shareholder.
In connection with this transaction, Ronald W. Burkle, managing partner of
Yucaipa, was appointed chairman of Cyrk's Board of Directors, Patrick D. Brady
and Allan I. Brown were named Co-Chief Executive Officers and Co-Presidents of
Cyrk, and Mr. Brown was named to Cyrk's Board of Directors. In addition to Mr.
Burkle, Yucaipa is entitled to nominate two individuals to a seven-person Cyrk
Board of Directors. Additionally, the Company will pay Yucaipa an annual
management fee of $500,000 for a five-year term for which Yucaipa will provide
general business consultation and advice and management services. See notes to
consolidated financial statements.
For additional information related to this transaction, reference is made to the
Company's Report on Form 8-K and its proxy statement filed on Schedule 14A with
the Securities and Exchange Commission, dated September 1, 1999 and October 12,
1999, respectively.
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1998 CORPORATE RESTRUCTURING
As a result of its 1998 corporate restructuring, the Company recorded a 1998
charge to operations of $11.8 million for asset write-downs, employee
termination costs, lease cancellations and other related exit costs associated
with the restructuring. The restructuring plan was fully executed by the end of
1998. See notes to consolidated financial statements.
RESULTS OF OPERATIONS
1999 Compared to 1998
Net sales increased $231.0 million, or 30%, to $988.8 million in 1999 from
$757.9 million in 1998. The increase in net sales was primarily attributable to
revenues associated with McDonald's, Beanie Babies related products and Philip
Morris.
Gross profit increased $34.5 million, or 25%, to $172.3 million in 1999 from
$137.9 million in 1998. As a percentage of net sales, gross profit decreased to
17.4% in 1999 from 18.2% in 1998. The decrease in the gross margin percentage
was primarily the result of a higher concentration of sales volume associated
with certain promotional programs that are subject to agreements with certain
customers that limit gross margin levels.
As a percentage of net sales, selling, general and administrative expenses
excluding nonrecurring charges totaled 15.7% in 1999 as compared to 17.9% in
1998. Selling, general and administrative expenses totaled $155.0 million in
1999 as compared to $135.5 million in 1998. The Company's increased spending was
attributable to an increase in the commissions paid to field sales
representatives associated with sales increases generated from the Company's
premium incentives and licensed product businesses, as well as to increased
client management and support costs.
The Company recorded a 1999 nonrecurring pre-tax charge to operations of $1.7
million associated with the settlement of previously issued incentive stock
options in a subsidiary which were issued to principals of a previously acquired
company. The settlement was reached to facilitate the integration of the
acquired company into other operations within the Company's CPG division.
Restructuring and nonrecurring charges totaled $15.3 million in 1998. In
connection with its February 1998 announcement to restructure worldwide
operations, the Company recorded a restructuring charge of $11.8 million
attributable to asset write-downs, employee termination costs, lease
cancellations and other related exit costs. In addition, the Company recorded a
$2.3 million nonrecurring charge associated with a December 1998 severance
agreement between the Company and its former chief executive officer, and also
recorded a $1.1 million nonrecurring charge associated with the Company's plan
to relocate its corporate facilities. See notes to consolidated financial
statements.
Other income of $2.8 million in 1999 and $7.1 million in 1998 represents the
gains realized on the sale of an investment. See notes to consolidated financial
statements.
For an analysis of the change in the effective tax rates from 1997 to 1999 and a
discussion of the valuation allowance recorded by the Company, see notes to
consolidated financial statements.
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.
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16
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.
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.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at December 31, 1999 was $110.8 million compared to $87.5
million at December 31, 1998. Net cash provided by operating activities during
1999 was $31.1 million, due principally to net income and depreciation and
amortization of $20.1 million and an increase in accrued expenses of $15.7
million.
Net cash used in investing activities was $16.9 million, which was primarily
attributable to $12.5 million in investments made by the Company in 1999 and
$5.5 million of purchases of property and equipment. In 1998, 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.
The Company is evaluating the implementation of an enterprise resource planning
("ERP") system. If approved, the Company anticipates that its year 2000
purchases of property and equipment will be substantially higher than the 1999
levels. The cost of the ERP system will be driven by the scope and timing of the
implementation which remains subject to final review and approval.
In February 2000, the Company announced its plan to transfer its e-business
operations into a wholly-owned subsidiary, along with the Internet related
equity investments the Company has made in various companies. Throughout 2000,
the Company expects to make additional Internet related equity investments as
the Company expands its overall e-business initiatives.
Net cash provided by financing activities in 1999 was $10.1 million which was
primarily attributable to $20.6 million of net proceeds received from an equity
investment in the Company (see notes to consolidated financial statements) which
was partially offset by $8.0 million of repayments of short-term borrowings. In
1998, 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
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17
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 and preferred stock, bank borrowings and capital
equipment leases. Such cash requirements for 1999 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 June
2000. The Company's primary domestic line of credit, amounting to $50 million,
expires in July 2000. As of December 31, 1999, based on the borrowing base
formulas prescribed by these credit facilities, the Company's borrowing capacity
was $107.5 million, of which $8.4 million of short-term borrowings and $20.0
million in letters of credit were outstanding. In addition, bank guarantees
totaling $2.3 million were outstanding at December 31, 1999. 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 2000. 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 2000. 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 revenues and related
contribution 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. Computer programs that
have date-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. The Company completed a comprehensive Year 2000
Compliance Program which is summarized below and has not experienced any systems
or operational disruptions associated with the Year 2000 issue.
State of Readiness
To manage its Year 2000 program, the Company 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 used 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).
The Company completed the four-step approach for the Year 2000 readiness for all
three program areas by December 1999.
Costs to Address Year 2000 Issues
The costs associated with becoming Year 2000 compliant totaled approximately $.3
million.
Risks of Year 2000 Issues and Contingency Plans
Although the Company has not encountered any significant Year 2000 issues to
date, the Company has business continuity plans and has created an
infrastructure for the identification, communication and resolution of issues
that may arise. 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 25
Consolidated Balance Sheets as of December 31, 1999 and 1998 26
Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997 27
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999, 1998
and 1997 28
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 29
Notes to Consolidated Financial Statements 30-41
Schedule II: Valuation and Qualifying Accounts 42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
NONE
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item regarding the Company's directors is
included in the Company's Proxy Statement to be filed pursuant to Schedule 14A
in connection with the Company's 2000 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
2000 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
2000 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
2000 Annual Meeting of Stockholders under the sections captioned "Certain
Relationships and Related Transactions" and "Indebtedness of Management" and is
incorporated herein by reference thereto.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) DOCUMENTS FILED AS PART OF THIS REPORT.
1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 1999
and 1998
Consolidated Statements of Operations for the years
ended December 31, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years
ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES FOR THE FISCAL YEARS
ENDED DECEMBER 31, 1999, 1998 AND 1997:
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 (11) Securities Purchase Agreement dated September 1, 1999,
between the Registrant and Overseas Toys, L.P.
3.1 (4) Restated Certificate of Incorporation of the Registrant
3.2 (2) Amended and Restated By-laws of the Registrant
3.3 Certificate of Designation for Series A Senior Cumulative
Participating Convertible Preferred Stock, filed herewith
4.1 (2) Specimen certificate representing Common Stock
10.1 (3)(13) 1993 Employee Stock Purchase Plan, as amended
10.2 (3)(4) 1993 Omnibus Stock Plan, as amended
10.3 (4) 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 (9) 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.
10.3.2 (12) Lease extension agreement dated July 29, 1999 by and
between Gregory P. Shlopak and Paul M. Butman, Jr., as
Trustees of PG Realty Trust and Cyrk, Inc.
10.3.3 (12) Lease extension agreement dated July 29, 1999 by and
between Gregory P. Shlopak and Paul M. Butman, Jr., as
Trustees of PG Realty Trust and Cyrk, Inc.
10.3.4 (12) Lease extension agreement dated July 29, 1999 by and
between Gregory P. Shlopak and Paul M. Butman, Jr., as
Trustees of PG Realty Trust and Cyrk, Inc.
10.4 (12) Credit Agreement dated as of July 29, 1999 among Cyrk,
Inc., as Borrower, The Lenders Listed Herein, as Lenders,
Wells Fargo Bank, National Association, as Issuing Lender, and
Wells Fargo HSBC Trade Bank, N.A., as Administrative Agent
10.5 (1) Tax Allocation and Indemnity Agreement dated July 6, 1993,
among Cyrk, Inc., the Registrant, Gregory P. Shlopak and
Patrick D. Brady
10.6 (2)(3) Restricted Stock Purchase Agreement dated May 10, 1993,
between the Registrant and Terry B. Angstadt
10.7 (3)(5) Life Insurance Agreement dated as of November 15, 1994 by and
between the Registrant and Patrick D. Brady as Trustee under a
declaration of trust dated November 7, 1994 between Gregory P.
Shlopak and Patrick D. Brady, Trustee, entitled "The Shlopak
Family 1994 Irrevocable Insurance Trust"
10.7.1 (3)(5) Assignments of Life Insurance policies as Collateral,
each dated November 15, 1994
10.8 (3)(5) Life Insurance Agreement dated as of November 15, 1994
by and between the Registrant and Patrick D. Brady as Trustee
under a declaration of trust dated November 7, 1994 between
Gregory P. Shlopak and Patrick D. Brady, Trustee, entitled
"The Gregory P. Shlopak 1994 Irrevocable Insurance Trust"
10.8.1 (3)(5) Assignments of Life Insurance policies as Collateral,
each dated November 15, 1994
10.9 (3)(5) Life Insurance Agreement dated as of November 15, 1994 by and
between the Registrant and Walter E. Moxham, Jr. as Trustee
under a declaration of trust dated November 7, 1994 between
Patrick D. Brady and Walter E. Moxham, Jr., Trustee, entitled
"The Patrick D. Brady 1994 Irrevocable Insurance Trust"
10.9.1 (3)(5) Assignments of Life Insurance policies as Collateral,
each dated November 15, 1994
10.10 (3)(6) 1997 Acquisition Stock Plan
10.11 (7) Securities Purchase Agreement dated February 12, 1998 by
and between Cyrk, Inc. and Ty Warner
10.12 (8) Severance Agreement between Cyrk, Inc. and Gregory P.
Shlopak
10.13 (3)(9) Change of Control Agreement between Cyrk, Inc. and
Terry B. Angstadt dated November 2, 1997
10.14 (3)(9) Severance Agreement between Cyrk, Inc. and Ted L.
Axelrod dated November 20, 1998
10.15 (3)(9) Severance Agreement between Cyrk, Inc. and Dominic F.
Mammola dated November 20, 1998
10.15.1 (3)(9) Amendment No. 1 to Severance Agreement between Cyrk,
Inc. and Dominic F. Mammola dated March 29, 1999
10.16 Registration Rights Agreement between Cyrk, Inc. and Overseas
Toys, L.P., filed herewith
10.17 Management Agreement between Cyrk, Inc. and The Yucaipa
Companies, filed herewith
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10.18 (3)(11) Employment Agreement between Cyrk, Inc. and Allan
Brown, dated September 1, 1999
10.19 (3)(11) Employment Agreement between Cyrk, Inc. and Patrick
Brady, dated September 1, 1999
10.20 Lease agreement dated as of July 29, 1999, between TIAA
Realty, Inc. and Cyrk, Inc., filed herewith
10.21 (3) Life Insurance Agreement dated as of September 29, 1997 by
and between Simon Marketing, Inc. and Frederic N. Gaines,
Trustee of the Allan I. Brown Insurance Trust, under
Declaration of Trust dated September 29, 1997, filed herewith
21.1 List of Subsidiaries, filed herewith
23.1 Consent of PricewaterhouseCoopers LLP - Independent
Accountants, filed herewith
27.98 Restated Financial Data Schedule, filed herewith
27.99 Financial Data Schedule, filed herewith
99.1 (10) Amended Cautionary Statement for Purposes of the "Safe
Harbor" Provisions of the Private Securities Litigation Reform
Act of 1995
99.2 (3) (11) Termination Agreement among Cyrk, Inc., Patrick
Brady, Allan Brown, Gregory Shlopak, Eric Stanton, and Eric
Stanton Self-Declaration of Revocable Trust
- ------------------------------------
(1) Filed as an exhibit to the Registrant's Registration Statement on Form
S-1 (Registration No. 33-75320) or an amendment thereto and
incorporated herein by reference.
(2) Filed as an exhibit to the Registrant's Registration Statement on Form
S-1 (Registration No. 33-63118) or an amendment thereto and
incorporated herein by reference.
(3) Management contract or compensatory plan or arrangement.
(4) Filed as an exhibit to the Annual Report on Form 10-K for the year
ended December 31, 1994 and incorporated herein by reference.
(5) Filed as an exhibit to the Registrant's Registration Statement on Form
10-Q dated March 31, 1995 and incorporated herein by reference.
(6) Filed as an exhibit to the Registrant's Registration Statement on Form
S-8 (Registration No. 333-45655) and incorporated herein by reference.
(7) Filed as an exhibit to the Annual Report on Form 10-K for the year
ended December 31, 1997 and incorporated herein by reference.
(8) Filed as an exhibit to the Registrant's Report on Form 8-K dated
December 31, 1998 and incorporated herein by reference.
(9) Filed as an exhibit to the Annual Report on Form 10-K for the year
ended December 31, 1998 and incorporated herein by reference.
(10) Filed as an exhibit to the Registrant's Registration Statement on Form
10-Q dated March 31, 1999 and incorporated herein by reference.
(11) Filed as an exhibit to the Registrant's Report on Form 8-K dated
September 1, 1999 and incorporated herein by reference.
(12) Filed as an exhibit to the Registrant's Registration Statement on Form
10-Q dated September 30, 1999 and incorporated herein by reference.
(13) Filed as an exhibit to the Registrant's Registration Statement on Form
S-8 dated February 1, 2000 and incorporated herein by reference.
22
23
(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, 1999.
23
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CYRK, INC.
Date: March 27, 2000 By: /s/Dominic F. Mammola
----------------------
Dominic F. Mammola
Executive Vice President and Chief Financial
Officer (principal financial and accounting
officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/Ronald W. Burkle Chairman March 27, 2000
- ------------------
RONALD W. BURKLE
/s/Patrick D. Brady Co-Chief Executive Officer March 27, 2000
- ------------------- Co-President
PATRICK D. BRADY (Co-principal executive officer)
/s/Allan I. Brown Co-Chief Executive Officer March 27, 2000
- ----------------- Co-President
ALLAN I. BROWN (Co-principal executive officer)
/s/Joseph W. Bartlett Director March 27, 2000
- ---------------------
JOSEPH W. BARTLETT
/s/J. Anthony Kouba Director March 27, 2000
- -------------------
J. ANTHONY KOUBA
/s/George G. Golleher Director March 27, 2000
- ---------------------
GEORGE G. GOLLEHER
24
25
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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted
in the United States. In addition, in our opinion, the financial statement
schedule listed in the accompanying index presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and schedule based on our
audits. We conducted our audits of these statements in accordance with auditing
standards generally accepted in the United States, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and schedule are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and schedule, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement and schedule presentation. We believe that our audits
provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 4, 2000
25
26
CYRK, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
1999 1998
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 99,698 $ 75,819
Investment 2,423 2,944
Accounts receivable:
Trade, less allowance for doubtful accounts of $4,243
at December 31, 1999 and $2,682 at December 31, 1998 91,782 87,372
Officers, stockholders and related parties 3,121 204
Inventories 45,193 51,250
Prepaid expenses and other current assets 7,056 7,227
Deferred and refundable income taxes 10,465 9,813
--------- ---------
Total current assets 259,738 234,629
Property and equipment, net 13,140 13,285
Excess of cost over net assets acquired, net 73,961 82,771
Investments 12,500 --
Deferred income taxes 1,778 --
Other assets 8,031 6,656
--------- ---------
$ 369,148 $ 337,341
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 8,888 $ 16,929
Accounts payable:
Trade 41,795 43,907
Affiliates -- 2,043
Accrued expenses and other current liabilities 97,278 83,280
Deferred income taxes 954 --
Accrued restructuring expenses -- 953
--------- ---------
Total current liabilities 148,915 147,112
Long-term obligations 9,156 12,099
Deferred income taxes -- 475
--------- ---------
Total liabilities 158,071 159,686
--------- ---------
Commitments and contingencies
Mandatorily redeemable preferred stock, Series A1 senior cumulative
participating convertible, $.01 par value, 25,000 shares issued
and outstanding, stated at redemption value of $1,000 per share ($25,000),
net of issuance costs 20,553 --
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized; 25,000 Series
A1 issued -- --
Common stock, $.01 par value; 50,000,000 shares authorized;
15,740,850 shares issued and outstanding at December 31, 1999 and
15,453,058 shares issued and outstanding at December 31, 1998 157 155
Additional paid-in capital 141,482 138,784
Retained earnings 48,587 37,593
Accumulated other comprehensive income (loss):
Unrealized gain on investment 1,336 1,442
Cumulative translation adjustment (1,038) (319)
--------- ---------
Total stockholders' equity 190,524 177,655
--------- ---------
$ 369,148 $ 337,341
========= =========
The accompanying notes are an integral part of
the consolidated financial statements.
26
27
CYRK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1999 1998 1997
---- ---- ----
Net sales $ 988,844 $ 757,853 $ 558,623
Cost of sales:
Related parties -- 9,211 10,094
Other 816,507 610,758 445,434
--------- --------- ---------
816,507 619,969 455,528
--------- --------- ---------
Gross profit 172,337 137,884 103,095
--------- --------- ---------
Selling, general and administrative expenses:
Goodwill amortization 3,568 3,324 2,226
Related parties 1,002 1,264 1,198
Other 150,425 130,863 90,529
Nonrecurring charges 1,675 15,288 --
--------- --------- ---------
156,670 150,739 93,953
--------- --------- ---------
Operating income (loss) 15,667 (12,855) 9,142
Interest income (3,232) (3,569) (2,413)
Interest expense 2,115 2,579 2,102
Equity in loss of affiliates -- 418 1,363
Other income (2,752) (7,100) --
--------- --------- ---------
Income (loss) before income taxes 19,536 (5,183) 8,090
Income tax provision (benefit) 8,400 (2,167) 4,854
--------- --------- ---------
Net income (loss) 11,136 (3,016) 3,236
Preferred stock dividends 142 -- --
--------- --------- ---------
Net income (loss) available to common stockholders $ 10,994 $ (3,016) $ 3,236
========= ========= =========
Earnings (loss) per common share - basic $ 0.70 $ (0.20) $ 0.26
========= ========= =========
Earnings (loss) per common share - diluted $ 0.67 $ (0.20) $ 0.25
========= ========= =========
Weighted average shares outstanding - basic 15,624 14,962 12,592
========= ========= =========
Weighted average shares outstanding - diluted 16,631 14,962 13,025
========= ========= =========
The accompanying notes are an integral part
of the consolidated financial statements.
27
28
CYRK, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(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, 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
Comprehensive income:
Net income 11,136 $ 11,136 11,136
--------
Other comprehensive loss,
net of income taxes:
Net unrealized loss on
available-for-sale securities (106) (106)
Translation adjustment (719) (719)
--------
Other comprehensive loss (825) (825)
--------
Comprehensive income $ 10,311
========
Dividends on preferred stock (142) (142)
Stock compensation 775 775
Issuance of shares under
employee stock option
and stock purchase plans 1 512 513
Issuance of shares for
businesses acquired 1 1,411 1,412
----- ---------- -------- --------- ---------
Balance, December 31, 1999 $ 157 $ 141,482 $ 48,587 $ 298 $ 190,524
===== ========== ======== ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
28
29
CYRK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
1999 1998 1997
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ 11,136 $ (3,016) $ 3,236
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 8,988 8,988 6,438
Write-down of leasehold improvements -- 1,143 --
(Gain) loss on sale of property and equipment 130 (244) (32)
Realized (gain) loss on sale of investments (2,752) (7,100) 32
Provision for doubtful accounts 2,578 1,485 390
Deferred income taxes 2,575 1,286 (772)
Equity in loss of affiliates -- 418 1,363
Tax benefit from stock option plans -- 56 --
Non-cash restructuring charges 854 8,555 --
Stock compensation 775 -- --
Increase (decrease) in cash from changes
in working capital items, net of acquisitions:
Accounts receivable (10,033) 6,382 17,972
Inventories 5,161 (6,050) 20,272
Prepaid expenses and other current assets 161 3,417 (2,616)
Refundable income taxes -- (1,232) --
Accounts payable (4,199) (11,925) (11,841)
Accrued expenses and other current liabilities 15,738 16,263 (2,893)
-------- -------- ---------
Net cash provided by operating activities 31,112 18,426 31,549
-------- -------- ---------
Cash flows from investing activities:
Purchase of property and equipment (5,461) (5,254) (6,028)
Proceeds from sale of property and equipment 45 928 243
Acquisitions, net of cash acquired * -- -- (16,581)
Repayments from (advances to) affiliates, net -- 1,556 (6,511)
Purchase of investments (12,500) -- (3,815)
Proceeds from sale of investments 3,086 10,759 6,259
Additional consideration related to acquisitions (730) (1,624) (1,577)
Other, net (1,375) (1,038) 110
-------- -------- ---------
Net cash provided by (used in) investing activities (16,935) 5,327 (27,900)
-------- -------- ---------
Cash flows from financing activities:
Repayments of short-term borrowings, net (8,041) (3,897) (5,365)
Proceeds from (repayments of) long-term obligations (2,943) 1,888 (333)
Proceeds from issuance of preferred stock, net 20,553 -- --
Proceeds from issuance of common stock 513 11,554 467
-------- -------- ---------
Net cash provided by (used in) financing activities 10,082 9,545 (5,231)
-------- -------- ---------
Effect of exchange rate changes on cash (380) 8 (129)
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents 23,879 33,306 (1,711)
Cash and cash equivalents, beginning of year 75,819 42,513 44,224
-------- -------- ---------
Cash and cash equivalents, end of year $ 99,698 $ 75,819 $ 42,513
======== ======== =========
* 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 $ 1,981 $ 2,301 $ 2,214
======== ======== =========
Income taxes $ 6,026 $ 2,863 $ 4,075
======== ======== =========
Supplemental non-cash investing activities:
Issuance of additional stock related to acquisitions $ 1,412 $ 7,351 $ --
======== ======== =========
The accompanying notes are an integral part
of the consolidated financial statements.
29
30
CYRK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
1. Nature of Business
Cyrk, Inc. is a full-service promotional marketing company, specializing in the
design and development of high-impact promotional products and programs.
2. Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Cyrk,
Inc. and its subsidiaries (the "Company"). All material intercompany accounts
and transactions have been eliminated in consolidation.
Revenue Recognition
Sales are generally recognized when products are shipped or services are
provided to customers. Sales of certain imported goods are recognized at the
time shipments are received at the customer's designated location. Deferred
revenue includes deposits related to merchandise for which the Company has
received payment but for which title and risk of loss have not passed.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Concentration of Credit Risk
The Company places its cash in what it believes to be credit-worthy financial
institutions. However, cash balances exceed FDIC insured levels at various times
during the year. In addition, the Company has significant receivables from
certain customers (see Note 18).
Financial Instruments
The carrying amounts of cash equivalents, investments, short-term borrowings and
long-term obligations approximate their fair values.
Cash Equivalents
Cash equivalents consist of short-term, highly liquid investments which have
original maturities at date of purchase to the Company of three months or less.
Investments
Investments are stated at fair value. Current investments are designated as
available-for-sale in accordance with the provisions of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities", and as such unrealized gains and losses are reported in a
separate component of stockholders' equity. Long-term investments, for which
there are no readily available market values, are carried at the lower of
estimated fair value or cost.
30
31
Inventories
Inventories are valued at the lower of cost (specific identification, first-in,
first-out and average methods) or market.
Property and Equipment
Property and equipment are stated at cost and are depreciated primarily using
the straight-line method over the estimated useful lives of the assets or over
the terms of the related leases, if such periods are shorter. The estimated
useful lives range from two to seven years for machinery and equipment and three
to ten years for furniture and fixtures. The cost and accumulated depreciation
for property and equipment sold, retired or otherwise disposed of are relieved
from the accounts, and resulting gains or losses are reflected in income.
Excess of Cost Over Net Assets Acquired, Net
The excess of cost over the net assets acquired ("goodwill") is being amortized
on a straight-line basis over a period of fifteen to thirty years. Accumulated
amortization amounted to $8,694 at December 31, 1999 and $5,126 at December 31,
1998.
Impairment of Long-Lived Assets
Periodically, the Company assesses, based on undiscounted cash flows, if there
has been a permanent impairment in the carrying value of its long-lived assets
and, if so, the amount of any such impairment by comparing anticipated
undiscounted future operating income with the carrying value of the related
long-lived assets. In performing this analysis, management considers such
factors as current results, trends and future prospects, in addition to other
economic factors.
Income Taxes
The Company determines deferred taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), which
requires that deferred tax assets and liabilities be computed based on the
difference between the financial statement and income tax bases of assets and
liabilities using the enacted marginal tax rate. Deferred income tax expenses or
credits are based on the changes in the asset or liability from period to
period.
Foreign Currency Translation
The Company translates financial statements denominated in foreign currency by
translating balance sheet accounts at the balance sheet date exchange rate and
income statement accounts at the average monthly rates of exchange. Translation
gains and losses are recorded in stockholders' equity, and transaction gains and
losses are reflected in income.
Earnings (Loss) per Common Share
Earnings (loss) per common share have been determined in accordance with the
provisions of Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("SFAS 128").
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
31
32
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). A deferred tax asset was provided for with a valuation allowance at the
time of the acquisition. The tax benefit from adjusting the valuation allowance
of the acquired deferred assets was recorded as a $6,941 reduction of goodwill
by the Company in 1999. During 1998, additions to excess of cost over net assets
acquired were recorded for the settlement of preacquisition contingencies
amounting to $3,500. 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 ($54,821, as adjusted) is
being amortized on a straight-line basis over thirty years.
On April 7, 1997, the Company acquired Tonkin, Inc. ("Tonkin"), a Washington
corporation which provides custom promotional programs and licensed promotional
products for an aggregate purchase price of $22,000 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 ($900 in cash,
$300 in Company common stock and $600 which will be paid in cash or Company
common stock at the election of the Company 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,
1999 1998
---- ----
Raw materials $10,181 $13,622
Work in process 14,887 9,034
Finished goods 20,125 28,594
------- -------
$45,193 $51,250
======= =======
5. Property and Equipment
Property and equipment consist of the following:
December 31,
1999 1998
---- ----
Machinery and equipment $22,139 $19,302
Furniture and fixtures 7,209 6,628
Leasehold improvements 6,205 5,184
----- -----
35,553 31,114
Less - accumulated depreciation and amortization (22,413) (17,829)
------- -------
$13,140 $13,285
======= =======
Depreciation and amortization expense on property and equipment totaled $5,420,
$5,664 and $4,212 in 1999, 1998 and 1997, respectively.
32
33
6. Investments
Current
In April 1998, the Company exchanged its then 50% interest (with a net book
value of $2,589) in Grant & Partners Limited Partnership ("GPLP"), a
Boston-based firm specializing in improving the returns on marketing
investments, in return for GPLP's rights, title and interest to 1,150,000 shares
of common stock of GPLP's Exchange Applications ("EXAP"), a company specializing
in software that helps businesses raise profits by targeting marketing
campaigns. In December 1998, EXAP completed its initial public offering and the
Company sold 1,000,000 shares of its EXAP holdings and realized a gain on the
sale of this stock of $7,100. The Company sold an additional 106,630 shares in
1999 and realized a gain on the sale of $2,752. As of December 31, 1999 and
1998, the shares of EXAP stock owned by the Company are stated at fair value of
$2,423 and $2,944, respectively. The Company sold its remaining shares in
January 2000 and received proceeds of $3,378.
Long-term
These investments represent the Company's investment in a variety of
privately-held companies which are being accounted for under the cost method.
7. Borrowings
The Company maintains worldwide credit facilities with several banks which
provide the Company with approximately $107,490 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 $38,130
and (iii) a foreign line of credit in the amount of $19,360. As of December 31,
1999, the Company had approximately $76,761 available under these bank
facilities. The total outstanding short-term borrowings at December 31, 1999 and
1998 were $8,888 and $16,929, respectively.
In July 1999, the Company secured a revised facility with the bank for its
primary domestic line of credit. Pursuant to the provisions of its primary
domestic line of credit, the Company has commitments for letter of credit
borrowings through July 2000 of up to an aggregate amount of $50,000 for the
purpose of financing the importation of various products from Asia and for
issuing standby letters of credit. Borrowings under the facility bear interest
at the lesser of the bank's prime rate (8.5% at December 31, 1999) or LIBOR plus
1.75% (7.63% at December 31, 1999), and are collateralized by all of the assets
of the Company. The revised facility contains certain net income, working
capital and debt to net worth covenants. At December 31, 1999, the Company's
borrowing capacity under this facility was $50,000, of which $5,174 in letters
of credit were outstanding. The letters of credit expire at various dates
through February 2001. The facility provides for a commitment fee of $125 per
annum.
In addition to the facility described above, other domestic credit facilities
provide for borrowings of up to an aggregate amount of $38,130 for working
capital requirements subject to borrowing base formulas. These credit lines,
which expire at various dates beginning in June 2000, bear interest at the
bank's prime rate (8.5% at December 31, 1999) or LIBOR plus 1.75% (8.24% at
December 31, 1999), and contain certain working capital, tangible net worth,
debt to net worth and cash flow covenants. The Company was in violation of the
cash flow covenant on one of its facilities at December 31, 1999 and has
received a waiver from the lender. At December 31, 1999, $8,397 of short-term
borrowings and $1,584 of letters of credit were outstanding under these
facilities.
The Company has a $17,058 (Deutsche Marks 33,129) working capital line of credit
for certain of its European subsidiaries. At December 31, 1999, there were
$13,199 (Deutsche Marks 25,635) 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 $1,989 (British Pounds 1,200) and $313
(Belgian Francs 12,500) to cover future duties and customs in the United
Kingdom. Bank guarantees totaling $2,302 were outstanding at December 31, 1999.
The weighted average interest rate on short-term borrowings was 8.24% and 7.54%
at December 31, 1999 and 1998, 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, 1999, $1,467 of this note was outstanding, of which $365 was included in
short-term borrowings and $1,102 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.
33
34
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 17). The approximate minimum rental commitments under all
noncancelable leases as of December 31, 1999, were as follows:
2000 $ 8,866
2001 6,646
2002 4,983
2003 4,060
2004 3,388
Thereafter 9,361
-------
Total minimum lease payments $37,304
=======
Rental expense for all operating leases was $11,286, $11,719 and $7,208 for the
years ended December 31, 1999, 1998 and 1997, respectively. Rent is charged to
operations on a straight-line basis for certain leases.
9. Income Taxes
The components of the provision (benefit) for income taxes are as follows:
For the Years Ended December 31,
1999 1998 1997
---- ---- ----
Current:
Federal $3,710 $(2,818) $3,192
State 1,074 (2,100) 1,227
Foreign 1,041 1,465 1,207
------ ------- ------
5,825 (3,453) 5,626
------ ------- ------
Deferred:
Federal 2,226 1,298 ( 681)
State 349 ( 12) ( 91)
------ ------- ------
2,575 1,286 ( 772)
------ ------- ------
$8,400 $(2,167) $4,854
====== ======= ======
As required by SFAS 109, the Company annually evaluates the positive and
negative evidence bearing upon the realizability of its deferred tax assets. The
Company has considered the recent and historical results of operations and
concluded, in accordance with the applicable accounting methods, that it is more
likely than not that a certain portion of the deferred tax assets will not be
realizable. To the extent that an asset will not be realizable, a valuation
allowance is established. The tax effects of temporary differences giving rise
to deferred tax assets and liabilities as of December 31, are as follows:
1999 1998
---- ----
Deferred tax assets
Receivable reserves $ 1,329 $ 890
Inventory capitalization and reserves 2,760 2,874
Other asset reserves 2,297 4,796
Deferred compensation 2,778 2,323
Foreign tax credits 3,141 4,298
Net operating losses 451 1,593
Depreciation 739 --
Valuation allowance (1,252) (8,193)
------ ------
$12,243 $8,581
======= ======
Deferred tax liabilities $ 954 $ 475
======= ======
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35
As of December 31, 1999, the Company had $11,459 of state net operating loss
carryforwards available to offset future taxable income. These loss
carryforwards may be utilized through 2003. As of December 31, 1999, the Company
has foreign tax credit carryforwards of $3,141 that will begin to expire in
2001.
The deferred tax assets consist partly of net operating losses, foreign tax
credits and other deferred assets acquired in connection with the Simon
acquisition. A substantial portion of these deferred assets was provided for
with a valuation allowance at the time of the acquisition. The tax benefit from
adjusting the valuation allowance of the acquired deferred assets is recorded as
a reduction of goodwill. The reduction in goodwill for the year ended December
31, 1999 was $6,941.
The following is a reconciliation of the statutory federal income tax rate to
the actual effective income tax rate:
1999 1998 1997
---- ---- ----
Federal tax (benefit) rate 35% (34)% 34%
Increase (decrease) in taxes resulting from:
State income taxes, net of federal benefit 5 (27) 9
Effect of foreign tax rates and non-utilization
of losses (1) (6) ( 7) 19
Goodwill 5 19 7
Foreign tax credit -- -- (12)
Meals and entertainment 1 4 1
Other, net 3 3 2
-- --- ---
Effective tax (benefit) rate 43% (42)% 60%
== === ===
(1) 1999 and 1998 include utilization of prior year foreign losses.
10. Accrued Expenses and Other Current Liabilities
At December 31, 1999 and 1998, accrued expenses and other current liabilities
consisted of the following:
1999 1998
---- ----
Inventory purchases $38,663 $13,778
Accrued payroll and related and
deferred compensation 15,142 13,466
Royalties 12,281 8,571
Deferred revenue 11,578 16,609
Other 19,614 30,856
------- -------
$97,278 $83,280
======= =======
11. Nonrecurring Charges
A summary of the nonrecurring charges for the years ended December 31, 1999 and
1998 are as follows:
1999 1998
---- ----
Settlement charge $1,675 $ --
Restructuring charge -- 11,813
Severance expense -- 2,332
Write-down of long-lived assets -- 1,143
------ -------
$1,675 $15,288
====== =======
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Settlement Charge
The Company recorded a 1999 nonrecurring pre-tax charge to operations of $1,675
associated with the settlement of previously issued incentive stock options in a
subsidiary which were issued to principals of a previously acquired company. The
settlement was reached to facilitate the integration of the acquired company
into other operations within one of the Company's divisions.
Restructuring Charge
As a result of its 1998 corporate restructuring, the Company recorded a
nonrecurring pre-tax charge to operations of $11,813 for asset write-downs,
employee termination costs, lease cancellations and other related exit costs
associated with the restructuring. The restructuring charge had the effect of
reducing 1998 after tax earnings by $6,875 or $0.46 per share. The restructuring
plan was fully executed by the end of 1998.
A summary of activity in the restructuring accrual 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
Miscellaneous cash payments (99)
Non-cash asset write-downs (854)
-------
Balance at December 31, 1999 $ --
=======
Severance Expense
Effective December 31, 1998, Gregory P. Shlopak, former chief executive officer,
resigned from the Company. Pursuant to an agreement entered into with Mr.
Shlopak, the Company recorded a 1998 pre-tax charge to operations of $2,332. The
agreement provides for payments and benefits to Mr. Shlopak payable over a three
year period.
Write-down of Long-lived Assets
In connection with the Company's plan to relocate from its Gloucester,
Massachusetts facilities, the Company recorded a 1998 pre-tax charge to
operations of $1,143. This charge represented the estimated net book value of
leasehold improvements at the anticipated abandonment date.
12. Redeemable Preferred Stock
In November 1999, The Yucaipa Companies ("Yucaipa"), a Los Angeles-based
investment firm, invested $25,000 in the Company in exchange for preferred stock
and a warrant to purchase additional preferred stock. Under the terms of the
investment, which was approved at a Special Meeting of Stockholders on November
10, 1999, the Company issued 25,000 shares of a newly authorized senior
cumulative participating convertible preferred stock ("preferred stock") to
Yucaipa for $25,000. Yucaipa is entitled, at their option, to convert each share
of preferred stock into common stock equal to the sum of $1,000 per share plus
all accrued and unpaid dividends, divided by $8.25 (3,030,303 shares as of
November 10, 1999 and 3,047,431 shares as of December 31, 1999).
In connection with the issuance of the preferred stock, the Company also issued
a warrant to purchase 15,000 shares of a newly authorized series of preferred
stock at a purchase price of $15,000. Each share of this series of preferred
stock issued upon exercise of the warrant is convertible, at Yucaipa's option,
into common stock equal to the sum of $1,000 per share plus all accrued and
unpaid dividends, divided by $9.00 (1,666,666 shares as of November 10, 1999 and
December 31, 1999). The warrant expires on November 10, 2004.
Assuming conversion of all of the convertible preferred stock, Yucaipa would own
approximately 16% of the then outstanding common shares at November 10, 1999 and
December 31, 1999, respectively. Assuming the preceding conversion, and assuming
the exercise of the warrant and the conversion of the preferred stock issuable
upon its exercise, Yucaipa would own a total of approximately 23% of the then
36
37
outstanding common shares at November 10, 1999 and December 31, 1999,
respectively, making it the Company's largest shareholder.
Yucaipa has voting rights equivalent to the number of shares of common stock
into which their preferred stock is convertible on the relevant record date.
Also, Yucaipa is entitled to receive a quarterly dividend equal to 4% of the
base liquidation preference of $1,000 per share outstanding, payable in cash or
in-kind at the Company's option.
In the event of liquidation, dissolution or winding up of the affairs of the
Company, Yucaipa, as holder's of the preferred stock, will be entitled to
receive the redemption price of $1,000 per share plus all accrued dividends plus
(1) (a) 7.5% of the amount that the Company's retained earnings exceeds $75,000
less (b) the aggregate amount of any cash dividends paid on common stock which
are not in excess of the amount of dividends paid on the preferred stock,
divided by (2) the total number of preferred shares outstanding as of such date
(the "adjusted liquidation preference"), before any payment is made to other
stockholders.
The Company may redeem all or a portion of the preferred stock at a price equal
to the adjusted liquidation preference of each share, if the average closing
prices of the Company's common stock have exceeded $12.00 for sixty consecutive
trading days on or after November 10, 2002, or, any time on or after November
10, 2004. The preferred stock is subject to mandatory redemption if a change in
control of the Company occurs.
In connection with this transaction, the managing partner of Yucaipa was
appointed chairman of the Company's board of directors and Yucaipa is entitled
to nominate two additional individuals to a seven-person board. Additionally,
the Company will pay Yucaipa an annual management fee of $500 for a five-year
term for which Yucaipa will provide general business consultation and advice and
management services.
13. Stock Plans
At December 31, 1999, 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 1999, 1998 and 1997 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:
1999 1998 1997
---- ---- ----
Net income (loss) - as reported $11,136 $(3,016) $3,236
Net income (loss) - pro forma 9,159 (6,395) 1,828
Earnings (loss) per common share - basic - as reported 0.70 (0.20) 0.26
Earnings (loss) per common share - diluted - as reported 0.67 (0.20) 0.25
Earnings (loss) per common share - basic - pro forma 0.58 (0.43) 0.15
Earnings (loss) per common share - diluted - pro forma 0.55 (0.43) 0.14
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.
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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 1999, 1998 and 1997, respectively: expected dividend yield of
zero % for all years; expected life of 4.4 years for 1999, 4.5 years for 1998
and 3.5 years for 1997; expected volatility of 63% for 1999, 65% for 1998 and
52% for 1997; and, a risk-free interest rate of 5.2% for 1999, 5.6% for 1998 and
6.5% for 1997.
The following summarizes the status of the Company's stock options as of
December 31, 1999, 1998 and 1997 and changes during the year ended on those
dates:
1999 1998 1997
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at beginning of year 2,175,927 $11.35 2,343,762 $11.31 975,255 $11.47
Granted 462,651 5.67 317,750 10.98 1,433,600 11.24
Exercised -- -- (97,717) 10.53 (9,386) 10.00
Canceled (316,457) 11.68 (387,868) 11.05 (55,707) 12.49
--------- --------- --------
Outstanding at end of year 2,322,121 10.17 2,175,927 11.35 2,343,762 11.31
========= ========= =========
Options exercisable at year-end 1,390,761 11.26 1,057,031 11.30 563,788 11.23
========= ========= =========
Options available for future grant 1,459,475 1,605,669 1,535,551
========= ========= =========
Weighted average fair value of
options granted during the year $3.12 $5.97 $4.69
===== ===== =====
The following table summarizes information about stock options outstanding at
December 31, 1999:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
------ ----------- ---- ----- ----------- -----
$ 5.25 - $ 7.56 413,251 9.2 years $ 5.44 -- $ --
8.00 - 12.00 1,532,000 7.0 10.58 1,064,384 10.56
12.25 - 18.13 371,370 5.8 13.46 320,877 13.31
23.25 - 28.75 5,500 4.3 28.25 5,500 28.25
--------- ---------
$5.25 - $28.75 2,322,121 7.2 10.17 1,390,761 11.26
========= =========
Employee Stock Purchase Plan
Pursuant to its 1993 Employee Stock Purchase Plan (the "Stock Purchase Plan"),
as amended in November 1999, the Company is authorized to issue up to an
aggregate of 600,000 shares of its common stock to substantially all full-time
employees electing to participate in the Stock Purchase Plan. Eligible employees
may contribute, through payroll withholdings or lump sum cash payment, up to 10%
of their base compensation during six-month participation periods beginning in
January and July of each year. At the end of each participation period, the
accumulated deductions are applied toward the purchase of Company common stock
at a price equal to 85% of the market price at the beginning or end of the
participation period, whichever is lower. Employee purchases amounted to 88,132
shares in 1999, 61,349 shares in 1998 and 40,293 shares in 1997 at prices
ranging from $5.05 to $9.67 per share. At December 31, 1999, 328,903 shares were
available for future purchases. The fair value of the employees' purchase rights
was estimated using the
38
39
Black-Scholes option pricing model with the following weighted average
assumptions for 1999, 1998 and 1997, respectively: expected dividend yield of
zero % for all years; expected life of six months for all years; expected
volatility of 63% for 1999, 65% for 1998 and 52% for 1997; and, a risk-free
interest rate of 4.8%, 5.4% and 5.4% for 1999, 1998 and 1997, respectively. The
weighted average fair value of those purchase rights per share granted in 1999,
1998 and 1997 was $1.91, $2.97 and $3.14, respectively.
Common Stock Purchase Warrants
In February 1998, the Company issued 975,610 shares of its common stock and a
warrant to purchase up to 100,000 shares of its common stock in a private
placement, resulting in net proceeds of approximately $10,000 which will be used
for general corporate purposes. The warrant is exercisable at any time from the
grant date of February 12, 1998 to February 12, 2003 at an exercise price of
$10.25 per share, which represented the fair market value on the grant date.
Additionally, in June 1998, the Company issued a warrant to purchase 200,000
shares of the Company's common stock as part of settling a preacquisition
contingency of Simon. The warrant is exercisable at any time from the grant date
of June 30, 1998 to July 31, 2002 at an exercise price of $11.00 per share,
which represented the fair market value on the grant date.
14. Comprehensive Income
The Company's comprehensive income consists of net income (loss), foreign
currency translation adjustments and unrealized holding gains (losses) on
available-for-sale securities, and is presented in the Consolidated Statements
of Stockholders' Equity.
Components of other comprehensive income (loss) consist of the following:
1999 1998 1997
---- ---- ----
Change in unrealized gains
and losses on investments $(189) $2,477 $140
Foreign currency translation
adjustments (719) (86) 247
Income tax benefit (expense) related to
unrealized gains and losses on investments 83 (1,035) (84)
----- ------ ----
Other comprehensive income (loss) $(825) $1,356 $303
====== ====== ====
15. Profit-Sharing Retirement Plan
The Company has a qualified profit-sharing plan under Section 401(k) of the
Internal Revenue Code that is available to substantially all employees. Under
this plan the Company matches one-half of employee contributions up to six
percent of eligible payroll. Employees are immediately fully vested for their
contributions and vest in the Company contribution ratably over a three-year
period. The Company's contribution expense for the years ended December 31,
1999, 1998 and 1997 was $1,101, $988 and $709, respectively.
16. Litigation
On or about February 15, 1997, Montague Corporation ("Montague") filed an action
in Middlesex Superior Court, Commonwealth of Massachusetts, Montague Corporation
v. Cyrk, Inc. (Civil Action No. 97-00888) ("Montague action"), alleging a breach
of a May 17, 1995 Exclusive Distribution Agreement naming the Company as the
exclusive USA distributor for the sale of Montague bicycles in connection with
promotional programs. On March 10, 1999, the Company and Montague entered into a
Settlement and Joint Venture Agreement ("Settlement"), terminating the Montague
action and establishing a joint venture to sell corporate logoed bicycles for
use in various corporate sales programs and promotions. Under the terms of the
Settlement, the Company may be obligated to pay Montague up to $900 in cash if
the joint venture does not achieve certain financial results within three years
from the Settlement date.
The Company is also involved in other litigation and various legal matters which
have arisen in the ordinary course of business. The Company does not believe
that the resolution of the above described litigation matters or the ultimate
resolution of any other currently pending litigation or other legal matters will
have a material adverse effect on its financial condition, results of operations
or net cash flows.
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17. Related Party Transactions
The Company leases a portion of its sales and administrative offices under a
ten-year operating lease agreement expiring April 30, 2000 from a real estate
trust of which a former director of the Company 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 does not
intend on renewing this lease.
The Company leases administrative offices and warehouse facilities under a
three-year operating lease agreement expiring April 30, 2000 from a real estate
trust of which a former director of the Company 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 does not
intend on renewing this lease.
The Company leases warehouse facilities under a fifteen-year operating lease
agreement which expires December 31, 2011 from a limited liability company which
is jointly owned by an officer and a former director of the Company. The
agreement provides for annual rent of $462 and for the payment by the Company of
all utilities, taxes, insurance and repairs.
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 and $9,904 for the years
ended December 31, 1998 and 1997, respectively. The amount due to this
corporation was $2,043 at December 31, 1998.
18. Segments and Related Information
The Company operates in one industry: the promotional marketing industry. The
Company's business in this industry encompasses the design, development and
marketing of high-impact promotional products and programs.
A significant percentage of the Company's sales is attributable to a small
number of customers. In addition, a significant portion of trade accounts
receivable relates to these customers. The following summarizes the
concentration of sales and trade receivables for customers with sales in excess
of 10% of total sales for any of the years ended December 31, 1999, 1998 and
1997, respectively:
% of Sales % of Trade Receivables
---------- ----------------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
Company A 9 11 16 6 9 12
Company B 61 57 36 35 32 40
Company C -- 1 21 -- -- 15
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,
1999, 1998 and 1997, respectively, by geographic area:
1999 1998 1997
---- ---- ----
United States $608,613 $482,200 $408,764
United Kingdom 153,976 60,524 37,758
Germany 111,231 35,351 21,270
Other foreign 115,024 179,778 90,831
-------- -------- --------
Consolidated $988,844 $757,853 $558,623
======== ======== ========
The following summarizes the Company's long-lived assets as of December 31,
1999, 1998 and 1997, respectively, by geographic area:
1999 1998 1997
---- ---- ----
United States $104,073 $ 99,611 $106,677
Foreign 3,559 3,101 2,327
-------- -------- --------
Consolidated $107,632 $102,712 $109,004
======== ======== ========
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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.
19. Earnings Per Share Disclosure
The following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computation for "income (loss) available to common
stockholders" and other related disclosures required by SFAS 128:
For the Years Ended December 31,
1999 1998 1997
-------------------------------------- ------------------------------------- ------------------------------------
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 $10,994 15,624,366 $0.70 $(3,016) 14,962,362 $(0.20) $3,236 12,592,333 $0.26
===== ====== =====
Preferred stock
dividends 142 -- --
Effect of Dilutive
Securities:
Common stock
equivalents 95,444 -- 95,835
Convertible
preferred
stock 428,195 -- --
Contingently and
non-contingently
issuable shares
related to
acquired
companies 483,402 -- 336,406
------ ---------- ------- ---------- ------ -------
Diluted EPS:
Income (loss)
available to
common
stockholders
and
assumed
conversions $11,136 16,631,407 $0.67 $(3,016) 14,962,362 $(0.20) $3,236 13,024,574 $0.25
======= ========== ===== ======= ========== ====== ====== ========== =====
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.
20. Quarterly Results of Operations (Unaudited)
The following is a tabulation of the quarterly results of operations for the
years ended December 31, 1999 and 1998, respectively:
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
1999
Net sales $159,077 $313,523 $258,823 $257,421
Gross profit 29,754 39,696 51,376 51,511
Net income (loss) (3,223) 2,483 7,761 4,115
Earnings (loss) per common share - basic (0.21) 0.16 0.49 0.25
Earnings (loss) per common share - diluted (0.21) 0.15 0.48 0.23
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
41
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CYRK, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(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
- ----------------- ---------- ------------------- --------- ----------- ---------
1999 $2,682 $2,578 $ -- $1,017 $4,243
1998 3,801 1,485 -- 2,604 2,682
1997 3,191 390 358(1) 138 3,801
(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
- ---------- ---------- -------- ---------- ------------ ---------
1999 $8,193 $ -- $ -- $6,941(3) $1,252
1998 8,193 -- -- -- 8,193
1997 -- -- 8,193(2) -- 8,193
(2) Represents addition to reserve as a result of an acquisition.
(3) Represents the tax benefit from adjusting the valuation allowance of the
acquired deferred assets.
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
2.1 (11) Securities Purchase Agreement dated September 1, 1999,
between the Registrant and Overseas Toys, L.P.
3.1 (4) Restated Certificate of Incorporation of the
Registrant
3.2 (2) Amended and Restated By-laws of the Registrant
3.3 Certificate of Designation for Series A Senior
Cumulative Participating Convertible Preferred Stock,
filed herewith
4.1 (2) Specimen certificate representing Common Stock
10.1 (3)(13) 1993 Employee Stock Purchase Plan, as amended
10.2 (3)(4) 1993 Omnibus Stock Plan, as amended
10.3 (4) 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 (9) 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.
10.3.2 (12) Lease extension agreement dated July 29, 1999 by and
between Gregory P. Shlopak and Paul M. Butman, Jr.,
as Trustees of PG Realty Trust and Cyrk, Inc.
10.3.3 (12) Lease extension agreement dated July 29, 1999 by and
between Gregory P. Shlopak and Paul M. Butman, Jr.,
as Trustees of PG Realty Trust and Cyrk, Inc.
10.3.4 (12) Lease extension agreement dated July 29, 1999 by and
between Gregory P. Shlopak and Paul M. Butman, Jr.,
as Trustees of PG Realty Trust and Cyrk, Inc.
10.4 (12) Credit Agreement dated as of July 29, 1999 among Cyrk,
Inc., as Borrower, The Lenders Listed Herein, as
Lenders, Wells Fargo Bank, National Association, as
Issuing Lender, and Wells Fargo HSBC Trade Bank,
N.A., as Administrative Agent
10.5 (1) Tax Allocation and Indemnity Agreement dated July 6,
1993, among Cyrk, Inc., the Registrant, Gregory P.
Shlopak and Patrick D. Brady
10.6 (2)(3) Restricted Stock Purchase Agreement dated May 10,
1993, between the Registrant and Terry B. Angstadt
10.7 (3)(5) Life Insurance Agreement dated as of November 15, 1994
by and between the Registrant and Patrick D. Brady as
Trustee under a declaration of trust dated November 7,
1994 between Gregory P. Shlopak and Patrick D. Brady,
Trustee, entitled "The Shlopak Family 1994 Irrevocable
Insurance Trust"
10.7.1 (3)(5) Assignments of Life Insurance policies as Collateral,
each dated November 15, 1994
10.8 (3)(5) Life Insurance Agreement dated as of November 15, 1994
by and between the Registrant and Patrick D. Brady
as Trustee under a declaration of trust dated November
7, 1994 between Gregory P. Shlopak and Patrick D.
Brady, Trustee, entitled "The Gregory P. Shlopak 1994
Irrevocable Insurance Trust"
10.8.1 (3)(5) Assignments of Life Insurance policies as Collateral,
each dated November 15, 1994
10.9 (3)(5) Life Insurance Agreement dated as of November 15, 1994
by and between the Registrant and Walter E. Moxham,
Jr. as Trustee under a declaration of trust dated
November 7, 1994 between Patrick D. Brady and Walter
E. Moxham, Jr., Trustee, entitled "The Patrick D.
Brady 1994 Irrevocable Insurance Trust"
10.9.1 (3)(5) Assignments of Life Insurance policies as Collateral,
each dated November 15, 1994
10.10 (3)(6) 1997 Acquisition Stock Plan
10.11 (7) Securities Purchase Agreement dated February 12, 1998
by and between Cyrk, Inc. and Ty Warner
10.12 (8) Severance Agreement between Cyrk, Inc. and Gregory P.
Shlopak
10.13 (3)(9) Change of Control Agreement between Cyrk, Inc. and
Terry B. Angstadt dated November 2, 1997
10.14 (3)(9) Severance Agreement between Cyrk, Inc. and Ted L.
Axelrod dated November 20, 1998
10.15 (3)(9) Severance Agreement between Cyrk, Inc. and Dominic F.
Mammola dated November 20, 1998
10.15.1 (3)(9) Amendment No. 1 to Severance Agreement between Cyrk,
Inc. and Dominic F. Mammola dated March 29, 1999
10.16 Registration Rights Agreement between Cyrk, Inc. and
Overseas Toys, L.P., filed herewith
10.17 Management Agreement between Cyrk, Inc. and The
Yucaipa Companies, filed herewith
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10.18 (3)(11) Employment Agreement between Cyrk, Inc. and Allan
Brown, dated September 1, 1999
10.19 (3)(11) Employment Agreement between Cyrk, Inc. and Patrick
Brady, dated September 1, 1999
10.20 Lease agreement dated as of July 29, 1999, between
TIAA Realty, Inc. and Cyrk, Inc., filed herewith
10.21 (3) Life Insurance Agreement dated as of September 29,
1997 by and between Simon Marketing, Inc. and Frederic
N. Gaines, Trustee of the Allan I. Brown Insurance
Trust, under Declaration of Trust dated September 29,
1997, filed herewith
21.1 List of Subsidiaries, filed herewith
23.1 Consent of PricewaterhouseCoopers LLP - Independent
Accountants, filed herewith
27.98 Restated Financial Data Schedule, filed herewith
27.99 Financial Data Schedule, filed herewith
99.1 (10) Amended Cautionary Statement for Purposes of the "Safe
Harbor" Provisions of the Private Securities
Litigation Reform Act of 1995
99.2 (3) (11) Termination Agreement among Cyrk, Inc., Patrick Brady,
Allan Brown, Gregory Shlopak, Eric Stanton, and
Eric Stanton Self-Declaration of Revocable Trust
- ------------------------------------
(1) Filed as an exhibit to the Registrant's Registration Statement
on Form S-1 (Registration No. 33-75320) or an amendment
thereto and incorporated herein by reference.
(2) Filed as an exhibit to the Registrant's Registration Statement
on Form S-1 (Registration No. 33-63118) or an amendment
thereto and incorporated herein by reference.
(3) Management contract or compensatory plan or arrangement.
(4) Filed as an exhibit to the Annual Report on Form 10-K for the
year ended December 31, 1994 and incorporated herein by
reference.
(5) Filed as an exhibit to the Registrant's Registration Statement
on Form 10-Q dated March 31, 1995 and incorporated herein by
reference.
(6) Filed as an exhibit to the Registrant's Registration Statement
on Form S-8 (Registration No. 333-45655) and incorporated
herein by reference.
(7) Filed as an exhibit to the Annual Report on Form 10-K for the
year ended December 31, 1997 and incorporated herein by
reference.
(8) Filed as an exhibit to the Registrant's Report on Form 8-K
dated December 31, 1998 and incorporated herein by reference.
(9) Filed as an exhibit to the Annual Report on Form 10-K for the
year ended December 31, 1998 and incorporated herein by
reference.
(10) Filed as an exhibit to the Registrant's Registration Statement
on Form 10-Q dated March 31, 1999 and incorporated herein by
reference.
(11) Filed as an exhibit to the Registrant's Report on Form 8-K
dated September 1, 1999 and incorporated herein by reference.
(12) Filed as an exhibit to the Registrant's Registration Statement
on Form 10-Q dated September 30, 1999 and incorporated herein
by reference.
(13) Filed as an exhibit to the Registrant's Registration Statement
on Form S-8 dated February 1, 2000 and incorporated herein by
reference.
44