ITEM 1. BUSINESS.
GENERAL DEVELOPMENT OF THE BUSINESS Cyrk, Inc. (referred to herein as "Cyrk" or "the Company") is a full-service promotional marketing company specializing in the design and development of promotional products and sales promotions. Cyrk was founded in 1976 and is a Delaware corporation. When founded, Cyrk was engaged primarily in the design, manufacture and sale of custom screen printed sports apparel and accessories. Cyrk also provided private label apparel and accessories to a wide variety of established brands, and developed its own "Cyrk" brand of apparel that was sold to sports and specialty retailers and resort-destination shops. In 1990, the Company broadened its design and manufacturing expertise to include a focus on custom-designed promotional products and the development of its international production and worldwide sourcing capabilities.
Beginning in 1996 the Company extended its focus in the promotional product industry by making a series of acquisitions of companies engaged in the corporate catalog and advertising specialty segment of the promotion industry. These acquired companies, operating within the Company's Corporate Promotions Group ("CPG"), provide promotional products and services for inclusion in corporate trade and employee catalog programs. Additionally, in 1997 Cyrk expanded into the consumer promotion arena with its acquisition of Simon Marketing, Inc. ("Simon"), a Los Angeles-based marketing and promotion agency that specializes in kid and family marketing. Simon provides marketing programs, promotional products and packaging and promotional games to clients including McDonald's(R)(1) Corporation ("McDonald's"), Chevron Products Company, a division of Chevron U.S.A. ("Chevron"), Toys "R" Us and Hallmark Cards, Inc. ("Hallmark").
Cyrk recently expanded its capabilities to include Internet business-to-business brand marketing. Cyrk's comprehensive e-commerce solutions include Internet and intranet electronic malls, point-based loyalty systems, electronic catalogs, online promotional marketing programs and Web design.
In February 1998, the Company announced a restructuring plan to streamline its business, thereby eliminating the majority of its screen print business, and its private label and retail operations. In April 2000, the Company implemented a realignment of its management team to enable the Company to maximize the value of its promotions business and its new Internet subsidiary. In May 2000, the Company announced that it would further restructure the Company by integrating and streamlining the operations of its Custom Product and Licensing group, ("CP&L"), its division that provides custom designed product for large consumer promotions, and its CPG division into one product-focused business unit.
In July 2000, the Company announced that it had retained investment bankers Credit Suisse First Boston ("CS First Boston") (formerly Donaldson, Lufkin & Jenrette) to advise the Company in exploring strategic alternatives. As a result of these efforts, the Company completed the sale of its CPG business in February 2001.
Cyrk's promotional products and services are sold to consumer product and services companies seeking to promote their brand names and corporate identities and to build brand loyalty. Cyrk custom designs unique, high-impact product in a broad spectrum of categories including apparel and accessories, hard goods, toys and electronics, in materials ranging from fabrics and plastics to metals and paper. Cyrk's customers include McDonald's (for its Happy Meal(R)(1) promotions, among others), Philip Morris Incorporated ("Philip Morris") (for its Marlboro(R)(2) brand, among others), and other companies with recognized brands. The programs developed and managed by Cyrk typically reward the consumer with promotional products that are distributed upon redemption of proofs of purchase or as gifts with the purchase of other products . Cyrk believes that its expertise in design, manufacturing and sourcing have allowed Cyrk to successfully execute large, worldwide high-impact promotional programs.
(1) MCDONALD'S AND HAPPY MEAL are registered trademarks of McDonald's Corporation. (2) MARLBORO is a registered trademark of Philip Morris Incorporated.
1998 CORPORATE RESTRUCTURING In February 1998, the Company announced a plan to restructure its worldwide operations. As a result of this restructuring plan, the Company consolidated certain operating facilities, discontinued its private label and Cyrk brand business, divested its investment in an apparel joint venture, and eliminated approximately 450 positions worldwide.
1999 YUCAIPA INVESTMENT In November 1999, The Yucaipa Companies ("Yucaipa"), a Los Angeles-based investment firm, invested $25 million into Cyrk in exchange for 25,000 shares of a new series A convertible preferred stock and a warrant to purchase an additional 15,000 shares of series A convertible preferred stock. In connection with the investment, which was approved by Cyrk's stockholders, Cyrk's board of directors was increased to seven and three designees of Yucaipa, including Yucaipa's managing partner, Ronald W. Burkle, were elected to Cyrk's board and Mr. Burkle was elected chairman. In addition, effective as of the closing of this investment, Patrick D. Brady and Allan I. Brown were each elected Co-President and Co-Chief Executive Officer of Cyrk. Additionally, the Company entered into a Management Agreement with Yucaipa whereby Yucaipa provides Cyrk with management and consultation services in exchange for an annual fee of $500,000 per year.
2000 MANAGEMENT REALIGNMENT In April 2000, Cyrk reorganized its management team to better position the Company to streamline the operations of its promotional products business and to maximize the potential of the Company's new Internet subsidiary. Co-President and Co-Chief Executive Officer Allan I. Brown was given responsibility for the global operations of the Company's traditional promotional products business and Simon. Co-President and Co-Chief Executive Officer Patrick D. Brady was named head of the Company's new e-business subsidiary.
2000 CORPORATE RESTRUCTURING In May 2000, the Company announced that it would implement a plan to restructure its operations by integrating and streamlining its traditional promotional products business into one product-focused business unit. As a result of the restructuring plan, the Company eliminated 85 positions or 7% of its domestic workforce. The restructuring plan was substantially complete by the end of 2000, and was terminated with respect to the CPG business as a result of the February 2001 sale of CPG.
SALE OF CPG In July 2000, the Company retained the services of investment bankers CS First Boston to advise the Company in exploring strategic alternatives, a step the Company saw as necessary to its efforts to maximize the value of the Company's core businesses and to generate more consistent revenues and earnings growth. In December 2000, the Company decided to sell its CPG division and, in February 2001, the Company announced that it had sold its CPG division, which was comprised principally of two subsidiaries of Cyrk: Tonkin, Inc. ("Tonkin") and Cyrk Acquisition Corp. The sale is described in the Company's report filed on Form 8-K dated February 15, 2001 which is incorporated herein by reference. In connection with the sale, the Company agreed not to compete in the CPG business in the United States for a period of five years after the closing of the sale.
PRODUCTS AND SERVICES Promotional Product Programs. Cyrk provides product-driven high-impact promotional programs to its customers. The goal of the promotional programs is to enhance corporate identity, develop brand awareness, and build customer or employee loyalty. Cyrk has achieved this goal for many of its customers and continues to develop and manage promotions that generate growth for customer brands and further develop customer and employee loyalty.
Most of the promotional products used in a typical program are (1) distributed to consumers in connection with the sale of another product, (2) issued upon redemption of coupons evidencing the purchase of other products, (3) sold in conjunction with the sale of another product or (4) sold as a complement to other products. Promotional products are also frequently provided to retailers that carry the brand name products to reward or incentivise sales efforts and foster goodwill towards employees.
The advertising and marketing campaigns of many companies include the promotional product concept within the design of their overall corporate development. Cyrk believes that increasing numbers of companies are seeking to leverage and enhance the value of their brands by demanding promotional products that are superior in quality and design, distinctive, contemporary, integrated with their other products and marketing efforts, and immediately identifiable with their primary product brands and services. Together, Cyrk and its customers recognize that promotional programs are a vital component of a successful marketing strategy. Increasingly, companies are turning to outside professionals to provide the expertise required in complex areas outside their core businesses, such as the design of custom promotional products, and the development and implementation of promotional programs. Cyrk believes that because of its ability to provide integrated services including product and program design; loyalty and direct marketing services; licensing; market research; direct manufacturing, sourcing and program fulfillment and its unique creative approach, it is able to provide highly superior promotional products that become integral components of an effective, impactful promotional program.
The promotional products industry is fragmented, consisting of designers, buying agents, jobbers, manufacturers, importers and distribution companies. Consequently, a company implementing a large promotional product program generally must deal with multiple vendors. In addition, there are often numerous intermediaries between such a company and the manufacturer of the promotional products. As a result, a company may have only limited control over the design, quality and delivery of the products. This lack of control over manufacturing sources coupled with the use of multiple vendors may produce inefficiencies and result in promotional products that are inconsistent with the company's other products and brand image. Cyrk's promotional products and services are designed to address these inefficiencies in the market and to provide a comprehensive, professional program to major companies seeking to leverage their brand.
Cyrk has successfully custom designed and developed proprietary product including toys, apparel and accessories for numerous successful consumer promotional programs including the Marlboro Gear and Marlboro Unlimited(R)(3) promotions.
In 1999, under its license arrangement with Ty Inc. ("Ty"), Cyrk developed and marketed licensed Beanie Babies(R)(4) products to consumers. Effective January 1, 2000, the Company became a strategic marketing agent for Ty and provides Ty with product and advisory, design, development and/or creative services on a project by project basis.
Through its Simon subsidiary, the Company provides promotional agency services and integrated marketing solutions including loyalty marketing, licensing, strategic and calendar planning, game design and execution, premium development and production management. Simon is one of the largest creators, developers and procurers of promotional games and toys in the world. In addition to providing its products and services to McDonald's, Simon's customer base includes Chevron, Toys "R" Us and Hallmark.
Internet Capabilities. Cyrk recognized an opportunity to extend its promotional success to the Internet, and in February 2000 announced its intention to create an Internet subsidiary to service the changing needs of its customers. Cyrk possesses technological expertise in the e-commerce area that includes Internet and intranet electronic malls, point-based loyalty systems, electronic catalogs, online promotional marketing programs and Web design.
Manufacturing and Sourcing. The quality and timely delivery of Cyrk's products depend on Cyrk's ability to control the manufacturing process. Cyrk seeks to maintain such control by maintaining a physical presence in the Far East to oversee the offshore manufacturing of Cyrk's products by independent Asian factories. Cyrk's Asian operations perform a variety of services for Cyrk, such as selecting manufacturers, communicating product specifications and quality control standards, monitoring the manufacturing process, performing on-site quality control inspections, transferring letters of credit and coordinating export clearance and shipping.
(3) MARLBORO UNLIMITED is a registered trademark of Philip Morris Incorporated. (4) BEANIE BABIES is a registered trademark of Ty Inc.
Cyrk has no long-term contracts with manufacturing sources and often competes with other companies for production facilities and import quota capacity. In addition, certain Asian manufacturers require that a letter of credit be posted at the time a purchase order is placed. Cyrk believes that its policy of outsourcing a substantial portion of its manufacturing requirements allows it to achieve increased production flexibility while reducing Cyrk's capital expenditures and costs of maintaining a substantial production work force. Cyrk is required by certain of its customers to ensure that the independent manufacturers that Cyrk contracts with are in compliance with codes of conduct relating to minimum wage and hour guidelines, minimum worker age requirements and health and safety requirements. Cyrk works with its customers and independent auditing firms to monitor compliance with these codes. If Cyrk were not able to contract with a sufficient number of manufacturers that are in compliance with these codes, or if compliance with these codes were to significantly increase the cost of production, Cyrk's business might be adversely affected. Cyrk's business is subject to risks normally associated with conducting business abroad, such as foreign government regulations, political unrest, disruptions or delays in shipments, fluctuations in foreign currency exchange rates and changes in the economic conditions in the countries in which Cyrk's manufacturing sources are located. If any such factors were to render the conduct of business in a particular country undesirable or impractical, or if Cyrk's current foreign manufacturing sources were to cease doing business with Cyrk for any reason, Cyrk's business and operating results could be adversely affected. Cyrk's business is also subject to the risks associated with the imposition of additional trade restrictions related to imported products, including quotas, duties, taxes and other charges or restrictions.
SIGNIFICANT CUSTOMER RELATIONSHIPS In recent years, Cyrk's business has been concentrated with McDonald's, Philip Morris and Ty. Cyrk's business with promotional customer clients such as McDonald's and Philip Morris is based upon purchase orders placed by the customers. McDonald's, along with certain other customers, order a fixed quantity of product to be delivered by an agreed date. While these orders may be canceled prior to delivery of the product, the customer is responsible for any costs associated with the canceled order. Philip Morris and certain other customers place purchase orders from time to time during the course of a promotion. These promotional product customers are not committed to making a minimum number of purchases. For all promotional product customers, the actual purchases depend upon a number of factors including, without limitation, the duration of the promotion and expected consumer redemption rates. Consequently, Cyrk's level of net sales is difficult to predict accurately and may fluctuate greatly from quarter to quarter.
Cyrk conducts its business with McDonald's through its subsidiary, Simon. Simon designs and implements marketing promotions for McDonald's, which include games, sweepstakes, premiums, events, contests, coupon offers, sports marketing, licensing and promotional retail items. Simon's net sales from its business with McDonald's consist of a combination of sales of promotional products and various service fees. In September 1999, the Company agreed with McDonald's that the Company would no longer provide administrative services in connection with McDonald's promotional programs in Europe effective January 1, 2000. As a result of this action, the Company's total sales for 2000 declined by approximately 15% from previous levels. The net profit contributed by the fees for these services has historically not been material to the overall results of operations. Therefore, the absence of these sales did not have a material adverse effect on the Company's profitability. Net sales to McDonald's accounted for approximately 65%, 61% and 57% of Cyrk's consolidated net sales in fiscal 2000, 1999 and 1998, respectively.
Philip Morris accounted for approximately 9%, 9% and 11% of Cyrk's consolidated net sales in 2000, 1999 and 1998, respectively. A substantial majority of those sales relate to Marlboro Unlimited promotions. The United States Food and Drug Administration ("FDA") issued final regulations with respect to promotional programs relating to tobacco products which, among other things, proposed to ban gifts based on proof of purchase of tobacco products and the use of tobacco brand names on non-tobacco products. In addition, on November 23, 1998, certain tobacco companies, including Philip Morris, entered into a settlement agreement with 46 states and five U.S. territories that, among other things, prohibits the use of brand names by the tobacco companies in connection with their marketing, distribution, licensing and sales of apparel and other merchandise. Each of the regulations and the settlement could have a material adverse effect on Cyrk's business with Philip Morris and on its results of operations. For a description of the FDA regulations and the tobacco settlement, and their potential impact on Cyrk's business with Philip Morris, please refer to Cyrk's Amended Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995.
Through its licensing arrangements with Ty, Cyrk developed and marketed licensed Beanie Babies products in 1999 and 1998. Sales of Beanie Babies related products accounted for approximately 11% and 7% of Cyrk's consolidated net sales for 1999 and 1998, respectively. Effective January 1, 2000, the Company became a strategic marketing agent for Ty and provides Ty with product and advisory, design,
development and/or creative services on a project by project basis. Ty related business accounted for approximately 1% of Cyrk's consolidated net sales for 2000. Given that the Company is providing these services on a project by project basis, the Company's future revenues and earnings associated with the Ty relationship are difficult to predict.
INTERNATIONAL SALES International sales accounted for approximately 34%, 38% and 36% of Cyrk's consolidated net sales in 2000, 1999 and 1998, respectively. International sales are currently made through Cyrk's account representatives in the United States as well as through Cyrk's German, United Kingdom and Hong Kong subsidiaries.
COMPETITION The promotional products industry is highly fragmented and competitive, and some of Cyrk's competitors have substantially greater financial and other resources than Cyrk. Cyrk's promotional products and services compete with the services of in-house advertising, promotional products and purchasing departments and with designers and vendors of single or multiple product lines. The promotional product services of Cyrk also compete for advertising dollars with other media such as television, radio, newspapers, magazines and billboards. Entry into the promotional product industry is not difficult and new competitors are continually commencing operations.
The primary methods of competition are creativity in product design, quality and style of products, prompt delivery, customer service, price, financial strength, and an ability to provide a full range of innovative Web-based marketing services. Cyrk believes that it currently competes favorably in each of the foregoing areas and that its ability to provide a full range of integrated services gives it a competitive advantage.
BACKLOG At December 31, 2000, Cyrk had written purchase orders for $236.9 million as compared to $312.1 million at December 31, 1999. Cyrk's purchase orders are generally subject to cancellation with limited penalty and are also subject to agreements with certain customers that limit gross margin levels. Therefore, Cyrk cautions that the backlog amounts may not necessarily be indicative of future revenues or earnings.
TESTING AND QUALITY CONTROL Cyrk bears the risk of non-conforming goods sold to its customers and, in the case of outsourced products, generally has recourse against the manufacturer. Because many products are sourced in Asia, Cyrk relies primarily on monitoring and inspection activities to ensure quality control rather than on any remedies it may have for defective goods.
Cyrk, through independent laboratories, performs extensive tests to ensure that materials and fabrics meet all applicable United States and foreign safety and quality standards, including flammability and child safety laws. In some cases additional tests are performed by or on behalf of Cyrk's customers.
IMPORTS AND IMPORT RESTRICTIONS A substantial amount of net sales of Cyrk in 2000 was attributable to products manufactured in Asia. The importation of such products is subject to the constraints imposed by bilateral agreements between the United States and substantially all of the countries from which Cyrk imports goods. These agreements impose quotas that limit the quantity of certain types of goods, including textile products imported by Cyrk, which can be imported into the United States from those countries. Such agreements also allow the United States to impose, under certain conditions, restraints on the importation of categories of merchandise that, under the terms of the agreements, are not subject to specified limits.
Cyrk's continued ability to source products that it imports may be adversely affected by additional bilateral and multilateral agreements, unilateral trade restrictions, significant decreases in import quotas, the disruption of trade from exporting countries as a result of political instability or the imposition of additional duties, taxes and other charges or restrictions on imports.
Products imported by Cyrk from China currently receive the same preferential tariff treatment accorded goods from countries granted "normal trade relations" status. However, the renewal of China's most favored nation treatment has been a contentious political issue for several years and there can be no assurance that such status will be continued. If China were to lose its "normal trade relations" status, goods imported from China will be subject to significantly higher duty rates which would increase the cost of goods from China. In 2000, a substantial amount of Cyrk's net sales were from products manufactured in China.
EMPLOYEES At December 31, 2000, Cyrk had approximately 1,306 full-time employees. Cyrk's work force is not unionized and Cyrk believes that its relations with its employees are good.
ITEM 2.
ITEM 2. PROPERTIES.
In August 2000, Cyrk relocated its principal executive and certain sales and administrative offices from its Gloucester, Massachusetts facilities to offices in Wakefield, Massachusetts. At December 31, 2000, Cyrk occupied approximately 47,900 square feet under a lease with an unrelated party that expires in March 2005 and has an annual base rent of approximately $623,000. Pursuant to a six month transition services agreement arising out of the February 2001 CPG sale, Cyrk is subletting a portion of the Wakefield property to the buyer.
Cyrk also leases approximately 120,000 square feet of warehouse space in Danvers, Massachusetts under the terms of a lease which expires in December 2011 and has an annual base rent of approximately $460,000. Cyrk uses the warehouse for inventory storage and to perform fulfillment services for certain of its customers. This facility is owned by a trust of which Patrick D. Brady, Cyrk's Co-Chief Executive Officer and Co-President, is both a trustee and beneficiary. As a result of the CPG sale in February 2001, the buyer became the primary obligor under this lease, however, Cyrk remains liable under this lease to the extent that the buyer does not perform any of its obligations under the lease.
Related to its Simon operations, Cyrk leases an aggregate of approximately 136,000 square feet of office space in Los Angeles, Chicago and Atlanta pursuant to leases which expire in January 2002 through December 2010. The annual base rent of these leases is approximately $2,689,000.
At December 31, 2000, Tonkin leased approximately 132,000 square feet of warehouse, production and office space in Monroe, Washington attributable to its Tonkin operations pursuant to a lease which expires in September 2007. The annual base rent of this lease is approximately $623,000. Additionally, Cyrk Acquisition Corp. leased approximately 20,800 square feet of warehouse and office space in Norwood, Massachusetts which is used for certain of its advertising specialty operations, pursuant to a lease which expires in July 2001. As a result of the CPG sale in February 2001, these leases were assumed by the buyer.
Cyrk also leases approximately 12,000 square feet of office space in New York City, pursuant to a lease which expires in July 2001.
In addition to its domestic lease facilities, Cyrk leases a total of approximately 60,500 square feet of European office and warehouse space in Frankfurt, London, Munich and Paris, and, leases an aggregate of approximately 52,600 square feet of Asian office and warehouse space in Hong Kong, Korea, Taiwan and Tokyo under leases which expire in April 2001 through December 2007.
For a summary of Cyrk's minimum rental commitments under all noncancelable operating leases as of December 31, 2000, see notes to the consolidated financial statements.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
NONE
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
NONE
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:
PART II
ITEM 5.
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.
As of February 28, 2001, the Company had approximately 330 holders of record (representing approximately 5,500 beneficial owners) of its common stock. The last reported sale price of the Company's common stock on February 28, 2001 was $2.91.
The Company has never paid cash dividends, other than series A preferred stock distributions in 2000 and stockholder distributions of Subchapter S earnings during 1993 and 1992, and none are contemplated in the foreseeable future (other than the dividends required to be paid by the Company pursuant to the terms of its redeemable preferred stock - see notes to consolidated financial statements) as the Company currently intends to retain its earnings to finance future growth. In addition, the Company's ability to pay cash dividends is limited pursuant to the terms of its credit facilities.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
(1) Includes $50,103 of pre-tax loss on sale of business and $6,395 of pre-tax restructuring and nonrecurring charges. See notes to consolidated financial statements.
(2) Includes $1,675 of pre-tax nonrecurring charges. See notes to consolidated financial statements.
(3) Includes $15,288 of pre-tax restructuring and nonrecurring charges. See notes to consolidated financial statements.
(4) Includes the results of operations of acquired companies from the acquisition dates.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
From time to time, the Company may provide forward-looking information such as forecasts of expected future performance or statements about the Company's plans and objectives, including certain information provided below. These forward-looking statements are based largely on the Company's expectations and are subject to a number of risks and uncertainties, certain of which are beyond the Company's control. The Company wishes to caution readers that actual results may differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company including, without limitation, as a result of factors described in the Company's Amended Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995, filed as Exhibit 99.1 to the Company's second quarter 2000 Report on Form 10-Q which is incorporated herein by reference.
GENERAL
The Company is a full-service promotional marketing company, specializing in the design and development of high-impact promotional products and programs. The majority of the Company's revenue is derived from the sale of products to consumer product companies seeking to promote their brand and build customer loyalty as well as products sold to consumers under certain license agreements.
The Company's business is heavily concentrated with McDonald's Corporation ("McDonald's") and, to a lesser extent, Philip Morris Incorporated ("Philip Morris"). Net sales to McDonald's and Philip Morris accounted for 65% and 9%, 61% and 9% and 57% and 11% of total net sales in 2000, 1999 and 1998, respectively.
The Company's business with McDonald's and Philip Morris (as well as other promotional customers) is based upon purchase orders placed from time to time during the course of promotions. Except for a two year agreement with McDonald's in Europe which expires in December 2001 and guarantees certain minimum order quantities, there are no written agreements which commit McDonald's or Philip Morris to make a certain level of purchases. The actual level of purchases depends on a number of factors, including the duration of the promotion and consumer redemption rates. Consequently, the Company's level of net sales is difficult to predict accurately and can fluctuate greatly from quarter to quarter. The Company expects that a significant percentage of its net sales in 2001 will be to McDonald's.
Philip Morris solicits competitive bids for its promotional programs. The Company's profit margin depends, to a great extent, on its competitive position when bidding and its ability to manage its costs after being awarded bids. Increased competition is expected to continue and may adversely impact the Company's profit margin on Philip Morris promotions in the future. Beginning July 1, 1999, a settlement agreement among 46 states and certain tobacco companies, including Philip Morris, prohibits the use of brand names by tobacco companies in connection with promotional programs relating to tobacco products. The settlement agreement, however, does not prohibit the use of Philip Morris's corporate name in promotional programs. Due to the restrictions on the use of brand names, and the other limitations imposed by the settlement agreement on the tobacco industry, the settlement agreement could have a material adverse effect on the Company's business with Philip Morris and on its results of operations.
In September 1999, the Company agreed with McDonald's that the Company would no longer provide administrative services in connection with McDonald's promotional programs in Europe effective January 1, 2000. The fees for these services have historically not been material to the overall results of operations. This action had an adverse impact of approximately $150 million to the Company's sales levels for 2000. However, because the agreement with McDonald's related to these services did not provide for significant gross margin on associated sales, the Company believes that the absence of these sales did not have a material adverse effect on the Company's profitability.
In December 1997, the Company entered into a license agreement ("the Agreement") with Ty Inc. ("Ty") which granted the Company the exclusive right to develop and market licensed Beanie Babies products in connection with the Beanie Babies Official Club, a consumer membership kit. In May 1999, the parties mutually agreed to modify the Agreement and to enter into a new arrangement in which the Company's rights in connection with the Beanie Babies Official Club became non-exclusive in order to enable Ty to market and distribute Beanie Babies products in connection with the Club and in cooperation with the Company commencing in July 1999. Under this arrangement,
which extended through the end of 1999, the Company provided creative and sourcing services for Ty in collaboration with Ty. In 1999, the Company's seasonal pattern of sales and earnings, including a loss in the first quarter, and significant revenues and profitability in the second half of the year, was primarily attributed to the sale of Ty Beanie Babies product. Sales of Beanie Babies related products accounted for 1%, 11% and 7% of total net sales in 2000, 1999 and 1998, respectively.
Effective January 1, 2000, the Company became a strategic marketing agent for Ty and provides Ty with product and advisory, design, development and/or creative services on a project by project basis. Given the nature and the timing of this arrangement, the Company's future revenues and earnings associated with the Ty relationship are difficult to predict. The Company expects that sales of Ty related products will be minimal in 2001.
At December 31, 2000, the Company had written purchase orders for $236.9 million as compared to $312.1 million at December 31, 1999. The Company's purchase orders are generally subject to cancellation with limited penalty and are also subject to agreements with certain customers that limit gross margin levels. Therefore, the Company cautions that the backlog amounts may not necessarily be indicative of future revenues or earnings.
SALE OF BUSINESS
Pursuant to its decision in December 2000, the Company sold its Corporate Promotions Group ("CPG") business on February 15, 2001 to Cyrk Holdings, Inc., formerly known as Rockridge Partners, Inc. ("Rockridge"), an investor group led by Gemini Investors LLC, a Wellesley, Massachusetts-based private equity investment firm, pursuant to a Purchase Agreement entered into as of January 20, 2001 (as amended, the "Purchase Agreement") for approximately $14.0 million, which included the assumption of approximately $3.7 million of Company debt. $2.3 million of the purchase price was paid with a 10% per annum five-year subordinated note from Rockridge, with the balance being paid in cash. The 2000 financial statements reflect this transaction and include a pre-tax charge of $50.1 million due to the loss on the sale of the CPG business, $22.7 million of which is associated with the write-off of goodwill attributable to CPG. This charge had the effect of increasing the 2000 net loss available to common stockholders by approximately $49.0 million or $3.07 per share. Net sales in 2000 attributable to the CPG business were $146.8 million, or 19% of consolidated Company revenues.
CPG was engaged in the corporate catalog and specialty advertising segment of the promotions industry. The group was formed as a result of Cyrk's acquisitions of Marketing Incentives, Inc. ("MI") and Tonkin, Inc. ("Tonkin") in 1996 and 1997, respectively.
Pursuant to the Purchase Agreement, Rockridge purchased from the Company (i) all of the outstanding capital stock of MI and Tonkin, each a wholly-owned subsidiary of the Company, (ii) other certain assets of the Company, including those assets of Cyrk's Danvers and Wakefield, Massachusetts facilities necessary for the operation of the CPG business and (iii) all intellectual property and assumed liabilities of CPG as specified in the Purchase Agreement. Additionally, pursuant to the Purchase Agreement, Cyrk agreed to transfer its name to the buyer upon obtaining all necessary customer, stockholder and stock exchange approvals to change its name. Until such approvals are obtained, the Company will provide the buyer with a non-exclusive, worldwide, royalty-free license to use the name "Cyrk" and any other derivation thereof solely in connection with the Cyrk CPG business. Rockridge extended employment offers to certain former Cyrk employees who had performed various support activities, including accounting, human resources, information technology, legal and other various management functions. There is no material relationship between Rockridge and the Company or any of its affiliates, directors or officers, or any associate thereof, other than the relationship created by the Purchase Agreement and related documents.
The sale of CPG effectively terminates the restructuring effort announced by the Company in May 2000 with respect to the CPG business. See notes to consolidated financial statements.
For additional information related to this transaction, reference is made to the Company's Report on Form 8-K dated February 15, 2001.
2000 CORPORATE RESTRUCTURING
On May 11, 2000, the Company announced that, pursuant to a plan approved by its Board of Directors, it was integrating and streamlining its traditional promotional product divisions, Corporate Promotions Group and Custom Product & Licensing, into one product-focused business unit. As a result of this action, the Company recorded a 2000
pre-tax charge to operations of approximately $5.7 million principally for involuntary termination costs, asset write-downs and the settlement of lease obligations. See notes to consolidated financial statements.
EQUITY INVESTMENT
In November 1999, The Yucaipa Companies ("Yucaipa"), a Los Angeles-based investment firm, invested $25 million in the Company in exchange for convertible preferred stock and a warrant to purchase an additional $15 million of convertible preferred stock. Under the terms of the investment, which was approved at a Special Meeting of Stockholders held on November 10, 1999, Yucaipa, through an affiliate, purchased 25,000 shares of a new series of Company convertible preferred stock (initially convertible into 3,030,303 shares of Company common stock) and received a warrant to purchase an additional 15,000 shares of a new series of Company convertible preferred stock (initially convertible into 1,666,666 shares of Company common stock). The net proceeds ($20.6 million) from this transaction are being used for general corporate purposes.
As of December 31, 2000, assuming conversion of all of the convertible preferred stock, Yucaipa would own approximately 16% of the then outstanding common shares. Assuming the preceding conversion, and assuming the exercise of the warrant and the conversion of the preferred stock issuable upon its exercise, Yucaipa would own a total of approximately 23% of the then outstanding common shares making it the Company's largest shareholder.
In connection with this transaction, Ronald W. Burkle, managing partner of Yucaipa, was appointed chairman of Cyrk's Board of Directors, Patrick D. Brady and Allan I. Brown were named Co-Chief Executive Officers and Co-Presidents of Cyrk, and Mr. Brown was named to Cyrk's Board of Directors. In addition to Mr. Burkle, Yucaipa is entitled to nominate two individuals to a seven-person Cyrk Board of Directors. Additionally, the Company will pay Yucaipa an annual management fee of $500,000 for a five-year term for which Yucaipa will provide general business consultation and advice and management services. See notes to consolidated financial statements.
For additional information related to this transaction, reference is made to the Company's Report on Form 8-K and its proxy statement filed on Schedule 14A with the Securities and Exchange Commission, dated September 1, 1999 and October 12, 1999, respectively.
1998 CORPORATE RESTRUCTURING
As a result of its 1998 corporate restructuring, the Company recorded a 1998 charge to operations of $11.8 million for asset write-downs, employee termination costs, lease cancellations and other related exit costs associated with the restructuring. The restructuring plan was fully executed by the end of 1998. See notes to consolidated financial statements.
OUTLOOK
The Company believes that the February 2001 sale of the CPG business enables it to proceed with a more rationalized, cost-efficient business model. The Company is currently evaluating its remaining businesses with the objective of restoring consistent profitability. The Company intends to initiate further restructuring action during the first half of 2001. The Company's ability to achieve its financial objective is subject to risks including, without limitation, all the risk factors described in the Company's Amended Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995, filed as Exhibit 99.1 to the Company's second quarter 2000 Report on Form 10-Q which is incorporated herein by reference.
RESULTS OF OPERATIONS
2000 Compared to 1999 Net sales decreased $220.4 million, or 22%, to $768.4 million in 2000 from $988.8 million in 1999. The decrease in net sales was primarily attributable to a decrease in revenues associated with McDonald's and Beanie Babies related product sales in 2000.
Gross profit decreased $28.3 million, or 16%, to $144.0 million in 2000 from $172.3 million in 1999. As a percentage of net sales, gross profit increased to 18.7% in 2000 from 17.4% in 1999. The increase in the gross margin percentage was due principally to a more favorable sales mix in which sales volume associated with certain promotional programs that have gross margin limitations were less than the levels of a year ago.
Selling, general and administrative expenses totaled $162.2 million in 2000 as compared to $155.0 million in 1999. As a percentage of net sales, selling, general and administrative costs totaled 21.1% as compared to 15.7% in 1999. The Company's increased spending was due principally to an increase in client service costs and a $1.2 million charge for a contingent payment of cash and stock which was associated with the acquisition of a previously acquired company.
In connection with its May 2000 announcement to restructure its promotional product divisions, the Company recorded a nonrecurring pre-tax restructuring charge of $5.7 million (including the $1.7 million inventory write-down charged against gross profit) attributable to employee termination costs, asset write-downs and lease cancellations costs. See notes to consolidated financial statements.
The Company also recorded a nonrecurring pre-tax charge to operations of $.7 million in 2000 associated with the settlement of a change in control agreement with an employee of the Company who was formerly an executive officer. See notes to consolidated financial statements. The Company recorded a 1999 nonrecurring pre-tax charge to operations of $1.7 million associated with the settlement of previously issued incentive stock options in a subsidiary which were issued to principals of a previously acquired company. The settlement was reached to facilitate the integration of the acquired company into other operations within the Company's CPG division.
Other expense in 2000 includes a $4.5 million charge related to an other-than-temporary investment impairment associated with its venture portfolio which was partially offset by a $3.2 million gain realized on the sale of an investment. See notes to consolidated financial statements. Other income of $2.8 million in 1999 represents a gain realized on the sale of an investment.
In connection with the February 2001 sale of its CPG business, the Company recognized a 2000 pre-tax loss of $50.1 million, $22.7 million of which is associated with the write-off of goodwill attributable to CPG. See notes to consolidated financial statements.
For an analysis of the change in the effective tax rates from 1998 to 2000 and a discussion of the valuation allowance recorded by the Company, see notes to consolidated financial statements.
1999 Compared to 1998 Net sales increased $231.0 million, or 30%, to $988.8 million in 1999 from $757.9 million in 1998. The increase in net sales was primarily attributable to revenues associated with McDonald's, Beanie Babies related products and Philip Morris.
Gross profit increased $34.5 million, or 25%, to $172.3 million in 1999 from $137.9 million in 1998. As a percentage of net sales, gross profit decreased to 17.4% in 1999 from 18.2% in 1998. The decrease in the gross margin percentage was primarily the result of a higher concentration of sales volume associated with certain promotional programs that are subject to agreements with certain customers that limit gross margin levels.
As a percentage of net sales, selling, general and administrative expenses totaled 15.7% in 1999 as compared to 17.9% in 1998. Selling, general and administrative expenses totaled $155.0 million in 1999 as compared to $135.5 million in 1998. The Company's increased spending was attributable to an increase in the commissions paid to field sales representatives associated with sales increases generated from the Company's premium incentives and licensed product businesses, as well as to increased client management and support costs.
The Company recorded a 1999 nonrecurring pre-tax charge to operations of $1.7 million associated with the settlement of previously issued incentive stock options in a subsidiary which were issued to principals of a previously
acquired company. The settlement was reached to facilitate the integration of the acquired company into other operations within the Company's CPG division.
Restructuring and nonrecurring charges totaled $15.3 million in 1998. In connection with its February 1998 announcement to restructure worldwide operations, the Company recorded a restructuring charge of $11.8 million attributable to asset write-downs, employee termination costs, lease cancellations and other related exit costs. In addition, the Company recorded a $2.3 million nonrecurring charge associated with a December 1998 severance agreement between the Company and its former chief executive officer, and also recorded a $1.1 million nonrecurring charge associated with the Company's plan to relocate its corporate facilities. See notes to consolidated financial statements.
Other income of $2.8 million in 1999 and $7.1 million in 1998 represents the gains realized on the sale of an investment. See notes to consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at December 31, 2000 was $60.4 million compared to $110.8 million at December 31, 1999. Net cash used in operating activities during 2000 was $11.8 million, due principally to a net loss of $69.7 million and a $34.9 million decrease in accrued expenses, which were partially offset by the loss on sale of business of $47.9 million, a $20.1 million decrease in inventories, a $10.7 million decrease in accounts receivable and $9.6 million of depreciation and amortization. Net cash provided by operating activities during 1999 was $31.1 million, due principally to net income and depreciation and amortization of $20.1 million and an increase in accrued expenses of $15.7 million.
Net cash used in investing activities in 2000 was $13.9 million, which was primarily attributable to $12.8 million of purchases of property and equipment. In 1999, net cash used in investing activities was $16.9 million, which was primarily attributable to $12.5 million in investments made by the Company and $5.5 million of purchases of property and equipment.
The Company entered into a lease arrangement in December 1999 to relocate its corporate offices from Gloucester, Massachusetts to Wakefield, Massachusetts in August 2000. The Company expended approximately $3.5 million to construct and furnish this move.
Net cash used in financing activities in 2000 was $5.9 million which was primarily attributable to $5.9 million of repayments of short-term borrowings and long-term obligations. In 1999, net cash provided by financing activities was $10.1 million which was primarily attributable to $20.6 million of net proceeds received from an equity investment in the Company (see notes to consolidated financial statements) which was partially offset by $8.0 million of repayments of short-term borrowings.
In February 2001, the Company sold its CPG business for approximately $14.0 million, which included approximately $3.7 million of Company debt that was assumed by the buyer. $2.3 million of the purchase price was paid with a 10% per annum five-year subordinated note, with the balance being paid in cash. See notes to consolidated financial statements.
Since inception, the Company has financed its working capital and capital expenditure requirements through cash generated from operations, public and private sales of common and preferred stock, bank borrowings and capital equipment leases.
The Company currently has available several worldwide bank letters of credit and revolving credit facilities which expire at various dates beginning in May 2001. In December 2000, the Company secured a new facility with a lender for its primary domestic line of credit. Pursuant to the provisions of its primary domestic line of credit, the Company had commitments for letter of credit and other borrowings as of December 31, 2000 of up to an aggregate amount of $35.0 million for the purpose of financing the importation of various products from Asia, for issuing standby letters of credit and for working capital purposes. In February 2001, the facility agreement was amended through May 15, 2001 as a result of the sale of the Company's CPG business. See notes to consolidated financial statements. Under the amended agreement, the
Company has commitments for letters of credit and other borrowings to May 15, 2001 of up to an aggregate amount of $16.2 million. As a result of the CPG sale, the Company is assessing its overall management and organizational structure and in conjunction with that assessment, is reassessing its financing strategy prior to the expiration of its primary domestic facility. As of December 31, 2000, based on the borrowing base formulas prescribed by these credit facilities, the Company's borrowing capacity was $61.0 million, of which $5.5 million of short-term borrowings and $11.6 million in letters of credit were outstanding. In addition, bank guarantees totaling $.3 million were outstanding at December 31, 2000. Borrowings under these facilities are collateralized by all assets of the Company.
Management believes that the Company's existing cash position and credit facilities combined with internally generated cash flow will satisfy its liquidity and capital needs through the first half of 2001. The Company intends to initiate further restructuring action during the first half of 2001 and, subject to such final plan, expects to incur significant restructuring charges that may adversely impact the Company's cash position. The Company's ability to generate internal cash flow is highly dependent upon its continued relationships with McDonald's and Philip Morris. Any material adverse change from the Company's revenues and related contribution from McDonald's and Philip Morris could adversely affect the Company's cash position and capital availability. The Company's ability to renew its credit facilities is subject to finalizing its management and organizational plan and is further subject to acceptance and approval of such plan by the Company's lenders.
In July 2000, the Company announced that it had retained an investment banker to explore strategic alternatives. The objective of seeking strategic alternatives is to maximize shareholder value including, without limitation, by examining ways to enhance the Company's ability to generate more consistent revenue and earnings growth. Pursuant to its decision in December 2000, the Company sold its CPG business in February 2001. See notes to consolidated financial statements. As of December 31, 2000, the investment banker was exploring further strategic alternatives. The Company has not made a decision as to any additional specific alternatives and there can be no assurance that any additional transactions will result from this process.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
NONE
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item regarding the Company's directors is included in the Company's Proxy Statement to be filed pursuant to Schedule 14A in connection with the Company's 2001 Annual Meeting of Stockholders under the section captioned "Election of Directors" and is incorporated herein by reference thereto. Information regarding the Company's executive officers is set forth in Part I hereof, above, under the caption "Executive Officers of the Registrant" and is incorporated herein by reference thereto.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is included in the Company's Proxy Statement to be filed pursuant to Schedule 14A in connection with the Company's 2001 Annual Meeting of Stockholders under the sections captioned "Directors' Compensation" and "Executive Compensation" and is incorporated herein by reference thereto.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is included in the Company's Proxy Statement to be filed pursuant to Schedule 14A in connection with the Company's 2001 Annual Meeting of Stockholders under the section captioned "Security Ownership of Certain Beneficial Owners and Management" and is incorporated herein by reference thereto.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is included in the Company's Proxy Statement to be filed pursuant to Schedule 14A in connection with the Company's 2001 Annual Meeting of Stockholders under the sections captioned "Certain Relationships and Related Transactions" and "Indebtedness of Management" and is incorporated herein by reference thereto.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) DOCUMENTS FILED AS PART OF THIS REPORT.
1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES FOR THE FISCAL YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998:
Schedule II: Valuation and Qualifying Accounts.
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
3. EXHIBITS
- --------
(1) Filed as an exhibit to the Registrant's Registration Statement on Form S-1 (Registration No. 33-75320) or an amendment thereto and incorporated herein by reference.
(2) Filed as an exhibit to the Registrant's Registration Statement on Form S-1 (Registration No. 33-63118) or an amendment thereto and incorporated herein by reference.
(3) Management contract or compensatory plan or arrangement.
(4) Filed as an exhibit to the Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference.
(5) Filed as an exhibit to the Registrant's Registration Statement on Form 10-Q dated March 31, 1995 and incorporated herein by reference.
(6) Filed as an exhibit to the Registrant's Registration Statement on Form S-8 (Registration No. 333-45655) and incorporated herein by reference.
(7) Filed as an exhibit to the Annual Report on Form 10-K for the year ended December 31, 1997 and incorporated herein by reference.
(8) Filed as an exhibit to the Registrant's Report on Form 8-K dated December 31, 1998 and incorporated herein by reference.
(9) Filed as an exhibit to the Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference.
(10) Filed as an exhibit to the Registrant's Report on Form 8-K dated September 1, 1999 and incorporated herein by reference.
(11) Filed as an exhibit to the Registrant's Registration Statement on Form S-8 dated February 1, 2000 and incorporated herein by reference.
(12) Filed as an exhibit to the Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated herein by reference.
(13) Filed as an exhibit to the Registrant's Registration Statement on Form 10-Q dated June 30, 2000 and incorporated herein by reference.
(14) Filed as an exhibit to the Registrant's Registration Statement on Form 10-Q dated September 30, 2000 and incorporated herein by reference.
(15) Filed as an exhibit to the Registrant's Report on Form 8-K dated February 15, 2001 and incorporated herein by reference.
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the last quarter of the fiscal year ended December 31, 2000.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CYRK, INC.
Date: March 29, 2001 By: /s/Dominic F. Mammola ------------------------ Dominic F. Mammola Executive Vice President and Chief Financial Officer (principal financial and accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Cyrk, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders' equity and cash flows present fairly, in all material respects, the financial position of Cyrk, Inc. and its subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedule, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement and schedule presentation. We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts February 15, 2001
CYRK, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2000 AND 1999 (IN THOUSANDS, EXCEPT SHARE DATA)
The accompanying notes are an integral part of the consolidated financial statements.
CYRK, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (IN THOUSANDS, EXCEPT PER SHARE DATA)
The accompanying notes are an integral part of the consolidated financial statements. CYRK, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (IN THOUSANDS)
The accompanying notes are an integral part of the consolidated financial statements.
CYRK, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (IN THOUSANDS)
The accompanying notes are an integral part of the consolidated financial statements.
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.
Inventories
Inventories are valued at the lower of cost (specific identification, first-in, first-out and average methods) or market.
Property and Equipment
Property and equipment are stated at cost and are depreciated primarily using the straight-line method over the estimated useful lives of the assets or over the terms of the related leases, if such periods are shorter. The estimated useful lives range from two to seven years for machinery and equipment and three to ten years for furniture and fixtures. The cost and accumulated depreciation for property and equipment sold, retired or otherwise disposed of are relieved from the accounts, and resulting gains or losses are reflected in income.
Excess of Cost Over Net Assets Acquired, Net
The excess of cost over the net assets acquired ("goodwill") is being amortized on a straight-line basis over a period of thirty years. Accumulated amortization amounted to $6,788 at December 31, 2000 and $8,694 at December 31, 1999. (See Note 3.)
Impairment of Long-Lived Assets
Periodically, the Company assesses, based on undiscounted cash flows, if there has been a permanent impairment in the carrying value of its long-lived assets and, if so, the amount of any such impairment by comparing anticipated undiscounted future operating income with the carrying value of the related long-lived assets. In performing this analysis, management considers such factors as current results, trends and future prospects, in addition to other economic factors.
Income Taxes
The Company determines deferred taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), which requires that deferred tax assets and liabilities be computed based on the difference between the financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate. Deferred income tax expenses or credits are based on the changes in the asset or liability from period to period.
Foreign Currency Translation
The Company translates financial statements denominated in foreign currency by translating balance sheet accounts at the balance sheet date exchange rate and income statement accounts at the average monthly rates of exchange. Translation gains and losses are recorded in stockholders' equity, and transaction gains and losses are reflected in income.
Earnings (Loss) per Common Share
Earnings (loss) per common share have been determined in accordance with the provisions of Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128").
Reclassifications
Certain prior year amounts have been reclassified to conform with the current year presentation.
3. Sale of Business
Pursuant to its decision in December 2000, the Company sold its Corporate Promotions Group ("CPG") business on February 15, 2001 to Cyrk Holdings, Inc., formerly known as Rockridge Partners, Inc. ("Rockridge"), an investor group led by Gemini Investors LLC, a Wellesley, Massachusetts-based private equity investment firm, pursuant to a Purchase Agreement entered into as of January 20, 2001 (as amended, the "Purchase Agreement") for approximately $14,000, which included the assumption of approximately $3,700 of Company debt. $2,300 of the purchase price was paid with a 10% per annum five-year subordinated note from Rockridge, with the balance being paid in cash. The 2000 financial statements reflect this transaction and include a pre-tax charge of $50,103 due to the loss on the sale of the CPG business, $22,716 of which is associated with the write-off of goodwill attributable to CPG. This charge had the effect of increasing the 2000 net loss available to common stockholders by approximately $48,975 or $3.07 per share. Net sales in 2000 attributable to the CPG business were $146,773, or 19% of consolidated Company revenues.
CPG was engaged in the corporate catalog and specialty advertising segment of the promotions industry. The group was formed as a result of Cyrk's acquisitions of Marketing Incentives, Inc. ("MI") and Tonkin, Inc. ("Tonkin") in 1996 and 1997, respectively.
Pursuant to the Purchase Agreement, Rockridge purchased from the Company (i) all of the outstanding capital stock of MI and Tonkin, each a wholly-owned subsidiary of the Company, (ii) other certain assets of the Company, including those assets of Cyrk's Danvers and Wakefield, Massachusetts facilities necessary for the operation of the CPG business and (iii) all intellectual property and assumed liabilities of CPG as specified in the Purchase Agreement. Additionally, pursuant to the Purchase Agreement, Cyrk agreed to transfer its name to the buyer upon obtaining all necessary customer, stockholder and stock exchange approvals to change its name. Until such approvals are obtained, the Company will provide the buyer with a non-exclusive, worldwide, royalty-free license to use the name "Cyrk" and any other derivation thereof solely in connection with the Cyrk CPG business. Rockridge extended employment offers to certain former Cyrk employees who had performed various support activities, including accounting, human resources, information technology, legal and other various management functions. There is no material relationship between Rockridge and the Company or any of its affiliates, directors or officers, or any associate thereof, other than the relationship created by the Purchase Agreement and related documents.
The sale of CPG effectively terminates the restructuring effort announced by the Company in May 2000 with respect to the CPG business. (See Note 11.)
4. Inventories
Inventories consist of the following:
5. Property and Equipment
Property and equipment consist of the following:
Depreciation and amortization expense on property and equipment totaled $6,078, $5,420 and $5,664 in 2000, 1999 and 1998, respectively.
6. Investments
Current In December 2000, the Company purchased 1,500,000 shares of a marketable security at $5.25 per share. As of December 31, 2000, these shares are stated at fair value of $7,969.
In April 1998, the Company exchanged its then 50% interest (with a net book value of $2,589) in Grant & Partners Limited Partnership ("GPLP"), a Boston-based firm specializing in improving the returns on marketing investments, in return for GPLP's rights, title and interest to 1,150,000 shares of common stock of GPLP's Exchange Applications ("EXAP"), a company specializing in software that helps businesses raise profits by targeting marketing campaigns. In December 1998, EXAP completed its initial public offering and the Company sold 1,000,000 shares of its EXAP holdings and realized a gain on the sale of this stock of $7,100. The Company sold an additional 106,630 and 43,370 shares in 1999 and 2000, respectively, and realized gains on the sales of $2,752 and $3,245, respectively. As of December 31, 1999, the shares of EXAP stock owned by the Company were stated at fair value of $2,423.
Long-term The Company has made strategic and venture investments in a portfolio of privately-held companies that are being accounted for under the cost method. These investments are in Internet-related companies that are at varying stages of development, including startups, and are intended to provide the Company with expanded Internet presence, to enhance the Company's position at the leading edge of e-business and to provide venture investment returns. These companies in which the Company has invested are subject to all the risks inherent in the Internet, including their dependency upon the widespread acceptance and use of the Internet as an effective medium for commerce. In addition, these companies are subject to the valuation volatility associated with the investment community and the capital markets. The carrying value of the Company's investments in these Internet-related companies is subject to the aforementioned risks inherent in Internet business.
Periodically, the Company performs a review of the carrying value of all its investments in these Internet-related companies, and considers such factors as current results, trends and future prospects, capital market conditions and other economic factors. Based on its reviews in 2000, the Company has recorded a charge to other expense of $4,500 for an other-than-temporary investment impairment associated with its venture portfolio. While the Company will continue to periodically evaluate its Internet investments, there can be no assurance that its investment strategy will be successful, and thus the Company might not ever realize any benefits from its portfolio of investments.
7. Borrowings
The Company maintains worldwide credit facilities with several banks. As of December 31, 2000, the facilities provided the Company with approximately $78,090 in total short-term borrowing capacity which consisted of (i) the Company's $35,000 primary domestic line of credit, (ii) an additional $19,000 domestic line of credit and (iii) a foreign line of credit in the amount of $24,090. As of December 31, 2000, the Company had approximately $61,023 available under these bank facilities. The total outstanding short-term borrowings at December 31, 2000 and 1999 were $5,523 and $8,888, respectively.
In December 2000, the Company secured a new facility with a lender for its primary domestic line of credit. Pursuant to the provisions of this line of credit, the Company had commitments for letter of credit and other borrowings as of December 31, 2000 of up to an aggregate amount of $35,000 for the purpose of financing the importation of various products from Asia, for issuing standby letters of credit and for working capital purposes. At December 31, 2000, the Company's borrowing capacity under this facility was $35,000, of which $11,581 in letters of credit were outstanding. The letters of credit expire at various dates through October 2002. Borrowings under the facility bear interest at the lesser of the bank's prime rate plus .5% (10.0% at December 31, 2000) or LIBOR plus 2.25% (8.81% at December 31, 2000), and are collateralized by all of the assets of the Company. The facility contains certain earnings, net worth, equity and capital expenditure covenants. In February 2001, the facility agreement was amended through May 15, 2001 as a result of the sale of the Company's CPG business (see Note 3). Under the amended agreement, the Company has commitments for letter of credit and other borrowings to May 15, 2001 of up to an aggregate amount of $16,228. As a result of the CPG sale, the Company is assessing its overall management and organizational structure and in conjunction with this assessment, is reassessing its financing strategy prior to the expiration of its primary domestic facility.
In addition to the facility described above, there is another domestic credit facility which provides for borrowings of up to an aggregate amount of $19,000 for working capital requirements. This credit facility, which expires in May 2001, bears interest at the bank's prime rate (9.5% at December 31, 2000) or LIBOR plus 2% (8.56% at December 31, 2000). At December 31, 2000, there were no short-term borrowings or letters of credit outstanding under this facility.
The Company has a $24,090 (Deutsche Marks 50,000) working capital line of credit for certain of its European subsidiaries. At December 31, 2000, there were no letters of credit outstanding under this credit facility and no short-term borrowings outstanding. The Company also has bank guarantees in the amounts of $1,792 (British Pounds 1,200) and $293 (Belgian Francs 12,500) to cover future duties and customs in the United Kingdom. Bank guarantees totaling $340 were outstanding at December 31, 2000.
The weighted average interest rate on short-term borrowings was 8.81% and 8.24% at December 31, 2000 and 1999, respectively.
8. Lease Commitments
The Company leases warehouse, production and administrative facilities and certain machinery and equipment, furniture and fixtures, and motor vehicles under noncancelable operating leases expiring at various dates through December 2010. The approximate minimum rental commitments under all noncancelable leases as of December 31, 2000, adjusted to reflect the February 2001 sale of the CPG business (see Note 3), were as follows:
Rental expense for all operating leases was $10,893, $11,286 and $11,719 for the years ended December 31, 2000, 1999 and 1998, respectively. Rent is charged to operations on a straight-line basis for certain leases.
9. Income Taxes
The components of the provision (benefit) for income taxes are as follows:
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:
As of December 31, 2000, the Company has federal and state net operating loss carryforwards of approximately $10,100 and $35,819, respectively. The federal net operating loss carryforward will begin to expire in 2020 and the state net operating loss carryforwards will begin to expire in 2002. As of December 31, 2000, the Company also has foreign tax credit carryforwards of $1,881 that will begin to expire in 2002 and alternative minimum tax credits of $637 which carryforward indefinitely.
The following is a reconciliation of the statutory federal income tax rate to the actual effective income tax rate:
(1) 1999 and 1998 include utilization of prior year foreign losses.
10. Accrued Expenses and Other Current Liabilities
At December 31, 2000 and 1999, accrued expenses and other current liabilities consisted of the following:
11. Nonrecurring Charges
A summary of the nonrecurring charges for the years ended December 31, 2000, 1999 and 1998 are as follows:
2000 Restructuring
On May 11, 2000, the Company announced that, pursuant to a plan approved by its Board of Directors, it was integrating and streamlining its traditional promotional product divisions, Corporate Promotions Group and Custom Product & Licensing, into one product focused business unit. In association with the consolidation of its product divisions, the Company eliminated a substantial number of inventory SKUs from its product offering. As a result of this action the Company recorded a 2000 pre-tax charge of $6,360 for restructuring expenses. This charge was based on the Company's intentions and best estimates at the time of the restructuring announcement. The original restructuring charge was revised downward to $5,735, or a reversal of $625 of the original accrual, as a result of the sale of the CPG business (see Note 3).
The restructuring charge relates principally to involuntary termination costs ($2,970), asset write-downs ($1,965, including $1,695 of inventory write-downs) and the settlement of lease obligations ($800). The Company eliminated approximately 85 positions, or 7% of its domestic workforce. This charge had the effect of increasing the 2000 net loss available to common stockholders by approximately $5,606 or $0.35 per share. The restructuring plan was substantially complete by the end of 2000. A summary of activity in the restructuring accrual is as follows:
1998 Restructuring
As a result of its 1998 corporate restructuring, the Company recorded a nonrecurring pre-tax charge to operations of $11,813 for asset write-downs, employee termination costs, lease cancellations and other related exit costs associated with the restructuring. The restructuring charge had the effect of reducing 1998 after tax earnings by $6,875 or $0.46 per share. The restructuring plan was fully executed by the end of 1998.
2000 Settlement Charge
The Company recorded a 2000 nonrecurring pre-tax charge to operations of $660 associated with the settlement of a change in control agreement with an employee of the Company who was formerly an executive officer.
1999 Settlement Charge
The Company recorded a 1999 nonrecurring pre-tax charge to operations of $1,675 associated with the settlement of previously issued incentive stock options in a subsidiary which were issued to principals of a previously acquired company. The settlement was reached to facilitate the integration of the acquired company into other operations within one of the Company's divisions.
Severance Expense
Effective December 31, 1998, Gregory P. Shlopak, former chief executive officer, resigned from the Company. Pursuant to an agreement entered into with Mr. Shlopak, the Company recorded a 1998 pre-tax charge to operations of $2,332. The agreement provides for payments and benefits to Mr. Shlopak payable over a three year period.
Write-down of Long-lived Assets
In connection with the Company's plan to relocate from its Gloucester, Massachusetts facilities, the Company recorded a 1998 pre-tax charge to operations of $1,143. This charge represented the estimated net book value of leasehold improvements at the anticipated abandonment date.
12. Redeemable Preferred Stock
In November 1999, The Yucaipa Companies ("Yucaipa"), a Los Angeles-based investment firm, invested $25,000 in the Company in exchange for preferred stock and a warrant to purchase additional preferred stock. Under the terms of the investment, which was approved at a Special Meeting of Stockholders on November 10, 1999, the Company issued 25,000 shares of a newly authorized senior cumulative participating convertible preferred stock ("preferred stock") to Yucaipa for $25,000. Yucaipa is entitled, at their option, to convert each share of preferred stock into common stock equal to the sum of $1,000 per share plus all accrued and unpaid dividends, divided by $8.25 (3,108,049 shares as of December 31, 2000 and 3,047,431 shares as of December 31, 1999).
In connection with the issuance of the preferred stock, the Company also issued a warrant to purchase 15,000 shares of a newly authorized series of preferred stock at a purchase price of $15,000. Each share of this series of preferred stock issued upon exercise of the warrant is convertible, at Yucaipa's option, into common stock equal to the sum of $1,000 per share plus all accrued and unpaid dividends, divided by $9.00 (1,666,666 shares as of December 31, 2000 and December 31, 1999, respectively). The warrant expires on November 10, 2004.
Assuming conversion of all of the convertible preferred stock, Yucaipa would own approximately 16% of the then outstanding common shares at December 31, 2000 and December 31, 1999, respectively. Assuming the preceding conversion, and assuming the exercise of the warrant and the conversion of the preferred stock issuable upon its exercise, Yucaipa would own a total of approximately 23% of the then outstanding common shares at December 31, 2000 and December 31, 1999, respectively, making it the Company's largest shareholder.
Yucaipa has voting rights equivalent to the number of shares of common stock into which their preferred stock is convertible on the relevant record date. Also, Yucaipa is entitled to receive a quarterly dividend equal to 4% of the base liquidation preference of $1,000 per share outstanding, payable in cash or in-kind at the Company's option.
In the event of liquidation, dissolution or winding up of the affairs of the Company, Yucaipa, as holders of the preferred stock, will be entitled to receive the redemption price of $1,000 per share plus all accrued dividends plus (1) (a) 7.5% of the amount that the Company's retained earnings exceeds $75,000 less (b) the aggregate amount of any cash dividends paid on common stock which are not in excess of the amount of dividends paid on the preferred stock, divided by (2) the total number of preferred shares outstanding as of such date (the "adjusted liquidation preference"), before any payment is made to other stockholders.
The Company may redeem all or a portion of the preferred stock at a price equal to the adjusted liquidation preference of each share, if the average closing prices of the Company's common stock have exceeded $12.00 for sixty consecutive trading days on or after November 10, 2002, or, any time on or after November 10, 2004. The preferred stock is subject to mandatory redemption if a change in control of the Company occurs.
In connection with this transaction, the managing partner of Yucaipa was appointed chairman of the Company's board of directors and Yucaipa was entitled to nominate two additional individuals to a seven-person board. Additionally, the Company will pay Yucaipa an annual management fee of $500 for a five-year term for which Yucaipa will provide general business consultation and advice and management services.
13. Stock Plans
At December 31, 2000, the Company had three stock-based compensation plans, which are described below. The Company adopted the disclosure provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") and has applied APB Opinion 25 and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized related to such plans. Had compensation cost for the Company's 2000, 1999 and 1998 grants for stock-based compensation plans been determined consistent with SFAS 123, the Company's net income (loss) and earnings (loss) per common share would have been reduced (increased) to the pro forma amounts indicated below:
1993 Omnibus Stock Plan
Under its 1993 Omnibus Stock Plan (the "Omnibus Plan"), as amended in May 1997, the Company has reserved up to 3,000,000 shares of its common stock for issuance pursuant to the grant of incentive stock options, nonqualified stock options or restricted stock. The Omnibus Plan is administered by the Compensation Committee of the Board of Directors. Subject to the provisions of the Omnibus Plan, the Compensation Committee has the authority to select the optionees or restricted stock recipients and determine the terms of the options or restricted stock granted, including: (i) the number of shares; (ii) the exercise period (which may not exceed ten years); (iii) the exercise or purchase price (which in the case of an incentive stock option cannot be less than the market price of the common stock on the date of grant); (iv) the type and duration of options or restrictions, limitations on transfer and other restrictions; and (v) the time, manner and form of payment. Generally, an option is not transferable by the option holder except by will or by the laws of descent and distribution. Also, generally, no incentive stock option may be exercised more than 60 days following termination of employment. However, in the event that termination is due to death or disability, the option is exercisable for a maximum of 180 days after such termination. Options granted under this plan generally become exercisable in three equal installments commencing on the first anniversary of the date of grant.
1997 Acquisition Stock Plan
The 1997 Acquisition Stock Plan (the "1997 Plan") is intended to provide incentives in connection with the acquisitions of other businesses by the Company. The 1997 Plan is identical in all material respects to the Omnibus Plan, except that the number of shares available for issuance under the 1997 Plan is 1,000,000 shares.
The fair value of each option grant under the above plans was estimated using the Black-Scholes option pricing model with the following weighted average assumptions for 2000, 1999 and 1998, respectively: expected dividend yield of zero % for all years; expected life of 4.5 years for 2000, 4.4 years for 1999 and 4.5 years for 1998; expected volatility of 70% for 2000, 63% for 1999 and 65% for 1998; and, a risk-free interest rate of 6.7% for 2000, 5.2% for 1999 and 5.6% for 1998.
The following summarizes the status of the Company's stock options as of December 31, 2000, 1999 and 1998 and changes during the year ended on those dates:
The following table summarizes information about stock options outstanding at December 31, 2000:
Employee Stock Purchase Plan
Pursuant to its 1993 Employee Stock Purchase Plan (the "Stock Purchase Plan"), as amended in November 1999, the Company is authorized to issue up to an aggregate of 600,000 shares of its common stock to substantially all full-time employees electing to participate in the Stock Purchase Plan. Eligible employees may contribute, through payroll withholdings or lump sum cash payment, up to 10% of their base compensation during six-month participation periods beginning in January and July of each year. At the end of each participation period, the accumulated deductions are applied toward the purchase of Company common stock at a price equal to 85% of the market price at the beginning or end of the participation period, whichever is lower. Employee purchases amounted to 80,284 shares in 2000, 88,132 shares in 1999 and 61,349 shares in 1998 at prices ranging from $4.72 to $8.71 per share. At December 31, 2000, 248,619 shares were available for future purchases. The fair value of the employees' purchase rights was estimated using the Black-Scholes option pricing model with the following weighted average assumptions for 2000, 1999 and 1998, respectively: expected dividend yield of zero % for all years; expected life of six months for all years; expected volatility of 70% for 2000, 63% for 1999 and 65% for 1998; and, a risk-free interest rate of 5.6%, 4.8% and 5.4% for 2000, 1999 and 1998, respectively. The weighted average fair value of those purchase rights per share granted in 2000, 1999 and 1998 was $1.77, $1.91 and $2.97, respectively.
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:
15. Profit-Sharing Retirement Plan
The Company has a qualified profit-sharing plan under Section 401(k) of the Internal Revenue Code that is available to substantially all employees. Under this plan the Company matches one-half of employee contributions up to six percent of eligible payroll. Employees are immediately fully vested for their contributions and vest in the Company contribution ratably over a three-year period. The Company's contribution expense for the years ended December 31, 2000, 1999 and 1998 was $1,194, $1,101 and $988, respectively.
16. Commitments and Contingencies
On or about February 15, 1997, Montague Corporation ("Montague") filed an action in Middlesex Superior Court, Commonwealth of Massachusetts, Montague Corporation v. Cyrk, Inc. (Civil Action No. 97-00888) ("Montague action"), alleging a breach of a May 17, 1995 Exclusive Distribution Agreement naming the Company as the exclusive USA distributor for the sale of Montague bicycles in connection with promotional programs. On March 10, 1999, the Company and Montague entered into a Settlement and Joint Venture Agreement ("Settlement"), terminating the Montague action and establishing a joint venture to sell corporate logoed bicycles for use in various corporate sales programs and promotions. Under the terms of the Settlement, the Company may be obligated to pay Montague up to $900 in cash if the joint venture does not achieve certain financial results within three years from the Settlement date.
The Company is also involved in other litigation and various legal matters which have arisen in the ordinary course of business. The Company does not believe that the resolution of the above described litigation matters or the ultimate resolution of any other currently pending litigation or other legal matters will have a material adverse effect on its financial condition, results of operations or net cash flows.
As a result of the Company's recent restructuring and other events, the Company may be required to make severance payments to two executive officers of the Company pursuant to existing severance agreements with the Company for the aggregate amount of approximately $3,500.
17. Related Party Transactions
The Company leases warehouse facilities under a fifteen-year operating lease agreement which expires December 31, 2011 from a limited liability company which is jointly owned by an officer and a former director of the Company. The agreement provides for annual rent of $462 and for the payment by the Company of all utilities, taxes, insurance and repairs. As a result of the February 2001 sale of the CPG business (see Note 3), the buyer became the primary obligor under this lease, however, the Company remains liable under this lease to the extent that the buyer does not perform any of its obligations under the lease.
In accordance with the provisions of an employment agreement between an officer of the Company and the Company, the officer exercised his option in 2000 to borrow $2,000 under a line of credit available to the officer. As of December 31, 2000, the Company had two $1,000 notes receivable from the officer. The notes bear interest at an annual rate of 6.6% and 6.3%, respectively, and are due and payable no later than six months after the Company's annual meeting in 2001.
A former director of the Company is chairman of the executive committee of a corporation which supplies certain promotional products to the Company. Purchases from this corporation amounted to $9,027 for the year ended December 31, 1998.
18. Segments and Related Information
The Company operates in one industry: the promotional marketing industry. The Company's business in this industry encompasses the design, development and marketing of high-impact promotional products and programs.
A significant percentage of the Company's sales is attributable to a small number of customers. In addition, a significant portion of trade accounts receivable relates to these customers. The following summarizes the concentration of sales and trade receivables for customers with sales in excess of 10% of total sales for any of the years ended December 31, 2000, 1999 and 1998, respectively:
The Company conducts its promotional marketing business on a global basis. The following summarizes the Company's net sales for the years ended December 31, 2000, 1999 and 1998, respectively, by geographic area:
The following summarizes the Company's long-lived assets as of December 31, 2000, 1999 and 1998, respectively, by geographic area:
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, 2000 and December 31, 1998, 3,499,226 of convertible preferred stock, common stock equivalents and contingently and non-contingently issuable shares related to acquired companies and 695,317 of common stock equivalents and contingently and non-contingently issuable shares related to acquired companies, respectively, were not included in the computation of diluted EPS because to do so would have been antidilutive.
20. Quarterly Results of Operations (Unaudited)
The following is a tabulation of the quarterly results of operations for the years ended December 31, 2000 and 1999, respectively:
CYRK, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (IN THOUSANDS)
(1) Represents the tax benefit from adjusting the valuation allowance of the acquired deferred assets.
EXHIBIT INDEX
(1) Filed as an exhibit to the Registrant's Registration Statement on Form S-1 (Registration No. 33-75320) or an amendment thereto and incorporated herein by reference.
(2) Filed as an exhibit to the Registrant's Registration Statement on Form S-1 (Registration No. 33-63118) or an amendment thereto and incorporated herein by reference.
(3) Management contract or compensatory plan or arrangement.
(4) Filed as an exhibit to the Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference.
(5) Filed as an exhibit to the Registrant's Registration Statement on Form 10-Q dated March 31, 1995 and incorporated herein by reference.
(6) Filed as an exhibit to the Registrant's Registration Statement on Form S-8 (Registration No. 333-45655) and incorporated herein by reference.
(7) Filed as an exhibit to the Annual Report on Form 10-K for the year ended December 31, 1997 and incorporated herein by reference.
(8) Filed as an exhibit to the Registrant's Report on Form 8-K dated December 31, 1998 and incorporated herein by reference.
(9) Filed as an exhibit to the Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference.
(10) Filed as an exhibit to the Registrant's Report on Form 8-K dated September 1, 1999 and incorporated herein by reference.
(11) Filed as an exhibit to the Registrant's Registration Statement on Form S-8 dated February 1, 2000 and incorporated herein by reference.
(12) Filed as an exhibit to the Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated herein by reference.
(13) Filed as an exhibit to the Registrant's Registration Statement on Form 10-Q dated June 30, 2000 and incorporated herein by reference.
(14) Filed as an exhibit to the Registrant's Registration Statement on Form 10-Q dated September 30, 2000 and incorporated herein by reference.
(15) Filed as an exhibit to the Registrant's Report on Form 8-K dated February 15, 2001 and incorporated herein by reference.