<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________________
Commission File Number 0-21878
CYRK, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 04-3081657
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3 POND ROAD, GLOUCESTER, MASSACHUSETTS 01930
(Address of principal executive offices)
(Zip Code)
(508) 283-5800
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
At October 31, 1996, 10,778,744 shares of the Registrant's common stock were
outstanding.
<PAGE> 2
CYRK, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE NUMBER
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -
September 30, 1996 and December 31, 1995 3
Consolidated Statements of Operations -
For the three and nine months ended
September 30, 1996 and 1995 4
Consolidated Statements of Cash Flows -
For the nine months ended September 30, 1996
and 1995 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-9
PART II OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
CYRK, INC.
<TABLE>
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
<CAPTION>
September 30, 1996 December 31, 1995
------------------ -----------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 31,950 $ 42,583
Investments 14,643 19,629
Accounts receivable:
Trade, less allowance for doubtful accounts of $3,081
at September 30, 1996 and $3,039 at December 31, 1995 40,664 20,681
Officers and stockholders 3,457 222
Inventories 31,306 27,237
Prepaid expenses and other current assets 3,445 3,456
Deferred and refundable income taxes 5,862 5,748
-------- --------
Total current assets 131,327 119,556
Property and equipment, net 9,777 9,542
Other assets 5,199 4,317
Investment in affiliate 1,337 2,487
Loan to affiliate 3,850 2,000
-------- --------
$151,490 $137,902
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,046 $ 3,420
Accrued expenses and other current liabilities 20,834 9,979
-------- --------
Total current liabilities 26,880 13,399
Deferred income taxes 599 599
-------- --------
Total liabilities 27,479 13,998
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 1,000 shares authorized; none issued -- --
Common stock, $.01 par value; 50,000 shares authorized;
10,779 shares issued and outstanding at September 30, 1996
and 10,737 shares issued and outstanding at December 31, 1995 108 107
Additional paid-in capital 87,280 86,862
Retained earnings 37,061 36,935
Unrealized loss on investments (438) --
-------- --------
Total stockholders' equity 124,011 123,904
-------- --------
$151,490 $137,902
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE> 4
CYRK, INC.
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
<CAPTION>
For the three months For the nine months
-------------------- -------------------
ended September 30, ended September 30,
-------------------- -------------------
1996 1995 1996 1995
------- ------- -------- --------
<S> <C> <C> <C> <C>
Net sales $55,556 $26,403 $164,801 $104,810
Cost of sales:
Related parties 247 161 448 7,968
Other 46,931 21,707 138,377 78,218
------- ------- -------- --------
47,178 21,868 138,825 86,186
------- ------- -------- --------
Gross profit 8,378 4,535 25,976 18,624
------- ------- -------- --------
Selling, general and administrative expenses:
Related parties 222 207 565 500
Other 9,156 7,383 26,130 21,544
------- ------- -------- --------
9,378 7,590 26,695 22,044
------- ------- -------- --------
Operating loss (1,000) (3,055) (719) (3,420)
Interest income, net (650) (855) (1,866) (2,284)
Equity in loss of affiliate 564 183 956 183
------- ------- -------- --------
Income (loss) before income taxes (914) (2,383) 191 (1,319)
Income tax provision (benefit) (390) (887) 65 (448)
------- ------- -------- --------
Net income (loss) $ (524) $(1,496) $ 126 $ (871)
======= ======= ======== ========
Earnings (loss) per share $ (0.05) $ (0.14) $ 0.01 $ (0.08)
======= ======= ======== ========
Weighted average shares outstanding 10,773 10,727 10,918 10,734
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE> 5
CYRK, INC.
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<CAPTION>
For the nine months ended September 30,
---------------------------------------
1996 1995
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 126 $ (871)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 2,051 1,371
Realized loss on sale of investments 247 --
Provision for doubtful accounts 90 90
Equity in loss of affiliate 956 183
Increase (decrease) in cash from changes
in working capital items:
Accounts receivable (23,308) 53,409
Inventories (4,069) (5,285)
Prepaid expenses and other current assets 11 (157)
Deferred and refundable income taxes (114) (1,305)
Accounts payable 2,626 (3,675)
Accrued expenses and other current liabilities 10,855 (5,774)
-------- -------
Net cash provided by (used in) operating activities (10,529) 37,986
-------- -------
Cash flows from investing activities:
Purchase of property and equipment (2,062) (3,018)
Investment in affiliate -- (3,186)
Loan to affiliate (1,850) (2,000)
Purchase of investments (36,742) --
Proceeds from sale of investments 41,043 --
Other, net (912) (793)
-------- -------
Net cash used in investing activities (523) (8,997)
-------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock 419 566
-------- -------
Net cash provided by financing activities 419 566
-------- -------
Net increase (decrease) in cash and cash equivalents (10,633) 29,555
Cash and cash equivalents, beginning of year 42,583 33,862
-------- -------
Cash and cash equivalents, end of period $ 31,950 $63,417
======== =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 95 $ 52
======== =======
Income taxes $ 123 $ 731
======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE> 6
CYRK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying unaudited financial statements have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission regarding interim financial reporting. Accordingly, they do not
include all of the information and footnotes in accordance with generally
accepted accounting principles for complete financial statements and should
be read in conjunction with the audited financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1995. In
the opinion of management, the accompanying unaudited financial statements
contain all adjustments, consisting only of those of a normal recurring
nature, necessary for fair presentation of the Company's financial position,
results of operations and cash flows at the dates and for the periods
presented.
The operating results for the nine months ended September 30, 1996 are not
necessarily indicative of the results to be expected for the full year.
Certain prior period amounts have been reclassified to conform with the
current period presentation.
<TABLE>
2. Inventories consist of the following (in thousands):
<CAPTION>
September 30, 1996 December 31, 1995
------------------ -----------------
<S> <C> <C>
Raw materials $13,392 $15,248
Finished goods 17,914 11,989
------- -------
$31,306 $27,237
======= =======
</TABLE>
3. At September 30, 1996, the Company was contingently liable for letters of
credit used to finance the purchase of inventory in the aggregate amount of
$19.4 million. Such letters of credit expire at various dates through
February 1997.
6
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following is a discussion of the financial condition and results of
operations of the Company for the three and nine month periods ended September
30, 1996 as compared to the same periods in the previous year. This discussion
should be read in conjunction with the Consolidated Financial Statements of the
Company and related Notes included elsewhere in this Form 10-Q.
GENERAL
In recent years, the Company's business has been heavily dependent on purchases
of promotional products by Philip Morris Incorporated ("Philip Morris"). Net
sales to Philip Morris accounted for 89%, 57% and 32% of the Company's total net
sales in 1994, 1995 and the first nine months of 1996, respectively. The Company
believes that as a result of increased competition and efforts by Philip Morris
to diversify its promotional product suppliers, sales to Philip Morris in 1995
were substantially less than in 1994. The Company expects that a significant
percentage of its net sales for the remainder of 1996 will continue to be to
Philip Morris. However, the Company does not anticipate that its percentage of
sales to Philip Morris in 1996 will achieve the same level as in 1995 as efforts
to diversify the Company's customer base continue.
As is generally the case with its other promotional product customers, the
Company's agreement with Philip Morris does not require Philip Morris to make a
certain level of purchases. Instead, purchase commitments are represented by
purchase orders placed by Philip Morris from time to time during the course of a
promotion. The actual level of purchases by Philip Morris (and other promotional
product customers) 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.
Since the fourth quarter of 1993, Philip Morris has sought 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 continually
lower its product costs after being awarded bids. Increased competition is
expected to continue and thus adversely impact the Company's profit margin in
the future.
The Company has pursued efforts to diversify and expand its customer base in
order to reduce its concentration of business with Philip Morris as well as to
mitigate the quarter-to-quarter fluctuations inherent in the business of
promotional product programs.
In the first quarter of 1996, Pepsi-Cola Company ("Pepsi") launched the "Pepsi
Stuff" national promotion. The Company supported Pepsi in the development of
this promotion and was responsible for the development and production of the
promotional merchandise and clothing. The "Pepsi Stuff" national promotion
expired on October 31, 1996. The contract for this promotion provides for a
sliding scale margin agreement at certain incremental volume levels. Net sales
to Pepsi accounted for 30% of total net sales in the first nine months
of 1996. The Company expects that a significant percentage of its net sales for
the remainder of 1996 will be to Pepsi and will be subject to contractual lower
gross margin percentages. Accordingly, the Company expects its gross margin
percentages to be lower in the fourth quarter of 1996 than in prior quarters.
At September 30, 1996, the Company had written purchase orders for $81.1
million, as compared to $34.0 million at September 30, 1995. The Company's
purchase orders are generally subject to cancellation with limited penalty and
are therefore not necessarily indicative of future revenues or earnings.
Generally, promotional products orders are filled and net sales are recognized
60 to 70 days after receipt of a purchase order.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30,1995
Net sales for the third quarter ended September 30, 1996 totaled $55.6 million
as compared to $26.4 million in the third quarter of 1995. The increase in net
sales of $29.2 million, or 110%, from the comparable period of a year ago, was
directly attributable to the success of the Company's customer diversification
effort. Promotional product sales in the third quarter of 1996 totaled $45.3
million, or an increase of 145%, as compared to $18.5 million in the third
quarter of 1995. Net sales related to the Company's private label and Cyrk brand
business in the third quarter of 1996 totaled $10.3 million, or an increase of
30%, as compared to $7.9 million in the third quarter of 1995.
7
<PAGE> 8
RESULTS OF OPERATIONS (CONTINUED)
Gross profit increased $3.8 million, or 85%, to $8.4 million in the third
quarter of 1996 from $4.5 million in the third quarter of 1995. As a percentage
of net sales, the third quarter gross profit decreased to 15.1% in 1996 from
17.2% in 1995. This decrease was due principally to the lower gross margins
associated with the promotional products division, which accounted for more than
three-fourths of the Company's total net sales in the third quarter of 1996.
Selling, general and administrative expenses increased $1.8 million, or 24%, to
$9.4 million in the third quarter of 1996 from $7.6 million in the third quarter
of 1995, but decreased as a percentage of net sales to 16.9% in the third
quarter of 1996 from 28.7% in the third quarter of 1995. The Company's
increased spending was primarily attributable to its expanded offshore sales and
sourcing and domestic fulfillment capabilities. The decrease in selling,
general and administrative expenses as a percentage of net sales was
attributable to the comparative increase in third quarter net sales.
Interest income in the third quarter of 1996 was attributable to interest earned
on short-term investments of excess cash, primarily in investment-grade
securities.
Equity in loss of affiliate represents the Company's proportionate share of an
investment being accounted for under the equity method.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1995
Net sales for the first nine months of 1996 totaled $164.8 million as compared
to $104.8 million in the first nine months of 1995. The increase in net sales of
$60.0 million, or 57%, from the comparable period of a year ago, was directly
attributable to the success of the Company's customer diversification effort.
Promotional product sales in the first nine months of 1996 totaled $125.7
million, or an increase of 71%, as compared to $73.7 million in the first nine
months of 1995. Net sales related to the Company's private label and Cyrk brand
business in the first nine months of 1996 totaled $39.1 million, or an increase
of 26%, as compared to $31.1 million in the first nine months of 1995.
Gross profit increased $7.4 million, or 39%, to $26.0 million in the first nine
months of 1996 from $18.6 million in the first nine months of 1995. As a
percentage of net sales, gross profit decreased to 15.8% in 1996 from 17.8% in
1995. This decrease was due principally to the lower gross margins associated
with the promotional products division, which accounted for approximately
three-fourths of the Company's total net sales in the first nine months of 1996.
Selling, general and administrative expenses increased $4.7 million, or 21%, to
$26.7 million in the first nine months of 1996 from $22.0 million in the first
nine months of 1995, but decreased as a percentage of net sales to 16.2% in the
first nine months of 1996 from 21.0% in the first nine months of 1995. The
Company's increased spending was primarily attributable to its expanded offshore
sales and sourcing and domestic fulfillment capabilities. Additionally, legal
fees increased as a result of certain litigation and business matters. The
decrease in selling, general and administrative expenses as a percentage of
net sales was attributable to the comparative increase in year to date net
sales.
Interest income in the first nine months of 1996 was attributable to interest
earned on short-term investments of excess cash, primarily in investment-grade
securities.
Equity in loss of affiliate represents the Company's proportionate share of an
investment being accounted for under the equity method.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its working capital and capital
expenditure requirements through cash generated from operations, public sales of
common stock, bank borrowings and capital equipment leases. Such cash
requirements for 1995 and 1996 to date were provided principally by cash
provided by operating activities.
8
<PAGE> 9
Working capital at September 30, 1996 was $104.4 million compared to $106.2
million at December 31, 1995. Net cash used by operating activities during the
first nine months of 1996 was $10.5 million, due principally to an increase in
accounts receivable. Trade accounts receivable grew to $40.7 million at
September 30, 1996 from $20.7 million at December 31, 1995, primarily as a
result of increased sales in the third quarter of 1996 compared to the fourth
quarter of 1995. Inventories increased to $31.3 million at September 30, 1996
compared to $27.2 million at December 31, 1995, primarily as a result of
purchases to satisfy promotional customer orders.
Net cash used in investing activities in the first nine months of 1996 was $.5
million, which included $2.1 million of additions to property and equipment, a
$1.9 million loan made to an affiliate and $4.3 million of net sales of
investments. In the first nine months of 1995, $5.2 million of cash used was
related to an equity investment transaction consummated in March 1995 and $3.0
million was used for additions to property and equipment.
The Company currently has available a bank letter of credit and revolving credit
facility which expires in January 1997. At September 30, 1996, based on the
borrowing base formula prescribed by this credit facility, the Company's
borrowing capacity was $75.0 million, of which $20.3 million in letters of
credit were outstanding. Borrowings under this facility are collateralized by
all assets of the Company.
Management believes that the Company's existing cash position, credit
facilities, and its ability to obtain additional financing, combined with
internally generated cash flow, will be adequate for its liquidity and capital
needs at least through the end of 1996.
9
<PAGE> 10
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings that have
not been previously reported, and during the quarter covered by this report
there have been no material developments in such reported legal proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Cautionary Statement for Purposes of the "Safe Harbor" Provisions
of the Private Securities Litigation Reform Act of 1995.
(b) No reports on Form 8-K were filed during the quarter for which this report
is filed.
10
<PAGE> 11
SIGNATURES
Pursuant to the requirements 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.
Date: November 6, 1996 CYRK, INC.
/s/ Dominic F. Mammola
-------------------------------------------
Dominic F. Mammola
Vice President and Chief Financial Officer
(duly authorized officer and principal
financial and accounting officer)
11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 31,950
<SECURITIES> 14,643
<RECEIVABLES> 43,745
<ALLOWANCES> 3,081
<INVENTORY> 31,306
<CURRENT-ASSETS> 131,327
<PP&E> 15,613
<DEPRECIATION> 5,836
<TOTAL-ASSETS> 151,490
<CURRENT-LIABILITIES> 26,880
<BONDS> 0
<COMMON> 108
0
0
<OTHER-SE> 123,903
<TOTAL-LIABILITY-AND-EQUITY> 151,490
<SALES> 164,801
<TOTAL-REVENUES> 164,801
<CGS> 138,825
<TOTAL-COSTS> 138,825
<OTHER-EXPENSES> 956
<LOSS-PROVISION> 90
<INTEREST-EXPENSE> 141
<INCOME-PRETAX> 191
<INCOME-TAX> 65
<INCOME-CONTINUING> 126
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 126
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
<PAGE> 1
EXHIBIT 99.1
CAUTIONARY STATEMENT FOR PURPOSES
OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
From time to time, Cyrk, Inc. (the "Company") may provide forward-looking
information such as forecasts of expected future performance or statements about
the Company's plans and objectives. This information may be contained in filings
with the Securities and Exchange Commission, press releases or oral statements
by the officers of the Company. The Company desires to take advantage of the new
"Safe Harbor" provisions of the Private Securities Litigation Reform Act of 1995
and is including this Exhibit 99.1 in its Form 10-Q in order to do so.
The Company wishes to caution readers that the following important factors,
among others, in some cases have affected, and in the future could affect, the
Company's actual results and could cause the Company's actual consolidated
results for the Company's current quarter and beyond to differ materially from
those expressed in any forward-looking statements made by, or on behalf of, the
Company.
DEPENDENCE ON PRINCIPAL CUSTOMERS
- - ---------------------------------
In recent years, the Company's business has been heavily dependent on purchases
of promotional products by certain key customers including, but not limited to,
Philip Morris Incorporated ("Philip Morris") and the Pepsi-Cola Company
("Pepsi"). The loss of either of these customers or a significant reduction in
their level of purchases from the Company without an offsetting increase in
purchases by new or other existing customers would have a material adverse
effect on the Company's business and results of operations.
LIMITED CUSTOMER COMMITMENTS
- - ----------------------------
As is generally the case with its other promotional product customers, the
Company's agreements with Philip Morris and Pepsi do not require them to make a
certain level of purchases. Instead, purchase commitments are represented by
purchase orders placed by the customers from time to time during the course of a
promotion. The actual level of purchases by Philip Morris and Pepsi (and other
promotional product customers) depends on a number of factors, including the
duration of the promotion and consumer redemption rates. Purchase orders are
generally subject to cancellation with limited penalty; however, the company
believes the imposition of this penalty may not preclude cancellations.
furthermore, if a promotional program does not achieve the customer's marketing
objectives, the customer may seek modifications of its agreement with the
company. Consequently, the Company's level of net sales is difficult to predict
accurately and can fluctuate greatly from quarter to quarter.
COMPETITION
- - -----------
Philip Morris and certain other customers seek competitive bids for their
promotional programs. The Company's profit margin depends, to a great extent, on
its competitive position when bidding and its ability to continually lower its
product costs after being awarded bids. Increased competition is expected to
continue and thus adversely impact the Company's profit margin in the future.
EFFECT OF INDUSTRY CONDITIONS FACING THE COMPANY'S CUSTOMERS
- - ------------------------------------------------------------
The Company's business is heavily dependent on the promotional budgets of its
customers, which in turn are influenced by industry conditions and other
factors. Accordingly, industry conditions faced by Philip Morris in particular
and conditions in the tobacco industry in general are expected to impact the
Company's business. There can be no assurance that these conditions will not
lead to a reduction in advertising and promotional spending by Philip Morris, or
that Philip Morris will not change its advertising and promotional strategy in a
manner that reduces the use of promotional programs such as the Marlboro
Adventure Team, Country Store and Unlimited promotions. A significant reduction
in spending by Philip Morris on promotional product programs would have a
material adverse effect on the Company's business and results of operations.
<PAGE> 2
Additionally, the United States Food and Drug Administration (the "FDA") has
proposed regulations with respect to tobacco products. Such regulations, among
other things, would ban (i) gifts or contests based on proof of purchase of
tobacco products or redeemable coupons, (ii) the use of tobacco brand names or
any other indices of tobacco brand identification on non-tobacco products (e.g.
T-shirts, hats, other clothing, gym bags and trinkets) and (iii) brand-name
sponsorship of sporting events, concerts and other events. If adopted, these
regulations would have a material and adverse effect on the Company's sales to
Philip Morris, which in turn would have a material adverse effect on the
Company's business and results of operations.
PROMOTIONAL PRODUCT DEMAND
- - --------------------------
The Company's business is driven by spending by companies to promote their
corporate identities and brand name products. If the demand for brand name
products diminishes or if companies decrease their use of promotional product
programs to promote their corporate identities and brands, the Company's
business could be materially and adversely affected. In addition, the Company's
relationship with certain of its promotional products customers has been
limited to the sourcing of products being offered or sold by the customer in
connection with a single promotional program. There can be no assurance that
such customers will continue to use the Company to source products for future
promotional programs.
DEPENDENCE ON FOREIGN MANUFACTURING
- - -----------------------------------
The majority of the Company's net sales in recent years were attributable to
products manufactured by subcontractors located in Asia. The Company has no
long-term contracts with these manufacturing sources and competes with other
companies for production facilities and import quota capacity. In addition,
most Asian manufacturers require that a letter of credit be posted at the time
a purchase order is placed. There can be no assurance that the Company will
continue to have the necessary credit facilities for the purpose of posting
such letters of credit. The Company's business is subject to the 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 economic conditions in
countries in which the Company's manufacturing sources are located. If any such
factors were to render the conduct of business in a particular country
undesirable or impractical, or if the Company's current foreign manufacturing
sources were to cease doing business with the Company for any reason, the
Company's business and operating results could be adversely affected.
IMPORTS AND IMPORT RESTRICTIONS
- - -------------------------------
The importation of products manufactured in Asia is subject to the constraints
imposed by bilateral agreements between the United States and substantially all
of the countries from which the Company imports goods. These agreements impose
quotas that limit the quantity of certain types of goods, including textile
products imported by the Company, which can be imported into the United States
from those countries. Such agreements also allow the United States to impose,
under certain conditions, restraints on the importation of categories of
merchandise that, under the terms of the agreements, are not subject to
specified limits.
The Company's continued ability to source products that it imports may be
adversely affected by additional bilateral and multilateral agreements,
unilateral trade restrictions, significant decreases in import quotas, the
disruption of trade from exporting countries as a result of political
instability or the imposition of additional duties, taxes and other charges or
restrictions on imports.
Products imported by the Company from China currently receive the same
preferential tariff treatment accorded goods from countries granted "most
favored nation" status. However, the renewal of China's most favored nation
treatment has been a contentious political issue for several years and there
can be no assurance that such status will be continued. If China were to lose
its most favored nation status, goods imported from China will be subject to
significantly higher duty rates which would increase the cost of goods from
China. Any such increase could have a material adverse effect on the Company's
business.
<PAGE> 3
DEPENDENCE ON KEY PERSONNEL
- - ---------------------------
The Company is dependent on several key personnel, including Gregory P. Shlopak,
Chairman of the Board and Chief Executive Officer, and Patrick D. Brady,
President and Chief Operating Officer. The loss of the services of either one of
them could have a material adverse effect on the Company. Neither Mr. Shlopak
nor Mr. Brady is subject to an employment contract with the Company. The
Company's continued success is also dependent upon its ability to retain and
attract skilled design, marketing and management personnel.
ACQUISITIONS AND STRATEGIC ALLIANCES
- - ------------------------------------
The Company expects to make acquisitions of other businesses which are
complementary to the Company's business or to enter into strategic alliances
with such businesses. There can be no assurance that such strategic alliances,
or any future acquisition or strategic alliance, will be completed or, if
completed, will result in long-term benefits to the Company. Further, if the
Company is not successful in its acquisition or strategic alliance endeavors,
the Company's operating results in future periods may be adversely affected.
LITIGATION
- - ----------
A lack of success, or associated costs, in defending pending and potential
litigation involving the Company could adversely affect the Company's operating
results. Specifically, the Company has been named as a defendant in a putative
class action filed on October 18, 1995 in the United States District Court for
the Southern District of New York (BARRY HALLET, JR. V. LI & FUNG ET. AL.,
Docket No. 95 Civ. 8917) in which the plaintiff alleges that, in violation of
the securities laws, the Company and its officers made false and misleading
statements concerning the Company's business which artificially inflated the
price of the Company's stock.
INTERNATIONAL EXPANSION
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The Company has recently begun to expand its international sales development
activity, particularly in Europe. The Company has limited prior experience in
international sales and there is no assurance that the Company's efforts will be
successful.
