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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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)
Registrant's telephone number, including area code: (508) 283-5800
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
COMMON STOCK, $0.01 THE NASDAQ STOCK MARKET
PAR VALUE PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
At February 28, 1997, the aggregate market value of voting stock held by
non-affiliates of the registrant was $105,162,538.
At February 28, 1997, 10,812,029 shares of the registrant's common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S PROXY STATEMENT TO BE FILED PURSUANT TO SECTION
14(a) OF THE SECURITIES EXCHANGE ACT OF 1934 IN CONNECTION WITH THE REGISTRANT'S
1997 ANNUAL MEETING OF STOCKHOLDERS HAVE BEEN INCORPORATED BY REFERENCE IN PART
III OF THIS REPORT.
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PART I
ITEM 1. BUSINESS.
GENERAL DEVELOPMENT OF THE BUSINESS
Cyrk, Inc. (referred to herein as "Cyrk" or the "Company") was founded as a
Massachusetts corporation in 1976 and was engaged primarily in the design,
manufacture and sale of custom screen-printed sports apparel and accessories. In
1990, Cyrk broadened its product design and manufacturing expertise to include a
focus on the promotional products business and the further development of its
international production and worldwide sourcing capabilities.
Cyrk designs, develops, manufactures, sources and distributes high quality
products for promotional programs and custom-designed sports apparel and
accessories. Cyrk's promotional products are sold to consumer products and
services companies seeking to promote their brand names and corporate identities
and to build brand loyalty. Cyrk's promotional products customers include Philip
Morris Incorporated ("Philip Morris") (for its Marlboro, Basic, Merit and
Virginia Slims brands, among others), Pepsi-Cola Company ("Pepsi") (for its
"Pepsi Stuff" national promotion, among others), Mars Incorporated (for its
M&M's and Snickers brands, among others), Fidelity Investments and other
companies with recognized brands. The programs developed and managed by Cyrk
typically reward the consumer with promotional products that are distributed
either as gifts, with the purchase of other products, or upon redemption of
proofs of purchase. Cyrk believes that its combination of design, manufacturing
and sourcing expertise has allowed the Company to execute large promotional
programs which require the coordinated worldwide sourcing of product
collections.
In addition, the Company sells private label custom-designed sports apparel and
accessories to major sporting goods and apparel manufacturers and retailers such
as Fila, Tommy Hilfiger and Pepe, which incorporate these Cyrk designed products
into their product lines. The Company also designs, manufactures and sells a
limited line of Cyrk brand sports apparel through retailers such as TJX, Bob's
Stores and The Sports Authority. The success of both the private label group and
Cyrk retail brand group is attributable to the large production capacity,
expertise in design and manufacturing and full-service approach that the Company
offers its customers.
PRODUCTS AND SERVICES
Promotional Product Programs. The goal of a promotional product program is to
enhance corporate identity or brand awareness and develop customer or employee
loyalty. Cyrk has achieved this goal and continues to develop and manage
promotions that generate tremendous growth for customer brands and for customer
loyalty. The programs typically incorporate a range of products varying in type,
value and appeal such as T-shirts, fleece pullovers, jackets, sports bags, caps
and watches that bear a brand or company name or logo. Most of the promotional
products used by Cyrk for programs are given away to consumers in connection
with the sale of another product (a "gift-with-purchase" program), sold in
conjunction with the sale of another product (a "purchase-with-purchase"
program), issued upon redemption of coupons evidencing the purchase of other
products (a "coupon redemption" or "continuity" program), or sold without any
condition as a complement to other products. Promotional products are also
frequently given away to retailers that carry the brand name products to reward
or incentivise sales efforts and foster goodwill towards employees.
The advertising and marketing campaigns of many companies include the
promotional product concept within the design of their overall corporate
development. Increasing numbers of companies are seeking to enhance and protect
the value of their brands by demanding promotional products that are superior in
quality and design, distinctive, contemporary, integrated with their other
products and marketing efforts and immediately identifiable with their primary
product brands and services. Together, Cyrk and its customers recognize that
promotional programs are a vital component of a successful marketing strategy.
Increasing numbers of companies are turning to outside professionals to provide
the expertise required in complex areas, such as design and sourcing of
promotional products, that remain outside their core businesses. Cyrk believes
that the demand for professional promotional services is not currently being met
by the traditional suppliers of corporate, brand and logoed products, such as
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advertising specialty vendors, many of which are small, have insufficient
resources and are limited to offering the standard products such as pens, mugs
and key chains on which a brand or corporate name or logo is imprinted.
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 selling brand merchandise.
Cyrk often provides professional services to customers during the developmental
stages of a company's promotional products program. In recent years, the Company
has become more involved with assisting in developing a promotional products
program around a particular concept or theme. The Company will generally provide
advice regarding the selection, cost and availability of products to be included
in a program. The Company will also work with a customer's market researchers to
develop program participation rules and forecast participation levels and
product demand.
Cyrk also offers warehouse fulfillment services and fulfillment consulting
services to its promotional product customers. Fulfillment is the process by
which promotional products are distributed, often through a product catalogue.
The Company utilizes automated warehouse management systems, validates
entitlement where the promotional product is distributed through goal
achievement or submission of coupons and provides inventory control and
monitoring to avoid over- or under-stocking. The Company performs fulfillment
services out of both its own and third-party contract warehouses although
inventory risk is borne by the customer. Philip Morris and Pepsi do not utilize
the Company's warehouse fulfillment services.
The Company charges separately for its graphic design and fulfillment services
but derives substantially all of its promotional product revenue from the sale
of products.
Custom-Designed Sports Apparel and Accessories. Cyrk also designs, manufactures,
sources and distributes private label custom-designed sports apparel and
accessories that are incorporated into the product lines of the Company's
customers. The Company's private label products include screen-printed T-shirts,
sweatshirts, sports bags and embroidered shirts and caps which the Company sells
to major sporting goods and apparel manufacturers and retailers such as Fila,
Tommy Hilfiger and Pepe. The Company also provides a variety of warehouse
fulfillment services for Fila.
The Company's Cyrk retail brands group offers a line of sportswear and
resortwear, to include Cyrk brand screen-printed T-shirts and other sports
apparel featuring Cyrk designs. These products are sold to retailers such as
TJX, Bob's Stores and The Sports Authority and to a variety of resorts. The
Company considers its experience with its own line of custom-designed sports
apparel to be an essential ingredient to better understanding the merchandising
issues that its promotional products and private label apparel customers face.
Development and management of its own line also enables Cyrk to remain current
with emerging fashion trends in design, color and materials.
Design, Merchandising and Product Development. The Company believes that one of
its most important competitive advantages is the strong apparel design and
merchandising capability that it has developed over the last 21 years. The
Company maintains a staff of graphic designers and product designers who service
both the Company's promotional product customers as well as its custom-designed
sports apparel and accessories customers. In designing private label sports
apparel and accessories, the Company's account representatives communicate
extensively with both the customer and the design staff to provide products that
are consistent in terms of color and design with the customer's total apparel
collection. For promotional product customers, Cyrk designers not only design
products and catalogues, but also provide direction as to the most effective
types of products to include in a promotional program. Cyrk's extensive design
capability enables the Company to furnish customers with product samples and
prototypes
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quickly. In addition, the merchandising experience of the Company's designers
allows them to assemble integrated collections of products for both promotional
programs and for private label sports apparel and accessories customers.
Finally, the Company's designers work closely with the production staff and
understand production methods which allows the Company's designs to move quickly
from the design to the production stage.
Manufacturing and Sourcing. The quality and timely delivery of the Company's
products depend on the Company's ability to control the manufacturing process.
The Company seeks to maintain such control by performing its sports apparel and
accessories manufacturing operations in-house and by maintaining a physical
presence in the Far East to oversee the offshore manufacturing of the Company's
products by independent Asian factories. The Company expanded its presence in
the Far East in 1993 when it established a branch office in Taiwan and a
subsidiary in Hong Kong, which perform a variety of services for the Company,
such as selecting manufacturers, communicating product specifications and
quality control standards, monitoring the manufacturing process, performing
on-site quality control inspections, transferring letters of credit and
coordinating export clearance and shipping. In May 1996, the Company further
expanded its presence in the Far East by establishing a Korean branch office,
further augmenting the Company's sourcing and manufacturing capabilities.
The Company has no long-term contracts with 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. The Company believes that its policy of
outsourcing a majority of its manufacturing requirements allows it to achieve
increased production flexibility while reducing the Company's capital
expenditures and costs of maintaining a substantial production work force. The
Company's business is subject to risks normally associated with conducting
business abroad, such as foreign government regulations, political unrest,
disruptions or delays in shipments, fluctuations in foreign currency exchange
rates and changes in the economic conditions in the countries in which the
Company's manufacturing sources are located. If any such factors were to render
the conduct of business in a particular country undesirable or impractical, or
if the Company's current foreign manufacturing sources were to cease doing
business with the Company for any reason, the Company's business and operating
results could be adversely affected. The Company's business is also subject to
the risks associated with the imposition of additional trade restrictions
related to imported products, including quotas, duties, taxes and other charges
or restrictions.
PHILIP MORRIS AND PEPSI RELATIONSHIPS
In recent years, the Company's business has been heavily dependent on purchases
of promotional products by Philip Morris. Net sales to Philip Morris accounted
for 30%, 57% and 89% of the Company's consolidated net sales in 1996, 1995 and
1994, respectively. A substantial majority of the Company's sales to Philip
Morris in the last three years was related to Philip Morris' Marlboro Adventure
Team, Marlboro Country Store and Marlboro Unlimited promotions.
Recently the United States Food and Drug Administration issued final regulations
with respect to tobacco products. Such regulations could have a material adverse
effect on the Company's business with Phillip Morris and on its results of
operations. For a description of such regulations, see the Company's Cautionary
Statement For Purposes Of The "Safe Harbor" Provisions Of The Private
Securities Litigation Reform Act Of 1995, filed as Exhibit 99.2 hereto.
Efforts by the Company to diversify its customer base resulted in an agreement
with Pepsi in 1996 for the Company's support in the "Pepsi Stuff" national
promotion. Net sales to Pepsi accounted for 38% of total net sales in 1996. The
"Pepsi Stuff" national promotion expired on October 31, 1996. In December 1996,
the Company entered into an agreement to provide similar promotional products
and services to Pepsi in 1997.
The Company's business with Pepsi and Philip Morris is based upon purchase
orders placed by these customers from time to time during the course of a
promotion. There are no written agreements with these customers which commit
them to make a certain level of purchases. The actual level of purchases by
Pepsi and Philip Morris (and other promotional products 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.
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SALES AND DISTRIBUTION
The Company sells its promotional product services and private label
custom-designed sports apparel and accessories through an employee sales force
composed of approximately 80 persons. In addition, executive officers of the
Company are actively involved in selling the Company's promotional product
services and managing large customer accounts. The Company's selling efforts
with respect to its promotional products and services consist of identifying and
making sales presentations to prospective customers and monitoring the progress
of a customer's promotional program from start to finish. These selling efforts
are targeted at companies whose products and brands the Company is currently
helping to promote as well as to other large companies that tend to rely heavily
on promotional product advertising. The Company believes that achieving growth
in net sales and increasing its number of customers will require the hiring of
additional sales employees.
The Company's selling efforts with respect to private label custom-designed
sports apparel and accessories are focused on increasing the number of different
items the Company sells to particular customers by creating collections of
products for them.
The Company sells its Cyrk brand screen-printed and embroidered apparel through
approximately 30 independent sales organizations that are compensated on a
commission basis. The Company has no written agreements with these
representatives, who work on an order-by-order basis. Typically, the Company's
sales representatives handle the products of three to five other noncompeting
manufacturers.
International sales accounted for approximately 8%, 3% and 1% of the Company's
net sales in 1996, 1995 and 1994, respectively. International sales are
currently made primarily through the Company's account representatives in the
United States and, to a lesser extent, through the Company's United Kingdom and
Hong Kong subsidiaries.
COMPETITION
The promotional products and the custom-designed sports apparel and accessories
industries are highly fragmented and competitive, and some of the Company's
competitors in both industries have substantially greater financial and other
resources than the Company. The Company's promotional products and services
compete with the services of in-house advertising, promotional products and
purchasing departments and with designers and vendors of single or multiple
product lines. The promotional product services of the Company also compete for
advertising dollars with other media such as television, radio, newspapers,
magazines and billboards. The Company's custom-designed sports apparel and
accessories business competes with many, mostly small, apparel manufacturers.
Entry into both industries is not difficult and new competitors are continually
commencing operations.
The primary bases for competition are creativity in product design, quality and
style of products, prompt delivery, customer service, price and financial
strength. The Company believes that it currently competes favorably in each of
the foregoing areas and that its ability to provide a full range of integrated
services gives it a competitive advantage.
BACKLOG
At December 31, 1996, the Company had written purchase orders for $97.6 million
as compared to $72.9 million at December 31, 1995. The Company's purchase orders
are generally subject to cancellation with limited penalty and are therefore not
necessarily indicative of future revenues and earnings. In promotional programs
there is, on average, a one to six-month period between development of the
concept and design and delivery of products to the customer. Private label
sports apparel and accessories orders are typically filled within two months
after receipt of an order, while Cyrk brand product orders are generally filled
within one month after receipt of an order.
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TESTING AND QUALITY CONTROL
The Company bears the risk of nonconforming goods sold to its customers and, in
the case of outsourced products, has recourse against the manufacturer. Because
many products are sourced in Asia, the Company relies primarily on monitoring
and inspection activities to ensure quality control rather than on any remedies
it may have for defective goods.
The Company, through independent laboratories, performs extensive tests to
ensure that materials and fabrics meet all applicable United States and foreign
safety and quality standards, including flammability and child safety laws. In
some cases additional tests are performed by the Company's customers.
IMPORTS AND IMPORT RESTRICTIONS
Net sales of the Company in 1996 attributable to products manufactured in Asia
were approximately 73% of the Company's total net sales. The importation of such
products is subject to the constraints imposed by bilateral agreements between
the United States and substantially all of the countries from which the Company
imports goods. These agreements impose quotas that limit the quantity of certain
types of goods, including textile products imported by the Company, which can be
imported into the United States from those countries. Textile products subject
to quotas represented approximately 45% of the Company's net sales in 1996. 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, because of concerns regarding Chinese labor and
human rights practices, weapons proliferation and trade policies, the renewal of
China's most favored nation treatment has been a contentious political issue for
several years. In 1992, the United States Congress passed bills on two separate
occasions, both of which were vetoed by President Bush, seeking to impose a
number of additional conditions on the renewal of China's most favored nation
status, and there can be no assurance that similar legislation will not be
introduced or adopted in the future or that such status will not be renewed when
it expires. If China were to lose its "most favored nation" status, goods
imported from China will be subject to significantly higher duty rates. Any such
increased duties would increase the cost of goods from China. In 1996,
approximately 35% of the Company's net sales were from products manufactured in
China.
TRADEMARKS
The Company is the owner in the United States of the trademark "CYRK" which is
registered in the United States Patent and Trademark Office. The Company is not
aware of any material claims of infringement or other challenges to the
Company's right to use this mark in the United States.
EMPLOYEES
At December 31, 1996, the Company had 730 full-time employees. The Company's
work force is not unionized and the Company believes that its relations with its
employees are good.
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ITEM 2. PROPERTIES.
The Company's manufacturing operations and principal executive offices are
located in Gloucester, Massachusetts. At December 31, 1996, the Company occupied
approximately 80,000 square feet (of which approximately two-thirds was
allocated to manufacturing operations) under leases that expire in April 1999
and have a current annual base rent of approximately $585,000. In January 1997,
the Company also began leasing approximately 21,400 square feet of additional
office and warehouse space in Gloucester, Massachusetts on a temporary basis at
a monthly rent of $14,267. The Company is currently negotiating a long-term
lease arrangement for this facility. All of the Gloucester facilities are owned
by a trust of which Mr. Shlopak, the Company's Chairman of the Board of
Directors and Chief Executive Officer, is both a trustee and beneficiary.
The Company also leases approximately 120,000 square feet of warehouse space in
Danvers, Massachusetts under the terms of a five-year extension option to the
operating lease agreement. The extension option expires on April 16, 2001. Under
the terms of the extension option, the Company pays monthly rent of $25,000. The
warehouse is used by the Company for inventory storage and to perform
fulfillment services for certain of its customers. This facility is owned by a
trust of which Mr. Shlopak and Mr. Brady, the Company's President and Chief
Operating Officer, are both trustees and beneficiaries.
Additionally, the Company leases approximately 60,000 square feet of warehouse
and office space in Milford, Connecticut which is used for fulfillment
operations pursuant to a lease which expires in March 2006. The Company also
leases approximately 20,800 square feet of warehouse and office space in
Norwood, Massachusetts which is used for its advertising specialty operations,
pursuant to a lease which expires in September 2001. The Company also leases
approximately 12,000 square feet of office space in New York City, pursuant to a
lease which expires in July 1999.
The Company's English subsidiary leases approximately 2,000 square feet of
office space in Windsor, England, pursuant to a lease which expires in February
1998. The Company's Hong Kong subsidiary leases approximately 3,800 square feet
of office space in Kowloon, Hong Kong, pursuant to a lease which expires in
December 1997. The Company's Taiwanese branch leases approximately 4,100 square
feet of office space in Taipei, Taiwan, pursuant to a lease which expires in
June 1997. The Company's Korean branch leases approximately 1,600 square feet of
office space in Seoul, Korea, pursuant to a lease which expires in April 1997.
ITEM 3. LEGAL PROCEEDINGS.
The Company and certain of its officers and directors have been named as
defendants in a putative class action filed on October 18, 1995 in the United
States District Court for the Southern District of New York (Barry Hallet, Jr.
v. Li & Fung, et al., Docket No. 95 Civ. 8917). Additional defendants include
the managing underwriter of the Company's previous public securities offerings
and a former principal stockholder of the Company. The plaintiff in the action
alleges that, in violation of the securities laws, the Company and its officers
made false and misleading statements concerning the Company's business which
artificially inflated the price of the Company's stock and that, as a result,
the plaintiff and other putative class members were damaged when they purchased
the Company's stock. The Company's motion to dismiss the complaint was denied
and the parties are continuing with discovery. The Company intends to vigorously
defend the action.
On August 30, 1995, the Company filed a complaint in the Superior Court for
Middlesex County, Massachusetts against Apex One, Inc. ("Apex") and its parent,
Converse, Inc. ("Converse") seeking money damages and equitable relief for
non-payment of $1.9 million of indebtedness arising from the sale and delivery
of goods to these defendants. In addition, the Company sought damages on account
of its production and holding of inventory, valued at over $2.0 million, arising
from Apex and Converse orders. On September 14, 1995, Apex filed for protection
under Chapter 11 of the United States Bankruptcy Code thereby staying the
Company's action against Apex. Pursuant to a settlement and Mutual Release
Agreement executed by the parties on February 7, 1997 and approved by
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the United States Bankruptcy Court on February 10, 1997, the Company will
receive $1.2 million in full settlement of its claims against Apex and Converse.
On or about February 15, 1997, Montague Corporation ("Montague") filed a
complaint against the Company in the Middlesex County Superior Court of the
Commonwealth of Massachusetts (Civil Action No. 97-00888). The complaint arises
out of an alleged distribution agreement ("Agreement") between the Company and
Montague's exclusive distributor for the sale of its bicycles in connection with
promotional programs in the United States. The complaint alleges that the
Company breached the purported Agreement, made negligent misrepresentations
concerning its performance of the Agreement and engaged in unfair and deceptive
trade practices in violation of Massachusetts General Law Chapter 93A. Montague
seeks actual and punitive damages with interest, attorneys' fees and costs. The
Company has meritorious defenses to these claims and intends to vigorously
oppose them. In fact, on March 17, 1997, the Company served upon Montague a
motion to dismiss the complaint. The litigation is in an early stage and the
Company is unable to express an opinion as to the likely outcome.
In the opinion of management, the outcomes of the foregoing pending actions will
not, in the aggregate, have a material adverse effect on the Company's financial
condition, results of operations or net cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's security holders during the
fourth quarter of the fiscal year ended December 31, 1996.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The following are the names, ages, positions with the Company and a brief
description of the business experience during the last five years of the
executive officers of the Company, all of whom serve until they resign or are
removed from such offices by the Board of Directors:
GREGORY P. SHLOPAK (50): Chairman of the Board of Directors and Chief
Executive Officer. Mr. Shlopak is a founder
of Cyrk and has served as one of its
directors since its incorporation in 1990.
From May 1990 to May 1993, Mr. Shlopak
served as the Company's President and
Secretary and was elected Chairman of the
Board and Chief Executive Officer in May
1993. Mr. Shlopak was also the founder,
President and a director of a company
engaged in the manufacture of custom
screen-printed and embroidered apparel and
accessories that was incorporated in 1976
and was merged into the Company in July
1993.
PATRICK D. BRADY (41): President and Chief Operating Officer. Mr.
Brady is a founder of the Company and has
served as one of its directors since its
incorporation in 1990. Mr. Brady was the
Chief Operating Officer and Treasurer of the
Company from May 1990 until May 1993 and
served as Chief Financial Officer from May
1993 to September 1994. Mr. Brady was
elected President and Chief Operating
Officer in May 1993.
TERRY B. ANGSTADT (43): Executive Vice President. Mr. Angstadt has
been a General Manager of the Company since
January 1992. Mr. Angstadt was elected an
Executive Vice President of the Company in
May 1993.
DOMINIC F. MAMMOLA (40): Vice President and Chief Financial Officer.
Mr. Mammola has served as Vice President and
Chief Financial Officer of the Company since
September 1994. From April 1987 to June
1994, he was Chief Financial Officer of Papa
Gino's, Inc., a restaurant chain.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's stock is traded on the Nasdaq National Market under the symbol
CYRK. The following table presents, for the periods indicated, the high and low
sales prices of the Company's common stock as reported by the Nasdaq National
Market.
<TABLE>
<CAPTION>
1996 1995
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter $ 16.75 $ 10.25 $ 39.63 $ 16.50
Second Quarter 16.25 11.38 17.00 7.50
Third Quarter 13.88 9.75 14.13 8.63
Fourth Quarter 13.00 10.00 12.16 9.63
</TABLE>
As of February 28, 1997, the Company had approximately 102 holders of record
(representing approximately 2,600 beneficial owners) of its common stock. The
last reported sale price of the Company's common stock on February 28, 1997 was
$12.50.
The Company has never paid cash dividends, other than stockholder distributions
of Subchapter S earnings during 1993 and 1992, and none are contemplated in the
foreseeable future as the Company currently intends to retain its earnings to
finance future growth. In addition, the Company's ability to pay cash dividends
is limited pursuant to the terms of its credit facility.
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ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
SELECTED INCOME (In thousands, except per share data)
STATEMENT DATA:
<S> <C> <C> <C> <C> <C>
Net sales $ 250,901 $ 135,842 $ 401,936 $ 165,708 $ 52,804
Net income (loss) 438 (2,338) 30,409 8,650 2,897
Earnings (loss) per
share .04 (.22) 3.20 1.18 .44
</TABLE>
<TABLE>
<CAPTION>
December 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
SELECTED BALANCE (In thousands)
SHEET DATA:
<S> <C> <C> <C> <C> <C>
Working capital $ 102,271 $ 106,188 $ 115,939 $ 25,101 $ 2,353
Total assets 190,239 137,598 147,029 67,221 21,506
Long-term debt -- -- -- 53 137
Cash dividends -- -- -- 3,900 2,117
Stockholders' equity 124,347 123,600 125,659 27,523 3,497
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
The Company is a full service, integrated provider of marketing and promotional
products and services. As such, the Company generates revenue from the sale of
promotional products and the development of marketing programs. The majority of
the Company's revenue is derived from the sale of promotional products to
consumer product companies seeking to promote their brand and build customer
loyalty.
Historically, the Company's business has been heavily dependent on purchases of
promotional products by Philip Morris Incorporated ("Philip Morris"). In 1995
and 1994, sales to Philip Morris accounted for 57% and 89% of the Company's
total net sales, respectively. In 1996, the Company extended its relationship
with Philip Morris. Efforts by the Company to diversify its customer base
resulted in an agreement with Pepsi-Cola Company ("Pepsi") in 1996 for the
Company's support in the "Pepsi Stuff" national promotion. Net sales to Pepsi
accounted for 38% of total net sales in 1996, while Philip Morris accounted for
30% of total net sales.
The Company's business with Pepsi and Philip Morris is based upon purchase
orders placed by these customers from time to time during the course of a
promotion. There are no written agreements with these customers which commits
them to make a certain level of purchases. The actual level of purchases by
Pepsi and Philip Morris (and other promotional products 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.
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 continually lower its product 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.
The Company's agreement with Pepsi for the 1996 "Pepsi Stuff" program provided
an exclusive role for the Company in the development and production of the
promotional merchandise and clothing. The contract further provided for
negotiated gross margins at various volume levels. The "Pepsi Stuff" national
promotion expired on, and required all consumer redemption orders to be
postmarked by, October 31, 1996. In December 1996, the Company entered into an
agreement to provide similar promotional products and services to Pepsi in 1997.
At December 31, 1996, the Company had written purchase orders for $97.6 million
as compared to $72.9 million at December 31, 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
The following table sets forth, for the periods presented, certain items in the
Company's statements of operations as a percentage of net sales:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Gross profit 14.7 17.2 19.3
Selling, general and
administrative expenses 14.8 21.8 6.1
Operating income (loss) -- (4.6) 13.2
Interest expense (income) (1.0) (2.4) .3
Net income (loss) .2 (1.7) 7.6
</TABLE>
12
<PAGE> 13
1996 Compared to 1995
Net sales increased $115.1 million, or 85%, to $250.9 million in 1996 from
$135.8 million in 1995. The increase in net sales was directly attributable to
the success of the Company's customer diversification effort. Promotional
product sales in 1996 totaled $202.7 million, or an increase of 108%, as
compared to $97.3 million in 1995. Net sales related to the Company's private
label and Cyrk brand business in 1996 totaled $48.2 million, or an increase of
25%, as compared to $38.5 million in 1995.
Gross profit increased $13.6 million, or 58%, to $37.0 million in 1996 from
$23.4 million in 1995. As a percentage of net sales, gross profit decreased to
14.7% in 1996 from 17.2% in 1995 primarily as a result of the continued
concentration of sales volume and lower margins associated with the large
promotional programs.
Selling, general and administrative expenses increased $7.4 million, or 25%, to
$37.0 million in 1996 from $29.7 million in 1995, but decreased as a percentage
of net sales to 14.8% in 1996 from 21.8% in 1995. The Company's increased
spending was primarily attributable to its expanded global sales, sourcing and
fulfillment capabilities. The decrease in selling, general and administrative
expenses as a percentage of net sales was attributable to the comparative
increase in net sales.
Interest income in 1996 was attributable to interest earned on short-term
investments of excess cash, primarily in investment grade securities.
Equity in loss of affiliates represents the Company's proportionate share of
investments being accounted for under the equity method.
For an analysis of the change in the effective tax rates from 1994 to 1996, see
notes to consolidated financial statements.
1995 Compared to 1994
Net sales decreased $266.1 million , or 66%, to $135.8 million in 1995 from
$401.9 million in 1994. The decrease was due primarily to the decline in net
sales of promotional products to Philip Morris. The decrease in net sales to
Philip Morris was partially offset by an increase in net sales of private label
and Cyrk brand sports apparel and accessories which increased 26% to $38.5
million in 1995 from $30.6 million in 1994, and by an increase in net sales of
other promotional products business.
Gross profit decreased $54.1 million, or 70%, to $23.4 million in 1995 from
$77.5 million in 1994. As a percentage of net sales, gross profit decreased to
17.2% in 1995 from 19.3% in 1994 due principally to higher material and
manufacturing costs associated with the Company's private label and Cyrk brand
business incurred in anticipation of a volume of business greater than actually
achieved.
Selling, general and administrative expenses increased $5.1 million, or 21%, to
$29.7 million in 1995 from $24.5 million in 1994, and increased as a percentage
of net sales to 21.8% in 1995 from 6.1% in 1994. The dollar increase was
primarily attributable to increased selling costs related to new business
development. The increase in selling, general and administrative expenses as a
percentage of net sales was attributable to the comparative decline in net sales
in 1995 versus 1994. Notwithstanding the significant fluctuations in its net
sales, the Company manages such expenses consistent with its longer-term
business plan and the timelines required for account development.
Interest income in 1995 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 a
1995 investment being accounted for under the equity method. (See notes to
consolidated financial statements.)
13
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
Working capital at December 31, 1996 was $102.3 million compared to $106.2
million at December 31, 1995. Net cash used in operating activities during 1996
was $25.5 million, due principally to an increase in accounts receivable. Trade
accounts receivable grew to $59.0 million at December 31, 1996 from $20.5
million at December 31, 1995, primarily as a result of increased sales in the
fourth quarter of 1996 compared to the fourth quarter of 1995. Days sales
outstanding were 62 days and 60 days at December 31, 1996 and December 31, 1995,
respectively. Inventories at December 31, 1996 were $45.9 million, an increase
of $18.9 million from December 31, 1995. This increase in inventories was
primarily as a result of inventory purchases to satisfy promotional customer
orders. Approximately one-third of this inventory at December 31, 1996 relates
to the Company's private label and Cyrk brand business. The inventory for this
business is customarily accumulated in anticipation of forecasted demand and
without written purchase orders which are typically associated with the
Company's promotional products business. At December 31, 1995, approximately
two-thirds of the Company's inventory consisted of inventory related to the
private label and Cyrk brand business.
Net cash provided by investing activities was $7.9 million, which included $16.8
million of net sales of investments, offset by $3.4 million of additions to
property and equipment, $1.8 million of acquired intangible assets and $2.3
million of loans made to an affiliate. In 1995, net cash used in investing
activities was $29.9 million, of which $19.6 million represented net purchases
of investments, $5.7 million was related to equity investments and $3.9 million
was used for additions to property and equipment. The Company currently
anticipates that its 1997 capital expenditures will substantially exceed those
of 1996.
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 1996 were provided principally by financing and investing
activities.
The Company currently has available a bank letter of credit and revolving credit
facility which expires March 31, 1998. As of December 31, 1996, based on the
borrowing base formula prescribed by this credit facility, the Company's
borrowing capacity was $75 million, of which $34.8 million in letters of credit
and $18.7 million of short-term borrowings were outstanding. Borrowings under
the facilities 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 1997.
14
<PAGE> 15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants 22
Consolidated Balance Sheets as of December 31, 1996 and 1995 23
Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994 24
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1995
and 1994 25
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 26
Notes to Consolidated Financial Statements 27-36
Schedule II: Valuation and Qualifying Accounts 37
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
NONE
15
<PAGE> 16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item regarding the Company's directors is
included in the Company's Proxy Statement to be filed pursuant to Schedule 14A
in connection with the Company's 1997 Annual Meeting of Stockholders under the
section captioned "Election of Directors" and is incorporated herein by
reference thereto. Information regarding the Company's executive officers is set
forth in Part I hereof, above, under the caption "Executive Officers of the
Registrant" and is incorporated herein by reference thereto.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is included in the Company's Proxy
Statement to be filed pursuant to Schedule 14A in connection with the Company's
1997 Annual Meeting of Stockholders under the sections captioned "Directors'
Compensation" and "Executive Compensation" and is incorporated herein by
reference thereto.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is included in the Company's Proxy
Statement to be filed pursuant to Schedule 14A in connection with the Company's
1997 Annual Meeting of Stockholders under the section captioned "Security
Ownership of Certain Beneficial Owners and Management" and is incorporated
herein by reference thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is included in the Company's Proxy
Statement to be filed pursuant to Schedule 14A in connection with the Company's
1997 Annual Meeting of Stockholders under the section captioned "Compensation
Committee Interlocks and Insider Participation" and is incorporated herein by
reference thereto.
16
<PAGE> 17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) DOCUMENTS FILED AS PART OF THIS REPORT.
1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 1996
and 1995
Consolidated Statements of Operations for the years
ended December 31, 1996, 1995 and 1994
Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years
ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES FOR THE FISCAL YEARS
ENDED DECEMBER 31, 1996, 1995 AND 1994:
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.
17
<PAGE> 18
3. EXHIBITS
EXHIBIT NO. DESCRIPTION
+2.1 Agreement of Merger dated July 6, 1993 between the Registrant
and Cyrk, Inc.
@3.1 Restated Certificate of Incorporation of the Registrant
*3.2 Amended and Restated By-laws of the Registrant
*4.1 Specimen certificate representing Common Stock
*10.1 1993 Non-Employee Director Stock Option Plan
x*10.2 1993 Employee Stock Purchase Plan
[email protected] 1993 Omnibus Stock Plan, as amended
+++10.4 First Amended and Restated Marlboro Adventure Team Products
Trade Financing Arrangement Agreement dated as of January 10,
1994, between the Registrant and Philip Morris Incorporated
*10.5 Subscription and Registration Rights Agreement dated as of May
1, 1990, between Li & Fung (B.V.I.) Limited, Patrick D. Brady,
Gregory P. Shlopak and the Registrant
@10.6 Letter agreement dated November 30, 1994 among Li & Fung
(Trading) Ltd., Li & Fung (B.V.I.) Ltd. and the Registrant
*10.7 Lease dated as of April 19, 1989, between Gregory P. Shlopak and
Paul M. Butman, Jr., as Trustees of PG Realty Trust, and Cyrk,
Inc.
*10.8 Lease dated as of April 19, 1989, between Gregory P. Shlopak and
Paul M. Butman, Jr., as Trustees of LPG Realty Trust, and Cyrk,
Inc.
o10.9 Lease dated April 17, 1986 between Spaulding and Slye Company
and Parker Brothers Division of Kenner-Parker Toys Inc., with
Assignment of Lessee's Interest in Lease dated as of June 11,
1995 between Tonka Corporation and the Registrant
+10.10 Letter Agreement dated October 19, 1993, between the Registrant
and The Hongkong and Shanghai Banking Corporation Limited
+10.11 Revolving Credit Agreement dated as of December 1, 1993, between
the Registrant and The Hongkong and Shanghai Banking Corporation
Limited
+10.12 Letter Agreement dated January 5, 1994, between the Registrant
and The Hongkong and Shanghai Banking Corporation Limited
+10.13 Amendment No. 1 to Revolving Credit Agreement dated as of
January 12, 1994, between the Registrant and The Hongkong and
Shanghai Banking Corporation Limited
+10.14 Security Agreement dated as of December 1, 1993, between the
Registrant and The Hongkong and Shanghai Banking Corporation
Limited
#10.15 Revolving Credit Agreement dated May 9, 1994 between the
Registrant and Fleet Bank of Massachusetts, N.A.
#10.16 Security Agreement dated May 9, 1994 between the Registrant and
Fleet Bank of Massachusetts, N.A.
#10.17 Security and Loan Agreement dated May 12, 1994 between the
Registrant and The Pacific Bank
#10.18 Security Agreement dated May 12, 1994 between the Registrant and
The Pacific Bank
#10.19 Letter Agreement dated May 5, 1994 between the Registrant and
The Hongkong and Shanghai Banking Corporation Limited
#10.20 Intercreditor Agreement dated May 12, 1994 among the Registrant,
Fleet Bank of Massachusetts, N.A., The Pacific Bank, and The
Hongkong and Shanghai Banking Corporation Limited
o10.21 Letter agreement dated February 7, 1996, between the Registrant
and The Wells Fargo HSBC Trade Bank, N.A.
10.21.1 Letter agreement dated March 26, 1997, between the Registrant
and The Wells Fargo HSBC Trade Bank, N.A., filed herewith
18
<PAGE> 19
3. EXHIBITS - continued
EXHIBIT NO. DESCRIPTION
+10.22 Tax Allocation and Indemnity Agreement dated July 6, 1993, among
Cyrk, Inc., the Registrant, Gregory P. Shlopak and Patrick D.
Brady
x*10.23 Restricted Stock Purchase Agreement dated May 10, 1993, between
the Registrant and Terry B. Angstadt
x-10.24 Life Insurance Agreement dated as of November 15, 1994 by and
between the Registrant and Patrick D. Brady as Trustee under a
declaration of trust dated November 7, 1994 between Gregory P.
Shlopak and Patrick D. Brady, Trustee, entitled "The Shlopak
Family 1994 Irrevocable Insurance Trust"
x-10.24.1 Assignments of Life Insurance policies as Collateral, each dated
November 15, 1994
x-10.25 Life Insurance Agreement dated as of November 15, 1994 by and
between the Registrant and Patrick D. Brady as Trustee under a
declaration of trust dated November 7, 1994 between Gregory P.
Shlopak and Patrick D. Brady, Trustee, entitled "The Gregory P.
Shlopak 1994 Irrevocable Insurance Trust"
x-10.25.1 Assignments of Life Insurance policies as Collateral, each dated
November 15, 1994
x-10.26 Consulting Agreement dated as of November 15, 1994 by and
between the Registrant and Gregory P. Shlopak
x-10.27 Life Insurance Agreement dated as of November 15, 1994 by and
between the Registrant and Walter E. Moxham, Jr. as Trustee
under a declaration of trust dated November 7, 1994 between
Patrick D. Brady and Walter E. Moxham, Jr., Trustee, entitled
"The Patrick D. Brady 1994 Irrevocable Insurance Trust"
x-10.27.1 Assignments of Life Insurance policies as Collateral, each dated
November 15, 1994
x-10.28 Consulting Agreement dated as of November 15, 1994 by and
between the Registrant and Patrick D. Brady
- -10.29 First Amended and Restated Agreement of Limited Partnership
dated as of March 28, 1995 by and between the Registrant and
Grant & Partners Limited Partnership
- -10.30 Revolving Credit Agreement dated as of March 28, 1995 by and
between the Registrant and Grant & Partners Limited Partnership
10.30.1 Agreement dated October 11, 1996, between the Registrant and
Grant & Partners Limited Partnership, filed herewith
- -10.31 Option Agreement dated as of March 28, 1995 by and among the
Registrant, Grant & Partners, Inc., Alan Grant and Grant &
Partners Limited Partnership
*-10.32 Non-Qualified Stock Option Agreement dated as of February 10,
1995 by and between the Registrant and Alan Grant
*-10.33 Non-Qualified Stock Option Agreement dated as of March 28, 1995
by and between the Registrant and Alan Grant
10.34 Loan agreement dated April 30, 1996, between the Registrant, 125
Water Street, LLC, Gregory P. Shlopak and Patrick D. Brady,
filed herewith
10.34.1 Promissory Note dated April 30, 1996, between the Registrant and
125 Water Street, LLC, filed herewith
21.1 List of Subsidiaries, filed herewith
23.1 Consent of Coopers & Lybrand L.L.P. - Independent Accountants,
filed herewith
[_]99.1 Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act of
1995
99.2 Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act of
1995, filed herewith
19
<PAGE> 20
+ 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.
* 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.
x Management contract or compensatory plan or arrangement.
+++ Filed as an exhibit to the Registrant's Registration Statement
on Form S-1 (Registration No. 33-75320) or an amendment thereto
accompanied by a request for confidential treatment as to
certain portions and incorporated herein by reference.
# Filed as an exhibit to the Registrant's Registration Statement
on Form 10-Q dated March 31, 1994 and incorporated herein by
reference.
@ Filed as an exhibit to the Annual Report on Form 10-K for the
year ended December 31, 1994 and incorporated herein by
reference
- - Filed as an exhibit to the Registrant's Registration Statement
on Form 10-Q dated March 31, 1995 and incorporated herein by
reference.
o Filed as an exhibit to the Annual Report on Form 10-K for the
year ended December 31, 1995 and incorporated herein by
reference
[_] Filed as an exhibit to the Registrant's Registration Statement
on Form 10-Q dated September 30, 1996 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, 1996.
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CYRK, INC.
Date: March 27, 1997 By: /s/ Patrick D. Brady
----------------------
Patrick D. Brady
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ Gregory P.Shlopak
- ------------------------ Chairman of the Board March 27, 1997
GREGORY P. SHLOPAK Chief Executive Officer
(principal executive officer)
Director
/s/ Patrick D. Brady
- ------------------------ President March 27, 1997
PATRICK D. BRADY Chief Operating Officer
Director
/s/ Dominic F. Mammola
- ------------------------ Chief Financial Officer March 27, 1997
DOMINIC F. MAMMOLA (principal financial and
accounting officer)
/s/ Joseph W. Bartlett
- ------------------------ Director March 27, 1997
JOSEPH W. BARTLETT
/s/ Louis Marx, Jr.
- ------------------------ Director March 27, 1997
LOUIS MARX, JR.
</TABLE>
21
<PAGE> 22
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Cyrk, Inc.:
We have audited the consolidated financial statements and the financial
statement schedule of Cyrk, Inc. and subsidiaries listed in Items 14a(1) and (2)
of this Form 10-K. These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and the financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion the financial statements referred to above, present fairly, in
all material respects, the consolidated financial position of Cyrk, Inc. as of
December 31, 1996 and 1995, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles. In addition,
in our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
February 14, 1997
22
<PAGE> 23
CYRK, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
1996 1995
---- ----
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 44,224 $ 42,583
Investments 2,420 19,555
Accounts receivable:
Trade, less allowance for doubtful accounts of $3,191 in
1996 and $3,039 in 1995 59,046 20,538
Officers, stockholders and related parties 3,466 222
Inventories 45,904 27,007
Prepaid expenses and other current assets 6,114 3,934
Deferred and refundable income taxes 6,186 5,748
--------- ---------
Total current assets 167,360 119,587
Property and equipment, net 10,407 9,542
Other assets 6,605 3,482
Investment in affiliates 1,617 2,987
Loan to affiliate 4,250 2,000
--------- ---------
$ 190,239 $ 137,598
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 18,749 $ --
Accounts payable:
Trade 8,834 3,399
Affiliates 992 21
Accrued expenses and other current liabilities 36,514 9,979
--------- ---------
Total current liabilities 65,089 13,399
Deferred income taxes 803 599
--------- ---------
Total liabilities 65,892 13,998
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized; none issued -- --
Common stock, $.01 par value; 50,000,000 shares authorized;
10,790,876 shares issued and outstanding in 1996
and 10,737,209 shares issued and outstanding in 1995 108 107
Additional paid-in capital 87,402 86,862
Retained earnings 37,373 36,935
Net unrealized loss on available-for-sale securities (56) (74)
Cumulative translation adjustment (480) (230)
--------- ---------
Total stockholders' equity 124,347 123,600
--------- ---------
$ 190,239 $ 137,598
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
23
<PAGE> 24
CYRK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales $ 250,901 $ 135,842 $ 401,936
Cost of sales:
Related parties 2,064 7,974 53,849
Other 211,851 104,489 270,633
--------- --------- ---------
213,915 112,463 324,482
--------- --------- ---------
Gross profit 36,986 23,379 77,454
--------- --------- ---------
Selling, general and administrative expenses:
Related parties 787 587 587
Other 36,248 29,065 23,924
--------- --------- ---------
37,035 29,652 24,511
--------- --------- ---------
Operating income (loss) (49) (6,273) 52,943
Interest expense (income), net (2,423) (3,274) 1,228
Equity in loss of affiliates 1,111 543 --
--------- --------- ---------
Income (loss) before income taxes 1,263 (3,542) 51,715
Income tax provision (benefit) 825 (1,204) 21,306
--------- --------- ---------
Net income (loss) $ 438 $ (2,338) $ 30,409
========= ========= =========
Earnings (loss) per share $ 0.04 $ (0.22) $ 3.20
========= ========= =========
Weighted average shares outstanding 10,909 10,735 9,512
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
24
<PAGE> 25
CYRK, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1996, 1995 and 1994
(In thousands)
<TABLE>
<CAPTION>
Net
Unrealized
Loss on
Additional Available- Cumulative Total
Common Paid-in Retained For-Sale Translation Stockholders'
Stock Capital Earnings Securities Adjustment Equity
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $ 82 $ 18,577 $ 8,864 $ -- $ -- $ 27,523
Issuance of shares in connection with
public offerings 22 62,196 -- -- -- 62,218
Issuance of shares under employee stock option
and stock purchase plans, net of tax benefit 3 5,506 -- -- -- 5,509
Net income -- -- 30,409 -- -- 30,409
--------- --------- --------- --------- --------- ---------
Balance, December 31, 1994 107 86,279 39,273 -- -- 125,659
Issuance of shares under employee stock option
and stock purchase plans, net of tax benefit -- 583 -- -- -- 583
Net unrealized losses on
available-for-sale-securities -- -- -- (74) -- (74)
Translation adjustment -- -- -- -- (230) (230)
Net loss -- -- (2,338) -- -- (2,338)
--------- --------- --------- --------- --------- ---------
Balance, December 31, 1995 107 86,862 36,935 (74) (230) 123,600
Issuance of shares under employee stock option
and stock purchase plans 1 540 -- -- -- 541
Net unrealized gains on
available-for-sale-securities -- -- -- 18 -- 18
Translation adjustment -- -- -- -- (250) (250)
Net income -- -- 438 -- -- 438
--------- --------- --------- --------- --------- ---------
Balance, December 31, 1996 $ 108 $ 87,402 $ 37,373 $ (56) $ (480) $ 124,347
========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
25
<PAGE> 26
CYRK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss) $ 438 $ (2,338) $ 30,409
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 2,875 1,956 832
Realized loss on sale of investments 352 13 --
Provision for doubtful accounts 152 120 2,568
Deferred income taxes (1,303) (220) (2,406)
Equity in loss of affiliates 1,111 543 --
Tax benefit from stock option plans -- 16 1,788
Increase (decrease) in cash from changes in working capital items:
Accounts receivable (41,973) 51,977 (39,244)
Inventories (18,905) (8,291) (3,166)
Prepaid expenses and other current assets (2,187) (1,429) (1,781)
Refundable income taxes 1,069 3,130 (4,199)
Accounts payable, trade 5,414 (617) 48
Accounts payable, affiliates 971 (2,414) (3,955)
Accrued expenses and other current liabilities 26,513 (4,400) 7,284
-------- -------- --------
Net cash provided by (used in) operating activities (25,473) 38,046 (11,822)
-------- -------- --------
Cash flows from investing activities:
Purchase of property and equipment (3,441) (3,890) (5,752)
Investment in affiliates -- (3,686) --
Loan to affiliate (2,250) (2,000) --
Purchase of investments (37,913) (35,639) (2,000)
Proceeds from sales of investments 54,714 15,997 --
Acquisition of intangible assets (1,789) -- --
Other, net (1,378) (674) (750)
-------- -------- --------
Net cash provided by (used in) investing activities 7,943 (29,892) (8,502)
-------- -------- --------
Cash flows from financing activities:
Proceeds (payments) under short-term borrowings, net 18,749 -- (21,984)
Proceeds from issuance of common stock 541 567 65,939
Repayments of obligations under capital leases -- -- (146)
-------- -------- --------
Net cash provided by financing activities 19,290 567 43,809
-------- -------- --------
Effect of exchange rate changes on cash (119) -- --
-------- -------- --------
Net increase in cash and cash equivalents 1,641 8,721 23,485
Cash and cash equivalents, beginning of year 42,583 33,862 10,377
-------- -------- --------
Cash and cash equivalents, end of year $ 44,224 $ 42,583 $ 33,862
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 149 $ 71 $ 1,573
======== ======== ========
Income taxes $ 208 $ 836 $ 26,650
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
26
<PAGE> 27
CYRK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
1. Nature of Business
Cyrk, Inc. designs, develops, manufactures, sources and distributes high quality
products for promotional programs and custom-designed sports apparel and
accessories.
2. Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Cyrk,
Inc. and its subsidiaries. All material intercompany accounts and transactions
have been eliminated in consolidation.
Revenue Recognition
Sales of goods manufactured domestically are recognized when such goods are
shipped from the Company's warehouse. Sales of imported goods are recognized at
the time shipments are received at the customer's designated location. Under
certain agreements, the Company warehouses products after manufacturing or
importation has been completed and recognizes a sale upon receipt of the goods
in the Company's warehouse, at which time title transfers to the customer.
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 16).
Financial Instruments
The carrying amounts of cash equivalents, investments and short-term borrowings
approximate their fair values.
Cash Equivalents
Cash equivalents consist of short-term, highly liquid investments which have
original maturities at date of purchase to the Company of three months or less.
Investments
Investments are stated at fair value as reported by the investment custodian.
All security investments are designated as available-for-sale in accordance with
the provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," and as such
unrealized gains and losses are reported in a separate component of
stockholders' equity.
27
<PAGE> 28
Inventories
Inventories are valued at the lower of cost (first-in, first-out and specific
identification methods) or market.
Property and Equipment
Property and equipment are stated at cost and are depreciated 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 3 to 15 years.
Goodwill
As of December 31, 1996, other assets includes $1,789 of goodwill which
represents the excess of the purchase price of acquired companies over the
estimated fair value of the net assets acquired. Goodwill is being amortized on
a straight-line basis over a period of five to fifteen years. Accumulated
amortization amounted to $45 at December 31, 1996.
Impairment of Long-Lived Assets
In fiscal 1996, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 121
requires that long-lived assets to be held and used or disposed of by an entity
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. During 1996, the
Company determined that an impairment loss was not required on its long-lived
assets.
Income Taxes
The Company determines deferred taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," 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 Share
Earnings (loss) per share are determined by dividing net income (loss) by the
weighted average number of common shares and dilutive share equivalents
outstanding during each year.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
3. Investments
The Company's investments in debt and equity securities are classified as
available-for-sale securities. At December 31, 1996, investments of $2,420
consisted of preferred stock. The contractual maturities of these investments at
December 31, 1996 were all due within one year. The gross unrealized gains and
(losses) on these investments at
28
<PAGE> 29
December 31, 1996 were $216 and $(272), respectively. At December 31, 1995,
investments consisted of $11,875 of U.S. government agency bonds and $7,680 of
preferred stock . The gross unrealized gains and (losses) on investments at
December 31, 1995 were $17 and $(91), respectively.
The gross realized gains and (losses) on sales of available-for-sale securities,
based on the specific identification method, totaled $44 and $(396),
respectively, for the year ended December 31, 1996 and, totaled $4 and $(17),
respectively, for the year ended December 31, 1995.
4. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
1996 1995
---- ----
<S> <C> <C>
Raw materials $12,009 $15,248
Finished goods 33,895 11,759
------- -------
$45,904 $27,007
======= =======
</TABLE>
5. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
1996 1995
---- ----
<S> <C> <C>
Machinery and equipment $ 11,497 $ 9,801
Furniture and fixtures 2,749 1,977
Leasehold improvements 2,742 1,773
-------- --------
16,988 13,551
Less - accumulated depreciation and amortization (6,581) (4,009)
-------- --------
$ 10,407 $ 9,542
======== ========
</TABLE>
Depreciation and amortization expense on property and equipment totaled $2,572,
$1,800 and $827 in 1996, 1995 and 1994, respectively.
6. Investment in Affiliate
In March 1995, the Company purchased at a total cost of $3,186 a 50% interest in
Grant & Partners Limited Partnership ("GPLP"), a Boston-based firm specializing
in improving the returns on marketing investments. This investment is being
accounted for under the equity method. Cost in excess of the Company's equity in
the underlying assets of GPLP of $3,136 is being amortized ratably over fifteen
years. Accumulated amortization amounted to $365 at December 31, 1996 and $156
at December 31, 1995. In addition, the carrying value of this investment has
been reduced by $894 and $543 representing the Company's share of GPLP's 1996
and 1995 net losses. In connection with such investment, the Company agreed to
extend a $15,000 line of credit to GPLP (the "Line of Credit"). Borrowings under
the Line of Credit bear interest at the prime rate (8.25% at December 31, 1996).
Interest is payable monthly in arrears while the principal amount of borrowings
is due upon termination of the Line of Credit in March 2003. At December 31,
1996, $4,250 was outstanding under the Line of Credit and $102 of interest was
due from GPLP. At December 31, 1995, $2,000 was outstanding under the Line of
Credit and $65 of interest was due from GPLP. Interest income recognized by the
Company from GPLP totaled $259 and $126 in 1996 and 1995, respectively. In
October 1996, the terms of the Line of Credit were amended to reduce the maximum
amount that could be outstanding at any time to $5,000.
29
<PAGE> 30
Summarized balance sheet and statement of operations information for GPLP were
as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
---- ----
Summarized Balance Sheet Information:
<S> <C> <C>
Current assets $ 2,951 $ 1,606
Other assets 2,363 2,061
------- -------
5,314 3,667
------- -------
Current liabilities 3,672 2,479
Other liabilities 4,314 2,073
------- -------
7,986 4,552
------- -------
Net liabilities $(2,672) $ (885)
======= =======
</TABLE>
<TABLE>
<CAPTION>
March 28, 1995
Year Ended through
December 31, 1996 December 31, 1995
----------------- -----------------
Summarized Statement of Operations:
<S> <C> <C>
Revenue $ 8,926 $ 3,544
Operating expenses 10,713 4,630
-------- --------
Net loss $ (1,787) $ (1,086)
======== ========
</TABLE>
7. Short-Term Borrowings
Pursuant to the provisions of its existing credit facility with a bank, as
amended in March 1997, the Company has commitments for letter of credit and
revolving credit borrowings through March 1998 of up to an aggregate amount of
$75,000 (the "Import Facility"), subject to borrowing base formulas, for the
purpose of financing the importation of various products from Asia and
supporting the Company's working capital requirements. Borrowings under the
facility bear interest at the lesser of the bank's prime rate (8.25% at December
31, 1996) or LIBOR plus 1.75% (7.25% at December 31, 1996), and are
collateralized by all of the assets of the Company. The facility contains
covenants which require the Company to maintain a minimum net worth level and
minimum current and debt to net worth ratios through the term of the commitment.
Additionally, during any consecutive four quarters, the Company is required to
maintain certain minimum operating results.
Under the terms of this facility, the bank will issue sight commercial
documentary credits supported by customer purchase orders, where the bank
retains control of the goods, in an aggregate amount outstanding at any one time
up to a maximum of $75,000, with a sublimit of $50,000 (the "Subline") for
drawings under documentary credits pursuant to which the bank does not retain
control of the goods. Within the Subline, the bank will provide the Company with
up to $15,000 of revolving credit (the "Revolving Subline"), subject to a
borrowing base formula. Also within the Import Facility, the bank will issue
documentary credits that are unsupported by customer purchase orders in an
aggregate amount outstanding at any one time of up to $27,500. At December 31,
1996, the Company's borrowing capacity under this facility was $75,000, of which
$34,762 in letters of credit were outstanding. The letters of credit expire at
various dates through July 1997. The facility provides for a fee of 3/8% per
annum on the unused portion of the commitment.
The maximum short-term borrowings at any month-end were $18,749 and $52,972
during 1996 and 1994, respectively. Average borrowings under all short-term
credit arrangements were $1,982 in 1996 and $16,188 in 1994. The weighted
average interest rates were 7.3% and 6.7% in 1996 and 1994, respectively. During
1995, there were no short-term borrowings.
30
<PAGE> 31
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 March
2006 (see Note 15). The approximate minimum rental commitments under all
noncancelable leases as of December 31, 1996, were as follows:
<TABLE>
<S> <C>
1997 $ 3,128
1998 2,626
1999 1,905
2000 1,450
2001 757
Thereafter 850
-------
Total minimum lease payments $10,716
=======
</TABLE>
Rental expense for all operating leases was $3,080, $2,655 and $1,073 for the
years ended December 31, 1996, 1995 and 1994, respectively.
9. Income Taxes
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
1996 1995 1994
Current:
<S> <C> <C> <C>
Federal $ 1,393 $ (1,330) $ 18,923
State 222 125 4,789
Foreign 513 221 --
-------- -------- --------
2,128 (984) 23,712
-------- -------- --------
Deferred:
Federal (1,223) 10 (2,084)
State (80) (230) (322)
-------- -------- --------
(1,303) (220) (2,406)
-------- -------- --------
$ 825 $ (1,204) $ 21,306
======== ======== ========
</TABLE>
The tax effects of temporary differences giving rise to deferred tax assets and
liabilities as of December 31, are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
Deferred tax assets
<S> <C> <C>
Receivable reserves $1,491 $1,185
Inventory capitalization and reserves 3,488 2,822
Other asset reserves 1,207 441
State net operating loss carryforward -- 231
------ ------
$6,186 $4,679
====== ======
Deferred tax liabilities (depreciation) $ 803 $ 599
====== ======
</TABLE>
31
<PAGE> 32
The following is a reconciliation of the statutory federal income tax rate to
the actual effective income tax rate:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Federal tax (benefit) rate 34% (34)% 35%
Increase (decrease) in taxes resulting from:
State income taxes, net of federal benefit 7 3 6
Effect of foreign tax rates and non-utilization
of losses 35 5 --
Tax exempt dividends (16) -- --
Meals and entertainment 6 -- --
State net operating loss carryforward -- (6) --
Other, net (1) (2) --
--- --- ---
Effective tax (benefit) rate 65% (34)% 41%
=== === ===
</TABLE>
10. Accrued Expenses and Other Current Liabilities
At December 31, 1996 and 1995, accrued expenses and other current liabilities
consisted of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Inventory purchases $24,286 $ 5,689
Accrued payroll and related 2,840 2,179
Other 9,388 2,111
------- -------
$36,514 $ 9,979
======= =======
</TABLE>
11. Stockholders' Equity
In December 1994, the Company completed the issuance of 958,251 shares of common
stock through a public offering, resulting in proceeds to the Company of
$32,824, net of offering costs. The proceeds are being used for working capital,
other general corporate purposes and acquisitions.
In March 1994, the Company issued 1,250,000 shares of common stock in a public
offering, resulting in proceeds to the Company of $29,394, net of offering
costs. The proceeds are being used for working capital and general corporate
purposes.
12. Stock Plans
At December 31, 1996, the Company had three stock-based compensation plans,
which are described below. In 1996, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 requires that companies either recognize
compensation expense for grants of stock, stock options, and other equity
instruments based on fair value, or provide pro forma disclosure of net income
and earnings per share in the notes to the financial statements. The Company
adopted the disclosure provisions of SFAS 123 and has applied APB Opinion 25 and
related Interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized related to such plans. Had compensation
cost for the Company's 1996 and 1995 grants for stock-based compensation plans
been determined consistent with SFAS 123, the Company's net income (loss) and
earnings (loss) per share would have been reduced (increased) to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net income (loss) -- as reported $438 $(2,338)
Net loss -- pro forma (570) (3,306)
Earnings (loss) per share -- as reported 0.04 (0.22)
Loss per share -- pro forma (0.05) (0.31)
</TABLE>
32
<PAGE> 33
The effects of applying SFAS 123 in this pro forma are not indicative of future
amounts. SFAS 123 does not apply to awards prior to 1995, and additional awards
in future years are anticipated.
1993 Omnibus Stock Plan
Under its 1993 Omnibus Stock Plan (the "Omnibus Plan"), the Company has reserved
up to 2,000,000 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 for restricted stock and upon exercise of options. 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 equal installments over three years
beginning one year after the grant date. Effective September 1, 1995, the
Company granted all employees (except executive officers) with outstanding
options the right to either exchange their existing options for new options with
an exercise price of $10.00 per share (the fair market value on September 1,
1995) and begin a new vesting period, or retain their current option position. A
total of 499,293 stock options were canceled and regranted under this program.
On November 3, 1994, the Company approved the immediate exercisability of
options granted in July and December 1993 to purchase an aggregate of 245,703
shares.
Non-Employee Director Stock Option Plan
The 1993 Non-Employee Director Stock Option Plan (the "Director Plan") provides
for the grant of options for the purchase of up to 150,000 shares of common
stock of the Company. The Director Plan is administered by the Board of
Directors or a committee appointed by the Board of Directors. On March 31 of
each year, each non-employee director holding office on such date is entitled to
receive an option to purchase 5,000 shares of common stock. The exercise price
per share for all options granted under the Director Plan is equal to the market
price of the common stock on the date of grant. Except for the options to
purchase 10,000 shares of common stock granted upon the commencement of the
initial public offering, the options under the Director Plan become exercisable
in two equal installments on each of the first and second anniversaries of the
date of grant. Options may not be assigned or transferred except by will or by
the laws of descent and distribution and are exercisable only to the extent
vested while the optionee is serving as a director of the Company or within 180
days after the optionee ceases to serve as a director of the Company (except
that if a director dies or becomes disabled while he or she is serving as a
director of the Company, the option is exercisable until the scheduled
expiration date of the option).
The fair value of each option grant was estimated using the Black-Scholes option
pricing model with the following weighted average assumptions for 1996 and 1995,
respectively: expected dividend yield of zero percent for both years; expected
life of 3.5 and 4.6 years; expected volatility of 56 percent for both years;
and, a risk-free interest rate of 5.2 and 6.6 percent.
33
<PAGE> 34
The following summarizes the status of the Company's stock options as of
December 31, 1996, 1995 and 1994 and changes during the year ended on those
dates:
<TABLE>
<CAPTION>
1996 1995 1994
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------------------- -------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,138,628 $15.71 621,696 $21.74 476,250 $15.50
Granted 417,500 12.57 1,059,293 15.21 430,000 24.20
Exercised (12,281) 10.02 (1,418) 16.97 (246,767) 14.57
Canceled (568,592) 20.81 (540,943) 21.65 (37,787) 19.25
---------- ---------- ----------
Outstanding at end of year 975,255 11.47 1,138,628 15.71 621,696 21.74
========== ========== ==========
Options exercisable at year-end 214,852 44,356 71,921
========== ========== ==========
Options available for future grant 913,444 762,352 1,280,702
========== ========== ==========
Weighted average fair value of
options granted during the year $ 6.36 $ 8.14
========== ==========
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding at Contractual Exercise Exercisable at Exercise
Prices December 31, 1996 Life Price December 31, 1996 Price
------- ----------------- ---- ------- ----------------- -------
<S> <C> <C> <C> <C> <C>
$10.00 - $12.00 584,471 8.6 years $10.07 195,386 $10.16
12.75 - 16.50 365,000 9.1 12.90 -- --
17.25 - 28.75 25,784 7.6 22.68 19,466 24.04
-------- -------
$10.00 - $28.75 975,255 8.8 11.47 214,852 11.41
======== =======
</TABLE>
Employee Stock Purchase Plan
Pursuant to its 1993 Employee Stock Purchase Plan (the "Stock Purchase Plan"),
the Company is authorized to issue up to an aggregate of 150,000 shares of its
common stock to eligible employees electing to participate in the Stock Purchase
Plan. Eligible employees may contribute, through payroll withholdings or lump
sum cash payment, up to 10% of their base compensation during six-month
participation periods beginning in January and July of each year. At the end of
each participation period, the accumulated deductions are applied toward the
purchase of Company common stock at a price equal to 85% of the market price at
the beginning or end of the participation period, whichever is lower. The first
offering under the Stock Purchase Plan commenced in January 1994. Employee
purchases amounted to 41,385 shares in 1996, 33,903 shares in 1995 and 6,035
shares in 1994 at prices ranging from $9.56 to $20.93 per share. At December 31,
1996, 68,677 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 1996 and 1995,
respectively: expected dividend yield of zero percent for both years; expected
life of six months for both years; expected volatility of 56 percent for both
years; and, a risk-free interest rate of 5.3 and 5.8 percent. The
weighted-average fair value of those purchase rights granted in 1996 and 1995
was $4.28 and $4.07, respectively.
34
<PAGE> 35
13. 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,
1996, 1995 and 1994 was $439, $353 and $226, respectively.
14. Litigation
The Company and certain of its officers and directors have been named as
defendants in a putative class action filed on October 18, 1995 in the United
States District Court for the Southern District of New York (Barry Hallet, Jr.
v. Li & Fung et al., Docket No. 95 Civ. 8917). Additional defendants include the
managing underwriter of the Company's previous public securities offerings and a
former principal stockholder of the Company. The plaintiff in the action alleges
that, in violation of the securities laws, the Company and its officers made
false and misleading statements concerning the Company's business which
artificially inflated the price of the Company's stock and that, as a result,
the plaintiff and other putative class members were damaged when they purchased
the Company's stock. The Company's motion to dismiss the complaint was denied on
June 24, 1996 and the parties are continuing with discovery. The Company intends
to vigorously defend the action.
On August 30, 1995, the Company filed a complaint in the Superior Court for
Middlesex County, Massachusetts against Apex One, Inc. ("Apex") and its parent,
Converse, Inc. ("Converse") seeking money damages and equitable relief for
non-payment of $1,900 of indebtedness arising from the sale and delivery of
goods to these defendants. In addition, the Company sought damages on account of
its production and holding of inventory, valued at over $2,000, arising from
Apex and Converse orders. On September 14, 1995, Apex filed for protection under
Chapter 11 of the United States Bankruptcy Code thereby staying the Company's
action against Apex. On February 7, 1997, the Company and Converse reached an
agreement, which was approved on February 10, 1997 by the Bankruptcy Court,
whereby the Company will receive $1,225 in full settlement of its claims against
Apex and Converse. The Company is adequately reserved with respect to the
difference between the amount of its original claims and the amount of
settlement.
The Company is also involved in other litigation and various legal matters which
have arisen in the ordinary course of business. The Company does not believe
that the ultimate resolution of any existing matter will have a material adverse
effect on its financial condition, results of operations or net cash flows.
15. Related Party Transactions
The Company leases production facilities and a portion of its administrative
offices under a ten-year operating lease agreement expiring April 19, 1999 from
a real estate trust of which one of the Company's officers is a trustee and
beneficiary. The agreement provides for annual rent of $354 and for the payment
by the Company of all utilities, taxes, insurance and repairs.
The Company leases production facilities under a ten-year operating lease
agreement which expires April 19, 1999 from a trust of which one of the trustees
and beneficiaries is an officer of the Company. The agreement provides for
annual rent of $182 and for the payment by the Company of all utilities, taxes,
insurance and repairs.
The Company leases warehouse facilities under the terms of a five-year extension
option to the operating lease agreement from a trust of which two of the
trustees and beneficiaries are officers of the Company. The extension option
expires on April 16, 2001. The agreement provides for annual rent of $300 and
for the payment by the Company of all utilities, taxes, insurance and repairs.
35
<PAGE> 36
As of December 31, 1996, the Company had a $3,230 loan receivable from a realty
trust of which two of the trustees and beneficiaries are officers of the
Company. The loan, which bears interest at a rate of 15%, matures in April 1997.
A director of the Company is chairman of the executive committee of a
corporation which supplies certain promotional products to the Company and
chairman of the executive committee of a company which is a principal
stockholder in a corporation which also supplies promotional products to the
Company. Purchases from these corporations amounted to $2,064, $7,974 and
$53,849 for the years ended December 31, 1996, 1995 and 1994, respectively.
Amounts due to one of these corporations were $992 and $21 at December 31, 1996
and 1995, respectively.
16. Significant Customers
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, 1996, 1995 and
1994:
<TABLE>
<CAPTION>
% of Sales % of Trade Receivables
---------- ----------------------
1996 1995 1994 1996 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Company A 30 57 89 19 42 90
Company B 10 11 1 6 11 1
Company C 38 2 -- 57 6 --
</TABLE>
17. Quarterly Results of Operations (Unaudited)
The following is a tabulation of the quarterly results of operations for the
years ended December 31, 1996 and 1995, respectively:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
1996 -------- -------- -------- --------
- ----
<S> <C> <C> <C> <C>
Net sales $ 65,101 $ 44,144 $ 55,556 $ 86,100
Gross profit 10,734 6,864 8,378 11,010
Net income (loss) 1,624 (974) (524) 312
Earnings (loss) per share .15 (.09) (.05) .03
<CAPTION>
1995
- ----
<S> <C> <C> <C> <C>
Net sales $ 44,349 $ 34,058 $ 26,403 $ 31,032
Gross profit 7,718 6,371 4,535 4,755
Net income (loss) 519 106 (1,496) (1,467)
Earnings (loss) per share .05 .01 (.14) (.14)
</TABLE>
18. Subsequent Event
The Company has been named as a defendant in a complaint filed in February 1997
in the Middlesex County Superior Court of the Commonwealth of Massachusetts. The
complaint alleges breach of contract, negligent misrepresentations, and unfair
trade practices by the Company related to a May 1995 distribution agreement
between the Company and the Montague Corporation, a company in the business of
designing, manufacturing and selling bicycles. The plaintiff is seeking
compensatory damages. The Company has filed a Motion to Dismiss the complaint
and intends to vigorously defend the complaint.
36
<PAGE> 37
CYRK, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
CHARGED TO DEDUCTIONS
ACCOUNTS RECEIVABLE, BALANCE AT COSTS AND (CHARGED AGAINST BALANCE AT
ALLOWANCE FOR BEGINNING EXPENSES ACCOUNTS END
DOUBTFUL ACCOUNTS OF PERIOD (BAD DEBT EXPENSES) RECEIVABLE) OF PERIOD
- ----------------- --------- ------------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
1996 $3,039 $ 152 $ -- $3,191
1995 3,102 120 183 3,039
1994 534 2,573 5 3,102
</TABLE>
37
<PAGE> 38
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE
---------- ----------- ----
+2.1 Agreement of Merger dated July 6, 1993 between the Registrant
and Cyrk, Inc.
@3.1 Restated Certificate of Incorporation of the Registrant
*3.2 Amended and Restated By-laws of the Registrant
*4.1 Specimen certificate representing Common Stock
*10.1 1993 Non-Employee Director Stock Option Plan
x*10.2 1993 Employee Stock Purchase Plan
[email protected] 1993 Omnibus Stock Plan, as amended
+++10.4 First Amended and Restated Marlboro Adventure Team Products
Trade Financing Arrangement Agreement dated as of January 10,
1994, between the Registrant and Philip Morris Incorporated
*10.5 Subscription and Registration Rights Agreement dated as of May
1, 1990, between Li & Fung (B.V.I.) Limited, Patrick D. Brady,
Gregory P. Shlopak and the Registrant
@10.6 Letter agreement dated November 30, 1994 among Li & Fung
(Trading) Ltd., Li & Fung (B.V.I.) Ltd. and the Registrant
*10.7 Lease dated as of April 19, 1989, between Gregory P. Shlopak and
Paul M. Butman, Jr., as Trustees of PG Realty Trust, and Cyrk,
Inc.
*10.8 Lease dated as of April 19, 1989, between Gregory P. Shlopak and
Paul M. Butman, Jr., as Trustees of LPG Realty Trust, and Cyrk,
Inc.
o10.9 Lease dated April 17, 1986 between Spaulding and Slye Company
and Parker Brothers Division of Kenner-Parker Toys Inc., with
Assignment of Lessee's Interest in Lease dated as of June 11,
1995 between Tonka Corporation and the Registrant
+10.10 Letter Agreement dated October 19, 1993, between the Registrant
and The Hongkong and Shanghai Banking Corporation Limited
+10.11 Revolving Credit Agreement dated as of December 1, 1993, between
the Registrant and The Hongkong and Shanghai Banking Corporation
Limited
+10.12 Letter Agreement dated January 5, 1994, between the Registrant
and The Hongkong and Shanghai Banking Corporation Limited
+10.13 Amendment No. 1 to Revolving Credit Agreement dated as of
January 12, 1994, between the Registrant and The Hongkong and
Shanghai Banking Corporation Limited
+10.14 Security Agreement dated as of December 1, 1993, between the
Registrant and The Hongkong and Shanghai Banking Corporation
Limited
#10.15 Revolving Credit Agreement dated May 9, 1994 between the
Registrant and Fleet Bank of Massachusetts, N.A.
#10.16 Security Agreement dated May 9, 1994 between the Registrant and
Fleet Bank of Massachusetts, N.A.
#10.17 Security and Loan Agreement dated May 12, 1994 between the
Registrant and The Pacific Bank
#10.18 Security Agreement dated May 12, 1994 between the Registrant and
The Pacific Bank
#10.19 Letter Agreement dated May 5, 1994 between the Registrant and
The Hongkong and Shanghai Banking Corporation Limited
#10.20 Intercreditor Agreement dated May 12, 1994 among the Registrant,
Fleet Bank of Massachusetts, N.A., The Pacific Bank, and The
Hongkong and Shanghai Banking Corporation Limited
o10.21 Letter agreement dated February 7, 1996, between the Registrant
and The Wells Fargo HSBC Trade Bank, N.A.
10.21.1 Letter agreement dated March 26, 1997, between the Registrant
and The Wells Fargo HSBC Trade Bank, N.A., filed herewith
38
<PAGE> 39
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
+10.22 Tax Allocation and Indemnity Agreement dated July 6, 1993, among
Cyrk, Inc., the Registrant, Gregory P. Shlopak and Patrick D.
Brady
x*10.23 Restricted Stock Purchase Agreement dated May 10, 1993, between
the Registrant and Terry B. Angstadt
x-10.24 Life Insurance Agreement dated as of November 15, 1994 by and
between the Registrant and Patrick D. Brady as Trustee under a
declaration of trust dated November 7, 1994 between Gregory P.
Shlopak and Patrick D. Brady, Trustee, entitled "The Shlopak
Family 1994 Irrevocable Insurance Trust"
x-10.24.1 Assignments of Life Insurance policies as Collateral, each dated
November 15, 1994
x-10.25 Life Insurance Agreement dated as of November 15, 1994 by and
between the Registrant and Patrick D. Brady as Trustee under a
declaration of trust dated November 7, 1994 between Gregory P.
Shlopak and Patrick D. Brady, Trustee, entitled "The Gregory P.
Shlopak 1994 Irrevocable Insurance Trust"
x-10.25.1 Assignments of Life Insurance policies as Collateral, each dated
November 15, 1994
x-10.26 Consulting Agreement dated as of November 15, 1994 by and
between the Registrant and Gregory P. Shlopak
x-10.27 Life Insurance Agreement dated as of November 15, 1994 by and
between the Registrant and Walter E. Moxham, Jr. as Trustee
under a declaration of trust dated November 7, 1994 between
Patrick D. Brady and Walter E. Moxham, Jr., Trustee, entitled
"The Patrick D. Brady 1994 Irrevocable Insurance Trust"
x-10.27.1 Assignments of Life Insurance policies as Collateral, each dated
November 15, 1994
x-10.28 Consulting Agreement dated as of November 15, 1994 by and
between the Registrant and Patrick D. Brady
- -10.29 First Amended and Restated Agreement of Limited Partnership
dated as of March 28, 1995 by and between the Registrant and
Grant & Partners Limited Partnership
- -10.30 Revolving Credit Agreement dated as of March 28, 1995 by and
between the Registrant and Grant & Partners Limited Partnership
10.30.1 Agreement dated October 11, 1996, between the Registrant and
Grant & Partners Limited Partnership, filed herewith
- -10.31 Option Agreement dated as of March 28, 1995 by and among the
Registrant, Grant & Partners, Inc., Alan Grant and Grant &
Partners Limited Partnership
*-10.32 Non-Qualified Stock Option Agreement dated as of February 10,
1995 by and between the Registrant and Alan Grant
*-10.33 Non-Qualified Stock Option Agreement dated as of March 28, 1995
by and between the Registrant and Alan Grant
10.34 Loan agreement dated April 30, 1996, between the Registrant, 125
Water Street, LLC, Gregory P. Shlopak and Patrick D. Brady,
filed herewith
10.34.1 Promissory Note dated April 30, 1996, between the Registrant and
125 Water Street, LLC, filed herewith
21.1 List of Subsidiaries, filed herewith
23.1 Consent of Coopers & Lybrand L.L.P. - Independent Accountants,
filed herewith
[_]99.1 Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act of
1995
99.2 Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act of
1995, filed herewith
39
<PAGE> 40
+ 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.
* 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.
x Management contract or compensatory plan or arrangement.
+++ Filed as an exhibit to the Registrant's Registration Statement
on Form S-1 (Registration No. 33-75320) or an amendment thereto
accompanied by a request for confidential treatment as to
certain portions and incorporated herein by reference.
# Filed as an exhibit to the Registrant's Registration Statement
on Form 10-Q dated March 31, 1994 and incorporated herein by
reference.
@ Filed as an exhibit to the Annual Report on Form 10-K for the
year ended December 31, 1994 and incorporated herein by
reference
- - Filed as an exhibit to the Registrant's Registration Statement
on Form 10-Q dated March 31, 1995 and incorporated herein by
reference.
o Filed as an exhibit to the Annual Report on Form 10-K for the
year ended December 31, 1995 and incorporated herein by
reference
[_] Filed as an exhibit to the Registrant's Registration Statement
on Form 10-Q dated September 30, 1996 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, 1996.
40
<PAGE> 1
EXHIBIT 10.21.1
26 March, 1997
Mr. Dominic Mammola
Cyrk, Inc.
21 Pond Road
Gloucester, MA 01930-1886
Re: Banking Facilities -- USD75,000,000
Dear Nick:
This letter supersedes our letter dated 12 March, 1997.
We are pleased to inform you that The Wells Fargo HSBC Trade Bank, N.A. (the
"Bank"), has committed to make banking facilities available to Cyrk, Inc.
("Borrower") substantially upon the terms and conditions outlined below:
1.0 Amount and Nature of Facility
1.1 Up to an aggregate amount of USD75,000,000 for the issuance of sight
commercial Documentary Credits (individually a "DC" and collectively,
"DC's"), for validity periods of up to 360 days (the "Import Facility").
Within the limits of the Import Facility:
1.2 Up to an aggregate amount of USD20,000,000 shall be available for the
issuance of commercial Documentary Credits by the Hongkong and Shanghai
Banking Corporations Limited's Taiwan Offshore Banking Unit on direct
instruction from Borrower.
1.3 Up to an aggregate amount of USD5,000,000 shall be available for the
issuance of Documentary Credits, for validity periods of up to 360 days.
Contrary to section 6.2, below, documentary credits applied for under the
sublimit need not be accompanied by a confirmed purchase order.
1.4 Up to an aggregate amount of USD1,000,000 shall be available for the
issuance of Standby Documentary Credits for validity periods of up to 364
days (the "Standby Sublimit"),
1 of 7
<PAGE> 2
1.5 Up to an aggregate amount of USD1,500,000 shall be available for issuing
a Standby Documentary Credit in favour of Midland Bank PLC to indemnify
Midland Bank against their offering a USD1,500,000 facility to the
Borrower's European office.
1.6 Up to an aggregate amount of USD200,000 shall be available for issuing
Documentary Credits by the Borrower's wholly owned subsidiary, Marketing
Incentives, Inc. for validity periods of up to 360 days.
1.7 Up to an aggregate amount of USD50,000,000 shall be available for Loans
Against Imports for up to 90 days to finance drawings under Documentary
Credits (the "Loans Against Import Facility").
Within the limits of the Loans Against Import Facility:
1.8 Up to an aggregate amount of USD15,000,000 shall be available for
Revolving Loans (the "Revolving Loan Subline").
2.0 Borrowing and Repayment
2.1 The Revolving Loan Subline discussed above shall be available to a
maximum of eighty percent (80%) of Borrower's eligible accounts
receivable as determined by Bank upon review of such documents as Bank
may require, plus fifty percent (50%) of the value of the Borrower's
eligible inventory.
Eligible accounts receivable shall include those accounts resulting from
the sale of private label or Cyrk branded merchandise which have been due
for no more than 90 days. Additionally, if 25% of any account is past due
more than 90 days, the entire receivable for that account will be taken
out of the borrowing base. No account may represent more than 20% of
aggregate outstanding receivables other than receivables to those
companies that have been previously approved by Bank - Philip Morris, M &
M Mars, Pepsi Co., and CitiCorp. Furthermore, the following accounts may
represent up to 30% of aggregate outstanding receivables - Tommy
Hilfiger, Inc., The Timberland Company, and Fila, Inc.
Other criteria for eligibility shall be included in the loan documents
evidencing this commitment.
Eligible inventory shall include only private label and Cyrk branded
merchandise as indicated by the Borrower's inventory valuation reports.
2.2 The facility will be available to 31 March, 1998. Prior to the
termination date, Borrower may borrow, repay and reborrow under the
Facilities.
2 of 7
<PAGE> 3
3.0 Purpose
3.1 To finance the importation of various consumer products from Asia and to
support Borrower's working capital requirements.
4.0 Interest and Fees
4.1 Loans Against Imports and Revolving Loans shall bear interest at
Borrower's option at either: i) LIBOR plus 175 basis points, per annum;
or ii) the Bank's Prime Rate. LIBOR contract periods may be for 30, 45,
60 or 90 days.
The "Prime Rate" is the rate of interest publicly announced by Wells
Fargo Bank, in San Francisco, California from time to time as its "Prime
Rate", and which serves as the basis upon which effective rates of
interest are calculated for those loans making reference thereto. Each
change in the rate of interest shall become effective on the date each
Prime Rate change is announced within the Bank.
Interest shall be computed on the basis of a 360-day year, actual days
elapsed. Interest shall be payable at the times and place set forth in
any promissory note and/or other contract or instrument executed by the
Borrower to evidence any extension of credit by the Bank pursuant to the
terms of this letter.
4.2 Fees relating to Documentary Credits shall be as follows:
- Issuance: 1/16% of the face amount of each DC (minimum USD100)
which shall be due and payable upon issuance of the credit.
- Drawings Under DCs: 1/12% of the amount of each bill of exchange
(minimum USD60).
- Guarantees in lieu of Bill of Lading/Air Waybill (if required):
USD80 flat (if related to DCs issued).
- Non Utilization Fee: 3/8% per annum on the unused portion of the
commitment facility described herein, assessed quarterly in
arrears.
- Standby Documentary Credits: 3/4% per annum on the face amount of
each Standby Documentary Credit.
- Standby Documentary Credit in Favour of Midland Bank PLC: 1 1/4%
per annum on the face amount of the Standby Documentary Credit.
3 of 7
<PAGE> 4
All other fees are subject to the Bank's standard tariff as may be
amended from time-to-time, copy attached.
DCs may be routed to Bank's overseas correspondent banks direct at the
Borrower's option (ie. there shall be no requirement to restrict DCs to
Bank's overseas offices).
4.3 Fees relating to Documentary Credits issued by the Bank's Taiwan Offshore
Banking Unit paid by Borrower shall be obtained at the time that the
facility is utilized.
5.0 Collateral
5.1 As security for the facility the Borrower shall grant to the Bank a first
priority perfected security interest in all Borrower's personal property
including, but not limited to, accounts receivable, inventory, equipment,
fixture, instruments, documents, chattel paper, general intangibles and
books and records thereto (collectively the "Collateral"); the Bank may,
at its sole discretion, consent to the Borrower's granting a lien senior
to that of the Bank on certain specific items of equipment securing the
unpaid purchase price thereof.
6.0 Non-Exclusive List of Conditions Precedent
Prior to Bank's extension to Borrower of any credit contemplated by this
letter:
6.1 Borrower shall execute, or cause to be executed, and deliver to Bank any
and all promissory notes, contracts, instruments and other documents,
including without limitation a loan agreement, required by Bank to
evidence Bank's extension of credit pursuant to the terms and conditions
of this letter, all of which shall include such representations,
warranties, conditions, covenants and events of default as Bank deems
appropriate, which shall be in addition to the terms and conditions
stated in this letter.
6.2 Each DC application opened under the Import Facility shall reference a
specific purchase order. A copy of said purchase order must be submitted
to Bank in conjunction with each DC application before Bank will issue
any DC.
6.3 No misrepresentation or material omission shall have been made by
Borrower to Bank with respect to Borrower's business operations or
financial condition.
7.0 Non-Exclusive List of Terms and Conditions
The loan agreement required by Bank shall include such covenants as Bank
may require, which may include, without limitation, covenants restricting
Borrower's ability to: borrow from others; create or permit liens on
assets; change the nature of Borrower's business; sell a substantial part
of Borrower's assets; make distributions to shareholders; and guaranty
debts of others.
4 of 7
<PAGE> 5
Without limiting the covenants which Bank may require in the loan
agreement with Borrower, Bank has determined that such document will
include Borrower's agreement to:
7.1 Provide annual audited financial statements within 120 days of Borrower's
fiscal year end.
7.2 Provide quarterly unaudited financial statements within 45 days after the
end of each quarter certified by an authorized officer of Borrower as
being true and correct.
7.3 Deliver evidence of Casualty and Marine insurance coverage with respect
to the goods under DCs provided by a financially sound and reputable
insurer(s) having a Best's rating of at lease "A-" and naming the Bank as
Loss Payee.
7.4 Provide monthly accounts receivable aging reports within 30 days after
the end of each month certified by an authorized officer of Borrower as
being true and correct.
7.5 Provide monthly inventory valuation reports within 30 days after the end
of each month certified by an authorized officer of Borrower as being
true and correct.
7.6 Give immediate notice in writing to Bank of any litigation in excess of
USD2,500,000.
7.7 Maintain a ratio of Total Debt to Tangible Net Worth of no more than
1.00:1 through the term of the commitment.
7.8 Maintain a minimum Tangible Net Worth of no less than USD100,000,000
through the term of the commitment.
7.9 Maintain a Current Ratio of no less than 2.0:1 through the term of the
commitment.
7.10 During any consecutive four fiscal quarters, net losses shall be no
greater that USD10,000,000 in aggregate.
8.0 Events of Default
The occurrence of one or more of the following shall constitute an Event
of Default:
8.1 Failure of Borrower to pay or perform any obligations to the Bank;
8.2 Breach by Borrower of any covenant contained herein or in any other Loan
Document;
8.3 Filing of bankruptcy, or any other similar proceeding, by or against
Borrower.
5 of 7
<PAGE> 6
8.4 Any adverse material change in Borrower's financial condition resulting
in material impairment of the prospect of repayment of any loans or
extensions of credit granted to Borrower by Bank.
9.0 Bank Rights Upon Event of Default
9.1 Bank's commitment to Borrower shall terminate without notice or demand.
9.2 Bank shall have all rights and remedies of a secured party under the
Loan Documents.
10.0 Additional Terms and Provisions
10.1 Borrower shall be liable for and shall pay to the Bank immediately upon
demand, all costs and expenses, including attorney's fees, expended or
incurred by the Bank in connection with the preparation of the loan
agreement and any other loan documents.
10.2 Bank will arrange an independent receivable and inventory audit to be
completed twice annually. The costs of such audit shall be paid for by
Borrower.
11.0 Governing Law
11.1 The laws of the State of California, without regard to principles of
conflict of laws, with nonexclusive courts of jurisdiction, will govern
this agreement.
12.0 Survival
12.1 If closing occurs in accordance with the Offer Letter, it is understood
that this Offer Letter shall survive closing of the Facility.
This offer is open for acceptance until the Expiry Date. Please indicate both
the Borrower's understanding and acceptance of these terms and conditions by
signing this letter to reach us on or before the Expiry Date.
6 of 7
<PAGE> 7
Your acknowledgment of this letter shall constitute acceptance of the foregoing
terms and conditions. Unless accepted or terminated, this commitment shall
expire on 30 April, 1997. If the loan documentation required by Bank, in its
sole discretion as necessary to carry out the effects and purposes hereof, is
not completed and credit has not been extended by Bank to Borrower hereunder for
any reason by 15 May, 1997, then this commitment shall expire on said date.
Sincerely,
/s/Duncan A. Sennott
Duncan A. Sennott
Vice President
(415) 396-3488
AGREED AND ACCEPTED:
By:__________________________________
Its:_________________________________
Date:________________________________
7 of 7
<PAGE> 1
EXHIBIT 10.30.1
AGREEMENT
This Agreement is made as of this 11th day of October, 1996 by and among
Cyrk, Inc., a Delaware corporation ("Cyrk"), Grant & Partners Limited
Partnership, a Massachusetts limited partnership ("GPLP"), Grant & Partners,
Inc., a Massachusetts corporation ("GPI"), and Alan Grant, an individual
("Grant").
WHEREAS, Cyrk and GPI are parties to a First Amended and Restated
Agreement of Limited Partnership of Grant & Partners Limited Partnership dated
March 28, 1995 (the "Partnership
Agreement");
WHEREAS, Cyrk, GPLP and Grant are parties to a Contribution Agreement
dated as of March 28, 1995 (the "Contribution Agreement");
WHEREAS, Cyrk, GPI and Grant are parties to a Stock Restriction and
Governance Agreement dated as of March 28, 1995 (the "Stock Restriction and
Governance Agreement");
WHEREAS, Cyrk and Grant are parties to two separate Non- Qualified Stock
Option Agreements, one dated February 10, 1995 ("Option No. 1") and the other
dated March 28, 1995 ("Option No.
2");
WHEREAS, GPLP and Grant are parties to an Employment Agreement dated March
28, 1995 (the "Grant Employment Agreement");
WHEREAS, Cyrk and GPLP are parties to a Consulting Agreement dated March
28, 1995 (the "Consulting Agreement");
WHEREAS, Cyrk and GPLP are parties to a Revolving Credit Agreement dated
as of March 28, 1995 (the "Credit Agreement"); and
WHEREAS, the parties hereto wish to amend the Partnership Agreement, the
Contribution Agreement, the Stock Restriction and Governance Agreement, Option
No. 1, Option No. 2, the Grant Employment Agreement, the Consulting Agreement
and the Credit Agreement (collectively, the "Original Agreements") as
hereinafter set forth.
<PAGE> 2
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Section 12 of the Partnership Agreement will be amended to (i) delete
all references to the Performance Bonus Plan and (ii) provide that 100% of any
distributions made by GPLP will be allocated to Cyrk until such time as Cyrk
shall have received cumulative distributions in an amount (the "Cyrk Preference
Amount")equal to $3 million plus an amount equal to 20% per annum of the
unreturned portion of such $3 million (commencing April 1, 1995). The next $3
million in distributions will be allocated 100% to G&P. Thereafter,
distributions will be allocated in accordance with the respective percentage
interests of the partners.
2. Section 15 of the Partnership Agreement will be further amended to
provide that no equity interests in the Partnership may be granted without
Cyrk's consent.
The Partnership Agreement will be further amended to prohibit the
Partnership from making equity distributions at any time when (i) the
Partnership is indebted to Grant for money borrowed and (ii) Cyrk has not
received cumulative distributions from the Partnership equal to the Cyrk
Preference Amount.
3. The Credit Agreement will be amended to prohibit any distributions by
GPLP without Cyrk's consent at any time when there are outstanding borrowings
thereunder.
4. The Stock Restriction and Governance Agreement will be amended to
provide that Cyrk shall have the right to designate a majority of the directors
of G&P. The original agreement, insofar as it relates to the composition of the
G&P board, will be reinstated when (i) all borrowings under the Credit Agreement
have been repaid and (ii) Cyrk has received cumulative distributions from GPLP
equal to the Cyrk Preference Amount.
5. Section 4 of the Stock Restriction and Governance Agreement will be
amended to delete the requirement that the consent of one Grant board designee
is necessary to (i) sell GPLP, (ii) grant any equity interest in GPLP or (iii)
cause GPLP to distribute assets. Section 4 of the original agreement will be
reinstated when all borrowings under the Credit Agreement have been repaid and
(ii) Cyrk has received cumulative distributions from GPLP equal to the Cyrk
Preference Amount. Grant will have a right of first refusal with respect to any
proposed sale of GPLP or of any subsidiary.
-2-
<PAGE> 3
6. Section 6 of the Stock Restriction and Governance Agreement (which
restricts the activities of Cyrk and GPLP) will be deleted.
7. Option No. 1 and Option No. 2 will be cancelled.
8. Cyrk will reserve for issuance to employees of GPLP and its
subsidiaries options exercisable for an aggregate of 125,000 shares of Cyrk
stock. The exercise price of such options will be no less than the fair market
value of Cyrk stock on the date of grant. The persons to whom these options will
be granted (and the number of options each will receive) will be determined
jointly by Cyrk and Grant. Grant will be eligible for option grants from this
pool but any decision to make such a grant to him will be in the sole discretion
of Cyrk.
9. The Grant Employment Agreement will be terminated, except that the
non-competition and confidentiality provisions will survive in a separate
agreement. Grant will continue to serve as CEO of GPLP, subject to the
discretion of the G&P board. Grant's salary will be $300,000 per year, subject
to such increases as Cyrk may approve. Grant's salary will not be subject to
offset in the event of a breach of the Consulting Agreement. Grant will be
eligible for discretionary performance bonuses approved by the G&P board.
Grant's non-compete will be revised to provide that (i) if he is terminated
without cause he will be subject to the two-year non-compete but only if GPLP
continues to pay him at his then current salary level (which shall be at least
$300,000 per year), and (ii) if his responsibilities are substantially reduced
so as not to involve senior level strategic consulting, business development or
intellectual property creation, it will be deemed a "termination without cause".
10. The 3/29/1995 Performance Bonus Plan referenced in the Grant
Employment Agreement will be terminated.
11. The Credit Agreement will be amended as follows: (i) the expiration
date will be 3/28/1998, subject to automatic 1 year extensions thereafter unless
either party gives notice of termination, (ii) credit extensions will be fully
discretionary by Cyrk, (iii) credit limit will be $5 million, (iv) all interests
in the GPLP subsidiaries will be pledged to secure the credit line and (v) the
guaranty of each subsidiary will be capped at the amount of its borrowings from
GPLP.
12. Grant will loan GPLP an aggregate of $1 million, the repayment of
which will be subordinated to the Cyrk line of credit per the existing affiliate
subordination agreement. The terms of the Grant loan shall provide that in no
event shall it be payable before such time as Cyrk has received cumulative
-3-
<PAGE> 4
distributions from GPLP of at least $3 million. The Grant loan will be secured
by all assets of GPLP. The Grant loan may consist of (i) cash advances, (ii)
foregone salary accrued since 4/1/95 (assuming for purposes hereof that since
such date he was entitled to salary at the rate of $300,000 per year) and (iii)
previously made loans.
13. Section 5 of the Contribution Agreement (relating to Grant's
contingent repayment obligation with respect to the $3 million) will be deleted.
14. GPLP will pay the fees and disbursements of Choate, Hall & Stewart
relating to the reorganization of GPLP. Cyrk will pay the fees and disbursements
of Choate, Hall & Stewart relating to the amendment of the Original Agreements.
15. Each party agrees to execute any and all further agreements and
instruments as may be reasonably necessary to implement and formalize the
foregoing provisions.
-4-
<PAGE> 5
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
CYRK, INC.
By: /s/ Patrick D. Brady
-----------------------------------
Patrick D. Brady, President
GRANT & PARTNERS LIMITED
PARTNERSHIP
By: Grant & Partners, Inc., its
general partner
By: /s/ Alan W.H. Grant
-----------------------------------
Alan Grant, President
GRANT & PARTNERS, INC.
By: /s/ Alan W.H. Grant
-----------------------------------
Alan Grant, President
/s/ Alan W.H. Grant
-----------------------------------
Alan Grant
-5-
<PAGE> 1
EXHIBIT 10.34
LOAN AGREEMENT
THIS LOAN AGREEMENT (the "Agreement") is entered into as of the 30th day
of April, 1996, by and among: (i) 125 WATER STREET, LLC, a Massachusetts limited
liability company (the "Borrower"), with a principal place of business at 63
Main Street, Gloucester, Massachusetts 01930; (ii) GREGORY P. SHLOPAK,
individually, with a primary residence at 1 Cambourne Way, Rockport,
Massachusetts 01966 ("Mr. Shlopak"); (iii) PATRICK D. BRADY, individually, with
a primary residence at 71 Eastern Point Boulevard East, Gloucester,
Massachusetts 01930 ("Mr. Brady," and together with Mr. Shlopak, the
"Guarantors," and each a "Guarantor"); and (iv) CYRK, INC., a Delaware
corporation (the "Lender"), with a place of business at 3 Pond Road, Gloucester,
Massachusetts 01930. (The Borrower and the Guarantors are sometimes collectively
referred to herein as the "Obligors"). Capitalized terms used herein but not
defined shall have the meanings specified in the Mortgage (defined below).
WITNESSETH:
RECITALS:
A. The Borrower has executed and delivered to the Lender simultaneously
herewith a certain Promissory Note dated April 30, 1996 payable to the order of
the Lender in the original principal amount of $3,500,000 (as amended in writing
from time to time, the "Note"). The maturity date of the Note is April 30, 1997.
The indebtedness evidenced by the Note and related loan and security documents
is referred to herein as the "Loan."
B. Repayment of the Note is secured by, among other things, a first
priority Mortgage and Security Agreement (the "Mortgage"), related first
priority Assignment of Leases and Rents (the "Assignment") and UCC-1 Financing
Statements (the "Financing Statements"), each of even date herewith granted by
the Borrower to the Lender, delivered simultaneously herewith, relating to the
premises, improvements and related appurtenances known as 125 Water Street,
Danvers, Essex County, Massachusetts (as more fully described in the Mortgage,
the "Property").
C. Repayment of the Loan is fully guaranteed by separate unlimited
Guaranties of each of the Guarantors, dated as of the date hereof and delivered
simultaneously herewith, all as more fully described below (the "Guaranties").
The Guarantors' obligations under the Guaranties are secured by a certain Pledge
and Assignment Agreement of the Guarantors to the Lender of even date herewith
relating to the Guarantors' interests in the Borrower (the "Pledge Agreement").
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(The Note, Mortgage, Assignment, Financing Statements, Guaranties, the
Pledge Agreement, this Agreement and the other Closing Documents (defined
below), each as amended in writing from time to time, are collectively referred
to herein as the "Loan Documents").
FOR GOOD AND VALUABLE CONSIDERATION the receipt and sufficiency of which
is hereby acknowledged, and in order to induce the Lender to make the Loan and
enter into this transaction, the Obligors hereby agree with the Lender as
follows:
I. AUTHORITY; PLACE OF BUSINESS; ETC.
1.1 Authority. Each Obligor hereby warrants and represents to the
Lender that:
(a) The execution, delivery and performance of this Agreement,
the Loan Documents and all other documents, certificates, agreements and
instruments delivered by such Obligor in connection herewith (all of the
foregoing, collectively, the "Closing Documents") have been duly and validly
authorized by all requisite action;
(b) All consents and approvals which are necessary for the
authorization, binding effect, performance and enforceability of this Agreement
and the other Closing Documents against the Obligors have been obtained and are
in full force and effect;
(c) The execution, delivery and performance of this Agreement
and the other Closing Documents by the Obligors did not and do not constitute
and will not result in a violation of or a conflict with, any law, regulation,
court order or other commitment or restriction, contractual or otherwise,
applicable to the Obligors, or to any assets of the Obligors; and
(d) This Agreement and the other Closing Documents constitute
the valid, binding and enforceable obligations of the Obligors, enforceable
against the Obligors in accordance with their respective terms.
1.2 Principal Place of Business.
The Borrower warrants and represents to the Lender that its
principal place of business and chief executive office, and the location of its
books and records, is as of the date hereof, and shall continue to be during the
term of this Loan, 63 Main Street, Gloucester, Massachusetts 01930.
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II. GENERAL.
2.1 Further Advances. The Loan proceeds shall be advanced in two
phases. At the closing hereof, subject to the Obligors compliance with all
applicable conditions and requirements, the Borrower has requested, and the
Lender shall advance, the sum of $3,220,000 to consummate the acquisition of the
Property for a purchase price of $3,200,000, and to satisfy related costs and
expenses. Thereafter, provided no Event of Default (or any event which with the
passage of time or the giving of notice would constitute an Event of Default)
shall have occurred, the remaining balance of the Loan shall be advanced to
satisfy additional costs and expenses related to the Property, reasonably
approved by the Lender.
2.2 Security Documents. Simultaneously with the execution and
delivery of this Agreement, the Borrower has executed and delivered to the
Lender certain security documents to further secure the Note, including without
limitation, the Mortgage, Assignment and Financing Statements relating to the
Property. The Obligors hereby covenant and agree that whether or not such
instruments are recorded, the Mortgage, Assignment and Financing Statements are
intended to, and shall, be a first priority lien on the Property, and
immediately effective, fully binding and operative documents, absolutely
delivered to the Lender, not in escrow. If Lender has not previously done so,
Lender shall be entitled to record such security documents even after the
occurrence of any Event of Default hereunder.
2.3 Lease. The parties acknowledge that there is an existing lease
(the "Existing Lease") dated April 17, 1986 relating to the Property (notice of
which has been filed with the Essex South Registry District of the Land Court as
Document No. 56693), the tenant's interest thereunder having been absolutely
assigned to the Lender pursuant to an Assignment of Lessee's Interest in Lease
dated June [ ], 1995 (the "Lease Assignment"). When such Existing Lease expires,
or is terminated, or Hasbro, Inc. fails to perform its obligations under the
Lease Assignment, and in the Lender's opinion such failure will not be duly
rectified (the earlier of which shall be defined herein as the "Lease
Termination Date"), the Obligors hereby agree to use their best efforts to
obtain a written termination of the Existing Lease from Hasbro, Inc., and to
enter into a new lease, effective immediately between Borrower, as landlord, and
Lender, as tenant, for a rental not to exceed $3.60 per square foot, on a triple
net basis, and containing a right of offset in favor of Lender for any unpaid
amounts under the Loan, otherwise in accordance with the terms and conditions
specified in that certain "Letter of Intent" dated as of April 30, 1996 between
Borrower and Lender.
2.4 Refinancing. The Obligors covenant and agree to promptly and
diligently seek permanent financing (the "Permanent
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Financing") to repay the Loan in full when due, and shall provide to Lender
copies of their applications, term sheets, commitment letters and related
materials. The Obligors acknowledge that the Lender has made no commitment to
extend or renew the Loan or any agreement to release collateral prior to full
repayment of the Loan.
III. COVENANTS. Without derogating from or limiting any
covenant or other term or provision in the Mortgage or any other
Loan Document, the Obligors hereby agree as follows, for so long
as the Loan remains outstanding:
3.1 Property.
(a) The Obligors shall not, directly or indirectly, permit or
suffer to be created or to remain, and shall discharge or promptly cause to be
discharged, any mortgage, lien, attachment, lis pendens or other encumbrance
charge or restriction on, or pledge or lease of, the Property or any part
thereof or interest therein, other than the Loan Documents;
(b) The Obligors shall not, directly or indirectly, convey,
sell, assign, transfer, lease, or dispose of, whether voluntarily or
involuntarily, all or any part of the Property or any legal or beneficial
interest in the Property;
(c) The Obligors shall not, directly or indirectly, convey,
sell, assign, transfer, lease or dispose of, whether voluntarily or
involuntarily, including the grant of any security interest in, any ownership
interest in the Borrower, or in any beneficiary or member in the Borrower, or in
any other entity which holds any legal or beneficial interest in the Property;
(d) The Obligors shall not enter into any lease of the
Property (except with Lender) or engage in any construction or alteration of the
Property without the prior written consent of Lender. Without limiting the
foregoing, the Obligors shall not take any action in connection with the
Property which would materially adversely affect the value, saleability or
financeability of the Property;
(e) The Obligors shall comply with all notification and
other requirements under M.G.L. Ch. 21E and related regulations and laws
applicable to the Property, and shall provide, simultaneously therewith, copies
of all notices and correspondence to the Lender;
(f) The Obligors shall diligently pursue to completion the
remedy of a certain title defect relating to the absence of a M.G.L. Chapter 91
License, subject to the terms of a certain escrow agreement between Borrower and
Bank of Nova
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Scotia, and shall provide simultaneously therewith copies of any correspondence
in connection therewith to the Lender.
IV. Put and Call. In consideration of the Loan, the Obligors further
agree with the Lender as follows:
4.1 Put. Provided no Event of Default (or occurrence which with the
passage of time or the giving of notice shall constitute an Event of Default)
has occurred, the Borrower shall have the right, but only after the Lease
Termination Date and prior to the earlier of: (a) the maturity of the Loan or
(b) any binding commitment for permanent financing of the Property, to elect to
convey to the Lender (or, at Lender's election, Lender's nominee), the Property,
in each case free and clear of any and all encumbrances (other than those of
record on the date hereof and any notice of environmental matters relating to
any environmental condition existing on the date hereof) (the "Put Rights"), in
full satisfaction of the Obligors' liability under the Loan and the instruments
evidencing and/or securing the Loan. Such conveyance shall be consummated no
later than 10 days from Borrower's written notice to Lender of such election,
and pursuant to documents and affidavits in form and content satisfactory to
Lender, including, without limitation, a title examination and lien search
confirming the absence of encumbrances. The Put Rights shall not be assignable.
4.2 Call. At any time prior to the earlier of (a) the maturity of
the Loan, or (b) the "Financing Election Date" defined below after which the
Borrower actually consummates the refinancing transaction pursuant to the
applicable commitment letter and repays the Loan in full, the Lender shall have
the right to elect to receive a conveyance to the Lender (or, at Lender's
election, Lender's nominee) of the Property, and the Borrower shall so convey
the Property free and clear of any and all encumbrances (other than those of
record on the date hereof and any notice of environmental matters relating to
any environmental condition existing on the date hereof) (the "Call Rights") in
full satisfaction of the Obligors' liability under the Loan and the instruments
evidencing and/or securing the Loan. The Borrower shall make such conveyance of
the Property no later than 10 days from the Lender's written notice to Borrower
of such election, pursuant to documents and affidavits in form and content
satisfactory to Lender, including, without limitation, a title examination and
lien search confirming the absence of encumbrances. If Lender elects to exercise
its Call Rights, but the Obligors cannot duly convey the Property to the Lender
(or Lender's nominee) free and clear of any and all encumbrances in accordance
with the above provisions, the Obligors shall be obligated to use their diligent
efforts to remove and/or remedy any noncompliance with the above requirements.
If Obligors are unsuccessful, the Lender shall have the right, at its sole
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election, to require conveyance of the Property, and the Borrower shall so
convey the Property despite the Obligors' failure to conform with the
requirements herein. In such event, the Lender shall be entitled to receive
conveyance of the Property, but the Obligors' credit against the Loan balance
shall be reduced by the amount of such non-complying encumbrances on the
Property, and the Obligors shall continue to have liability for such remaining
Loan balance. (For example, if the Lender exercises its Call Rights hereunder,
but the Property has been encumbered by an attachment against the Borrower in
the amount of $10,000, the Lender, at its option, shall be entitled nevertheless
to a conveyance of the Property, and shall release the Obligors from liability
under the Loan to the extent of the then outstanding Loan amount less $10,000,
and the Obligors shall remain liable for such balance.) If the amount of any
such non-complying encumbrance is not quantifiable by its express terms, then
each of the Lender and the Borrower shall obtain an appraisal of property by an
appraiser who is a member of the American Institute of Real Estate Appraisers
each of which shall specify the diminution in value to the Property which
results from such encumbrance. If the appraisers' determinations differ by more
than ten percent (10%), then both appraisers shall promptly select a third
appraiser (who shall also be a member of the American Institute of Real Estate
Appraiser's) to also determine the diminution in value which results from such
encumbrance. A written determination of the diminution in value which results
from such encumbrance signed by any two of the three appraisers shall be final
and binding upon the parties. If the appraisals of the first two appraisers
differ by ten percent (10%) or less, then the average of their appraisals shall
be the final determination binding on the parties.
4.3 Financing Election Date. The Obligors hereby covenant and agree that
promptly upon their receipt of each bona fide, binding commitment for permanent
financing of the Property, the Obligors shall provide a copy thereof to the
Lender. The Lender shall have at least ten (10) business days from Lender's
receipt of such notice in which to elect to exercise Lender's Call Rights (the
last day of any such ten day period, each hereinafter, a "Financing Election
Date"). In such event, the Obligors hereby agree to assist the Lender in
obtaining an assignment of each such financing commitment from the applicable
lender. If Lender elects not to exercise its Call Rights, the Borrower shall be
free to consummate the refinancing transaction upon the terms in such
commitment. If the Borrower fails to do so, or substantially modifies the
commitment, the Lender's rights hereunder shall continue (i.e., Lender shall be
entitled to have ten business days from the date of such modification or
subsequent commitments to exercise its Call Rights as herein provided) until the
Borrower actually consummates a refinancing transaction for the Property and
repays the Loan in full.
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4.4 Transfer Costs. All transfer costs, including without limitation,
legal fees, deed stamps, recording fees, title examination fees, and UCC search
fees shall be paid by the party exercising the Put Rights or Call Rights, as the
case may be.
V. DEFAULT; REMEDIES; ETC.
5.1 Events of Default. The occurrence of any one or more of the
following shall constitute an "Event of Default" hereunder:
(a) The failure to fully and timely pay or perform any of the
covenants and agreements made herein or in any of the other Closing Documents by
any of the Obligors when due;
(b) The failure of any material representation or warranty
made by or on behalf of any of the Obligors in this Agreement to be true,
accurate and complete when made;
(c) The occurrence of any Event of Default under and as
defined in, the Note, Mortgage, Assignment, Pledge Agreement, or any other Loan
Document.
5.2 Remedies.
(a) Upon the occurrence of any Event of Default,
notwithstanding anything to the contrary herein or in any other Loan Document,
at the option of the Lender, all obligations of the Obligors under the Loan
Documents shall be accelerated and immediately due and payable, without further
notice or demand, and the Lender shall be entitled to exercise all rights and
remedies under the Loan Documents and/or under applicable law.
(b) No remedy conferred in this Agreement or in any of the
other Loan Documents upon the Lender is intended to be exclusive of any other
remedy, and each and every such remedy shall be cumulative and shall be in
addition to every other remedy given hereunder, thereunder or under any of the
other Loan Documents or now or hereafter existing at law or in equity, by
statute or otherwise.
VI. No Further Assurances. The Obligors hereby acknowledge and agree that
the Lender shall have no obligation to the Obligors to extend, rewrite or
otherwise restructure the Note or the other Loan Documents, or to amend this
Agreement, and that in making any determination as to any issue in connection
therewith, the Lender shall be justified in attempting to protect only its own
interests as a creditor. The Obligors further acknowledge and agree that the
relationship between the Lender and the Obligors is strictly that of a lender
and a borrower and/or guarantor, and that no other business relationship, such
as a partnership or joint venture, is created (or shall be deemed to
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have been created) as a result of the transactions contemplated by this
Agreement, and that no fiduciary relationship exists between the Lender and the
Obligors and that, except as otherwise specifically provided in the Loan
Documents, no express or implied duty from the Lender to the Obligors is created
by virtue of this Agreement or the other Closing Documents, or any action taken
by the Obligors in connection herewith.
VII. Litigation; Claims; Etc. Each of the Obligors hereby warrants and
represents to the Lender that there is no litigation or governmental proceeding
pending (nor has such Obligor received notice that any such action is threatened
or to be commenced) against any Obligor or the Property.
VIII. Additional Documents. From time to time, the Obligors shall execute
and deliver to the Lender such security documents, instruments, amendments,
certificates and affidavits, as reasonably requested by the Lender, to effect or
confirm the transactions contemplated in this Agreement and the other Closing
Documents, or take such action, as reasonably requested by the Lender, to
effectuate, confirm or clarify the transactions contemplated in this Agreement
and the other Closing Documents.
IX. Benefit; No Duress. By executing this Agreement below, each of the
Obligors acknowledges and agrees that it/he has read and understands the
contents of this Agreement and the transactions contemplated hereby, and has had
an opportunity to consult with counsel of its/his choice respecting the same,
and each has acted voluntarily and without duress in connection with the
execution and delivery hereof and other documents delivered in connection
herewith.
X. Survival. All covenants, representations, warranties,
acknowledgments and agreements (including without limitation, indemnification
provisions, if any) shall survive the execution and delivery of this Agreement.
XI. Governing Law. This Agreement has been negotiated and accepted in
and shall be deemed to have been made in the Commonwealth of Massachusetts, and
the validity of this Agreement and the other Loan Documents, their construction,
interpretation and enforcement and the rights of the parties hereunder, shall be
determined under, and governed by and construed in accordance with, the internal
laws (and not the law of conflicts) of The Commonwealth of Massachusetts.
XII. Captions; Construction; Etc. The captions in this Agreement are for
convenience of reference only and shall not affect the meaning of, nor give any
construction to, any of the provisions hereof. The interpretation of the
provisions of this Agreement shall not be construed against any party hereto
based upon the fact that such party may have drafted or caused to be
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drafted such provision. The Obligors hereby acknowledge that they have been
represented by independent counsel of their own selection and, notwithstanding
that counsel for the Lender has prepared the first draft of this Agreement and
the other Closing Documents, the Obligors hereby agree that the same shall not
be construed against the Lender in the event of any ambiguity, in that each
parties' counsel extensively participated in the negotiation and codification of
this Agreement and the other Closing Documents. Further, no prior draft or
version of this Agreement or any other Closing Document may be used or relied
upon to interpret or construe any provisions hereof or thereof.
XIII. Time Is Of The Essence. Time shall be of the essence with respect to
each and every of the various undertakings and obligations of the Obligors set
forth in this Agreement.
XIV. Entire Agreement. The Closing Documents (including all exhibits or
schedules to any of them), constitute the entire agreement between the Lender
and the other parties to such documents relating to or connected with the
transactions contemplated hereby and thereby, and supersede any and all prior
and contemporaneous discussions, correspondence and term sheets with respect to
the Loan.
XV. Severability. In case any provision (or any part of any provision)
contained in this Agreement shall for any reason be held to be invalid, illegal
or unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision (or the remaining part of the affected
provision) of this Agreement, but this Agreement shall be construed as if such
invalid, illegal or unenforceable provision (or part thereof) had never been
contained herein, but only to the extent it is invalid, illegal or
unenforceable.
XVI. Notices. All notices given in connection with this Agreement shall
be deemed duly given if made in the manner specified in the Mortgage, and with
respect to the Guarantors, in the manner specified in the Guaranties.
XVII. Miscellaneous. This Agreement may be executed in any number of
counterparts which together shall constitute one instrument and shall bind and
inure to the benefit of the parties hereto and their respective successors and
assigns.
[This space intentionally left blank.]
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EXECUTED as a Massachusetts instrument under seal as of the date first set
forth above.
WITNESSES: BORROWER:
125 WATER STREET, LLC
/s/ J. Michael Faherty By: /s/ Patrick D. Brady
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Patrick D. Brady,
hereunto duly authorized
GUARANTORS:
/s/ J. Michael Faherty /s/ Gregory P. Shlopak
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Gregory P. Shlopak, individually
/s/ J. Michael Faherty /s/ Patrick D. Brady
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Patrick D. Brady, individually
LENDER:
CYRK, INC.
By:
/s/ J. Michael Faherty /s/ Gregory P. Shlopak
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----------------------------,
hereunto duly authorized
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EXHIBIT 10.34.1
PROMISSORY NOTE
$3,500,000.00 APRIL 30, 1996
BOSTON, MASSACHUSETTS
FOR VALUE RECEIVED, 125 WATER STREET, LLC, a Massachusetts limited
liability company (together with all successors and assigns, collectively, the
"Borrower"), with a principal place of business at 63 Main Street, Gloucester,
Massachusetts 01930, promises to pay to the order of CYRK, INC., a Delaware
corporation (together with all subsequent holders of this Note, the "Lender"),
at 3 Pond Road, Gloucester, Massachusetts 01930 (or such other address specified
by the Lender from time to time), the principal sum of THREE MILLION FIVE
HUNDRED THOUSAND AND 00/100 DOLLARS ($3,500,000.00) or so much thereof as shall
be outstanding from time to time, together with all accrued interest thereon, as
provided below.
Subject to the other terms of this Note regarding default rate interest,
interest on the principal balance outstanding from time to time under this Note
shall accrue and be payable as follows:
(i) Commencing on May 1, 1996, and continuing thereafter on the 1st day
of each month until December 1, 1996, interest only, in arrears, shall be
payable by the Borrower to the Lender on the outstanding balance of this Note at
the fixed per annum rate of nine percent (9%).
(ii) Commencing from and after January 1, 1997, and continuing thereafter
on the 1st day of each month until payment in full of this Note, interest only,
in arrears, shall be payable by the Borrower to the Lender on the outstanding
balance of this Note at the fixed per annum rate of fifteen percent (15%).
Interest shall be calculated on the basis of a 360-day year for the actual
number of days elapsed.
If not sooner paid, all outstanding principal and accrued and unpaid
interest thereon shall be paid in full on April 30, 1997 (the "Maturity Date").
If any payment due under this Note, whether principal or interest, is not
received by the Lender within fifteen (15) days after the same is due, the
Borrower shall be charged a late payment penalty (whether or not such late
payment constitutes an Event of Default hereunder as defined below) equal to
five percent (5%) of the amount of such late payment. To the extent permitted by
law, interest on any principal or interest unpaid after the occurrence of an
Event of Default shall be payable on demand at an interest
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rate equal to 3% above the then prevailing interest rate hereunder (the "Default
Rate").
If at any time the interest rate or the amount of any fee or penalty
required to be paid in connection with this Note would exceed the maximum rate
for interest or amount for fees or penalties permitted by the laws of any
applicable jurisdiction or the rules or regulations of any appropriate
regulatory authority or agency thereof, then, during such time as such interest,
fees, or penalties would be deemed excessive, that portion of each payment of
interest, fees or penalties which exceeds the maximum rate for interest or
amount for fees or penalties so permitted shall be deemed a voluntary prepayment
of principal.
The Borrower acknowledges that no payments of principal are being
required, which will result in a balloon payment of the unpaid principal balance
and accrued interest being due upon maturity. The Borrower acknowledges that the
Lender has made no agreement to refinance such balloon payment.
The entries on the records of the Lender (including any appearing on this
Note) shall be prima facie evidence of the aggregate principal amount
outstanding under this Note and interest accrued thereon as of the date thereof.
The Borrower hereby grants to the Lender a continuing first priority lien
on, and security interest in, any securities, instruments or other property
belonging to, standing in the name of, or pledged on behalf of, the Borrower
which may be now or hereafter in the possession of the Lender for any purpose,
which, together with any other property of the Borrower in which the Lender may
at any time have a security interest or other lien, including, without
limitation, the property subject to the Loan Documents (defined below) (all of
the foregoing being called "Collateral"), shall constitute security for any and
all Secured Obligations (defined below), exercisable by the Lender after the
occurrence of any Event of Default hereunder.
Any deposits or other sums from time to time credited by or due from the
Lender to the Borrower at any time in the possession of the Lender for any
purpose shall at all times constitute Collateral for the payment and performance
of the Secured Obligations, and the Borrower hereby grants to the Lender a right
of offset, and a continuing first priority lien on, and security interest in,
such deposits and other sums as security for the Secured Obligations,
exercisable by the Lender after the occurrence of any Event of Default
hereunder. Regardless of the adequacy of Collateral securing the Secured
Obligations, on the occurrence of an Event of Default, the Lender may apply such
deposits, other sums or property to, and set off the same against, the Secured
Obligations without prior notice to the Borrower, and the right is expressly
granted to the Lender at its option following an Event of
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Default to transfer at any time to itself or to its nominee, any securities,
instruments or other property pledged hereunder and to receive the income
thereon and hold the same as security therefor, or apply it to the principal or
interest due hereon or due on any other Secured Obligation.
The following shall constitute an event of default ("Event of Default")
hereunder: (a) default in the payment of any principal or interest, or other sum
required hereunder, continuing for a period of ten (10) days without having been
duly cured after written notice thereof to the Borrower, provided that the
Lender shall not be required to give such written notice more than twice in any
consecutive twelve-month period; or (b) default in the payment of any sum or the
performance of any covenant or agreement contained herein, the Loan Agreement of
even date herewith between the Borrower and the Lender (as amended in writing,
the "Loan Agreement") or in any of the other Loan Documents (as defined in the
Loan Agreement) continuing beyond the applicable grace period specified therein,
if any; or (c) any warranty, representation or statement made or furnished to
the Lender by, or on behalf of, the Borrower proves to have been false in any
material respect when made or furnished; or (d) [Intentionally Omitted]; or (e)
the dissolution, termination of existence, winding up, liquidation, or cessation
of normal business operations of the Borrower or any endorser or Guarantor
hereof; or (f) an Insolvency Default (as defined in Section 7.3(d) of the
Mortgage) occurs with respect to the Borrower or any Guarantor of the Secured
Obligations; or (g) the service of any process upon the Lender seeking to attach
by trustee process any funds of the Borrower or any Guarantor on deposit with
the Lender; or (h) any material adverse change in the financial condition of the
Borrower (existing as of the date hereof) which in the reasonable opinion of the
Lender will impair its security for the Secured Obligations or creates a
material risk that the Borrower will not be able to satisfy the Secured
Obligations in full; or (i) the occurrence of any of the foregoing Events of
Default with respect to any Guarantor, endorser or surety to the Lender of all
or any part of the Secured Obligations; or (j) the termination or attempted
termination of any guaranty by any Guarantor of the Secured Obligations; or (k)
the occurrence of any default continuing beyond any applicable grace period in
the payment of any loan, note, indebtedness or other obligation of the Borrower
or any Guarantor, now or hereafter existing; or (l) failure of the Borrower and
the Lender to reach agreement and enter into a lease of the Property pursuant to
that certain Letter of Intent dated as of April 30, 1996. Upon the occurrence of
one or more Events of Default, or at any time thereafter, at the option of the
Lender, all Secured Obligations shall become immediately due and payable without
further notice or demand, and the Lender shall then have, in addition to all
other rights and remedies, the rights and remedies of a secured party under the
Uniform Commercial Code.
-3-
<PAGE> 4
No delay or omission on the part of the Lender in exercising any right
hereunder shall operate as a waiver of such right or of any other right under
this Note. No waiver of any right shall be effective unless in writing and
signed by the Lender nor shall a waiver on one occasion be construed as a bar to
or waiver of any such right on any future occasion.
The Borrower and each endorser or Guarantor hereof waives presentment,
demand, notice, protest, and all other demands and notices in connection with
the delivery, acceptance, performance, default or enforcement of this Note or
any Collateral, and consents to any extension or postponement of the time of
payment of any other indulgence under this Note or with respect to any
Collateral, to any substitution, exchange or release of any Collateral, and to
the addition or release of any other party or person primarily or secondarily
liable hereunder. The Borrower hereby waives the right to assert any statute of
limitations as a part of the enforcement of this Note or to any action brought
to enforce this Note.
To the maximum extent permitted by law, (i) the Borrower hereby knowingly,
voluntarily and intentionally waives any right the Borrower may now or hereafter
have to a trial by jury in respect of any suit, action or proceeding arising out
of or relating to this Note, the Mortgage (defined below) or any of the other
Loan Documents, and (ii) the Borrower and each endorser, surety and Guarantor,
hereby submit to the jurisdiction of all courts of The Commonwealth of
Massachusetts, as well as to the jurisdiction of all courts from which an appeal
may be taken from the aforesaid courts, for the purpose of any suit, action or
other proceeding arising out of, or with respect to this Note or the other Loan
Documents, and expressly waive any and all objections they may have to venue in
any of such courts.
The Borrower will pay on demand all collection costs and reasonable
attorneys' fees paid or incurred by the Lender in enforcing the Secured
Obligations or any costs of collection and reasonable attorneys' fees incurred
in enforcing the liability of any endorser or Guarantor with respect to the
Secured Obligations. If not paid when due, such costs of collection and
attorneys fees shall constitute Secured Obligations and be fully secured by the
Collateral securing this Note. Further, in the event the Borrower defaults
hereunder, under the Mortgage or any of the other Loan Documents, and the Lender
has not yet accelerated this Note on account of such default, the Borrower may
not thereafter cure such default so as to avoid acceleration without also
reimbursing the Lender for the reasonable cost of any costs of collection and
attorneys' fees incurred to the date of such cure.
As used in this Note, "Secured Obligations" means all obligations of the
Borrower to the Lender under this Note and the other Loan Documents, whether
direct or indirect, absolute or contingent, joint, several or joint and several,
secured or
-4-
<PAGE> 5
unsecured, due or to become due, now existing or hereafter arising or of any
other type, nature, or description but nevertheless arising under this Note or
the other Loan Documents; and "Lender" means the payee or any endorsee of this
Note who is in the possession of it, or the bearer hereof if this Note is at the
time payable to the bearer. As used in this Note "Guarantor" shall have the same
meaning as defined in the Mortgage defined below.
All notices required or permitted to be given hereunder shall be in
writing and shall be effective when mailed, postage prepaid, by registered or
certified mail, addressed in the case of the Borrower to it at the Borrower's
address specified in the first paragraph of this Note, with a courtesy copy to
Richard Novak, Esq, Rackemann, Sawyer & Brewster, One Financial Center, Boston,
Massachusetts 02111, and in the case of the Lender to it at the Lender's address
specified in the first paragraph of this Note, with a courtesy copy to Choate,
Hall & Stewart, Exchange Place, 53 State Street, Boston, MA 02109-2891, Attn:
Cameron Read, Esq., or to such other address as either the Borrower or the
Lender may from time to time specify by like notice.
This Note is secured and/or evidenced by, among other things, a certain
first priority Mortgage and Security Agreement, as amended from time to time
(the "Mortgage") and related first priority Assignment of Leases and Rents, as
amended from time to time (the "Assignment"), each of even date herewith,
granted by the Borrower encumbering the premises known as and numbered 125 Water
Street, Danvers, Essex County, Massachusetts (as more particularly described in
the Mortgage, the "Property"); a certain Pledge and Security Agreement of the
Guarantors (the "Pledge Agreement"), each of even date herewith, and the Loan
Agreement.
This Note shall take effect as a sealed instrument, and shall be governed
by the laws of The Commonwealth of Massachusetts.
WITNESS THE EXECUTION HEREOF as of the day first set forth above.
WITNESS: BORROWER:
125 WATER STREET, LLC
/s/ J. Michael Faherty By: /s/ Gregory P. Shlopak
- ------------------------ -------------------------------------
Gregory P. Shlopak, hereunto
duly authorized
-5-
<PAGE> 1
EXHIBIT 21.1
CYRK, INC. SUBSIDIARIES
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY JURISDICTION OF INCORPORATION OWNERSHIP
- ------------------ ----------------------------- ---------
<S> <C> <C>
Cyrk Europe Limited United Kingdom 100% owned by Cyrk, Inc.
Super Premium Limited British Virgin Islands 100% owned by Cyrk, Inc.
Cyrk Far East, Inc. British Virgin Islands 100% owned by Cyrk, Inc.
Cyrk (H.K.) Limited Hong Kong 100% owned by Cyrk Far East Inc.
Cyrk Marketing Services, Inc. Canada 100% owned by Cyrk, Inc.
Cyrk Acquisition Corp. Delaware 100% owned by Cyrk, Inc.
CXDATA, Inc. Delaware 100% owned by Cyrk, Inc.
Global Sourcing and Risk Group, Inc. Delaware 100% owned by Cyrk, Inc.
UKNY Limited United Kingdom 100% owned by Cyrk, Inc.
Tonkin Acquisition, Inc. Delaware 100% owned by Cyrk, Inc.
Cyrk CPG Corp. Delaware 100% owned by Cyrk, Inc.
Creative Premium Manufacturing, Inc. Delaware 100% owned by Cyrk CPG Corp.
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Cyrk, Inc.:
We consent to the incorporation by reference in the registration statements of
Cyrk, Inc. and subsidiaries on Form S-8 (File Nos. 33-75194 and 33-89534) of
our report dated February 14, 1997 on our audits of the consolidated financial
statements and the financial statement schedule of Cyrk, Inc. and subsidiaries
as of December 31, 1996 and 1995, and for the years ended December 31, 1996,
1995 and 1994, which report is included in this Annual Report on Form 10-K.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
March 28, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 44,244
<SECURITIES> 2,420
<RECEIVABLES> 62,237
<ALLOWANCES> 3,191
<INVENTORY> 45,904
<CURRENT-ASSETS> 167,360
<PP&E> 16,988
<DEPRECIATION> 6,581
<TOTAL-ASSETS> 190,239
<CURRENT-LIABILITIES> 65,089
<BONDS> 0
0
0
<COMMON> 108
<OTHER-SE> 124,239
<TOTAL-LIABILITY-AND-EQUITY> 190,239
<SALES> 250,901
<TOTAL-REVENUES> 250,901
<CGS> 213,915
<TOTAL-COSTS> 213,915
<OTHER-EXPENSES> 1,111
<LOSS-PROVISION> 152
<INTEREST-EXPENSE> 257
<INCOME-PRETAX> 1,263
<INCOME-TAX> 825
<INCOME-CONTINUING> 438
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 438
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
<PAGE> 1
EXHIBIT 99.2
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 99.2 in its Form 10-K 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
Significantly, the United States Food and Drug Administration (the "FDA") has
issued final regulations with respect to tobacco products. Such regulations,
among other things, ban (i) gifts 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. These regulations are scheduled to
become effective on August 28, 1997, except for the ban on brand-name
sponsorship, which becomes effective August 28, 1998. These regulations could
have a material and adverse effect on the Company's sales to Philip Morris,
which in turn could 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
<PAGE> 3
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.
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
The Company continues to expand its international sales development activity on
a worldwide basis. The Company has limited prior experience in international
sales and there is no assurance that the Company's efforts will be successful.
