<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ____________________
Commission File Number 0-21878
CYRK, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 04-3081657
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3 POND ROAD, GLOUCESTER, MASSACHUSETTS 01930
(Address of principal executive offices)
(Zip Code)
(978) 283-5800
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
At October 30, 1998, 15,453,058 shares of the Registrant's common stock were
outstanding.
<PAGE> 2
CYRK, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NUMBER
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations -
For the three and nine months ended
September 30, 1998 and 1997 4
Consolidated Statements of Comprehensive Income -
For the three and nine months ended
September 30, 1998 and 1997 5
Consolidated Statements of Cash Flows -
For the nine months ended September 30, 1998
and 1997 6
Notes to Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-14
Part II OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
CYRK, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 61,443 $ 42,513
Accounts receivable:
Trade, less allowance for doubtful accounts of $2,033
at September 30, 1998 and $3,801 at December 31, 1997 83,742 95,388
Officers, stockholders and related parties 243 228
Inventories 54,461 46,317
Prepaid expenses and other current assets 8,378 10,649
Deferred and refundable income taxes 13,607 9,746
-------- --------
Total current assets 221,874 204,841
Property and equipment, net 14,797 16,268
Excess of cost over net assets acquired, net 83,023 77,483
Investments in and advances to affiliates 3,602 9,506
Other assets 6,357 5,747
-------- --------
$329,653 $313,845
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 29,428 $ 20,826
Accounts payable:
Trade 36,051 57,690
Affiliates 1,223 180
Accrued expenses and other current liabilities 78,841 64,831
Accrued restructuring expenses 3,891 --
-------- --------
Total current liabilities 149,434 143,527
Long-term obligations 11,538 9,611
Deferred income taxes 704 704
-------- --------
Total liabilities 161,676 153,842
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000
shares authorized; none issued -- --
Common stock, $.01 par value; 50,000,000 shares
authorized; 15,453,058 shares issued and
outstanding at September 30, 1998 and 13,688,038
shares issued and outstanding at December 31, 1997 155 137
Additional paid-in capital 138,728 119,840
Retained earnings 30,098 40,609
Accumulated other comprehensive income:
Cumulative translation adjustment (1,004) (583)
-------- --------
Total stockholders' equity 167,977 160,003
-------- --------
$329,653 $313,845
======== ========
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
3
<PAGE> 4
CYRK INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION> For the three months For the nine months
ended September 30, ended September 30,
-------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $163,669 $170,813 $545,420 $374,568
Cost of sales 131,099 139,479 450,743 306,496
-------- -------- -------- --------
Gross profit 32,570 31,334 94,677 68,072
Selling, general and administrative expenses 33,543 29,527 94,941 58,432
Goodwill amortization expense 826 828 2,465 1,403
Restructuring expense -- -- 15,486 --
-------- -------- -------- --------
Operating income (loss) (1,799) 979 (18,215) 8,237
Interest income (1,422) (439) (2,659) (2,102)
Interest expense 549 538 1,798 1,676
Equity in loss (income) of affiliates, net (490) 570 418 1,186
-------- -------- -------- --------
Income (loss) before income taxes (436) 310 (17,772) 7,477
Income tax provision (benefit) (191) 186 (7,261) 4,486
-------- -------- -------- --------
Net income (loss) $ (245) $ 124 $(10,511) $ 2,991
======== ======== ======== ========
Earnings (loss) per common share - basic $ (0.02) $ 0.01 $ (0.71) $ 0.24
======== ======== ======== ========
Earnings (loss) per common share - diluted $ (0.02) $ 0.01 $ (0.71) $ 0.24
======== ======== ======== ========
Weighted average shares outstanding - basic 15,233 13,677 14,799 12,228
======== ======== ======== ========
Weighted average shares outstanding - diluted 15,233 14,275 14,799 12,542
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
4
<PAGE> 5
CYRK INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
<TABLE>
<CAPTION> For the three months For the nine months
ended September 30, ended September 30,
-------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $(245) $124 $(10,511) $2,991
----- ---- -------- ------
Other comprehensive income (loss), before income taxes:
Foreign currency translation adjustments (68) 121 (421) 10
Unrealized holding gains arising during period -- 11 -- 56
----- ---- -------- ------
Other comprehensive income (loss), before income taxes (68) 132 (421) 66
Income tax expense (benefit) related to items of
other comprehensive income (loss) (32) 80 (172) 40
----- ---- -------- ------
Other comprehensive income (loss), net of income taxes (36) 52 (249) 26
----- ---- -------- ------
Comprehensive income (loss) $(281) $176 $(10,760) $3,017
===== ==== ======== ======
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
5
<PAGE> 6
CYRK INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
For the nine months ended September 30,
---------------------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(10,511) $ 2,991
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 6,590 4,305
Gain on sale of property and equipment (313) (17)
Provision for doubtful accounts 576 115
Equity in loss of affiliates, net 418 1,186
Non-cash restructuring charges 9,651 --
Increase (decrease) in cash from changes
in working capital items, net of acquisitions:
Accounts receivable 10,848 15,130
Inventories (10,075) 10,909
Prepaid expenses and other current assets 2,230 (1,965)
Refundable income taxes (3,861) --
Accounts payable (20,646) (24,074)
Accrued expenses and other current liabilities 16,147 2,161
-------- --------
Net cash provided by operating activities 1,054 10,741
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (3,945) (3,446)
Proceeds from sale of property and equipment 895 203
Acquisitions, net of cash acquired* -- (16,581)
Repayments from (advances to) affiliates, net 1,029 (2,623)
Purchase of investments -- (3,815)
Proceeds from sale of investments 529 6,271
Additional consideration related to acquisitions (2,039) (1,065)
Other, net (739) --
-------- --------
Net cash used in investing activities (4,270) (21,056)
-------- --------
Cash flows from financing activities:
Proceeds from short-term borrowings, net 8,602 2,231
Increase in long-term obligations 1,927 252
Proceeds from issuance of common stock 11,554 412
-------- --------
Net cash provided by financing activities 22,083 2,895
-------- --------
Effect of exchange rate changes on cash 63 133
-------- --------
Net increase (decrease) in cash and cash equivalents 18,930 (7,287)
Cash and cash equivalents, beginning of year 42,513 44,224
-------- --------
Cash and cash equivalents, end of period $ 61,443 $ 36,937
======== ========
*Details of acquisitions:
Fair value of asset acquired $ -- $104,257
Cost in excess of net assets of companies acquired, net -- 73,162
Liabilities assumed -- (107,069)
Stock issued -- (32,000)
-------- --------
Cash paid -- 38,350
Less: cash acquired -- (21,769)
-------- --------
Net cash paid for acquisitions $ -- $ 16,581
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 1,579 $ 1,333
======== ========
Income taxes $ 2,415 $ 4,191
======== ========
Supplemental non-cash financing activities:
Additional stock related to acquisitions $ 7,352 $ -
======== ========
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
6
<PAGE> 7
CYRK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared by the
Company pursuant to the rules and regulations of the Securities and
Exchange Commission regarding interim financial reporting. Accordingly,
they do not include all of the information and footnotes in accordance with
generally accepted accounting principles for complete financial statements
and should be read in conjunction with the audited financial statements
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997. In the opinion of management, the accompanying unaudited
financial statements contain all adjustments, consisting only of those of a
normal recurring nature, necessary for fair presentation of the Company's
financial position, results of operations and cash flows at the dates and
for the periods presented.
The operating results for the nine months ended September 30, 1998 are not
necessarily indicative of the results to be expected for the full year.
Certain prior period amounts have been reclassified to conform with the
current period presentation.
2. Inventories
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Raw materials $10,953 $10,807
Work in process 12,725 5,033
Finished goods 30,783 30,477
------- -------
$54,461 $46,317
======= =======
</TABLE>
3. Short-Term Borrowings
At September 30, 1998, the Company was contingently liable for letters of
credit used to finance the purchase of inventory in the aggregate amount of
$13.4 million. Such letters of credit expire at various dates through
January 1999. As of September 30, 1998, the Company was in violation of
certain financial covenants associated with its primary domestic line of
credit which have been waived by the bank.
4. Restructuring
On February 13, 1998, the Company announced a plan to restructure its
worldwide operations. The plan reflects the Company's strategy to focus on
its core business in the promotional marketing industry. The Company
intends to consolidate certain operating facilities, discontinue certain
divisions of its apparel business and eliminate approximately 450 positions
or 28% of its worldwide work force. The majority of the eliminated
positions will affect the screen printing and embroidery business in
Gloucester, Massachusetts. As of September 30, 1998, all anticipated
employee terminations have occurred. In the first quarter of 1998, the
Company recorded a charge to operations of $15.5 million primarily related
to asset write-downs, employee termination costs, lease cancellations and
other related exit costs. This charge has had the effect of reducing after
tax earnings by $9.1 million or $0.64 per share. The Company anticipates
the restructuring will be completed during 1998. A summary of activity in
the restructuring accrual is as follows (in thousands):
<TABLE>
<S> <C>
Balance at January 1, 1998 $ --
Restructuring provision 15,486
Employee termination costs
and other cash payments (1,944)
Non-cash asset write-downs (9,651)
------
Balance at September 30, 1998 $3,891
======
</TABLE>
7
<PAGE> 8
5. Income Taxes
The effective tax rate for the nine months ended September 30, 1998 was 41%
as compared to an effective tax rate of 60% for the year ended December 31,
1997. The effective rate of 41% represents the estimated federal and state
tax benefit expected to be realized primarily as a result of the
restructuring charge recorded in the first quarter.
6. Litigation
The Company and certain of its officers and directors were named as
defendants in a putative class action filed on October 18, 1995 in the
United States District Court for the Southern District of New York (BARRY
HALLETT, JR. V. LI & FUNG, ET AL., Docket No. 95 Civ. 8917). On March 4,
1998, with the assistance of a professional mediator, all parties to the
litigation reached an agreement to settle the case which was approved by
the Federal District Court on June 26, 1998. The settlement agreement
called for a cash contribution by the Company of $4.0 million; other
parties and various insurance carriers have also contributed to the
settlement. In the opinion of management, after consideration of amounts
accrued, this settlement will not have a material adverse effect on the
Company's financial condition or results of operations.
On February 11, 1993, Simon Marketing, Inc. ("Simon"), a wholly-owned
subsidiary of the Company, filed a complaint against Promotional Concept
Group, Inc. ("PCG") in the United States District Court for the Central
District of California (Case No. SA-CV 93-156 AHS (EEx)). On April 30,
1993, PCG filed its answer, denying liability, as well as its counterclaim
against Simon. On June 30, 1998, Simon and PCG entered into a settlement
agreement and, subsequently, entered a dismissal of the lawsuit with the
court. As part of settling this preacquisition contingency of Simon, the
Company made an upfront payment of $.6 million to a third party,
Interpublic Group of Companies, Inc. ("IPG"). The Company also agreed to
pay IPG a total of $2.9 million in additional consideration, comprised of
warrants to purchase 200,000 shares of the Company's common stock and cash
based on the difference between $2.9 million, certain amounts received by
IPG under a separate business arrangement with the Company, and the value
of the warrant shares as of different measurement dates. In the opinion of
management, this settlement will not have a material adverse effect on the
Company's financial condition or results of operations.
7. Earnings Per Share Disclosure
The following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computation for "income (loss) available to common
stockholders" and other related disclosures required by Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (in thousands,
except share data):
<TABLE>
<CAPTION>
For the Quarters Ended September 30,
1998 1997
------------------------------------ ---------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------------------------------ ---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Income (loss) available to
common stockholders $(245) 15,233,017 $(0.02) $ 124 13,676,921 $0.01
====== =====
Effect of Dilutive Securities:
Common stock equivalents -- 40,455
Contingently and non-contingently
issuable shares -- 558,024
---------------------- -----------------------
Diluted EPS:
Income (loss) available to common
stockholders and assumed
conversions $(245) 15,233,017 $(0.02) $ 124 14,275,400 $0.01
====================== ====== =============-========== =====
</TABLE>
For the quarter ended September 30, 1998, 411,340 of common stock
equivalents and contingently and non-contingently issuable shares related
to acquired companies were not included in the computation of diluted EPS
because to do so would have been antidilutive.
8
<PAGE> 9
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
1998 1997
------------------------------------ ---------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------------------------------ ---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Income (loss) available to
common stockholders $(10,511) 14,798,798 $(0.71) $ 2,991 12,227,941 $0.24
====== =====
Effect of Dilutive Securities:
Common stock equivalents -- 90,597
Contingently and non-contingently --
issuable shares 222,997
-------------------------- -----------------------
Diluted EPS:
Income (loss) available to common
stockholders and assumed
conversions $(10,511) 14,798,798 $(0.71) $ 2,991 12,541,535 $0.24
========================== ====== ======================= =====
</TABLE>
For the nine months ended September 30, 1998, 676,933 of common stock
equivalents and contingently and non-contingently issuable shares related
to acquired companies were not included in the computation of diluted EPS
because to do so would have been antidilutive.
8. New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 specifies new
guidelines for determining a company's operating segments and related
requirements for disclosure. The Company is in the process of evaluating
the impact of the new standard on the presentation of the financial
statements and the disclosures therein. The Statement will become effective
for fiscal years beginning after December 15, 1997. The Company will adopt
the new standard for the fiscal year ending December 31, 1998.
9. Impact of the Year 2000 Issue
In 1997, the Company conducted an assessment of issues related to the Year
2000 and determined that it was necessary to modify or replace portions of
its software in order to ensure that its computer systems will properly
utilize dates beyond December 31, 1999. The Company expects to complete
any Year 2000 systems modifications and conversions by the beginning of
1999. Currently, the Company does not expect that the costs associated
with becoming Year 2000 compliant will be material. At this time, the
Company cannot determine the impact the Year 2000 will have on its key
customers or suppliers. If the Company's customers or suppliers do not
convert their systems to become Year 2000 compliant, the Company may be
adversely impacted. The Company is addressing these risks in order to
reduce the impact on the Company.
9
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following is a discussion of the financial condition and results of
operations of the Company for the three and nine month periods ended
September 30, 1998 as compared to the same periods in the previous year. This
discussion should be read in conjunction with the Consolidated Financial
Statements of the Company and related Notes included elsewhere in this Form-10Q.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
From time to time, the Company may provide forward-looking information such as
forecasts of expected future performance or statements about the Company's plans
and objectives, including certain information provided below. These
forward-looking statements are based largely on the Company's expectations and
are subject to a number of risks and uncertainties, certain of which are beyond
the Company's control. The Company wishes to caution readers that actual results
may differ materially from those expressed in any forward-looking statements
made by, or on behalf of, the Company as a result of factors described in the
Company's Amended Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act of 1995, filed as
Exhibit 99.3 to the Company's 1997 Annual Report on Form 10-K which is
incorporated herein by reference.
GENERAL
The Company is a full-service, integrated provider of marketing and promotional
products and services. As such, the Company generates revenue from the sale of
promotional products and the development of marketing programs. The majority of
the Company's revenue is derived from the sale of promotional products to
consumer product companies seeking to promote their brand and build customer
loyalty.
Historically, the Company's business has been heavily concentrated with two
customers, Philip Morris Incorporated ("Philip Morris") and Pepsi-Cola Company
("Pepsi"). Purchases of promotional products by Philip Morris and Pepsi in 1997
accounted for 16% and 21% of net sales, respectively. Net sales to Philip Morris
and Pepsi accounted for 12% and 1%, respectively, of total net sales in the
first nine months of 1998.
As a part of its continuing effort to diversify its customer base and broaden
its capability, the Company completed the acquisition of two providers of
promotional services and products during the second quarter of 1997. These
transactions were completed through mergers of these providers with and into
wholly-owned subsidiaries of the Company. On April 7, 1997, the Company acquired
Tonkin, Inc. ("Tonkin"), a Monroe, Washington provider of custom promotional
programs and licensed promotional products. On June 9, 1997, the Company
acquired Simon Marketing, Inc. ("Simon"), a Los Angeles-based global marketing
and promotion agency and provider of custom promotional products. Simon's
business is heavily concentrated with McDonald's Corporation ("McDonald's"). Net
sales to McDonald's accounted for 36% of the Company's total net sales in 1997
and 59% of the Company's total net sales for the first nine months of 1998.
The Company's business with McDonald's, Philip Morris and Pepsi (as well as
other promotional customers) is based upon purchase orders placed from time to
time during the course of promotions. There are no written agreements which
commit them to make a certain level of purchases. The actual level of purchases
depends on a number of factors, including the duration of the promotion and
consumer redemption rates. Consequently, the Company's level of net sales is
difficult to predict accurately and can fluctuate greatly from quarter to
quarter. The Company expects that a significant percentage of its net sales in
1998 will be to McDonald's and Philip Morris. The Company's agreements with
Pepsi were terminated in December 1997 and the Company expects sales to Pepsi in
1998 to be minimal.
While the Company has been seeking new major promotional customers in an effort
to replace the 1997 Pepsi revenues of $117.1 million, it is very unlikely that
sales to new customers, or increased sales to existing customers, in 1998 will
materially reduce the revenue shortfall caused by the termination of the Pepsi
agreements. Therefore, while the restructuring described below will help
mitigate the impact of the loss of Pepsi revenues on 1998 earnings, the Company
expects to report operating losses for the year.
10
<PAGE> 11
Philip Morris solicits competitive bids for its promotional programs. The
Company's profit margin depends, to a great extent, on its competitive position
when bidding and its ability to manage its costs after being awarded bids.
Increased competition is expected to continue and may adversely impact the
Company's profit margin on Philip Morris promotions in the future. Recent
negotiations between state attorneys general and certain tobacco companies,
including Philip Morris, as well as recent federal regulations, would result in
a ban on promotional programs relating to tobacco products and would have a
material adverse effect on the Company's business with Philip Morris and its
results of operations.
At September 30, 1998, the Company had written purchase orders for
$282.5 million as compared to $240.0 million at September 30, 1997. The
Company's purchase orders are generally subject to cancellation with limited
penalty and are therefore not necessarily indicative of future revenues or
earnings.
CORPORATE RESTRUCTURING
On February 13, 1998, the Company announced a plan to restructure its worldwide
operations. The plan reflects the Company's strategy to focus on its core
business in the promotional marketing industry. The Company intends to
consolidate certain operating facilities, discontinue certain divisions of its
apparel business and eliminate approximately 450 positions or 28% of its
worldwide work force. The majority of the eliminated positions will affect the
screen printing and embroidery business in Gloucester, Massachusetts. In the
first quarter of 1998 the Company recorded a charge to operations of $15.5
million for asset write-downs, employee termination costs, lease cancellations
and other related exit costs associated with the restructuring. The Company
anticipates the restructuring will be completed during 1998 and once completed
is expected to yield annualized cost savings of $9 to $12 million. See notes to
consolidated financial statements.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
Net sales decreased $7.1 million, or 4%, to $163.7 million in the third quarter
ended September 30, 1998 from $170.8 million in the third quarter of 1997. The
decrease in net sales was primarily attributable to the decrease in revenues
associated with the termination of the Pepsi agreements, which was partially
offset by an increase in sales to other promotional customers. Promotional
product sales accounted for substantially all of the Company's revenue in the
third quarter of 1998 as compared to $163.1 million in the third quarter of
1997. Net sales related to the Company's private label and Cyrk brand business
in the third quarter of 1998 were minimal as compared to $7.7 million in the
third quarter of 1997 which reflects the Company's strategy to focus on its core
business in the promotional marketing industry.
Gross profit increased $1.2 million, or 4%, to $32.6 million in the third
quarter of 1998 from $31.3 million in the third quarter of 1997. As a percentage
of net sales, the third quarter gross profit increased to 19.9% in 1998 from
18.3% in 1997. This increase was primarily the result of cost and operational
improvements associated with the restructuring announced in February 1998, as
well as the effect of a more favorable product sales mix.
Selling, general and administrative expenses totaled $34.4 million in the third
quarter of 1998 as compared to $30.4 million in the third quarter of 1997. As a
percentage of net sales, selling, general and administrative costs totaled 21.0%
as compared to 17.8% in the third quarter of 1997. The Company's increased
spending was primarily attributable to its expanded global sales and operations
associated with its 1997 acquisitions.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Net sales increased $170.9 million, or 46%, to $545.4 million in the first nine
months of 1998 from $374.6 million in the first nine months of 1997. The
increase in net sales was primarily attributable to revenues associated with
Simon and Tonkin. Promotional product sales accounted for substantially all of
the Company's revenue in the first nine months of 1998 as compared to $346.2
million in the first nine months of 1997. Net sales related to the Company's
private label and Cyrk brand business in the first nine months of 1998 were
minimal as compared to $28.4 million in the first nine months of 1997 which
reflects the Company's strategy to focus on its core business in the promotional
marketing industry.
Gross profit increased $26.6 million, or 39%, to $94.7 million in the first nine
months of 1998 from $68.1 million in the first nine months of 1997. As a
percentage of net sales, gross profit decreased to 17.4% in 1998 from 18.2% in
1997. This decrease was primarily the result of a concentration of sales volume
and lower margins associated with the large promotional programs, which was
partially offset by cost and operational improvements associated with the
restructuring announced in February 1998.
11
<PAGE> 12
Selling, general and administrative expenses totaled $97.4 million in the first
nine months of 1998 as compared to $59.8 million in the first nine months of
1997. As a percentage of net sales, selling, general and administrative costs
totaled 17.9% as compared to 16.0% in the first nine months of 1997. The
Company's increased spending was primarily attributable to its expanded global
sales and operations associated with its 1997 acquisitions.
In connection with its February 1998 announcement to restructure worldwide
operations, the Company recorded a restructuring charge of $15.5 million
attributable to asset write-downs, employee termination costs, lease
cancellations and other related exit costs. See notes to consolidated financial
statements.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at September 30, 1998 was $72.4 million compared to
$61.3 million at December 31, 1997. Net cash provided by operating activities
during the first nine months of 1998 was $1.1 million, due principally to a
$16.1 million increase in accrued expenses and other current liabilities, a
$10.8 million decrease in accounts receivable, $9.7 million of non-cash asset
write-downs related to the restructuring and $6.6 million of depreciation and
amortization expense which were partially offset by a $20.6 million decrease in
accounts payable, a $10.5 million net loss and a $10.1 million increase in
inventory.
Net cash used in investing activities was $4.3 million, which was primarily
attributable to $3.9 million for purchases of property and equipment and an
increase of $2.0 million in intangible assets which were partially offset by
$1.0 million of repayments from affiliates and $.9 million of proceeds from the
sale of property and equipment. In the first nine months of 1997, net cash used
by investing activities was $21.1 million which was primarily attributable to
$16.6 million of net cash used to acquire Simon and Tonkin in the second quarter
of 1997.
The Company currently expects to make cash payments totaling approximately
$2.5 million for employee termination costs, lease buyouts and other exit costs
associated with its plan to restructure its operations, of which $1.9 million
has been paid as of September 30, 1998.
Net cash provided by financing activities was $22.1 million, which was primarily
attributable to $11.6 million of proceeds from the issuance of common stock and
$8.6 million of proceeds from short-term borrowings. In February 1998, the
Company issued 975,610 shares of its common stock and a warrant to purchase up
to 100,000 shares of its common stock in a private placement, resulting in net
proceeds of approximately $10.0 million which is being used for general
corporate purposes.
Since inception, the Company has financed its working capital and capital
expenditure requirements through cash generated from operations, public and
private sales of common stock, bank borrowings and capital equipment leases.
Such cash requirements for 1997 were provided principally by operating
activities, and principally by financing activities for 1998 to date.
The Company currently has available several worldwide bank letters of credit and
revolving credit facilities which expire at various dates beginning in December
1998. The Company's primary domestic line of credit, amounting to $50 million,
has been extended to September 1999. As of September 30, 1998, based on the
borrowing base formulas prescribed by these credit facilities, the Company's
borrowing capacity was $92.5 million, of which $28.8 million of short-term
borrowings and $14.2 million in letters of credit were outstanding. Borrowings
under these facilities are collateralized by all assets of the Company.
Management believes that the Company's existing cash position and credit
facilities combined with internally generated cash flow will satisfy its
liquidity and capital needs through the end of 1998. The Company may seek
additional financing during the next twelve months. However, there can be no
assurance that such financing will be available on acceptable terms, and any
additional equity financing could result in additional dilution to existing
investors.
12
<PAGE> 13
IMPACT OF THE YEAR 2000 ISSUE
General
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities. Based on an assessment conducted
in 1997, the Company determined that it was necessary to modify or replace
portions of its software so that its computer systems will properly utilize
dates beyond December 31, 1999. To address these problems, the Company initiated
a Year 2000 Compliance Program which is described below.
The Company does not anticipate that the addressing of the Year 2000 problem for
its internal information systems and current and future products will have a
material impact on its operations or financial results. However, there can be
no assurance that these costs will not be greater than anticipated, or that
corrective actions undertaken will be completed before any Year 2000 problems
occur. The Year 2000 issue could lower demand for the Company's products while
increasing the Company's costs. These combining factors, while not quantified,
could have a material adverse impact on the Company's financial results.
State of Readiness
To manage its Year 2000 program, the Company has divided its efforts into three
program areas--Information Technology (computer hardware, software, and
electronic data interchange (EDI) interfaces), Physical Plant (manufacturing
equipment and facilities) and Extended Enterprise (suppliers and customers). For
each of these program areas, the Company is using a four-step approach:
Ownership (creating awareness, assigning tasks); Inventory (listing items to be
assessed for Year 2000 readiness); Assessment (prioritizing the inventoried
items, assessing their Year 2000 readiness, planning corrective actions, making
initial contingency plans); and, Corrective Action Deployment (implementing
corrective actions, verifying implementation, finalizing and executing
contingency plans).
In January 1998, the Ownership and Inventory steps were essentially complete for
all program areas. The target completion dates for priority items by remaining
steps are as follows: Assessment--January 1999; Corrective Action Deployment--
March 1999.
To date, the Company has achieved approximately 90 percent of its Assessment
goals for its three program areas. The Company expects to complete its Year
2000 assessments, modifications and conversions by the beginning of 1999. The
Assessment status for each program area is as follows:
* Information Technology: Substantially all of the Company's business
strategic information systems (financial, distribution and marketing)
have been assessed, corrected and verified, and corrected systems are on
schedule to be completed by March 1999. Hardware assessment is in process
and on schedule for completion.
* Physical Plant: Manufacturing equipment assessment has been completed
with no corrective action necessary. Facilities assessment is in process
and on schedule to be completed by March 1999.
* Extended Enterprise: As a result of discussions with its computer
software program suppliers, the Company has been assured that all of its
current software will be modified or replaced to be Year 2000 compliant.
In addition, the Company has initiated a formal Year 2000 compliance
document where the Company's software suppliers will certify their plans
and action steps for modification or replacement of existing Company
software to ensure timely Year 2000 compliance. The Company will initiate
formal communications with its key customers and suppliers by the end of
1998 to determine the extent to which the Company may be vulnerable to
the failure of those third parties to address their own Year 2000 issues.
At this time, the Company cannot determine the impact the Year 2000 will
have on its key customers or suppliers. If the Company's customers or
suppliers do not convert their systems to become Year 2000 compliant, the
Company may be materially adversely affected.
Costs to Address Year 2000 Issues
Currently, the Company does not expect that the costs associated with becoming
Year 2000 compliant will be material.
13
<PAGE> 14
Risks of Year 2000 Issues and Contingency Plans
The Company continues to assess the Year 2000 issues relating to its physical
plant, suppliers and customers. The Company is developing, and will continue to
develop, contingency plans for dealing with any adverse effect that becomes
likely in the event the Company's remediation plans are not successful or third
parties fail to remediate their own Year 2000 issues. The Company's contingency
planning process is intended to mitigate worst-case business disruptions.
14
<PAGE> 15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Disclosure concerning the settlement of litigation against the
Company is contained in the Company's Form 10-Q filed August 13,
1998. There have been no material developments with respect to such
litigation since such date.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter for which this
report is filed.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: November 10, 1998 CYRK, INC.
/s/ Dominic F. Mammola
-----------------------------------
Dominic F. Mammola
Executive Vice President and Chief
Financial Officer (duly authorized
officer and principal financial and
accounting officer)
16
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 61,443
<SECURITIES> 0
<RECEIVABLES> 85,775
<ALLOWANCES> 2,033
<INVENTORY> 54,461
<CURRENT-ASSETS> 221,874
<PP&E> 33,613
<DEPRECIATION> 18,816
<TOTAL-ASSETS> 329,653
<CURRENT-LIABILITIES> 149,434
<BONDS> 0
155
0
<COMMON> 0
<OTHER-SE> 167,822
<TOTAL-LIABILITY-AND-EQUITY> 329,653
<SALES> 545,420
<TOTAL-REVENUES> 545,420
<CGS> 450,743
<TOTAL-COSTS> 450,743
<OTHER-EXPENSES> 418
<LOSS-PROVISION> 576
<INTEREST-EXPENSE> 1,798
<INCOME-PRETAX> (17,772)
<INCOME-TAX> (7,261)
<INCOME-CONTINUING> (10,511)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,511)
<EPS-PRIMARY> (0.71)
<EPS-DILUTED> (0.71)
</TABLE>
