<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________to __________________
Commission File Number 0-21878
CYRK, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 04-3081657
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3 POND ROAD, GLOUCESTER, MASSACHUSETTS 01930
(Address of principal executive offices)
(Zip Code)
(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 April 30, 1999, 15,494,204 shares of the Registrant's common stock were
outstanding.
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CYRK, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE NUMBER
<S> <C>
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -
March 31, 1999 and December 31, 1998 3
Consolidated Statements of Operations -
For the three months ended March 31, 1999
and 1998 4
Consolidated Statements of Comprehensive Income -
For the three months ended March 31, 1999
and 1998 5
Consolidated Statements of Cash Flows -
For the three months ended March 31, 1999
and 1998 6
Notes to Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-12
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
</TABLE>
2
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PART I - FINANCIAL INFORMATION
CYRK, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 58,179 $ 75,819
Investment 3,769 2,944
Accounts receivable:
Trade, less allowance for doubtful accounts of $3,494
at March 31, 1999 and $2,682 at December 31, 1998 82,522 87,372
Officers, stockholders and related parties 205 204
Inventories 68,266 51,250
Prepaid expenses and other current assets 7,459 7,227
Deferred and refundable income taxes 10,782 9,813
--------- ---------
Total current assets 231,182 234,629
Property and equipment, net 13,022 13,285
Excess of cost over net assets acquired, net 81,933 82,771
Other assets 9,044 6,656
--------- ---------
$ 335,181 $ 337,341
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 16,509 $ 16,929
Accounts payable:
Trade 49,914 43,907
Affiliates -- 2,043
Accrued expenses and other current liabilities 80,845 83,280
Accrued restructuring expenses 575 953
--------- ---------
Total current liabilities 147,843 147,112
Long-term obligations 12,191 12,099
Deferred income taxes 230 475
--------- ---------
Total liabilities 160,264 159,686
--------- ---------
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;
15,494,204 shares issued and outstanding at March 31, 1999 and
15,453,058 shares issued and outstanding at December 31, 1998 155 155
Additional paid-in capital 139,059 138,784
Retained earnings 34,370 37,593
Accumulated other comprehensive income (loss):
Unrealized gain on investment 1,978 1,442
Cumulative translation adjustment (645) (319)
--------- ---------
Total stockholders' equity 174,917 177,655
--------- ---------
$ 335,181 $ 337,341
========= =========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
3
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CYRK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the three months
--------------------
ended March 31,
---------------
1999 1998
---- ----
<S> <C> <C>
Net sales $ 159,077 $ 169,142
Cost of sales 129,323 138,834
--------- ---------
Gross profit 29,754 30,308
Selling, general and administrative expenses 33,864 30,234
Goodwill amortization expense 870 818
Restructuring expense -- 15,486
--------- ---------
Operating loss (4,980) (16,230)
Interest income (637) (566)
Interest expense 616 614
Equity in loss of affiliates, net -- 419
--------- ---------
Loss before income taxes (4,959) (16,697)
Income tax benefit (1,736) (6,846)
--------- ---------
Net loss $ (3,223) $ (9,851)
========= =========
Loss per common share - basic and diluted $ (0.21) $ (0.69)
========= =========
Weighted average shares outstanding - basic and diluted 15,485 14,310
========= =========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
4
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CYRK, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
For the three months
--------------------
ended March 31,
---------------
1999 1998
---- ----
<S> <C> <C>
Net loss $ (3,223) $ (9,851)
-------- --------
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments (502) (271)
Unrealized holding gains arising during period 825 --
-------- --------
Other comprehensive income (loss), before tax 323 (271)
Income tax expense (benefit) related to items of
other comprehensive income (loss) 113 (111)
-------- --------
Other comprehensive income (loss), net of tax 210 (160)
-------- --------
Comprehensive loss $ (3,013) $(10,011)
======== ========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
5
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CYRK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
For the three months
--------------------
ended March 31,
---------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,223) $ (9,851)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 2,011 2,253
Realized gain on sale of investments -- (215)
Provision for doubtful accounts 959 271
Deferred income taxes 1,080 (111)
Equity in loss of affiliates -- 634
Non-cash restructuring charges 334 282
Increase (decrease) in cash from changes
in working capital items:
Accounts receivable 3,920 7,780
Inventories (17,313) (26,059)
Prepaid expenses and other current assets (224) 1,178
Refundable income taxes (2,293) (2,309)
Accounts payable 4,010 3,046
Accrued expenses and other current liabilities (3,405) 27,634
-------- --------
Net cash provided by (used in) operating activities (14,144) 4,533
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (872) (1,543)
Repayments from affiliates, net -- 676
Purchase of investment (2,000) --
Proceeds from sale of investments -- 529
Other, net (421) (371)
-------- --------
Net cash used in investing activities (3,293) (709)
-------- --------
Cash flows from financing activities:
Proceeds from (repayments of) short-term borrowings, net (420) 4,273
Proceeds from (repayments of) long-term obligations 92 (64)
Proceeds from issuance of common stock 275 10,594
-------- --------
Net cash provided by (used in) financing activities (53) 14,803
-------- --------
Effect of exchange rate changes on cash (150) 8
-------- --------
Net increase (decrease) in cash and cash equivalents (17,640) 18,635
Cash and cash equivalents, beginning of year 75,819 42,513
-------- --------
Cash and cash equivalents, end of period $ 58,179 $ 61,148
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 482 $ 509
======== ========
Income taxes $ 421 $ 1,350
======== ========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
6
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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, 1998. 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 three months ended March 31, 1999 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>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Raw materials $16,364 $13,622
Work in process 25,829 9,034
Finished goods 26,073 28,594
------- -------
$68,266 $51,250
======= =======
</TABLE>
3. Short-Term Borrowings
At March 31, 1999, the Company was contingently liable for letters of
credit used to finance the purchase of inventory in the aggregate
amount of $28.4 million. Such letters of credit expire at various dates
through July 1999. As a result of the Company's 1997 acquisitions
accounted for as a purchase, the Company has subsequently been in
violation of certain of its credit facility covenants. The Company
secured bank approval for its acquisition transactions as required by
its credit agreement and the bank has issued waivers on a quarterly
basis since the completion of the acquisitions. The Company is in
discussions with the bank for a revised facility which will include
modifying its existing covenants. The Company expects to secure a
revised facility in the second quarter of 1999. Accordingly, as
expected, the Company was in violation of its existing covenants in the
first quarter of 1999 and received a waiver from the lender.
4. Restructuring
As a result of its 1998 corporate restructuring, the Company recorded a
1998 charge to operations of $11.8 million for asset write-downs,
employee termination costs, lease cancellations and other related exit
costs associated with the restructuring. The restructuring plan was
fully executed in 1998 and the remaining restructuring accrual of $.6
million is primarily related to the liquidation of certain assets which
are expected to be completed during the first half of 1999.
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A summary of activity in the restructuring accrual is as follows (in
thousands):
Balance at January 1, 1998 $ --
Restructuring provision 15,486
Employee termination costs
and other cash payments (2,305)
Non-cash asset write-downs (8,555)
Accrual reversal (3,673)
--------
Balance at December 31, 1998 953
Miscellaneous cash payments (44)
Non-cash asset write-downs (334)
--------
Balance at March 31, 1999 $ 575
========
5. Earnings Per Share Disclosure
The following is a reconciliation of the numerators and denominators of
the basic and diluted EPS computation for "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 March 31,
1999 1998
----------------------------------------- ----------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic and Diluted EPS:
Loss available to common
stockholders $(3,223) 15,484,589 $(0.21) $(9,851) 14,310,300 $(0.69)
======= ========== ====== ======= ========== ======
</TABLE>
For the quarters ended March 31, 1999 and 1998, 774,362 and 638,345 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
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 month period ended March 31, 1999 as
compared to the same period in the previous year. This discussion should be read
in conjunction with the Consolidated Financial Statements of the Company and
related Notes included elsewhere in this Form 10-Q.
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
herewith as Exhibit 99.1.
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.
The Company's business is heavily concentrated with two customers, McDonald's
Corporation ("McDonald's") and Philip Morris Incorporated ("Philip Morris").
Purchases of promotional products by McDonald's and Philip Morris in 1998
accounted for 57% and 11% of net sales, respectively. Net sales to McDonald's
and Philip Morris accounted for 62% and 7% respectively, of total net sales in
the first three months of 1999.
The Company's business with McDonald's and Philip Morris (as well as other
promotional customers) is based upon purchase orders placed from time to time
during the course of promotions. There are no written agreements which commit
them to make a certain level of purchases. The actual level of purchases depends
on a number of factors, including the duration of the promotion and consumer
redemption rates. Consequently, the Company's level of net sales is difficult to
predict accurately and can fluctuate greatly from quarter to quarter. The
Company expects that a significant percentage of its net sales in 1999 will be
to McDonald's and Philip Morris.
Philip Morris solicits competitive bids for its promotional programs. The
Company's profit margin depends, to a great extent, on its competitive position
when bidding and its ability to manage its costs after being awarded bids.
Increased competition is expected to continue and may adversely impact the
Company's profit margin on Philip Morris promotions in the future. A recent
settlement agreement between 46 states and certain tobacco companies, including
Philip Morris, prohibits the use of brand names by tobacco companies in
connection with promotional programs relating to tobacco products beginning on
July 1, 1999. The settlement agreement, however, does not prohibit the use of
Philip Morris's corporate name in promotional programs. Due to the restrictions
on the use of brand names, and the other limitations imposed by the settlement
agreement on the tobacco industry, the settlement could have a material adverse
effect on the Company's business with Philip Morris and on its results of
operations.
In December 1997, the Company entered into a license agreement ("the
Agreement") with Ty, Inc. ("Ty"), the world's largest manufacturer and marketer
of plush toys (sold under the name Beanie Babies(R)). The Agreement granted the
Company the exclusive right to develop and market licensed Beanie Babies
products in connection with the Beanie Babies(R) Official Club(TM), a consumer
membership kit. In May 1999, the parties mutually agreed to modify the
Agreement and to enter into a new arrangement in which the Company's rights in
connection with the Beanie Babies Official Club are non-exclusive in order to
enable Ty to market and distribute Beanie Babies products in connection with
the Club in cooperation with the Company commencing in July 1999. Under the new
arrangement, Cyrk will continue to provide creative and sourcing services for
Ty in collaboration with Ty. While the terms of the new arrangement have not
yet been finalized, the Company does not expect it will have a material adverse
effect on the Company's anticipated sales of Beanie Babies products for the
balance of 1999. Sales of Beanie Babies related products accounted for 7% of
the Company's consolidated net sales for 1998 and 8% of the Company's
consolidated net sales in the first three months of 1999.
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The Company expects that 1999 revenues and profitability will be significantly
benefited by sales of Beanie Babies products, of which the majority will be
derived in the second half of the year.
At March 31, 1999, the Company had written purchase orders for $500.1 million as
compared to $301.9 million at March 31, 1998. The Company's purchase orders are
generally subject to cancellation with limited penalty and are also subject to
agreements with certain customers that limit gross margin levels. Therefore, the
Company cautions that the backlog amounts may not necessarily be indicative of
future revenues or earnings.
CORPORATE RESTRUCTURING
As a result of its 1998 corporate restructuring, the Company recorded a 1998
charge to operations of $11.8 million for asset write-downs, employee
termination costs, lease cancellations and other related exit costs associated
with the restructuring. The restructuring plan was fully executed in 1998 and
the remaining restructuring accrual of $.6 million is primarily related to the
liquidation of certain assets which are expected to be completed during the
first half of 1999. The Company expects the restructuring to have an annualized
benefit to future results of approximately $9 million primarily due to the
elimination of operating losses associated with its discontinued businesses
and, to a lesser extent, as a result of cost savings from positions eliminated
in its core ongoing promotional business. See notes to consolidated financial
statements.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Net sales decreased $10.1 million, or 6%, to $159.1 million in the first quarter
ended March 31, 1999 from $169.1 million in the first quarter of 1998. The
overall decrease in net sales was primarily attributable to a decrease in sales
to Pepsi-Cola Company ("Pepsi")(resulting from the Company terminating its
agreements with Pepsi in December 1997), and a decrease in sales associated with
discontinued businesses. Promotional product sales accounted for substantially
all of the Company's revenue in the first quarter of 1999 as compared to $163.4
million in the first quarter of 1998. Net sales related to the Company's private
label and Cyrk brand business in the first quarter of 1999 and 1998 were minimal
which reflects the Company's restructuring strategy to focus on its core
business in the promotional marketing industry.
Gross profit decreased $.6 million, or 2%, to $29.8 million in the first
quarter of 1999 from $30.3 million in the first quarter of 1998. As a
percentage of net sales, the first quarter gross profit increased to 18.7% in
1999 from 17.9% in 1998. This increase was due principally to more favorable
margins associated with the Company's focus on the promotional marketing
industry consistent with its 1998 restructuring plan.
Selling, general and administrative expenses totaled $34.7 million in the first
quarter of 1999 as compared to $31.1 million in the first quarter of 1998. As a
percentage of net sales, selling, general and administrative costs totaled 21.8%
as compared to 18.4% in the first quarter of 1998. The Company's increased
spending was attributable to an increase in the number of field sales
representatives associated with the Company's premium incentives business as
well as commissions, development expenses and service charges associated with
the Company's licensed product sales activity.
In connection with its February 1998 announcement to restructure worldwide
operations, the Company recorded a restructuring charge in the first quarter of
1998 of $15.5 million attributable to asset write-downs, employee termination
costs, lease cancellations and other related exit costs. Subsequent to the first
quarter of 1998, the Company adjusted its original restructuring charge downward
to $11.8 million to reflect the actual scope and extent of the exit costs of
various operating facilities and activities. See notes to consolidated financial
statements.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at March 31, 1999 was $83.3 million compared to $87.5 million at
December 31, 1998. Net cash used in operating activities during the first three
months of 1999 was $14.1 million, due principally to a $17.3 million increase in
inventory. The increase in inventories was primarily due to a higher level of
inventory purchases related to promotional customer orders.
Net cash used in investing activities was $3.3 million, which was primarily
attributable to a $2.0 million purchase of an investment in the first quarter
and $.9 million of purchases of property and equipment. In the first quarter of
1998, net cash used in investing
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activities was $.7 million, which was primarily attributable to $1.5 million for
purchases of property and equipment, which were partially offset by $.7 million
of repayments of advances from an affiliate.
As a result of the Company's decision to embark on the implementation of an
enterprise resource planning ("ERP") system in 1999, the Company anticipates
that its 1999 purchases of property and equipment will be substantially higher
than the 1998 levels. The cost of the ERP system is expected to approximate $4.5
million and the Company anticipates utilizing external financing for this
capital investment.
Net cash used in financing activities in the first quarter of 1999 was $.1
million. In the first quarter of 1998, net cash provided by financing activities
was $14.8 million, which was primarily attributable to $10.6 million of proceeds
from the issuance of common stock. In February 1998, the Company issued 975,610
shares of its common stock and a warrant to purchase 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.
The Company currently has available several worldwide bank letters of credit and
revolving credit facilities which expire at various dates beginning in June
1999. The Company's primary domestic line of credit, amounting to $50 million,
expires in September 1999. The Company is currently negotiating with the bank
for a revised credit facility which it expects to secure in the second quarter
of 1999. As of March 31, 1999, based on the borrowing base formulas prescribed
by these credit facilities, the Company's borrowing capacity was $94.3 million,
of which $16.0 million of short-term borrowings and $31.7 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 1999. The Company anticipates the
majority of its internal cash flow will be derived in the second half of 1999.
The Company's ability to generate internal cash flow is highly dependent upon
its continued relationships with McDonald's, Philip Morris and Ty. Any material
adverse change from the Company's current expectations of its ability to secure
a revised credit facility or of its current expectations of 1999 revenues
attributable to its major business relationships could adversely affect the
Company's cash position and capital availability.
IMPACT OF THE YEAR 2000 ISSUE
General
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. 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,
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making initial contingency plans); and, Corrective Action Deployment
(implementing corrective actions, verifying implementation, finalizing and
executing contingency plans).
In December 1998, the Ownership, Inventory and Assessment steps were essentially
complete for all program areas. The target completion date for Corrective Action
Deployment is July 1999.
To date, the Company has achieved approximately 90 percent of its Corrective
Action Deployment goals for its three program areas. The Company expects to
complete its Year 2000 assessments, modifications and conversions by July 1999.
The 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 July 1999.
* 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 July 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 has initiated formal communications with its key
customers and suppliers 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 expects that the costs associated with becoming Year 2000
compliant will not exceed $.3 million, of which approximately $.1 million has
been expended to date.
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.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
27 Financial Data Schedule
99.1 Amended Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act of 1995.
(b) Reports on Form 8-K
Severance Agreement between Cyrk, Inc. and Gregory P. Shlopak filed as
an exhibit to the Registrant's Report on Form 8-K dated December 31, 1998,
filed on January 21, 1999 and incorporated herein by reference.
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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: May 13, 1999 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)
14
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Exhibit 99.1
------------
AMENDED 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
"Safe Harbor" provisions of the Private Securities Litigation Reform Act of 1995
and is including this Exhibit 99.1 in this Form 8-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"). Additionally, the business of the Company's subsidiary, Simon
Marketing, Inc. ("Simon"), is heavily dependent on purchases of promotional
products and services by McDonald's Corporation or its franchisees
("McDonald's") for which it receives an annual fee. The loss of any 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. The Company's agreements with Pepsi were terminated in
December of 1997 and the Company expects the volume of its business with Pepsi
in the future to be minimal in comparison to that of 1996 and 1997.
LIMITED CUSTOMER COMMITMENTS
As is generally the case with its other promotional product customers, the
Company's agreements with Philip Morris and McDonald's 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 McDonald's
(and other promotional products 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
<PAGE> 2
limited penalty. 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. Competition is not expected to abate and
thus will continue to exert pressure on the Company's profit margin in the
future.
INTEGRATION OF NEW SUBSIDIARIES
The successful integration of the operations of the Company's new subsidiaries,
Simon Marketing, Inc. ("Simon"), which was acquired on June 9, 1997, and Tonkin,
Inc. ("Tonkin"), which was acquired on April 7, 1997, with those of the Company
will require, among other things, the coordination of the respective product and
promotional offerings of the Company, Simon and Tonkin related sales, marketing,
development and administrative activities. There can be no assurance that the
Company will not encounter unexpected difficulties in such integration or that
the expected benefits of the business combination will be realized. Any
unexpected delays or costs incurred in such integration could have a materially
adverse effect upon the Company.
EFFECT OF INDUSTRY CONDITIONS FACING THE COMPANY'S CUSTOMERS
On November 23, 1998, certain tobacco companies, including Philip Morris,
entered into a settlement agreement with 46 states and five United States
territories that effectively ended the lawsuits brought by the states against
the tobacco industry over public-health costs connected with smoking. Among
other things, the settlement agreement prohibits the use of brand names by the
tobacco companies in connection with the marketing, distribution, licensing and
sales of apparel and other merchandise (including, but not limited to,
catalogues or direct mail orders). This restriction begins on July 1, 1999 and
will prohibit the Company from using Philip Morris brand names in connection
with the promotions and programs it provides for Philip Morris. The settlement
agreement, however, does not prohibit the use of Philip Morris's corporate name
for such promotions or programs. Due to the restrictions on the use of brand
names, and the other limitations imposed by the settlement agreement on the
tobacco industry, the settlement could have a material adverse effect on the
Company's sales to Philip Morris, which in turn will have a material adverse
effect on the Company's business and results of operations.
The United States Food and Drug Administration (the "FDA") has issued final
regulations with respect to promotional programs relating 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
<PAGE> 3
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 became effective
on August 28, 1997, except for the ban on brand-name sponsorship, which was to
become effective on August 28, 1998. In April of 1997, a federal district court
in North Carolina ruled that the FDA did not have the authority to restrict the
use of tobacco brand identification on promotional items and struck down this
section of the regulations. The decision was appealed to the Fourth Circuit
Court of Appeals which in August of 1998 held that the FDA does not have the
authority to regulate tobacco products. The Fourth Circuit's decision has been
appealed to the Supreme Court of the United States. If the Fourth Circuit's
decision is reversed, the FDA regulations could have a material adverse effect
on the Company's sales to Philip Morris similar to the tobacco settlement
agreement, which in turn will have a material adverse effect on the Company's
business and results of operations.
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.
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 the 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.
LICENSED PRODUCT DEMAND
The Company's business is driven by the retail demand for licensed products.
Typically, the Company's licenses are with well recognized, prominent companies
that seek to extend their brand recognition through licensed programs. The
success of the licensed products depends on the popularity of the licensed
properties as well as the popularity of the licensed products. The Company
spends substantial resources in obtaining licenses and developing and
manufacturing licensed products including taking large inventory positions
required for the introduction of these products into the retail channel of
distribution. Our results of operations may be adversely impacted if the
licensed products or the licensed properties on which these products are based
turn out to be less popular than we anticipate. The failure of these products
to sell into and/or through the retail channel of distribution would impact
operating results adversely and likely result in a shortfall from the
expectations of securities analysts and investors.
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 often competes with
other companies for production facilities and import quota capacity. In
addition, certain Asian manufactures
<PAGE> 4
require that a letter of credit be posted at the time a purchase order is
placed. There can be no assurance that the Company will continue to have the
necessary credit facilities for the purpose of posting such letters of credit.
The Company's business is subject to the risks normally associated with
conducting business abroad, such as foreign government regulations, political
unrest, disruptions or delays in shipments, fluctuations in foreign currency
exchange rates and changes in economic conditions in countries in which the
Company's manufacturing sources are located. If any such factors were to render
the conduct of business in a particular country undesirable or impractical, or
if the Company's current foreign manufacturing sources were to cease doing
business with the Company for any reason, the Company's business and operating
results could be adversely affected.
IMPORTS AND IMPORT RESTRICTIONS
The importation of products manufactured in Asia is subject to the constraints
imposed by bilateral agreements between the United States and substantially all
of the countries from which the Company imports goods. These agreements impose
quotas that limit the quantity of certain types of goods, including textile
products imported by the Company, which can be imported into the United States
from those countries. Such agreements also allow the United States to impose,
under certain conditions, restraints on the importation of categories of
merchandise that, under the terms of the agreements, are not subject to
specified limits.
The Company's continued ability to source products that it imports may be
adversely affected by additional bilateral and multilateral agreements,
unilateral trade restrictions, significant decreases in import quotas, the
disruption of trade from exporting countries as a result of political
instability or the imposition of additional duties, taxes and other charges or
restrictions on imports.
Products imported by the Company from China currently receive the same
preferential tariff treatment accorded goods from countries granted "most
favored nation" status. However, the renewal of China's most favored nation
treatment has been a contentious political issue for several years and there can
be no assurance that such status will be continued. If China were to lose its
most favored nation status, goods imported from China will be subject to
significantly higher duty rates which would increase the cost of goods from
China. Any such increase could have a material adverse effect on the Company's
business.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on several key personnel, including Patrick D. Brady,
Chief Executive Officer, President and Chief Operating Officer and Allan Brown,
Chief Executive Officer of Simon. The loss of the services of any one of them
could have a material adverse effect on the Company. Moreover, Mr. Brady is not
subject to an employment contract with the Company. The Company's continued
success is also
<PAGE> 5
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 the future may be adversely affected.
IMPACT OF "YEAR 2000" ISSUES
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.
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 by the Company will be completed before any Year
2000 problems could occur. These combining factors could have a material adverse
impact on the Company's financial results. In addition, the Company plans to
initiate formal communications with its major customers and suppliers 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 these third
parties. If the Company's customers or suppliers do not convert their systems to
become Year 2000 compliant, the Company's business and operating results could
be materially adversely affected.
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