<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, 2000
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 28, 2000, 15,801,253 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, 2000 and December 31, 1999 3
Consolidated Statements of Operations -
For the three months ended March 31, 2000 and 1999 4
Consolidated Statements of Comprehensive Income -
For the three months ended March 31, 2000 and 1999 5
Consolidated Statements of Cash Flows -
For the three months ended March 31, 2000 and 1999 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-10
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
CYRK, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
ASSETS -------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 86,774 $ 99,698
Investment - 2,423
Accounts receivable:
Trade, less allowance for doubtful accounts of $4,295
at March 31, 2000 and $4,243 at December 31, 1999 81,411 91,782
Officers, stockholders and related parties 2,842 3,121
Inventories 43,698 45,193
Prepaid expenses and other current assets 7,587 7,056
Deferred income taxes 11,628 10,465
-------- --------
Total current assets 233,940 259,738
Property and equipment, net 13,148 13,140
Excess of cost over net assets acquired, net 73,273 73,961
Investments 13,000 12,500
Deferred income taxes 1,778 1,778
Other assets 7,779 8,031
-------- --------
$342,918 $369,148
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 6,604 $ 8,888
Accounts payable:
Trade 40,931 41,795
Affiliates 141 141
Accrued expenses and other current liabilities 76,058 97,137
Deferred income taxes 954 954
-------- --------
Total current liabilities 124,688 148,915
Long-term obligations 8,992 9,156
-------- --------
Total liabilities 133,680 158,071
-------- --------
Commitments and contingencies
Mandatorily redeemable preferred stock, Series A1 senior cumulative
participating convertible, $.01 par value, 25,000 shares issued and
outstanding, stated at redemption value of $1,000 per share ($25,000),
net of issuance costs 20,553 20,553
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized;
25,000 Series A1 issued - -
Common stock, $.01 par value; 50,000,000 shares authorized;
15,801,253 shares issued and outstanding at March 31, 2000 and
15,740,850 shares issued and outstanding at December 31, 1999 158 157
Additional paid-in capital 141,789 141,482
Retained earnings 47,669 48,587
Accumulated other comprehensive income (loss):
Unrealized gain on investment - 1,336
Cumulative translation adjustment (931) (1,038)
-------- --------
Total stockholders' equity 188,685 190,524
-------- --------
$342,918 $369,148
======== ========
</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
--------------------
ended March 31,
---------------
2000 1999
---- ----
<S> <C> <C>
Net sales $177,303 $159,077
Cost of sales 144,369 129,323
-------- --------
Gross profit 32,934 29,754
-------- --------
Selling, general and administrative expenses 37,185 33,864
Goodwill amortization 881 870
-------- --------
Operating loss (5,132) (4,980)
Interest income (1,037) (637)
Interest expense 364 616
Other income (3,245) -
-------- --------
Loss before income taxes (1,214) (4,959)
Income tax benefit (546) (1,736)
-------- --------
Net loss (668) (3,223)
Preferred stock dividends 250 -
-------- --------
Net loss available to common stockholders $ (918) $ (3,223)
======== ========
Loss per common share - basic and diluted $ (0.06) $ (0.21)
======== ========
Weighted average shares outstanding - basic and diluted 15,778 15,485
======== ========
</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
--------------------
ended March 31,
---------------
2000 1999
---- ----
<S> <C> <C>
Net loss $ (668) $(3,223)
------- -------
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments 107 (502)
Unrealized holding gains (losses) arising during period (2,290) 825
------- -------
Other comprehensive income (loss), before tax (2,183) 323
Income tax expense (benefit) related to items of
other comprehensive income (loss) (954) 113
------- -------
Other comprehensive income (loss), net of tax (1,229) 210
------- -------
Comprehensive loss $(1,897) $(3,013)
======= =======
</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 three months
--------------------
ended March 31,
---------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (668) $ (3,223)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 2,179 2,011
Realized gain on sale of investments (3,245) -
Provision for doubtful accounts 115 959
Deferred income taxes (209) 1,080
Non-cash restructuring charges - 334
Increase (decrease) in cash from changes
in working capital items:
Accounts receivable 10,561 3,920
Inventories 1,517 (17,313)
Prepaid expenses and other current assets (522) (224)
Refundable income taxes - (2,293)
Accounts payable (861) 4,010
Accrued expenses and other current liabilities (21,073) (3,405)
-------- --------
Net cash used in operating activities (12,206) (14,144)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (1,303) (872)
Purchase of investment (500) (2,000)
Proceeds from sale of investments 3,378 -
Other, net 59 (421)
-------- --------
Net cash provided by (used in) investing activities 1,634 (3,293)
-------- --------
Cash flows from financing activities:
Repayments of short-term borrowings, net (2,284) (420)
Proceeds from (repayments of) long-term obligations (164) 92
Proceeds from issuance of common stock 308 275
Dividends paid (250) -
-------- --------
Net cash used in financing activities (2,390) (53)
-------- --------
Effect of exchange rate changes on cash 38 (150)
-------- --------
Net decrease in cash and cash equivalents (12,924) (17,640)
Cash and cash equivalents, beginning of year 99,698 75,819
-------- --------
Cash and cash equivalents, end of period $ 86,774 $ 58,179
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 271 $ 482
======== ========
Income taxes $ 2,473 $ 421
======== ========
</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, 1999. 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, 2000 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):
March 31, 2000 December 31, 1999
-------------- -----------------
Raw materials $ 9,513 $10,181
Work in process 10,590 14,887
Finished goods 23,595 20,125
------- -------
$43,698 $45,193
======= =======
3. Short-Term Borrowings
At March 31, 2000, the Company was contingently liable for letters of
credit used to finance the purchase of inventory in the aggregate amount of
$11.6 million. Such letters of credit expire at various dates through July
2000.
The Company was in violation of the cash flow covenant on one of its
domestic credit facilities at March 31, 2000 and has received a waiver from
the lender.
4. 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,
2000 1999
-------------------------------------------- ------------------------------------------
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:
Net loss $(668) 15,778,276 $(0.04) $(3,223) 15,484,589 $(0.21)
Preferred stock dividends 250 --
Loss available to common ------------------------ ----------------------
stockholders $(918) 15,778,276 $(0.06) $(3,223) 15,484,589 $(0.21)
======================== ======= ====================== =======
</TABLE>
For the quarters ended March 31, 2000 and 1999, 3,575,918 of convertible
preferred stock, common stock equivalents and contingently and
non-contingently issuable shares related to acquired companies and 774,362
of common stock equivalents and contingently and non-contingently issuable
shares related to acquired companies, respectively, were not included in
the computation of diluted EPS because to do so would have been
antidilutive.
5. Subsequent Event
On May 11, 2000, the Company announced that, pursuant to a plan approved by
its Board of Directors, it will integrate and streamline its traditional
promotional product divisions, Corporate Promotions Group and Custom
Product & Licensing, into one product focused business unit. As a result of
this action the Company expects to record a second quarter 2000 pre-tax
charge of approximately $7 million to $9 million for restructuring and
nonrecurring expenses. The second quarter charge will relate principally to
involuntary termination costs, the settlement of lease obligations and
asset write-downs. The Company plans to eliminate approximately 175
positions, or 15 percent of its domestic workforce. The Company expects to
make cash payments of approximately $6 million for employee termination
costs and settlement of lease obligations associated with the
restructuring. The restructuring plan is anticipated to be substantially
complete by the end of the current fiscal year, and is expected to yield
annualized savings of approximately $12 million to $15 million once
complete.
7
<PAGE> 8
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 months ended March 31, 2000 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-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 99.1 to the Company's first quarter 1999 Report on Form 10-Q which is
incorporated herein by reference.
GENERAL
The Company is a full-service promotional marketing company, specializing in the
design and development of high-impact promotional products and programs. The
majority of the Company's revenue is derived from the sale of products to
consumer product companies seeking to promote their brand and build customer
loyalty as well as products sold to consumers under certain license agreements.
The Company's business is heavily concentrated with McDonald's Corporation
("McDonald's"). Net sales to McDonald's accounted for 61% of total net sales in
1999 and 68% of total net sales in the first three months of 2000.
The Company's business with McDonald's (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 2000 will be to
McDonald's.
In September 1999, the Company agreed with McDonald's that the Company would no
longer provide administrative services in connection with McDonald's promotional
programs in Europe effective January 1, 2000. The fees for these services have
historically not been material to the overall results of operations. This action
has an adverse impact of $150 million to the Company's sales levels. However,
because the agreement with McDonald's related to these services did not provide
for significant gross margin on associated sales, the Company believes that the
absence of these sales will have no material adverse effect on the Company's
profitability.
In December 1997, the Company entered into a license agreement ("the Agreement")
with Ty Inc. ("Ty") which granted the Company the exclusive right to develop and
market licensed Beanie Babies products in connection with the Beanie Babies
Official Club, a consumer membership kit. In May 1999, the parties mutually
agreed to modify the Agreement and to enter into a new arrangement in which the
Company's rights in connection with the Beanie Babies Official Club became
non-exclusive in order to enable Ty to market and distribute Beanie Babies
products in connection with the Club and in cooperation with the Company
commencing in July 1999. Under this arrangement, which extended through the end
of 1999, the Company provided creative and sourcing services for Ty in
collaboration with Ty. In 1999, the Company's seasonal pattern of sales and
earnings, including a loss in the first quarter, and significant revenues and
profitability in the second half of the year, was primarily attributed to the
sale of Ty Beanie Babies product. Sales of Beanie Babies related products
accounted for 11% of total net sales in 1999.
8
<PAGE> 9
Effective January 1, 2000, the Company is a strategic marketing agent for Ty
and will provide Ty advisory, design, development and/or creative services on a
project by project basis, primarily in the second half of the year. Given the
nature and the timing of the service arrangement, the Company's future revenues
and earnings associated with the Ty relationship are difficult to predict.
However, the Company expects sales of Ty-related products in 2000 to be
substantially less than the 1999 volume.
As a result of the absence of sales associated with Ty-related business and
consistent with the seasonal nature of other client promotional activity, the
Company expects to incur an operating loss for the first half of 2000.
At March 31, 2000, the Company had written purchase orders for $315.5 million as
compared to $500.1 million at March 31, 1999. The Company's purchase orders are
generally subject to cancellation with limited penalty and are also subject to
agreements with certain customers that limit gross margin levels. Therefore, the
Company cautions that the backlog amounts may not necessarily be indicative of
future revenues or earnings.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
Net sales increased $18.2 million, or 11%, to $177.3 million in the first
quarter ended March 31, 2000 from $159.1 million in the first quarter of 1999.
The increase in net sales was primarily attributable to revenues associated with
McDonald's which were partially offset by the lack of Beanie Babies related
product sales in 2000.
Gross profit increased $3.2 million, or 11%, to $32.9 million in the first
quarter of 2000 from $29.8 million in the first quarter of 1999. As a percentage
of net sales, the first quarter gross profit of 18.6% was comparable to the
prior year's quarter.
Selling, general and administrative expenses including amortization of goodwill
totaled $38.1 million in the first quarter of 2000 as compared to $34.7 million
in the first quarter of 1999. As a percentage of net sales, selling, general and
administrative costs totaled 21.5% as compared to 21.8% in the first quarter of
1999. The Company's increased spending was attributable to an increase in the
commissions paid to field sales representatives associated with sales increases
generated from the Company's premium incentives business, as well as to
increased client management and support costs.
Other income of $3.2 million in the first quarter of 2000 represents a gain
realized on the sale of an investment.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at March 31, 2000 was $109.3 million compared to $110.8 million
at December 31, 1999. Net cash used in operating activities during the first
three months of 2000 was $12.2 million, due principally to a $21.1 million
decrease in accrued expenses which was partially offset by a $10.6 million
decrease in accounts receivable.
Net cash provided by investing activities in the first quarter of 2000 was $1.6
million, which was primarily attributable to $3.4 million of proceeds from the
sale of an investment which was partially offset by $1.3 million of purchases of
property and equipment.
The Company is evaluating the implementation of an enterprise resource planning
("ERP") system. If approved, the Company anticipates that its year 2000
purchases of property and equipment will be substantially higher than the 1999
levels. The cost of the ERP system will be driven by the scope and timing of the
implementation which remains subject to final review and approval.
In February 2000, the Company announced its plan to transfer its e-business
operations into a wholly-owned subsidiary, along with the Internet related
equity investments the Company has made in various companies. Throughout 2000,
the Company expects to make additional Internet related equity investments as
the Company expands its overall e-business initiatives.
The Company entered into a lease arrangement in December 1999 to relocate from
its Gloucester, Massachusetts corporate offices in August 2000 to offices in
Wakefield, Massachusetts. The Company plans on expending $3.5 million to
construct and furnish this move.
Net cash used in financing activities in the first quarter of 2000 was $2.4
million which was primarily attributable to $2.3 million of repayments of
short-term borrowings.
Since inception, the Company has financed its working capital and capital
expenditure requirements through cash generated from operations, public and
private sales of common and preferred stock, bank borrowings and capital
equipment leases.
9
<PAGE> 10
The Company currently has available several worldwide bank letters of credit and
revolving credit facilities which expire at various dates beginning in June
2000. The Company's primary domestic line of credit, amounting to $50 million,
expires in July 2000. As of March 31, 2000, based on the borrowing base formulas
prescribed by these credit facilities, the Company's borrowing capacity was
$110.6 million, of which $6.1 million of short-term borrowings and $12.3 million
in letters of credit were outstanding. In addition, bank guarantees totaling
$2.3 million were outstanding at March 31, 2000. Borrowings under these
facilities are collateralized by all assets of the Company.
On May 11, 2000, the Company announced that, pursuant to a plan approved by its
Board of Directors, it will integrate and streamline its traditional promotional
product divisions, Corporate Promotions Group and Custom Product & Licensing,
into one product focused business unit. As a result of this action the Company
expects to record a second quarter 2000 pre-tax charge of approximately $7
million to $9 million for restructuring and nonrecurring expenses. The second
quarter charge will relate principally to involuntary termination costs, the
settlement of lease obligations and asset write-downs. The Company plans to
eliminate approximately 175 positions, or 15 percent of its domestic workforce.
The Company expects to make cash payments of approximately $6 million for
employee termination costs and settlement of lease obligations associated with
the restructuring. The restructuring plan is anticipated to be substantially
complete by the end of the current fiscal year, and is expected to yield
annualized savings of approximately $12 million to $15 million once complete.
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 2000. Consistent with the
Company's expectation of an operating loss in the first half of 2000, the
Company anticipates the majority of its internal cash flow will be derived in
the second half of 2000. The Company's ability to generate internal cash flow is
highly dependent upon its continued relationships with McDonald's and Ty. Any
material adverse change from the Company's revenues and related contribution
attributable to its major business relationships could adversely affect the
Company's cash position and capital availability.
IMPACT OF THE YEAR 2000 ISSUE
Although the Company has not encountered and does not expect to encounter any
significant Year 2000 issues, the Company has business continuity plans and has
created an infrastructure for the identification, communication and resolution
of issues that may arise. The Company's contingency planning process is intended
to mitigate worst-case business disruptions.
10
<PAGE> 11
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for which this report
is filed.
11
<PAGE> 12
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 11, 2000 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)
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 86,774
<SECURITIES> 0
<RECEIVABLES> 85,706
<ALLOWANCES> 4,295
<INVENTORY> 43,698
<CURRENT-ASSETS> 233,940
<PP&E> 36,795
<DEPRECIATION> 23,647
<TOTAL-ASSETS> 342,918
<CURRENT-LIABILITIES> 124,688
<BONDS> 0
20,553
0
<COMMON> 158
<OTHER-SE> 188,527
<TOTAL-LIABILITY-AND-EQUITY> 342,918
<SALES> 177,303
<TOTAL-REVENUES> 177,303
<CGS> 144,369
<TOTAL-COSTS> 144,369
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 115
<INTEREST-EXPENSE> 364
<INCOME-PRETAX> (1,214)
<INCOME-TAX> (546)
<INCOME-CONTINUING> (668)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (668)
<EPS-BASIC> (.06)
<EPS-DILUTED> (.06)
</TABLE>
