<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 JUNE 30, 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 July 31, 2000, 16,020,241 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> <C>
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -
June 30, 2000 and December 31, 1999 3
Consolidated Statements of Operations -
For the three and six months ended
June 30, 2000 and 1999 4
Consolidated Statements of Comprehensive Income -
For the three and six months ended
June 30, 2000 and 1999 5
Consolidated Statements of Cash Flows -
For the six months ended June 30, 2000
and 1999 6
Notes to Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-14
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 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>
June 30, 2000 December 31, 1999
------------- -----------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 74,442 $ 99,698
Investment - 2,423
Accounts receivable:
Trade, less allowance for doubtful accounts of $4,908
at June 30, 2000 and $4,243 at December 31, 1999 90,296 91,782
Officers, stockholders and related parties 2,687 3,121
Inventories 41,125 45,193
Prepaid expenses and other current assets 5,983 7,056
Deferred and refundable income taxes 16,805 10,465
-------- --------
Total current assets 231,338 259,738
Property and equipment, net 12,971 13,140
Excess of cost over net assets acquired, net 72,378 73,961
Investments 16,000 12,500
Deferred income taxes 1,778 1,778
Other assets 7,782 8,031
-------- --------
$342,247 $369,148
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 4,140 $ 8,888
Accounts payable:
Trade 44,522 41,795
Affiliates 141 141
Accrued expenses and other current liabilities 78,000 97,137
Accrued restructuring expenses 6,001 -
Deferred income taxes - 954
-------- --------
Total current liabilities 132,804 148,915
Long-term obligations 8,808 9,156
-------- --------
Total liabilities 141,612 158,071
-------- --------
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;
16,020,241 shares issued and outstanding at June 30, 2000 and
15,740,850 shares issued and outstanding at December 31, 1999 160 157
Additional paid-in capital 143,200 141,482
Retained earnings 37,896 48,587
Accumulated other comprehensive income (loss):
Unrealized gain on investment - 1,336
Cumulative translation adjustment (1,174) (1,038)
-------- --------
Total stockholders' equity 180,082 190,524
-------- --------
$342,247 $369,148
======== ========
</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 For the six months
ended June 30, ended June 30,
------------------------- -----------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $224,333 $313,523 $401,636 $472,600
Cost of sales 190,285 273,827 334,654 403,150
Write-down of inventory in connection
with restructuring 1,695 - 1,695 -
-------- -------- -------- --------
Gross profit 32,353 39,696 65,287 69,450
Selling, general and administrative expenses 40,394 36,541 77,579 70,405
Goodwill amortization expense 895 909 1,776 1,779
Restructuring and other nonrecurring charges 5,325 - 5,325 -
-------- -------- -------- --------
Operating income (loss) (14,261) 2,246 (19,393) (2,734)
Interest income (1,077) (727) (2,114) (1,364)
Interest expense 280 539 644 1,155
Other (income) expense 1,000 (1,179) (2,245) (1,179)
-------- -------- -------- --------
Income (loss) before income taxes (14,464) 3,613 (15,678) (1,346)
Income tax expense (benefit) (4,941) 1,130 (5,487) (606)
-------- -------- -------- --------
Net income (loss) (9,523) 2,483 (10,191) (740)
Preferred stock dividends 250 - 500 -
-------- -------- -------- --------
Net income (loss) available to common stockholders $ (9,773) $ 2,483 $ (10,691) $ (740)
======== ======= ========= ========
Earnings (loss) per common share - basic $ (0.61) $ 0.16 $ (0.67) $ (0.05)
======== ======= ========= ========
Earnings (loss) per common share - diluted $ (0.61) $ 0.15 $ (0.67) $ (0.05)
======== ======= ========= ========
Weighted average shares outstanding - basic 16,001 15,542 15,890 15,514
======== ======= ========= ========
Weighted average shares outstanding - diluted 16,001 16,133 15,890 15,514
======== ======= ========= ========
</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 For the six months
ended June 30, ended June 30,
------------------------ --------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $ (9,523) $2,483 $ (10,191) $ (740)
-------- ------ --------- ------
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments (243) (100) (136) (602)
Unrealized holding gains (losses) arising during period - (163) (2,290) 662
-------- ------ --------- ------
Other comprehensive income (loss), before tax (243) (263) (2,426) 60
Income tax expense (benefit) related to items of
other comprehensive income (loss) - (86) (954) 27
-------- ------ --------- ------
Other comprehensive income (loss), net of tax (243) (177) (1,472) 33
-------- ------ --------- ------
Comprehensive income (loss) $ (9,766) $2,306 $ (11,663) $ (707)
======== ====== ========= ======
</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 six months
ended June 30,
----------------------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (10,191) $ (740)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 4,419 4,174
Loss (gain) on sale of property and equipment (73) 106
Realized gain on sale of investments (3,245) (1,179)
Provision for doubtful accounts 1,023 1,169
Deferred income taxes - 2,858
Non-cash restructuring charges - 854
Charge for impaired investment 1,000 -
Issuance of common stock related to acquisition agreement 575 -
Increase (decrease) in cash from changes
in working capital items:
Accounts receivable 792 (17,599)
Inventories 4,104 (5,124)
Prepaid expenses and other current assets 1,084 (2,495)
Refundable income taxes (6,340) (3,347)
Accounts payable 2,666 10,818
Accrued expenses and other current liabilities (12,492) 4,820
-------- --------
Net cash used in operating activities (16,678) (5,685)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (2,622) (2,090)
Proceeds from sale of property and equipment 213 26
Purchase of investments (4,500) (2,000)
Proceeds from sale of investments 3,378 1,387
Additional consideration related to acquisitions - (665)
Other, net 56 (989)
-------- --------
Net cash used in investing activities (3,475) (4,331)
-------- --------
Cash flows from financing activities:
Proceeds from (repayments of) short-term borrowings, net (4,748) 5,329
Repayments of long-term obligations (348) (2,495)
Proceeds from issuance of common stock 308 275
Dividends paid (500) -
-------- --------
Net cash provided by (used in) financing activities (5,288) 3,109
-------- --------
Effect of exchange rate changes on cash 185 (96)
-------- --------
Net decrease in cash and cash equivalents (25,256) (7,003)
Cash and cash equivalents, beginning of year 99,698 75,819
-------- --------
Cash and cash equivalents, end of period $ 74,442 $ 68,816
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 507 $ 1,007
======== ========
Income taxes $ 2,652 $ 1,089
======== ========
</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, 1999. In the opinion of management, the accompanying unaudited
financial statements contain all adjustments 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 six months ended June 30, 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):
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
Raw materials $ 8,442 $10,181
Work in process 9,836 14,887
Finished goods 22,847 20,125
------ ------
$41,125 $45,193
======= =======
</TABLE>
3. Investments
The Company has made strategic and venture investments in a portfolio of
privately-held companies that are being accounted for under the cost
method. These investments are in Internet-related companies, that are at
varying stages of development including startups, and are intended to
provide the Company with expanded Internet presence, enhance the Company's
position at the leading edge of e-business and provide venture investment
returns. These companies in which the Company has invested in are subject
to all the risks inherent in the Internet, including their dependency upon
the widespread acceptance and use of the Internet as an effective medium
for commerce. In addition, these companies are subject to the valuation
volatility associated with the investment community and the capital
markets. The carrying value of the Company's investments in these
Internet-related companies is subject to the aforementioned risks inherent
in Internet business.
In the second quarter, the Company performed a quarterly review of the
carrying value of all its investments in these Internet-related companies,
and considered such factors as current results, trends and future
prospects, capital market conditions and other economic factors. Based on
its second quarter 2000 review, the Company has recorded a charge to other
expense of $1 million for an other-than-temporary investment impairment
associated with its venture portfolio. While the Company will continue to
periodically evaluate its Internet investments, there can be no assurance
that its investment strategy will be successful, and thus the Company might
not ever realize any benefits from its portfolio of investments.
4. Short-Term Borrowings
In July 2000, the Company extended its credit facility with the bank for
its primary domestic line of credit. Pursuant to the provisions of its
primary domestic line of credit, the Company has commitments for letter of
credit borrowings through October 2000 of up to an aggregate amount of $50
million for the purpose of financing the importation of various products
from Asia and for issuing standby letters of credit. The Company is in
discussions related to a revised credit facility which it expects to secure
in the third quarter of 2000.
At June 30, 2000, the Company was contingently liable for letters of credit
used to finance the purchase of inventory in the aggregate amount of $4.5
million. Such letters of credit expire at various dates through October
2000.
The Company was in violation of the cash flow covenant on one of its
domestic credit facilities at June 30, 2000 and has received a waiver from
the lender.
7
<PAGE> 8
5. Nonrecurring Charges
A summary of nonrecurring charges for the six months ended June 30, 2000 is
as follows (in thousands):
Restructuring charge $6,360
Settlement charge 660
------
$7,020
======
Restructuring
On May 11, 2000, the Company announced that, pursuant to a plan approved by
its Board of Directors, it is integrating and streamlining its traditional
promotional product divisions, Corporate Promotions Group and Custom
Product & Licensing, into one product focused business unit. In association
with the consolidation of its product divisions, the Company has eliminated
a substantial number of inventory SKUs from its current product offering.
As a result of this action the Company recorded a second quarter 2000
pre-tax charge of approximately $6.4 million for restructuring expenses.
The second quarter charge relates principally to involuntary termination
costs ($3.5 million), asset write-downs ($2.1 million, including $1.7
million of inventory write-downs) and the settlement of lease obligations
($.8 million). The Company intends to eliminate approximately 140
positions, or 12 percent of its domestic workforce. This charge has had the
effect of reducing year to date after tax earnings by $4.1 million or $0.26
per share. The restructuring plan is anticipated to be substantially
complete by the end of the first quarter of 2001. A summary of activity in
the restructuring accrual is as follows (in thousands):
Balance at March 31, 2000 $ --
Restructuring provision 6,360
Employee termination costs
and other cash payments (359)
-------
Balance at June 30, 2000 $ 6,001
=======
Settlement Charge
The Company recorded a second quarter 2000 nonrecurring pre-tax charge to
operations of $.7 million associated with the settlement of a change in
control agreement with an employee of the Company who was formerly an
executive officer.
8
<PAGE> 9
6. 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 June 30,
2000 1999
---------------------------------------- --------------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
---------- ------------ --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income (loss) $(9,523) 16,000,989 $(0.60) $2,483 15,542,450 $0.16
Preferred stock dividends 250 --
------------------------ -----------------------
Income (loss) available to common
stockholders $(9,773) 16,000,989 $(0.61) 2,483 15,542,450 $0.16
====== =====
Effect of Dilutive Securities:
Common stock equivalents -- 124,775
Contingently and non-contingently
issuable shares -- 465,941
------------------------ -----------------------
Diluted EPS:
Income (loss) available to common
stockholders and assumed
conversions $(9,773) 16,000,989 $(0.61) $2,483 16,133,166 $0.15
======================== ====== ======================= =====
</TABLE>
For the quarter ended June 30, 2000, 3,420,734 of convertible preferred
stock, 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.
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
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 $(10,191) 15,889,633 $(0.64) $(740) 15,513,519 $(0.05)
------------------------ -----------------------
Preferred stock dividends 500 --
------------------------ -----------------------
Loss available to
common stockholders $(10,691) 15,889,633 $(0.67) $(740) 15,513,519 $(0.05)
======================== ====== ======================= ======
</TABLE>
For the six months ended June 30, 2000 and 1999, 3,498,326 of convertible
preferred stock, common stock equivalents and contingently and
non-contingently issuable shares related to acquired companies and 682,539
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.
9
<PAGE> 10
7. Subsequent Event
In July 2000, the Company announced that it has retained an investment
banker to explore strategic alternatives. The objective of seeking
strategic alternatives is to maximize shareholder value including, without
limitation, enhancing the Company's ability to generate more consistent
revenue and earnings growth. The Company has not made a decision as to any
specific alternative and there can be no assurance that a transaction will
result from this process.
10
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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 six month periods ended June 30,
2000 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
herewith as Exhibit 99.1.
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 69% of total net sales in the first six 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
will have an adverse impact of approximately $150 million to the Company's sales
levels for 2000. 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.
11
<PAGE> 12
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.
At June 30, 2000, the Company had written purchase orders for $303.2 million as
compared to $342.6 million at June 30, 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.
RESTRUCTURING
On May 11, 2000, the Company announced that, pursuant to a plan approved by its
Board of Directors, it is integrating and streamlining 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 recorded a second quarter 2000 pre-tax charge of approximately $6.4
million for restructuring expenses. The second quarter charge relates
principally to involuntary termination costs, asset write-downs and the
settlement of lease obligations. The Company intends to eliminate approximately
140 positions, or 12 percent of its domestic workforce. The restructuring plan
is anticipated to be substantially complete by the end of the first quarter of
2001, and is expected to yield annualized savings of approximately $9 million to
$11 million once complete. See notes to consolidated financial statements.
OUTLOOK
The Company believes that it will likely continue to report net losses for the
balance of the year. However, the Company expects the benefits of the
restructuring action to begin to materialize in the latter part of the year and,
accordingly, has established a financial target that seeks to achieve break-even
operating income before interest, taxes, depreciation and amortization. The
Company's ability to achieve its financial target remains subject to all the
risk 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
Net sales decreased $89.2 million, or 28%, to $224.3 million in the second
quarter ended June 30, 2000 from $313.5 million in the second quarter of 1999.
The decrease in net sales was primarily attributable to a decrease in revenues
associated with McDonald's and Beanie Babies related product sales in 2000.
Gross profit decreased $7.3 million, or 18%, to $32.4 million in the second
quarter of 2000 from $39.7 million in the second quarter of 1999. $1.7 million
of the gross profit decrease is a result of a nonrecurring charge attributable
to a write-down of inventory associated with the May 2000 restructuring. As a
percentage of net sales (excluding the nonrecurring charge), the second quarter
gross profit increased to 15.2% in 2000 from 12.7% in 1999. The increase in the
gross margin percentage was due principally to a more favorable sales mix in
which sales volume associated with certain promotional programs that have gross
margin limitations were less than levels of a year ago.
Selling, general and administrative expenses, including amortization of
goodwill, totaled $41.3 million in the second quarter of 2000 as compared to
$37.5 million in the second quarter of 1999. As a percentage of net sales,
selling, general and administrative costs totaled 18.4% as compared to 11.9% in
the second quarter of 1999. The Company's increased spending was due principally
to a $1.2 million charge for a contingent payment of cash and stock which was
associated with the acquisition agreement of a previously acquired company, an
increase in commissions paid to field sales representatives associated with
sales increases generated from the Company's premium incentives business and an
increase in client service costs.
In connection with its May 2000 announcement to restructure its promotional
product divisions, the Company recorded a nonrecurring pre-tax restructuring
charge of $6.4 million (including the $1.7 million inventory write-down charged
against gross profit) attributable to employee termination costs, asset
write-downs and lease cancellations costs. See notes to consolidated financial
statements.
The Company also recorded a nonrecurring pre-tax charge to operations of $.7
million in the second quarter of 2000 associated with the settlement of a change
in control agreement with an employee of the Company who was formerly an
executive officer. See notes to consolidated financial statements.
The Company has recorded a $1 million charge to other expense in the second
quarter of 2000 to reflect an other-than-temporary investment impairment
associated with its venture portfolio. See notes to consolidated financial
statements. Other income of $1.2 million in the second quarter of 1999
represents a gain realized on the sale of an investment.
12
<PAGE> 13
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Net sales decreased $71.0 million, or 15%, to $401.6 million in the first six
months of 2000 from $472.6 million in the first six months of 1999. The decrease
in net sales was primarily attributable to revenues associated with McDonald's
and Beanie Babies related products.
Gross profit decreased $4.2 million, or 6%, to $65.3 million in the first six
months of 2000 from $69.5 million in the first six months of 1999. $1.7 million
of the gross profit decrease is a result of a nonrecurring charge attributable
to a write-down of inventory associated with the May 2000 restructuring. As a
percentage of net sales (excluding the nonrecurring charge), gross profit
increased to 16.7% in 2000 from 14.7% in 1999. The increase in the gross margin
percentage was due principally to a more favorable sales mix in which sales
volume associated with certain promotional programs that have gross margin
limitations were less than levels of a year ago.
Selling, general and administrative expenses, including amortization of
goodwill, totaled $79.4 million in the first six months of 2000 as compared to
$72.2 million in the first six months of 1999. As a percentage of net sales,
selling, general and administrative costs totaled 19.8% as compared to 15.3% in
the first six months of 1999. The Company's increased spending was due
principally to an increase in commissions paid to field sales representatives
associated with sales increases generated from the Company's premium incentives
business, a $1.2 million charge for a contingent payment of cash and stock which
was associated with the acquisition agreement of a previously acquired company
and an increase in client service costs.
In connection with its May 2000 announcement to restructure its promotional
product divisions, the Company recorded a nonrecurring pre-tax restructuring
charge of $6.4 million (including the $1.7 million inventory write-down charged
against gross profit) attributable to employee termination costs, asset
write-downs and lease cancellations costs. See notes to consolidated financial
statements.
The Company also recorded a nonrecurring pre-tax charge to operations of $.7
million in the second quarter associated with the settlement of a change in
control agreement with an employee of the Company who was formerly an executive
officer. See notes to consolidated financial statements.
Other income in 2000 includes a $3.2 million gain realized on the sale of an
investment in the first quarter which was partially offset by a $1 million
charge in the second quarter of 2000 related to an other-than-temporary
investment impairment associated with its venture portfolio. See notes to
consolidated financial statements. Other income of $1.2 million in 1999
represents a gain realized on the sale of an investment.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at June 30, 2000 was $98.5 million compared to $110.8 million at
December 31, 1999. Net cash used in operating activities during the first six
months of 2000 was $16.7 million, due principally to a $12.5 million decrease in
accrued expenses.
Net cash used in investing activities in the first six months of 2000 was $3.5
million, which was primarily attributable to $4.5 million of investments made in
Internet-related companies.
The Company embarked on the implementation of an enterprise resource planning
("ERP") system in the second quarter of 2000. As a result of the ERP system, 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 is
expected to approximate $8 million and the Company anticipates seeking external
financing for this capital investment.
The Company entered into a lease arrangement in December 1999 to relocate its
corporate offices from Gloucester, Massachusetts to Wakefield, Massachusetts in
August 2000. The Company plans on expending approximately $3.5 million to
construct and furnish this move.
Net cash used in financing activities in the first six months of 2000 was $5.3
million which was primarily attributable to $4.7 million of repayments of
short-term borrowings.
The Company currently expects to make cash payments totaling approximately $4.3
million for employee termination costs, lease buyouts and other exit costs
associated with its plan to restructure its operations, of which $.4 million has
been paid as of June 30, 2000.
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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.
The Company currently has available several worldwide bank letters of credit and
revolving credit facilities which expire at various dates beginning in August
2000. The Company's primary domestic line of credit, amounting to $50 million,
has been extended to October 2000. The Company is in discussions related to a
revised credit facility which it expects to secure in the third quarter of 2000.
As of June 30, 2000, based on the borrowing base formulas prescribed by these
credit facilities, the Company's borrowing capacity was $109.5 million, of which
$3.7 million of short-term borrowings and $5.2 million in letters of credit were
outstanding. In addition, bank guarantees totaling $2.2 million were outstanding
at June 30, 2000. 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 2000. The Company's ability to
generate internal cash flow is highly dependent upon its continued relationships
with McDonald's. Any material adverse change from the Company's revenues and
related contribution from McDonald's and/or from the Company's product division
could adversely affect the Company's cash position and capital availability.
In July 2000, the Company announced that it has retained an investment banker to
explore strategic alternatives. The objective of seeking strategic alternatives
is to maximize shareholder value including, without limitation, enhancing the
Company's ability to generate more consistent revenue and earnings growth. The
Company has not made a decision as to any specific alternative and there can be
no assurance that a transaction will result from this process.
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.
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 17, 2000, the Company held its Annual Meeting of Stockholders. The
matters considered at the meeting consisted of the following:
The election of two Class I directors to serve for a term of three years
and until their successors are elected and qualified. The results of the
voting were as follows:
Nominee For Votes Withheld Broker Non-Votes
-------- --- -------------- ----------------
Joseph W. Bartlett 10,736,817 60,637 0
Allan I. Brown 10,735,547 61,907 0
The ratification of the appointment of PricewaterhouseCoopers LLP as the
Company's independent auditors for the 2000 fiscal year. The results of the
voting were as follows:
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
10,785,060 3,517 8,877 0
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
No reports on Form 8-K were filed during the quarter for which this report
is filed.
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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: August 14, 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)
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