<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 SEPTEMBER 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.)
101 EDGEWATER DRIVE, WAKEFIELD, MASSACHUSETTS 01880
(Address of principal executive offices)
(Zip Code)
(781) 876-5800
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
At October 31, 2000, 16,059,130 shares of the Registrant's common stock were
outstanding.
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CYRK, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE NUMBER
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -
September 30, 2000 and December 31, 1999 3
Consolidated Statements of Operations -
For the three and nine months ended
September 30, 2000 and 1999 4
Consolidated Statements of Comprehensive Income -
For the three and nine months ended
September 30, 2000 and 1999 5
Consolidated Statements of Cash Flows -
For the nine months ended September 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 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
2
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PART I - FINANCIAL INFORMATION
CYRK, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
September 30, 2000 December 31, 1999
------------------ -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 71,572 $ 99,698
Investment -- 2,423
Accounts receivable:
Trade, less allowance for doubtful
accounts of $5,763 at September 30,
2000 and $4,243 at December 31, 1999 64,366 91,782
Officers, stockholders and related parties 2,498 3,121
Inventories 45,109 45,193
Prepaid expenses and other current assets 6,069 7,056
Deferred and refundable income taxes 17,806 10,465
-------- --------
Total current assets 207,420 259,738
Property and equipment, net 15,596 13,140
Excess of cost over net assets
acquired, net 71,484 73,961
Investments 15,000 12,500
Deferred income taxes 1,778 1,778
Other assets 8,826 8,031
-------- --------
$320,104 $369,148
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 1,607 $ 8,888
Accounts payable:
Trade 41,906 41,795
Affiliates 141 141
Accrued expenses and other current
liabilities 66,584 97,137
Accrued restructuring expenses 4,328 --
Deferred income taxes -- 954
-------- --------
Total current liabilities 114,566 148,915
Long-term obligations 6,167 9,156
-------- --------
Total liabilities 120,733 158,071
-------- --------
Commitments and contingencies
Mandatorily redeemable preferred stock,
Series A1 senior cumulative participating
convertible, $.01 par value, 25,250 and
25,000 shares issued and outstanding at
September 30, 2000 and December 31, 1999,
respectively, stated at redemption
value of $1,000 per share ($25,250 and
$25,000 at September 30, 2000 and December
31, 2000, respectively), net of issuance costs 20,803 20,553
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000
shares authorized; 25,250 and 25,000
Series A1 shares issued and outstanding
at September 30, 2000 and December 31,
1999, respectively -- --
Common stock, $.01 par value; 50,000,000
shares authorized; 16,059,130 shares issued
and outstanding at September 30, 2000 and
15,740,850 shares issued and outstanding at
December 31, 1999 160 157
Additional paid-in capital 143,425 141,482
Retained earnings 36,212 48,587
Accumulated other comprehensive income (loss):
Unrealized gain on investment -- 1,336
Cumulative translation adjustment (1,229) (1,038)
-------- --------
Total stockholders' equity 178,568 190,524
-------- --------
$320,104 $369,148
======== ========
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 nine months
ended September 30, ended September 30,
-------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $178,702 $258,823 $580,338 $731,423
Cost of sales 141,300 207,447 475,954 610,597
Write-down of inventory
in connection with
restructuring -- -- 1,695 --
-------- -------- -------- --------
Gross profit 37,402 51,376 102,689 120,826
Selling, general and
administrative expenses 38,462 36,574 116,041 106,979
Goodwill amortization expense 894 905 2,670 2,684
Restructuring and other
nonrecurring charges -- -- 5,325 --
-------- -------- -------- --------
Operating income (loss) (1,954) 13,897 (21,347) 11,163
Interest income (1,078) (723) (3,192) (2,087)
Interest expense 330 508 974 1,663
Other (income) expense 1,000 -- (1,245) (1,179)
-------- -------- -------- --------
Income (loss) before income
taxes (2,206) 14,112 (17,884) 12,766
Income tax expense (benefit) (772) 6,351 (6,259) 5,745
-------- -------- -------- --------
Net income (loss) (1,434) 7,761 (11,625) 7,021
Preferred stock dividends 250 -- 750 --
-------- -------- -------- --------
Net income (loss) available to
common stockholders $ (1,684) $ 7,761 $(12,375) $ 7,021
======== ======== ======== ========
Earnings (loss) per common
share -- basic $ (0.10) $ 0.49 $ (0.78) $ 0.45
======== ======== ======== ========
Earnings (loss) per common
share -- diluted $ (0.10) $ 0.48 $ (0.78) $ 0.43
======== ======== ======== ========
Weighted average shares
outstanding -- basic 16,048 15,730 15,942 15,586
======== ======== ======== ========
Weighted average shares
outstanding -- diluted 16,048 16,280 15,942 16,224
======== ======== ======== ========
</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 nine months
ended September 30, ended September 30,
-------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $(1,434) $7,761 $(11,625) $7,021
------- ------ -------- ------
Other comprehensive income
(loss), before tax:
Foreign currency translation
adjustments (55) 299 (191) (303)
Unrealized holding losses
arising during period -- (977) (2,290) (315)
------- ------ -------- ------
Other comprehensive loss,
before tax (55) (678) (2,481) (618)
Income tax benefit related to
items of other comprehensive
loss -- (305) (954) (278)
------- ------ -------- ------
Other comprehensive loss, net
of tax (55) (373) (1,527) (340)
------- ------ -------- ------
Comprehensive income (loss) $(1,489) $7,388 $(13,152) $6,681
======= ====== ======== ======
</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)
For the nine months
ended September 30,
-------------------
2000 1999
---- ----
Cash flows from operating activities:
Net income (loss) $(11,625) $ 7,021
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization 7,040 6,722
Loss (gain) on sale of property and equipment (60) 106
Realized gain on sale of investments (3,245) (1,179)
Provision for doubtful accounts 2,151 1,534
Deferred income taxes -- 2,554
Non-cash restructuring charges 47 854
Charge for impaired investments 2,000 --
Issuance of common stock related to acquisition
agreement 575 --
Increase (decrease) in cash from changes in
working capital items:
Accounts receivable 25,933 (18,520)
Inventories 119 (5,595)
Prepaid expenses and other current assets 1,018 313
Refundable income taxes (7,340) --
Accounts payable 103 2,620
Accrued expenses and other current
liabilities (25,416) 11,728
-------- -------
Net cash provided by (used in) operating activities (8,700) 8,158
-------- -------
Cash flows from investing activities:
Purchase of property and equipment (7,025) (3,725)
Proceeds from sale of property and equipment 223 26
Purchase of investments (4,500) (2,000)
Proceeds from sale of investments 3,378 1,387
Additional consideration related to acquisitions -- (730)
Other, net (988) (768)
-------- -------
Net cash used in investing activities (8,912) (5,810)
-------- -------
Cash flows from financing activities:
Repayments of short-term borrowings, net (7,281) (19)
Repayments of long-term obligations (2,989) (3,208)
Proceeds from issuance of common stock 533 512
Dividends paid (500) --
-------- -------
Net cash used in financing activities (10,237) (2,715)
-------- -------
Effect of exchange rate changes on cash (277) (49)
-------- -------
Net decrease in cash and cash equivalents (28,126) (416)
Cash and cash equivalents, beginning of year 99,698 75,819
-------- -------
Cash and cash equivalents, end of period $ 71,572 $75,403
======== =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 758 $ 1,543
======== =======
Income taxes $ 2,948 $ 1,905
======== =======
Supplemental non-cash financing activities:
Additional stock related to acquisitions $ 1,413 $ 1,413
======== =======
Dividend paid in mandatorily redeemable
preferred stock $ 250 $ --
======== =======
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 nine months ended September 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):
September 30, 2000 December 31, 1999
------------------ -----------------
Raw materials $ 7,378 $10,181
Work in process 11,477 14,887
Finished goods 26,254 20,125
------- -------
$45,109 $45,193
======= =======
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, to enhance the
Company's position at the leading edge of e-business and to provide
venture investment returns. These companies in which the Company has
invested 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.
Each quarter, the Company performs a review of the carrying value of all
its investments in these Internet-related companies, and considers such
factors as current results, trends and future prospects, capital market
conditions and other economic factors. Based on its quarterly reviews in
2000, the Company has recorded a year to date charge to other expense of
$2 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. Related Party Transaction
In accordance with the provisions of an employment agreement between an
officer of the Company and the Company, the officer exercised his option in
July 2000 to borrow $1 million of a total $2 million line of credit
available to the officer. As of September 30, 2000, the Company had a $1
million note receivable from the officer which is included in other assets.
The note bears interest at an annual rate of 6.6% and is due and payable no
later than six months after the Company's annual meeting in 2001.
7
<PAGE> 8
5. Short-Term Borrowings
In October 2000, the Company extended its credit facility with its 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 November 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 new credit facility which it expects to secure in
the fourth quarter of 2000.
At September 30, 2000, the Company was contingently liable for letters of
credit used to finance the purchase of inventory in the aggregate amount of
$14.7 million. Such letters of credit expire at various dates through
January 2001.
The Company was in violation of the cash flow coverage covenant on one of
its domestic credit facilities at September 30, 2000 and has received a
waiver from the lender.
6. Nonrecurring Charges
A summary of nonrecurring charges for the nine months ended September 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 (1,985)
Non-cash asset write-downs (47)
------
Balance at September 30, 2000 $4,328
======
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
7. Earnings Per Share Disclosure
The following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computation for "income (loss) available to common
stockholders" and other related disclosures required by Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (in thousands,
except share data):
<TABLE>
<CAPTION>
For the Quarters Ended September 30,
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) $(1,434) 16,047,753 $(0.09) $7,761 15,729,592 $0.49
Preferred stock dividends 250 --
------- ----------- ------ ----------
Income (loss) available to common
stockholders (1,684) 16,047,753 $(0.10) 7,761 15,729,592 $0.49
====== =====
Effect of Dilutive Securities:
Common stock equivalents -- 39,356
Contingently and non-contingently
issuable shares -- 510,758
------- ---------- ------- ----------
Diluted EPS:
Income (loss) available to common
stockholders and assumed
conversions $(1,684) 16,047,753 $(0.10) $7,761 16,279,706 $0.48
======= ========== ====== ====== ========== =====
</TABLE>
For the quarter ended September 30, 2000, 3,456,424 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 Nine Months Ended September 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) $(11,625) 15,942,339 $(0.73) $7,021 15,585,544 $0.45
Preferred stock dividends 750 --
-------- ---------- ------ ----------
Income (loss) available to common
stockholders (12,375) 15,942,339 $(0.78) 7,021 15,585,544 $0.45
====== =====
Effect of Dilutive Securities:
Common stock equivalents -- 73,162
Contingently and non-contingently
issuable shares -- 565,235
-------- ---------- ----- ----------
Diluted EPS:
Income (loss) available to common
stockholders and assumed
conversions $(12,375) 15,942,339 $(0.78) $7,021 16,223,941 $0.43
======== ========== ====== ====== ========== =====
</TABLE>
9
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For the nine months ended September 30, 2000, 3,484,359 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.
8. Strategic Alternatives
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 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 nine month periods ended September
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 as
Exhibit 99.1 to the Company's second quarter 2000 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 67% of total net sales in the first nine 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
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Effective January 1, 2000, the Company became a strategic marketing agent for
Ty and provides Ty advisory, design, development and/or creative services on a
project by project basis. 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. The Company expects that sales related
to Beanie Babies and revenues related to services to Ty will be insignificant
this year.
At September 30, 2000, the Company had written purchase orders for $268.1
million as compared to $364.9 million at September 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 was 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 in the
fourth quarter of 2000. However, the Company has begun to realize the initial
benefits of the May 2000 restructuring action 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 is 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 as
Exhibit 99.1 to the Company's second quarter 2000 Report on Form 10-Q which is
incorporated herein by reference.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
Net sales decreased $80.1 million, or 31%, to $178.7 million in the third
quarter ended September 30, 2000 from $258.8 million in the third quarter of
1999. The decrease in net sales was primarily attributable to a decrease in
revenues associated with Beanie Babies and McDonald's related product sales in
2000.
Gross profit decreased $14.0 million, or 27%, to $37.4 million in the third
quarter of 2000 from $51.4 million in the third quarter of 1999. As a percentage
of net sales, the third quarter gross profit increased to 20.9% in 2000 from
19.8% 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 the
levels of a year ago.
Selling, general and administrative expenses, including amortization of
goodwill, totaled $39.4 million in the third quarter of 2000 as compared to
$37.5 million in the third quarter of 1999. As a percentage of net sales,
selling, general and administrative costs totaled 22.0% as compared to 14.5% in
the third quarter of 1999. The Company's increased spending was due principally
to an increase in client service costs associated with the Company's largest
customer.
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<PAGE> 13
The Company has recorded a $1.0 million charge to other expense in the third
quarter of 2000 to reflect an other-than-temporary investment impairment
associated with its venture portfolio. See notes to consolidated financial
statements.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
Net sales decreased $151.1 million, or 21%, to $580.3 million in the first nine
months of 2000 from $731.4 million in the first nine months of 1999. The
decrease in net sales was primarily attributable to revenues associated with
Beanie Babies and McDonald's related products.
Gross profit decreased $18.1 million, or 15%, to $102.7 million in the first
nine months of 2000 from $120.8 million in the first nine 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 18.0% in 2000 from 16.5% 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 the levels of a year ago.
Selling, general and administrative expenses, including amortization of
goodwill, totaled $118.7 million in the first nine months of 2000 as compared
to $109.7 million in the first nine months of 1999. As a percentage of net
sales, selling, general and administrative costs totaled 20.5% as compared to
15.0% in the first nine months of 1999. The Company's increased spending was
due principally to an increase in client service costs associated with the
Company's largest customer and a $1.2 million charge for a contingent payment of
cash and stock which was associated with the acquisition of a previously
acquired company.
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 $2.0 million
year to date charge 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 September 30, 2000 was $92.9 million compared to $110.8
million at December 31, 1999. Net cash used in operating activities during the
first nine months of 2000 was $8.7 million, due principally to a $25.4 million
decrease in accrued expenses and a $7.3 million increase in refundable income
taxes which were partially offset by a $25.9 million decrease in accounts
receivable.
Net cash used in investing activities in the first nine months of 2000 was $8.9
million, which was primarily attributable to $7.0 million of purchases of
property and equipment and $4.5 million of investments made in Internet-related
companies, which were partially offset by $3.4 million of proceeds from the sale
of investments.
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 expended approximately $3.5 million to construct and
furnish this move.
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Net cash used in financing activities in the first nine months of 2000 was $10.2
million which was primarily attributable to $7.3 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 $2.0 million
had been paid as of September 30, 2000.
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 November
2000. The Company's primary domestic line of credit, amounting to $50 million,
has been extended to November 2000. The Company is in discussions related to a
new credit facility which it expects to secure in the fourth quarter of 2000. As
of September 30, 2000, based on the borrowing base formulas prescribed by these
credit facilities, the Company's borrowing capacity was $106.1 million, of which
$1.2 million of short-term borrowings and $15.4 million in letters of credit
were outstanding. In addition, bank guarantees totaling $.3 million were
outstanding at September 30, 2000. Borrowings under these facilities are
collateralized by all assets of the Company. The Company was in violation of the
cash flow coverage covenant on one of its domestic credit facilities at
September 30, 2000 and has received a waiver from the lender.
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 relationship
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 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.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Extension agreement dated as of October 25, 2000 and entered
into by and among Cyrk, Inc., Wells Fargo Bank, National
Association, and Wells Fargo HSBC Trade Bank, N.A.
10.2 Promissory note and pledge agreement between Allan I. Brown and
Simon Marketing, Inc.
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.
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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: November 9, 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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