-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GXoBmnRXZYWdV6bVyp/524KlyoM4Ur97kCk7Royuu+U1d4lBpGjEkJ7+TDNI5kBo k3Cfw1PzZcZ5Uk+m0YgQMg== 0000950135-01-500419.txt : 20010402 0000950135-01-500419.hdr.sgml : 20010402 ACCESSION NUMBER: 0000950135-01-500419 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CYRK INC CENTRAL INDEX KEY: 0000864264 STANDARD INDUSTRIAL CLASSIFICATION: APPAREL & OTHER FINISHED PRODS OF FABRICS & SIMILAR MATERIAL [2300] IRS NUMBER: 043081657 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-21878 FILM NUMBER: 1587184 BUSINESS ADDRESS: STREET 1: 101 EDGEWATER DRIVE CITY: WAKEFIELD STATE: MA ZIP: 01880 BUSINESS PHONE: 5082835800 MAIL ADDRESS: STREET 1: 101 EDGEWATER DRIVE CITY: WAKEFIELD STATE: MA ZIP: 01880 FORMER COMPANY: FORMER CONFORMED NAME: CYRK INTERNATIONAL INC DATE OF NAME CHANGE: 19930521 10-K 1 b38133cie10-k.txt CYRK INC. 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 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.) 101 EDGEWATER DRIVE WAKEFIELD, MASSACHUSETTS 01880 (Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (781) 876-5800 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- COMMON STOCK, $0.01 THE NASDAQ STOCK MARKET PAR VALUE PER SHARE
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 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] At February 28, 2001, the aggregate market value of voting stock held by non-affiliates of the registrant was $40,193,950. At February 28, 2001, 16,112,791 shares of the registrant's common stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE PORTIONS OF THE REGISTRANT'S PROXY STATEMENT TO BE FILED PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934 IN CONNECTION WITH THE REGISTRANT'S 2001 ANNUAL MEETING OF STOCKHOLDERS HAVE BEEN INCORPORATED BY REFERENCE IN PART III OF THIS REPORT. 2 PART I ITEM 1. BUSINESS. GENERAL DEVELOPMENT OF THE BUSINESS Cyrk, Inc. (referred to herein as "Cyrk" or "the Company") is a full-service promotional marketing company specializing in the design and development of promotional products and sales promotions. Cyrk was founded in 1976 and is a Delaware corporation. When founded, Cyrk was engaged primarily in the design, manufacture and sale of custom screen printed sports apparel and accessories. Cyrk also provided private label apparel and accessories to a wide variety of established brands, and developed its own "Cyrk" brand of apparel that was sold to sports and specialty retailers and resort-destination shops. In 1990, the Company broadened its design and manufacturing expertise to include a focus on custom-designed promotional products and the development of its international production and worldwide sourcing capabilities. Beginning in 1996 the Company extended its focus in the promotional product industry by making a series of acquisitions of companies engaged in the corporate catalog and advertising specialty segment of the promotion industry. These acquired companies, operating within the Company's Corporate Promotions Group ("CPG"), provide promotional products and services for inclusion in corporate trade and employee catalog programs. Additionally, in 1997 Cyrk expanded into the consumer promotion arena with its acquisition of Simon Marketing, Inc. ("Simon"), a Los Angeles-based marketing and promotion agency that specializes in kid and family marketing. Simon provides marketing programs, promotional products and packaging and promotional games to clients including McDonald's(R)(1) Corporation ("McDonald's"), Chevron Products Company, a division of Chevron U.S.A. ("Chevron"), Toys "R" Us and Hallmark Cards, Inc. ("Hallmark"). Cyrk recently expanded its capabilities to include Internet business-to-business brand marketing. Cyrk's comprehensive e-commerce solutions include Internet and intranet electronic malls, point-based loyalty systems, electronic catalogs, online promotional marketing programs and Web design. In February 1998, the Company announced a restructuring plan to streamline its business, thereby eliminating the majority of its screen print business, and its private label and retail operations. In April 2000, the Company implemented a realignment of its management team to enable the Company to maximize the value of its promotions business and its new Internet subsidiary. In May 2000, the Company announced that it would further restructure the Company by integrating and streamlining the operations of its Custom Product and Licensing group, ("CP&L"), its division that provides custom designed product for large consumer promotions, and its CPG division into one product-focused business unit. In July 2000, the Company announced that it had retained investment bankers Credit Suisse First Boston ("CS First Boston") (formerly Donaldson, Lufkin & Jenrette) to advise the Company in exploring strategic alternatives. As a result of these efforts, the Company completed the sale of its CPG business in February 2001. Cyrk's promotional products and services are sold to consumer product and services companies seeking to promote their brand names and corporate identities and to build brand loyalty. Cyrk custom designs unique, high-impact product in a broad spectrum of categories including apparel and accessories, hard goods, toys and electronics, in materials ranging from fabrics and plastics to metals and paper. Cyrk's customers include McDonald's (for its Happy Meal(R)(1) promotions, among others), Philip Morris Incorporated ("Philip Morris") (for its Marlboro(R)(2) brand, among others), and other companies with recognized brands. The programs developed and managed by Cyrk typically reward the consumer with promotional products that are distributed upon redemption of proofs of purchase or as gifts with the purchase of other products . Cyrk believes that its expertise in design, manufacturing and sourcing have allowed Cyrk to successfully execute large, worldwide high-impact promotional programs. (1) MCDONALD'S AND HAPPY MEAL are registered trademarks of McDonald's Corporation. (2) MARLBORO is a registered trademark of Philip Morris Incorporated. 2 3 1998 CORPORATE RESTRUCTURING In February 1998, the Company announced a plan to restructure its worldwide operations. As a result of this restructuring plan, the Company consolidated certain operating facilities, discontinued its private label and Cyrk brand business, divested its investment in an apparel joint venture, and eliminated approximately 450 positions worldwide. 1999 YUCAIPA INVESTMENT In November 1999, The Yucaipa Companies ("Yucaipa"), a Los Angeles-based investment firm, invested $25 million into Cyrk in exchange for 25,000 shares of a new series A convertible preferred stock and a warrant to purchase an additional 15,000 shares of series A convertible preferred stock. In connection with the investment, which was approved by Cyrk's stockholders, Cyrk's board of directors was increased to seven and three designees of Yucaipa, including Yucaipa's managing partner, Ronald W. Burkle, were elected to Cyrk's board and Mr. Burkle was elected chairman. In addition, effective as of the closing of this investment, Patrick D. Brady and Allan I. Brown were each elected Co-President and Co-Chief Executive Officer of Cyrk. Additionally, the Company entered into a Management Agreement with Yucaipa whereby Yucaipa provides Cyrk with management and consultation services in exchange for an annual fee of $500,000 per year. 2000 MANAGEMENT REALIGNMENT In April 2000, Cyrk reorganized its management team to better position the Company to streamline the operations of its promotional products business and to maximize the potential of the Company's new Internet subsidiary. Co-President and Co-Chief Executive Officer Allan I. Brown was given responsibility for the global operations of the Company's traditional promotional products business and Simon. Co-President and Co-Chief Executive Officer Patrick D. Brady was named head of the Company's new e-business subsidiary. 2000 CORPORATE RESTRUCTURING In May 2000, the Company announced that it would implement a plan to restructure its operations by integrating and streamlining its traditional promotional products business into one product-focused business unit. As a result of the restructuring plan, the Company eliminated 85 positions or 7% of its domestic workforce. The restructuring plan was substantially complete by the end of 2000, and was terminated with respect to the CPG business as a result of the February 2001 sale of CPG. SALE OF CPG In July 2000, the Company retained the services of investment bankers CS First Boston to advise the Company in exploring strategic alternatives, a step the Company saw as necessary to its efforts to maximize the value of the Company's core businesses and to generate more consistent revenues and earnings growth. In December 2000, the Company decided to sell its CPG division and, in February 2001, the Company announced that it had sold its CPG division, which was comprised principally of two subsidiaries of Cyrk: Tonkin, Inc. ("Tonkin") and Cyrk Acquisition Corp. The sale is described in the Company's report filed on Form 8-K dated February 15, 2001 which is incorporated herein by reference. In connection with the sale, the Company agreed not to compete in the CPG business in the United States for a period of five years after the closing of the sale. PRODUCTS AND SERVICES Promotional Product Programs. Cyrk provides product-driven high-impact promotional programs to its customers. The goal of the promotional programs is to enhance corporate identity, develop brand awareness, and build customer or employee loyalty. Cyrk has achieved this goal for many of its customers and continues to develop and manage promotions that generate growth for customer brands and further develop customer and employee loyalty. Most of the promotional products used in a typical program are (1) distributed to consumers in connection with the sale of another product, (2) issued upon redemption of coupons evidencing the purchase of other products, (3) sold in conjunction with the sale of another product or (4) sold as a complement to other products. Promotional products are also frequently provided to retailers that carry the brand name products to reward or incentivise sales efforts and foster goodwill towards employees. 3 4 The advertising and marketing campaigns of many companies include the promotional product concept within the design of their overall corporate development. Cyrk believes that increasing numbers of companies are seeking to leverage and enhance the value of their brands by demanding promotional products that are superior in quality and design, distinctive, contemporary, integrated with their other products and marketing efforts, and immediately identifiable with their primary product brands and services. Together, Cyrk and its customers recognize that promotional programs are a vital component of a successful marketing strategy. Increasingly, companies are turning to outside professionals to provide the expertise required in complex areas outside their core businesses, such as the design of custom promotional products, and the development and implementation of promotional programs. Cyrk believes that because of its ability to provide integrated services including product and program design; loyalty and direct marketing services; licensing; market research; direct manufacturing, sourcing and program fulfillment and its unique creative approach, it is able to provide highly superior promotional products that become integral components of an effective, impactful promotional program. The promotional products industry is fragmented, consisting of designers, buying agents, jobbers, manufacturers, importers and distribution companies. Consequently, a company implementing a large promotional product program generally must deal with multiple vendors. In addition, there are often numerous intermediaries between such a company and the manufacturer of the promotional products. As a result, a company may have only limited control over the design, quality and delivery of the products. This lack of control over manufacturing sources coupled with the use of multiple vendors may produce inefficiencies and result in promotional products that are inconsistent with the company's other products and brand image. Cyrk's promotional products and services are designed to address these inefficiencies in the market and to provide a comprehensive, professional program to major companies seeking to leverage their brand. Cyrk has successfully custom designed and developed proprietary product including toys, apparel and accessories for numerous successful consumer promotional programs including the Marlboro Gear and Marlboro Unlimited(R)(3) promotions. In 1999, under its license arrangement with Ty Inc. ("Ty"), Cyrk developed and marketed licensed Beanie Babies(R)(4) products to consumers. Effective January 1, 2000, the Company became a strategic marketing agent for Ty and provides Ty with product and advisory, design, development and/or creative services on a project by project basis. Through its Simon subsidiary, the Company provides promotional agency services and integrated marketing solutions including loyalty marketing, licensing, strategic and calendar planning, game design and execution, premium development and production management. Simon is one of the largest creators, developers and procurers of promotional games and toys in the world. In addition to providing its products and services to McDonald's, Simon's customer base includes Chevron, Toys "R" Us and Hallmark. Internet Capabilities. Cyrk recognized an opportunity to extend its promotional success to the Internet, and in February 2000 announced its intention to create an Internet subsidiary to service the changing needs of its customers. Cyrk possesses technological expertise in the e-commerce area that includes Internet and intranet electronic malls, point-based loyalty systems, electronic catalogs, online promotional marketing programs and Web design. Manufacturing and Sourcing. The quality and timely delivery of Cyrk's products depend on Cyrk's ability to control the manufacturing process. Cyrk seeks to maintain such control by maintaining a physical presence in the Far East to oversee the offshore manufacturing of Cyrk's products by independent Asian factories. Cyrk's Asian operations perform a variety of services for Cyrk, such as selecting manufacturers, communicating product specifications and quality control standards, monitoring the manufacturing process, performing on-site quality control inspections, transferring letters of credit and coordinating export clearance and shipping. (3) MARLBORO UNLIMITED is a registered trademark of Philip Morris Incorporated. (4) BEANIE BABIES is a registered trademark of Ty Inc. 4 5 Cyrk has no long-term contracts with manufacturing sources and often competes with other companies for production facilities and import quota capacity. In addition, certain Asian manufacturers require that a letter of credit be posted at the time a purchase order is placed. Cyrk believes that its policy of outsourcing a substantial portion of its manufacturing requirements allows it to achieve increased production flexibility while reducing Cyrk's capital expenditures and costs of maintaining a substantial production work force. Cyrk is required by certain of its customers to ensure that the independent manufacturers that Cyrk contracts with are in compliance with codes of conduct relating to minimum wage and hour guidelines, minimum worker age requirements and health and safety requirements. Cyrk works with its customers and independent auditing firms to monitor compliance with these codes. If Cyrk were not able to contract with a sufficient number of manufacturers that are in compliance with these codes, or if compliance with these codes were to significantly increase the cost of production, Cyrk's business might be adversely affected. Cyrk's business is subject to risks normally associated with conducting business abroad, such as foreign government regulations, political unrest, disruptions or delays in shipments, fluctuations in foreign currency exchange rates and changes in the economic conditions in the countries in which Cyrk's manufacturing sources are located. If any such factors were to render the conduct of business in a particular country undesirable or impractical, or if Cyrk's current foreign manufacturing sources were to cease doing business with Cyrk for any reason, Cyrk's business and operating results could be adversely affected. Cyrk's business is also subject to the risks associated with the imposition of additional trade restrictions related to imported products, including quotas, duties, taxes and other charges or restrictions. SIGNIFICANT CUSTOMER RELATIONSHIPS In recent years, Cyrk's business has been concentrated with McDonald's, Philip Morris and Ty. Cyrk's business with promotional customer clients such as McDonald's and Philip Morris is based upon purchase orders placed by the customers. McDonald's, along with certain other customers, order a fixed quantity of product to be delivered by an agreed date. While these orders may be canceled prior to delivery of the product, the customer is responsible for any costs associated with the canceled order. Philip Morris and certain other customers place purchase orders from time to time during the course of a promotion. These promotional product customers are not committed to making a minimum number of purchases. For all promotional product customers, the actual purchases depend upon a number of factors including, without limitation, the duration of the promotion and expected consumer redemption rates. Consequently, Cyrk's level of net sales is difficult to predict accurately and may fluctuate greatly from quarter to quarter. Cyrk conducts its business with McDonald's through its subsidiary, Simon. Simon designs and implements marketing promotions for McDonald's, which include games, sweepstakes, premiums, events, contests, coupon offers, sports marketing, licensing and promotional retail items. Simon's net sales from its business with McDonald's consist of a combination of sales of promotional products and various service fees. 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. As a result of this action, the Company's total sales for 2000 declined by approximately 15% from previous levels. The net profit contributed by the fees for these services has historically not been material to the overall results of operations. Therefore, the absence of these sales did not have a material adverse effect on the Company's profitability. Net sales to McDonald's accounted for approximately 65%, 61% and 57% of Cyrk's consolidated net sales in fiscal 2000, 1999 and 1998, respectively. Philip Morris accounted for approximately 9%, 9% and 11% of Cyrk's consolidated net sales in 2000, 1999 and 1998, respectively. A substantial majority of those sales relate to Marlboro Unlimited promotions. The United States Food and Drug Administration ("FDA") issued final regulations with respect to promotional programs relating to tobacco products which, among other things, proposed to ban gifts based on proof of purchase of tobacco products and the use of tobacco brand names on non-tobacco products. In addition, on November 23, 1998, certain tobacco companies, including Philip Morris, entered into a settlement agreement with 46 states and five U.S. territories that, among other things, prohibits the use of brand names by the tobacco companies in connection with their marketing, distribution, licensing and sales of apparel and other merchandise. Each of the regulations and the settlement could have a material adverse effect on Cyrk's business with Philip Morris and on its results of operations. For a description of the FDA regulations and the tobacco settlement, and their potential impact on Cyrk's business with Philip Morris, please refer to Cyrk's Amended Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995. Through its licensing arrangements with Ty, Cyrk developed and marketed licensed Beanie Babies products in 1999 and 1998. Sales of Beanie Babies related products accounted for approximately 11% and 7% of Cyrk's consolidated net sales for 1999 and 1998, respectively. Effective January 1, 2000, the Company became a strategic marketing agent for Ty and provides Ty with product and advisory, design, 5 6 development and/or creative services on a project by project basis. Ty related business accounted for approximately 1% of Cyrk's consolidated net sales for 2000. Given that the Company is providing these services on a project by project basis, the Company's future revenues and earnings associated with the Ty relationship are difficult to predict. INTERNATIONAL SALES International sales accounted for approximately 34%, 38% and 36% of Cyrk's consolidated net sales in 2000, 1999 and 1998, respectively. International sales are currently made through Cyrk's account representatives in the United States as well as through Cyrk's German, United Kingdom and Hong Kong subsidiaries. COMPETITION The promotional products industry is highly fragmented and competitive, and some of Cyrk's competitors have substantially greater financial and other resources than Cyrk. Cyrk's promotional products and services compete with the services of in-house advertising, promotional products and purchasing departments and with designers and vendors of single or multiple product lines. The promotional product services of Cyrk also compete for advertising dollars with other media such as television, radio, newspapers, magazines and billboards. Entry into the promotional product industry is not difficult and new competitors are continually commencing operations. The primary methods of competition are creativity in product design, quality and style of products, prompt delivery, customer service, price, financial strength, and an ability to provide a full range of innovative Web-based marketing services. Cyrk believes that it currently competes favorably in each of the foregoing areas and that its ability to provide a full range of integrated services gives it a competitive advantage. BACKLOG At December 31, 2000, Cyrk had written purchase orders for $236.9 million as compared to $312.1 million at December 31, 1999. Cyrk'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, Cyrk cautions that the backlog amounts may not necessarily be indicative of future revenues or earnings. TESTING AND QUALITY CONTROL Cyrk bears the risk of non-conforming goods sold to its customers and, in the case of outsourced products, generally has recourse against the manufacturer. Because many products are sourced in Asia, Cyrk relies primarily on monitoring and inspection activities to ensure quality control rather than on any remedies it may have for defective goods. Cyrk, through independent laboratories, performs extensive tests to ensure that materials and fabrics meet all applicable United States and foreign safety and quality standards, including flammability and child safety laws. In some cases additional tests are performed by or on behalf of Cyrk's customers. IMPORTS AND IMPORT RESTRICTIONS A substantial amount of net sales of Cyrk in 2000 was attributable to products manufactured in Asia. The importation of such products is subject to the constraints imposed by bilateral agreements between the United States and substantially all of the countries from which Cyrk imports goods. These agreements impose quotas that limit the quantity of certain types of goods, including textile products imported by Cyrk, which can be imported into the United States from those countries. Such agreements also allow the United States to impose, under certain conditions, restraints on the importation of categories of merchandise that, under the terms of the agreements, are not subject to specified limits. Cyrk's continued ability to source products that it imports may be adversely affected by additional bilateral and multilateral agreements, unilateral trade restrictions, significant decreases in import quotas, the disruption of trade from exporting countries as a result of political instability or the imposition of additional duties, taxes and other charges or restrictions on imports. Products imported by Cyrk from China currently receive the same preferential tariff treatment accorded goods from countries granted "normal trade relations" status. However, the renewal of China's most favored nation treatment has been a contentious political issue for several years and there can be no assurance that such status will be continued. If China were to lose its "normal trade relations" status, goods imported from China will be subject to significantly higher duty rates which would increase the cost of goods from China. In 2000, a substantial amount of Cyrk's net sales were from products manufactured in China. EMPLOYEES At December 31, 2000, Cyrk had approximately 1,306 full-time employees. Cyrk's work force is not unionized and Cyrk believes that its relations with its employees are good. 6 7 ITEM 2. PROPERTIES. In August 2000, Cyrk relocated its principal executive and certain sales and administrative offices from its Gloucester, Massachusetts facilities to offices in Wakefield, Massachusetts. At December 31, 2000, Cyrk occupied approximately 47,900 square feet under a lease with an unrelated party that expires in March 2005 and has an annual base rent of approximately $623,000. Pursuant to a six month transition services agreement arising out of the February 2001 CPG sale, Cyrk is subletting a portion of the Wakefield property to the buyer. Cyrk also leases approximately 120,000 square feet of warehouse space in Danvers, Massachusetts under the terms of a lease which expires in December 2011 and has an annual base rent of approximately $460,000. Cyrk uses the warehouse for inventory storage and to perform fulfillment services for certain of its customers. This facility is owned by a trust of which Patrick D. Brady, Cyrk's Co-Chief Executive Officer and Co-President, is both a trustee and beneficiary. As a result of the CPG sale in February 2001, the buyer became the primary obligor under this lease, however, Cyrk remains liable under this lease to the extent that the buyer does not perform any of its obligations under the lease. Related to its Simon operations, Cyrk leases an aggregate of approximately 136,000 square feet of office space in Los Angeles, Chicago and Atlanta pursuant to leases which expire in January 2002 through December 2010. The annual base rent of these leases is approximately $2,689,000. At December 31, 2000, Tonkin leased approximately 132,000 square feet of warehouse, production and office space in Monroe, Washington attributable to its Tonkin operations pursuant to a lease which expires in September 2007. The annual base rent of this lease is approximately $623,000. Additionally, Cyrk Acquisition Corp. leased approximately 20,800 square feet of warehouse and office space in Norwood, Massachusetts which is used for certain of its advertising specialty operations, pursuant to a lease which expires in July 2001. As a result of the CPG sale in February 2001, these leases were assumed by the buyer. Cyrk also leases approximately 12,000 square feet of office space in New York City, pursuant to a lease which expires in July 2001. In addition to its domestic lease facilities, Cyrk leases a total of approximately 60,500 square feet of European office and warehouse space in Frankfurt, London, Munich and Paris, and, leases an aggregate of approximately 52,600 square feet of Asian office and warehouse space in Hong Kong, Korea, Taiwan and Tokyo under leases which expire in April 2001 through December 2007. For a summary of Cyrk's minimum rental commitments under all noncancelable operating leases as of December 31, 2000, see notes to the consolidated financial statements. ITEM 3. LEGAL PROCEEDINGS. NONE ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. NONE 7 8 EXECUTIVE OFFICERS OF THE REGISTRANT The following are the names, ages, positions with Cyrk and a brief description of the business experience during the last five years of the executive officers of Cyrk, all of whom serve until they resign or are removed from such offices by the Board of Directors: PATRICK D. BRADY (45): Co-Chief Executive Officer and Co-President. Mr. Brady is a founder of Cyrk and has served as one of its directors since its incorporation in 1990. Mr. Brady served as the Treasurer of Cyrk from May 1990 until May 1993, and has also served as Cyrk's Chief Operating Officer from May 1993 until November 1999 and its Chief Financial Officer from May 1993 to September 1994. Mr. Brady was elected President in May 1993 and Chief Executive Officer in December 1998. In November 1999, he was elected Co-Chief Executive Officer and Co-President. ALLAN I. BROWN (60): Co-Chief Executive Officer and Co-President. Mr. Brown has been the Chief Executive Officer of our Simon Marketing, Inc. subsidiary since 1975. In November 1999, he was elected Co-Chief Executive Officer and Co-President and to Cyrk's Board of Directors TED L. AXELROD (45): Executive Vice President. Mr. Axelrod joined Cyrk in July 1995 to direct Cyrk's corporate strategy and development efforts. He was elected an Executive Vice President of Cyrk in September 1997. From August 1987 to July 1995, he held various positions including Managing Director and Head of Mergers and Acquisitions of BNY Associates, Incorporated, an investment banking subsidiary of The Bank of New York Company, Inc. (formerly BNE Associates, Inc., a subsidiary of The Bank of New England, N.A.). DOMINIC F. MAMMOLA (45): Executive Vice President and Chief Financial Officer. Mr. Mammola was elected an Executive Vice President of Cyrk in September 1997. He has served as Vice President and Chief Financial Officer of Cyrk since September 1994.
8 9 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's stock is traded on The Nasdaq Stock Market under the symbol CYRK. The following table presents, for the periods indicated, the high and low sales prices of the Company's common stock as reported by The Nasdaq Stock Market's National Market.
2000 1999 High Low High Low ---- --- ---- --- First Quarter $13.63 $7.00 $8.00 $5.38 Second Quarter 9.31 4.31 6.88 6.00 Third Quarter 7.50 2.94 5.88 4.63 Fourth Quarter 4.47 1.81 12.00 6.44
As of February 28, 2001, the Company had approximately 330 holders of record (representing approximately 5,500 beneficial owners) of its common stock. The last reported sale price of the Company's common stock on February 28, 2001 was $2.91. The Company has never paid cash dividends, other than series A preferred stock distributions in 2000 and stockholder distributions of Subchapter S earnings during 1993 and 1992, and none are contemplated in the foreseeable future (other than the dividends required to be paid by the Company pursuant to the terms of its redeemable preferred stock - see notes to consolidated financial statements) as the Company currently intends to retain its earnings to finance future growth. In addition, the Company's ability to pay cash dividends is limited pursuant to the terms of its credit facilities. 9 10 ITEM 6. SELECTED FINANCIAL DATA.
SELECTED INCOME For the Years Ended December 31, STATEMENT DATA: 2000 1999 1998 1997(4) 1996 ---- ---- ---- ---- ---- (In thousands, except per share data) Net sales $768,450 $988,844 $757,853 $558,623 $250,901 Net income (loss) (69,715)(1) 11,136(2) (3,016)(3) 3,236 438 Earnings (loss) per common share - basic (4.43)(1) 0.70(2) (0.20)(3) 0.26 0.04 Earnings (loss) per common share - diluted (4.43)(1) 0.67(2) (0.20)(3) 0.25 0.04
SELECTED BALANCE December 31, SHEET DATA: 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (In thousands) Working capital $ 60,371 $110,823 $ 87,517 $ 61,314 $100,565 Total assets 252,435 369,148 337,341 313,845 190,239 Long-term obligations 6,587 9,156 12,099 9,611 -- Redeemable preferred stock 25,500 25,000 -- -- -- Stockholders' equity 116,176 186,077 177,655 160,353 124,347
(1) Includes $50,103 of pre-tax loss on sale of business and $6,395 of pre-tax restructuring and nonrecurring charges. See notes to consolidated financial statements. (2) Includes $1,675 of pre-tax nonrecurring charges. See notes to consolidated financial statements. (3) Includes $15,288 of pre-tax restructuring and nonrecurring charges. See notes to consolidated financial statements. (4) Includes the results of operations of acquired companies from the acquisition dates. 10 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 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 including, without limitation, 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") and, to a lesser extent, Philip Morris Incorporated ("Philip Morris"). Net sales to McDonald's and Philip Morris accounted for 65% and 9%, 61% and 9% and 57% and 11% of total net sales in 2000, 1999 and 1998, respectively. The Company's business with McDonald's and Philip Morris (as well as other promotional customers) is based upon purchase orders placed from time to time during the course of promotions. Except for a two year agreement with McDonald's in Europe which expires in December 2001 and guarantees certain minimum order quantities, there are no written agreements which commit McDonald's or Philip Morris 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 2001 will be to McDonald's. Philip Morris solicits competitive bids for its promotional programs. The Company's profit margin depends, to a great extent, on its competitive position when bidding and its ability to manage its costs after being awarded bids. Increased competition is expected to continue and may adversely impact the Company's profit margin on Philip Morris promotions in the future. Beginning July 1, 1999, a settlement agreement among 46 states and certain tobacco companies, including Philip Morris, prohibits the use of brand names by tobacco companies in connection with promotional programs relating to tobacco products. The settlement agreement, however, does not prohibit the use of Philip Morris's corporate name in promotional programs. Due to the restrictions on the use of brand names, and the other limitations imposed by the settlement agreement on the tobacco industry, the settlement agreement could have a material adverse effect on the Company's business with Philip Morris and on its results of operations. 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 had 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 did not have a 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, 11 12 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 1%, 11% and 7% of total net sales in 2000, 1999 and 1998, respectively. Effective January 1, 2000, the Company became a strategic marketing agent for Ty and provides Ty with product and advisory, design, development and/or creative services on a project by project basis. Given the nature and the timing of this arrangement, the Company's future revenues and earnings associated with the Ty relationship are difficult to predict. The Company expects that sales of Ty related products will be minimal in 2001. At December 31, 2000, the Company had written purchase orders for $236.9 million as compared to $312.1 million at December 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. SALE OF BUSINESS Pursuant to its decision in December 2000, the Company sold its Corporate Promotions Group ("CPG") business on February 15, 2001 to Cyrk Holdings, Inc., formerly known as Rockridge Partners, Inc. ("Rockridge"), an investor group led by Gemini Investors LLC, a Wellesley, Massachusetts-based private equity investment firm, pursuant to a Purchase Agreement entered into as of January 20, 2001 (as amended, the "Purchase Agreement") for approximately $14.0 million, which included the assumption of approximately $3.7 million of Company debt. $2.3 million of the purchase price was paid with a 10% per annum five-year subordinated note from Rockridge, with the balance being paid in cash. The 2000 financial statements reflect this transaction and include a pre-tax charge of $50.1 million due to the loss on the sale of the CPG business, $22.7 million of which is associated with the write-off of goodwill attributable to CPG. This charge had the effect of increasing the 2000 net loss available to common stockholders by approximately $49.0 million or $3.07 per share. Net sales in 2000 attributable to the CPG business were $146.8 million, or 19% of consolidated Company revenues. CPG was engaged in the corporate catalog and specialty advertising segment of the promotions industry. The group was formed as a result of Cyrk's acquisitions of Marketing Incentives, Inc. ("MI") and Tonkin, Inc. ("Tonkin") in 1996 and 1997, respectively. Pursuant to the Purchase Agreement, Rockridge purchased from the Company (i) all of the outstanding capital stock of MI and Tonkin, each a wholly-owned subsidiary of the Company, (ii) other certain assets of the Company, including those assets of Cyrk's Danvers and Wakefield, Massachusetts facilities necessary for the operation of the CPG business and (iii) all intellectual property and assumed liabilities of CPG as specified in the Purchase Agreement. Additionally, pursuant to the Purchase Agreement, Cyrk agreed to transfer its name to the buyer upon obtaining all necessary customer, stockholder and stock exchange approvals to change its name. Until such approvals are obtained, the Company will provide the buyer with a non-exclusive, worldwide, royalty-free license to use the name "Cyrk" and any other derivation thereof solely in connection with the Cyrk CPG business. Rockridge extended employment offers to certain former Cyrk employees who had performed various support activities, including accounting, human resources, information technology, legal and other various management functions. There is no material relationship between Rockridge and the Company or any of its affiliates, directors or officers, or any associate thereof, other than the relationship created by the Purchase Agreement and related documents. The sale of CPG effectively terminates the restructuring effort announced by the Company in May 2000 with respect to the CPG business. See notes to consolidated financial statements. For additional information related to this transaction, reference is made to the Company's Report on Form 8-K dated February 15, 2001. 2000 CORPORATE 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 2000 12 13 pre-tax charge to operations of approximately $5.7 million principally for involuntary termination costs, asset write-downs and the settlement of lease obligations. See notes to consolidated financial statements. EQUITY INVESTMENT In November 1999, The Yucaipa Companies ("Yucaipa"), a Los Angeles-based investment firm, invested $25 million in the Company in exchange for convertible preferred stock and a warrant to purchase an additional $15 million of convertible preferred stock. Under the terms of the investment, which was approved at a Special Meeting of Stockholders held on November 10, 1999, Yucaipa, through an affiliate, purchased 25,000 shares of a new series of Company convertible preferred stock (initially convertible into 3,030,303 shares of Company common stock) and received a warrant to purchase an additional 15,000 shares of a new series of Company convertible preferred stock (initially convertible into 1,666,666 shares of Company common stock). The net proceeds ($20.6 million) from this transaction are being used for general corporate purposes. As of December 31, 2000, assuming conversion of all of the convertible preferred stock, Yucaipa would own approximately 16% of the then outstanding common shares. Assuming the preceding conversion, and assuming the exercise of the warrant and the conversion of the preferred stock issuable upon its exercise, Yucaipa would own a total of approximately 23% of the then outstanding common shares making it the Company's largest shareholder. In connection with this transaction, Ronald W. Burkle, managing partner of Yucaipa, was appointed chairman of Cyrk's Board of Directors, Patrick D. Brady and Allan I. Brown were named Co-Chief Executive Officers and Co-Presidents of Cyrk, and Mr. Brown was named to Cyrk's Board of Directors. In addition to Mr. Burkle, Yucaipa is entitled to nominate two individuals to a seven-person Cyrk Board of Directors. Additionally, the Company will pay Yucaipa an annual management fee of $500,000 for a five-year term for which Yucaipa will provide general business consultation and advice and management services. See notes to consolidated financial statements. For additional information related to this transaction, reference is made to the Company's Report on Form 8-K and its proxy statement filed on Schedule 14A with the Securities and Exchange Commission, dated September 1, 1999 and October 12, 1999, respectively. 1998 CORPORATE RESTRUCTURING As a result of its 1998 corporate restructuring, the Company recorded a 1998 charge to operations of $11.8 million for asset write-downs, employee termination costs, lease cancellations and other related exit costs associated with the restructuring. The restructuring plan was fully executed by the end of 1998. See notes to consolidated financial statements. OUTLOOK The Company believes that the February 2001 sale of the CPG business enables it to proceed with a more rationalized, cost-efficient business model. The Company is currently evaluating its remaining businesses with the objective of restoring consistent profitability. The Company intends to initiate further restructuring action during the first half of 2001. The Company's ability to achieve its financial objective is subject to risks including, without limitation, 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 2000 Compared to 1999 Net sales decreased $220.4 million, or 22%, to $768.4 million in 2000 from $988.8 million in 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. 13 14 Gross profit decreased $28.3 million, or 16%, to $144.0 million in 2000 from $172.3 million in 1999. As a percentage of net sales, gross profit increased to 18.7% in 2000 from 17.4% 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 totaled $162.2 million in 2000 as compared to $155.0 million in 1999. As a percentage of net sales, selling, general and administrative costs totaled 21.1% as compared to 15.7% in 1999. The Company's increased spending was due principally to an increase in client service costs 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 $5.7 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 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 recorded a 1999 nonrecurring pre-tax charge to operations of $1.7 million associated with the settlement of previously issued incentive stock options in a subsidiary which were issued to principals of a previously acquired company. The settlement was reached to facilitate the integration of the acquired company into other operations within the Company's CPG division. Other expense in 2000 includes a $4.5 million charge related to an other-than-temporary investment impairment associated with its venture portfolio which was partially offset by a $3.2 million gain realized on the sale of an investment. See notes to consolidated financial statements. Other income of $2.8 million in 1999 represents a gain realized on the sale of an investment. In connection with the February 2001 sale of its CPG business, the Company recognized a 2000 pre-tax loss of $50.1 million, $22.7 million of which is associated with the write-off of goodwill attributable to CPG. See notes to consolidated financial statements. For an analysis of the change in the effective tax rates from 1998 to 2000 and a discussion of the valuation allowance recorded by the Company, see notes to consolidated financial statements. 1999 Compared to 1998 Net sales increased $231.0 million, or 30%, to $988.8 million in 1999 from $757.9 million in 1998. The increase in net sales was primarily attributable to revenues associated with McDonald's, Beanie Babies related products and Philip Morris. Gross profit increased $34.5 million, or 25%, to $172.3 million in 1999 from $137.9 million in 1998. As a percentage of net sales, gross profit decreased to 17.4% in 1999 from 18.2% in 1998. The decrease in the gross margin percentage was primarily the result of a higher concentration of sales volume associated with certain promotional programs that are subject to agreements with certain customers that limit gross margin levels. As a percentage of net sales, selling, general and administrative expenses totaled 15.7% in 1999 as compared to 17.9% in 1998. Selling, general and administrative expenses totaled $155.0 million in 1999 as compared to $135.5 million in 1998. 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 and licensed product businesses, as well as to increased client management and support costs. The Company recorded a 1999 nonrecurring pre-tax charge to operations of $1.7 million associated with the settlement of previously issued incentive stock options in a subsidiary which were issued to principals of a previously 14 15 acquired company. The settlement was reached to facilitate the integration of the acquired company into other operations within the Company's CPG division. Restructuring and nonrecurring charges totaled $15.3 million in 1998. In connection with its February 1998 announcement to restructure worldwide operations, the Company recorded a restructuring charge of $11.8 million attributable to asset write-downs, employee termination costs, lease cancellations and other related exit costs. In addition, the Company recorded a $2.3 million nonrecurring charge associated with a December 1998 severance agreement between the Company and its former chief executive officer, and also recorded a $1.1 million nonrecurring charge associated with the Company's plan to relocate its corporate facilities. See notes to consolidated financial statements. Other income of $2.8 million in 1999 and $7.1 million in 1998 represents the gains realized on the sale of an investment. See notes to consolidated financial statements. LIQUIDITY AND CAPITAL RESOURCES Working capital at December 31, 2000 was $60.4 million compared to $110.8 million at December 31, 1999. Net cash used in operating activities during 2000 was $11.8 million, due principally to a net loss of $69.7 million and a $34.9 million decrease in accrued expenses, which were partially offset by the loss on sale of business of $47.9 million, a $20.1 million decrease in inventories, a $10.7 million decrease in accounts receivable and $9.6 million of depreciation and amortization. Net cash provided by operating activities during 1999 was $31.1 million, due principally to net income and depreciation and amortization of $20.1 million and an increase in accrued expenses of $15.7 million. Net cash used in investing activities in 2000 was $13.9 million, which was primarily attributable to $12.8 million of purchases of property and equipment. In 1999, net cash used in investing activities was $16.9 million, which was primarily attributable to $12.5 million in investments made by the Company and $5.5 million of purchases of property and equipment. 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. Net cash used in financing activities in 2000 was $5.9 million which was primarily attributable to $5.9 million of repayments of short-term borrowings and long-term obligations. In 1999, net cash provided by financing activities was $10.1 million which was primarily attributable to $20.6 million of net proceeds received from an equity investment in the Company (see notes to consolidated financial statements) which was partially offset by $8.0 million of repayments of short-term borrowings. In February 2001, the Company sold its CPG business for approximately $14.0 million, which included approximately $3.7 million of Company debt that was assumed by the buyer. $2.3 million of the purchase price was paid with a 10% per annum five-year subordinated note, with the balance being paid in cash. See notes to consolidated financial statements. 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 May 2001. In December 2000, the Company secured a new facility with a lender for its primary domestic line of credit. Pursuant to the provisions of its primary domestic line of credit, the Company had commitments for letter of credit and other borrowings as of December 31, 2000 of up to an aggregate amount of $35.0 million for the purpose of financing the importation of various products from Asia, for issuing standby letters of credit and for working capital purposes. In February 2001, the facility agreement was amended through May 15, 2001 as a result of the sale of the Company's CPG business. See notes to consolidated financial statements. Under the amended agreement, the 15 16 Company has commitments for letters of credit and other borrowings to May 15, 2001 of up to an aggregate amount of $16.2 million. As a result of the CPG sale, the Company is assessing its overall management and organizational structure and in conjunction with that assessment, is reassessing its financing strategy prior to the expiration of its primary domestic facility. As of December 31, 2000, based on the borrowing base formulas prescribed by these credit facilities, the Company's borrowing capacity was $61.0 million, of which $5.5 million of short-term borrowings and $11.6 million in letters of credit were outstanding. In addition, bank guarantees totaling $.3 million were outstanding at December 31, 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 first half of 2001. The Company intends to initiate further restructuring action during the first half of 2001 and, subject to such final plan, expects to incur significant restructuring charges that may adversely impact the Company's cash position. The Company's ability to generate internal cash flow is highly dependent upon its continued relationships with McDonald's and Philip Morris. Any material adverse change from the Company's revenues and related contribution from McDonald's and Philip Morris could adversely affect the Company's cash position and capital availability. The Company's ability to renew its credit facilities is subject to finalizing its management and organizational plan and is further subject to acceptance and approval of such plan by the Company's lenders. In July 2000, the Company announced that it had retained an investment banker to explore strategic alternatives. The objective of seeking strategic alternatives is to maximize shareholder value including, without limitation, by examining ways to enhance the Company's ability to generate more consistent revenue and earnings growth. Pursuant to its decision in December 2000, the Company sold its CPG business in February 2001. See notes to consolidated financial statements. As of December 31, 2000, the investment banker was exploring further strategic alternatives. The Company has not made a decision as to any additional specific alternatives and there can be no assurance that any additional transactions will result from this process. 16 17 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
PAGE ---- Report of Independent Accountants 23 Consolidated Balance Sheets as of December 31, 2000 and 1999 24 Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998 25 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998 26 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 27 Notes to Consolidated Financial Statements 28-40 Schedule II: Valuation and Qualifying Accounts 41
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. NONE 17 18 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this item regarding the Company's directors is included in the Company's Proxy Statement to be filed pursuant to Schedule 14A in connection with the Company's 2001 Annual Meeting of Stockholders under the section captioned "Election of Directors" and is incorporated herein by reference thereto. Information regarding the Company's executive officers is set forth in Part I hereof, above, under the caption "Executive Officers of the Registrant" and is incorporated herein by reference thereto. ITEM 11. EXECUTIVE COMPENSATION. The information required by this item is included in the Company's Proxy Statement to be filed pursuant to Schedule 14A in connection with the Company's 2001 Annual Meeting of Stockholders under the sections captioned "Directors' Compensation" and "Executive Compensation" and is incorporated herein by reference thereto. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this item is included in the Company's Proxy Statement to be filed pursuant to Schedule 14A in connection with the Company's 2001 Annual Meeting of Stockholders under the section captioned "Security Ownership of Certain Beneficial Owners and Management" and is incorporated herein by reference thereto. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this item is included in the Company's Proxy Statement to be filed pursuant to Schedule 14A in connection with the Company's 2001 Annual Meeting of Stockholders under the sections captioned "Certain Relationships and Related Transactions" and "Indebtedness of Management" and is incorporated herein by reference thereto. 18 19 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) DOCUMENTS FILED AS PART OF THIS REPORT. 1. FINANCIAL STATEMENTS: Consolidated Balance Sheets as of December 31, 2000 and 1999 Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 Notes to Consolidated Financial Statements 2. FINANCIAL STATEMENT SCHEDULES FOR THE FISCAL YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998: Schedule II: Valuation and Qualifying Accounts. All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. 19 20 3. EXHIBITS
EXHIBIT NO. DESCRIPTION ----------- ----------- 2.1 (10) Securities Purchase Agreement dated September 1, 1999, between the Registrant and Overseas Toys, L.P. 2.2 (15) Purchase Agreement between Cyrk, Inc. and Rockridge Partners, Inc., dated January 20, 2001 as amended by Amendment No. 1 to the Purchase Agreement, dated February 15, 2001 3.1 (4) Restated Certificate of Incorporation of the Registrant 3.2 (2) Amended and Restated By-laws of the Registrant 3.3 (12) Certificate of Designation for Series A Senior Cumulative Participating Convertible Preferred Stock 4.1 (2) Specimen certificate representing Common Stock 10.1 (3)(11) 1993 Employee Stock Purchase Plan, as amended 10.2 (3)(4) 1993 Omnibus Stock Plan, as amended 10.3 (1) Tax Allocation and Indemnity Agreement dated July 6, 1993, among Cyrk, Inc., the Registrant, Gregory P. Shlopak and Patrick D. Brady 10.4 (3)(5) Life Insurance Agreement dated as of November 15, 1994 by and between the Registrant and Patrick D. Brady as Trustee under a declaration of trust dated November 7, 1994 between Gregory P. Shlopak and Patrick D. Brady, Trustee, entitled "The Shlopak Family 1994 Irrevocable Insurance Trust" 10.4.1 (3)(5) Assignments of Life Insurance policies as Collateral, each dated November 15, 1994 10.5 (3)(5) Life Insurance Agreement dated as of November 15, 1994 by and between the Registrant and Patrick D. Brady as Trustee under a declaration of trust dated November 7, 1994 between Gregory P. Shlopak and Patrick D. Brady, Trustee, entitled "The Gregory P. Shlopak 1994 Irrevocable Insurance Trust" 10.5.1 (3)(5) Assignments of Life Insurance policies as Collateral, each dated November 15, 1994 10.6 (3)(5) Life Insurance Agreement dated as of November 15, 1994 by and between the Registrant and Walter E. Moxham, Jr. as Trustee under a declaration of trust dated November 7, 1994 between Patrick D. Brady and Walter E. Moxham, Jr., Trustee, entitled "The Patrick D. Brady 1994 Irrevocable Insurance Trust" 10.6.1 (3)(5) Assignments of Life Insurance policies as Collateral, each dated November 15, 1994 10.7 (3)(6) 1997 Acquisition Stock Plan 10.8 (7) Securities Purchase Agreement dated February 12, 1998 by and between Cyrk, Inc. and Ty Warner 10.9 (8) Severance Agreement between Cyrk, Inc. and Gregory P. Shlopak 10.10 (3)(9) Severance Agreement between Cyrk, Inc. and Ted L. Axelrod dated November 20, 1998 10.11 (3)(9) Severance Agreement between Cyrk, Inc. and Dominic F. Mammola dated November 20, 1998 10.11.1 (3)(9) Amendment No. 1 to Severance Agreement between Cyrk, Inc. and Dominic F. Mammola dated March 29, 1999 10.12 (12) Registration Rights Agreement between Cyrk, Inc. and Overseas Toys, L.P. 10.13 (12) Management Agreement between Cyrk, Inc. and The Yucaipa Companies 10.14 (3)(10) Employment Agreement between Cyrk, Inc. and Allan Brown, dated September 1, 1999 10.15 (3)(10) Employment Agreement between Cyrk, Inc. and Patrick Brady, dated September 1, 1999 10.16 (12) Lease agreement dated as of July 29, 1999, between TIAA Realty, Inc. and Cyrk, Inc. 10.17 (3)(12) Life Insurance Agreement dated as of September 29, 1997 by and between Simon Marketing, Inc. and Frederic N. Gaines, Trustee of the Allan I. Brown Insurance Trust, under Declaration of Trust dated September 29, 1997 10.18 (3)(14) Promissory Note and Pledge Agreement by Allan Brown in favor of Cyrk, Inc., dated July 10, 2000 10.19 (3) Promissory Note and Pledge Agreement by Allan Brown in favor of Cyrk, Inc., dated October 18, 2000, filed herewith 10.20 (15) Subordinated Promissory Note by Rockridge Partners, Inc. in favor of Cyrk, Inc., dated February 15, 2001 10.21 Amended and Restated Loan and Security Agreement by and among, Cyrk, Inc., Foothill Capital Corporation and the other signatories thereto, dated as of February 15, 2001, filed herewith 21.1 List of Subsidiaries, filed herewith 23.1 Consent of PricewaterhouseCoopers LLP - Independent Accountants, filed herewith
20 21 99.1 (13) Amended Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 99.2 (3)(10) Termination Agreement among Cyrk, Inc., Patrick Brady, Allan Brown, Gregory Shlopak, Eric Stanton, and Eric Stanton Self-Declaration of Revocable Trust
- -------- (1) Filed as an exhibit to the Registrant's Registration Statement on Form S-1 (Registration No. 33-75320) or an amendment thereto and incorporated herein by reference. (2) Filed as an exhibit to the Registrant's Registration Statement on Form S-1 (Registration No. 33-63118) or an amendment thereto and incorporated herein by reference. (3) Management contract or compensatory plan or arrangement. (4) Filed as an exhibit to the Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference. (5) Filed as an exhibit to the Registrant's Registration Statement on Form 10-Q dated March 31, 1995 and incorporated herein by reference. (6) Filed as an exhibit to the Registrant's Registration Statement on Form S-8 (Registration No. 333-45655) and incorporated herein by reference. (7) Filed as an exhibit to the Annual Report on Form 10-K for the year ended December 31, 1997 and incorporated herein by reference. (8) Filed as an exhibit to the Registrant's Report on Form 8-K dated December 31, 1998 and incorporated herein by reference. (9) Filed as an exhibit to the Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference. (10) Filed as an exhibit to the Registrant's Report on Form 8-K dated September 1, 1999 and incorporated herein by reference. (11) Filed as an exhibit to the Registrant's Registration Statement on Form S-8 dated February 1, 2000 and incorporated herein by reference. (12) Filed as an exhibit to the Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated herein by reference. (13) Filed as an exhibit to the Registrant's Registration Statement on Form 10-Q dated June 30, 2000 and incorporated herein by reference. (14) Filed as an exhibit to the Registrant's Registration Statement on Form 10-Q dated September 30, 2000 and incorporated herein by reference. (15) Filed as an exhibit to the Registrant's Report on Form 8-K dated February 15, 2001 and incorporated herein by reference. (b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the last quarter of the fiscal year ended December 31, 2000. 21 22 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. CYRK, INC. Date: March 29, 2001 By: /s/Dominic F. Mammola ------------------------ Dominic F. Mammola Executive Vice President and Chief Financial Officer (principal financial and accounting officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/Ronald W. Burkle Chairman March 29, 2001 - ------------------- RONALD W. BURKLE /s/Patrick D. Brady Co-Chief Executive Officer March 29, 2001 - ------------------- PATRICK D. BRADY Co-President (Co-principal executive officer) /s/Allan I. Brown Co-Chief Executive Officer March 29, 2001 - ----------------- ALLAN I. BROWN Co-President (Co-principal executive officer) /s/Joseph W. Bartlett Director March 29, 2001 - --------------------- JOSEPH W. BARTLETT /s/J. Anthony Kouba Director March 29, 2001 - ------------------- J. ANTHONY KOUBA /s/George G. Golleher Director March 29, 2001 - --------------------- GEORGE G. GOLLEHER /s/Erika Paulson Director March 29, 2001 - --------------------- ERIKA PAULSON
22 23 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Cyrk, Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders' equity and cash flows present fairly, in all material respects, the financial position of Cyrk, Inc. and its subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedule, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement and schedule presentation. We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Boston, Massachusetts February 15, 2001 23 24 CYRK, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2000 AND 1999 (IN THOUSANDS, EXCEPT SHARE DATA)
2000 1999 --------- --------- ASSETS Current assets: Cash and cash equivalents $ 68,162 $ 99,698 Investment 7,969 2,423 Accounts receivable: Trade, less allowance for doubtful accounts of $2,074 at December 31, 2000 and $4,243 at December 31, 1999 48,877 91,782 Officers, stockholders and related parties 4,340 3,121 Inventories 10,175 45,193 Prepaid expenses and other current assets 5,120 7,056 Deferred and refundable income taxes 11,537 10,465 Net assets held for sale 8,363 -- --------- --------- Total current assets 164,543 259,738 Property and equipment, net 12,510 13,140 Excess of cost over net assets acquired, net 48,033 73,961 Investments 12,500 12,500 Deferred income taxes 4,734 1,778 Other assets 7,815 8,031 Net assets held for sale 2,300 -- --------- --------- $ 252,435 $ 369,148 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings $ 5,523 $ 8,888 Accounts payable: Trade 36,035 41,795 Affiliates 281 141 Accrued expenses and other current liabilities 53,265 97,137 Investment payable 7,875 -- Deferred income taxes -- 954 Accrued restructuring expenses 1,193 -- --------- --------- Total current liabilities 104,172 148,915 Long-term obligations 6,587 9,156 --------- --------- Total liabilities 110,759 158,071 --------- --------- Commitments and contingencies Mandatorily redeemable preferred stock, Series A1 senior cumulative participating convertible, $.01 par value, 25,500 shares issued and outstanding at December 31, 2000 and 25,000 shares issued and outstanding at December 31, 1999, stated at redemption value of $1,000 per share 25,500 25,000 Stockholders' equity: Preferred stock, $.01 par value; 1,000,000 shares authorized; 25,500 Series A1 shares issued at December 31, 2000 and 25,000 Series A1 shares issued at December 31, 1999 -- -- Common stock, $.01 par value; 50,000,000 shares authorized; 16,059,130 shares issued and outstanding at December 31, 2000 and 15,740,850 shares issued and outstanding at December 31, 1999 161 157 Additional paid-in capital 138,978 137,035 Retained (deficit) earnings (22,128) 48,587 Accumulated other comprehensive income (loss): Unrealized gain on investment 94 1,336 Cumulative translation adjustment (929) (1,038) --------- --------- Total stockholders' equity 116,176 186,077 --------- --------- $ 252,435 $ 369,148 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 24 25 CYRK, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (IN THOUSANDS, EXCEPT PER SHARE DATA)
2000 1999 1998 --------- --------- --------- Net sales $ 768,450 $ 988,844 $ 757,853 Cost of sales: Related parties -- -- 9,211 Other 622,730 816,507 610,758 Write-down of inventory in connection with restructuring 1,695 -- -- --------- --------- --------- 624,425 816,507 619,969 --------- --------- --------- Gross profit 144,025 172,337 137,884 --------- --------- --------- Selling, general and administrative expenses: Goodwill amortization 3,547 3,568 3,324 Related parties 1,265 1,002 1,264 Other 157,429 150,425 130,863 Restructuring and other nonrecurring charges 4,700 1,675 15,288 --------- --------- --------- 166,941 156,670 150,739 --------- --------- --------- Operating income (loss) (22,916) 15,667 (12,855) Interest income (4,269) (3,232) (3,569) Interest expense 1,315 2,115 2,579 Equity in loss of affiliates -- -- 418 Other (income) expense 1,255 (2,752) (7,100) Loss on sale of business 27,387 -- -- Write-off of goodwill attributable to business sold 22,716 -- -- --------- --------- --------- Income (loss) before income taxes (71,320) 19,536 (5,183) Income tax provision (benefit) (1,605) 8,400 (2,167) --------- --------- --------- Net income (loss) (69,715) 11,136 (3,016) Preferred stock dividends 1,000 142 -- --------- --------- --------- Net income (loss) available to common stockholders $ (70,715) $ 10,994 $ (3,016) ========= ========= ========= Earnings (loss) per common share - basic $ (4.43) $ 0.70 $ (0.20) ========= ========= ========= Earnings (loss) per common share - diluted $ (4.43) $ 0.67 $ (0.20) ========= ========= ========= Weighted average shares outstanding - basic 15,972 15,624 14,962 ========= ========= ========= Weighted average shares outstanding - diluted 15,972 16,631 14,962 ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 25 26 CYRK, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (IN THOUSANDS)
Accumulated Common Additional Retained Other Total Stock Paid-in (Deficit) Comprehensive Comprehensive Stockholders' ($.01 Par Value) Capital Earnings Income (Loss) Income (Loss) Equity -------------- ------------ --------- ------------- ------------- ------------- Balance, December 31, 1997 $ 137 $ 119,840 $ 40,609 $ (233) $ 160,353 Comprehensive loss: Net loss (3,016) $(3,016) (3,016) -------- Other comprehensive income (loss), net of income taxes: Net unrealized gains on available-for-sale securities 1,442 1,442 Translation adjustment (86) (86) -------- Other comprehensive income 1,356 1,356 -------- Comprehensive loss $(1,660) ======== Issuance of shares under employee stock option and stock purchase plans, net of tax benefit 2 1,609 1,611 Issuance of shares for businesses acquired 6 7,345 7,351 Issuance of shares for private placement 10 9,990 10,000 ------ --------- -------- ------ --------- Balance, December 31, 1998 155 138,784 37,593 1,123 177,655 Comprehensive income: Net income 11,136 $ 11,136 11,136 -------- Other comprehensive loss, net of income taxes: Net unrealized loss on available-for-sale securities (106) (106) Translation adjustment (719) (719) -------- Other comprehensive loss (825) (825) -------- Comprehensive income $ 10,311 ======== Dividends on preferred stock (142) (142) Stock compensation 775 775 Mandatorily redeemable preferred stock issuance costs (4,447) (4,447) Issuance of shares under employee stock option and stock purchase plans 1 512 513 Issuance of shares for businesses acquired 1 1,411 1,412 ------ --------- -------- ------ --------- Balance, December 31, 1999 157 137,035 48,587 298 186,077 Comprehensive loss: Net loss (69,715) $(69,715) (69,715) -------- Other comprehensive loss, net of income taxes: Net unrealized loss on available-for-sale securities (1,242) (1,242) Translation adjustment 109 109 -------- Other comprehensive loss (1,133) (1,133) -------- Comprehensive loss $(70,848) ======== Dividends on preferred stock (1,000) (1,000) Issuance of shares under employee stock option and stock purchase plans 2 533 535 Issuance of shares for businesses acquired 2 1,410 1,412 ------ --------- -------- ------ --------- Balance, December 31, 2000 $ 161 $ 138,978 $(22,128) $ (835) $ 116,176 ====== ========= ======== ====== =========
The accompanying notes are an integral part of the consolidated financial statements. 26 27 CYRK, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (IN THOUSANDS)
2000 1999 1998 -------- -------- -------- Cash flows from operating activities: Net income (loss) $(69,715) $ 11,136 $ (3,016) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 9,625 8,988 8,988 Write-down of leasehold improvements -- -- 1,143 (Gain) loss on sale of property and equipment 103 130 (244) Realized gain on sale of investments (3,245) (2,752) (7,100) Provision for doubtful accounts 3,423 2,578 1,485 Loss on sale of business 47,876 -- -- Deferred income taxes 389 2,575 1,286 Charge for impaired investments 4,500 -- -- Issuance of common stock related to acquisition agreement 575 -- -- Equity in loss of affiliates -- -- 418 Tax benefit from stock option plans -- -- 56 Non-cash restructuring charges 684 854 8,555 Stock compensation -- 775 -- Increase (decrease) in cash from changes in working capital items: Accounts receivable 10,731 (10,033) 6,382 Inventories 20,132 5,161 (6,050) Prepaid expenses and other current assets (105) 161 3,417 Refundable income taxes (4,417) -- (1,232) Accounts payable 2,483 (4,199) (11,925) Accrued expenses and other current liabilities (34,868) 15,738 16,263 -------- -------- -------- Net cash provided by (used in) operating activities (11,829) 31,112 18,426 -------- -------- -------- Cash flows from investing activities: Purchase of property and equipment (12,828) (5,461) (5,254) Proceeds from sale of property and equipment 277 45 928 Repayments from affiliates, net -- -- 1,556 Purchase of investments (4,500) (12,500) -- Proceeds from sale of investments 3,378 3,086 10,759 Additional consideration related to acquisitions -- (730) (1,624) Other, net (202) (1,375) (1,038) -------- -------- -------- Net cash provided by (used in) investing activities (13,875) (16,935) 5,327 -------- -------- -------- Cash flows from financing activities: Repayments of short-term borrowings, net (3,346) (8,041) (3,897) Proceeds from (repayments of) long-term obligations (2,569) (2,943) 1,888 Proceeds from issuance of preferred stock, net -- 20,553 -- Proceeds from issuance of common stock 534 513 11,554 Dividends paid (500) -- -- -------- -------- -------- Net cash provided by (used in) financing activities (5,881) 10,082 9,545 -------- -------- -------- Effect of exchange rate changes on cash 49 (380) 8 -------- -------- -------- Net increase (decrease) in cash and cash equivalents (31,536) 23,879 33,306 Cash and cash equivalents, beginning of year 99,698 75,819 42,513 -------- -------- -------- Cash and cash equivalents, end of year $ 68,162 $ 99,698 $ 75,819 ======== ======== ======== Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 1,167 $ 1,981 $ 2,301 ======== ======== ======== Income taxes $ 5,262 $ 6,026 $ 2,863 ======== ======== ======== Supplemental non-cash investing activities: Issuance of additional stock related to acquisitions $ 1,413 $ 1,412 $ 7,351 ======== ======== ======== Dividends paid in kind on mandatorily redeemable preferred stock $ 500 $ -- $ -- ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 27 28 CYRK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share data) 1. Nature of Business Cyrk, Inc. is a full-service promotional marketing company, specializing in the design and development of high-impact promotional products and programs. 2. Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial statements include the accounts of Cyrk, Inc. and its subsidiaries (the "Company"). All material intercompany accounts and transactions have been eliminated in consolidation. Revenue Recognition Sales are generally recognized when products are shipped or services are provided to customers. Sales of certain imported goods are recognized at the time shipments are received at the customer's designated location. Deferred revenue includes deposits related to merchandise for which the Company has received payment but for which title and risk of loss have not passed. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Concentration of Credit Risk The Company places its cash in what it believes to be credit-worthy financial institutions. However, cash balances exceed FDIC insured levels at various times during the year. In addition, the Company has significant receivables from certain customers (see Note 18). Financial Instruments The carrying amounts of cash equivalents, investments, short-term borrowings and long-term obligations approximate their fair values. Cash Equivalents Cash equivalents consist of short-term, highly liquid investments which have original maturities at date of purchase to the Company of three months or less. Investments Investments are stated at fair value. Current investments are designated as available-for-sale in accordance with the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities", and as such unrealized gains and losses are reported in a separate component of stockholders' equity. Long-term investments, for which there are no readily available market values, are carried at the lower of estimated fair value or cost. 28 29 Inventories Inventories are valued at the lower of cost (specific identification, first-in, first-out and average methods) or market. Property and Equipment Property and equipment are stated at cost and are depreciated primarily using the straight-line method over the estimated useful lives of the assets or over the terms of the related leases, if such periods are shorter. The estimated useful lives range from two to seven years for machinery and equipment and three to ten years for furniture and fixtures. The cost and accumulated depreciation for property and equipment sold, retired or otherwise disposed of are relieved from the accounts, and resulting gains or losses are reflected in income. Excess of Cost Over Net Assets Acquired, Net The excess of cost over the net assets acquired ("goodwill") is being amortized on a straight-line basis over a period of thirty years. Accumulated amortization amounted to $6,788 at December 31, 2000 and $8,694 at December 31, 1999. (See Note 3.) Impairment of Long-Lived Assets Periodically, the Company assesses, based on undiscounted cash flows, if there has been a permanent impairment in the carrying value of its long-lived assets and, if so, the amount of any such impairment by comparing anticipated undiscounted future operating income with the carrying value of the related long-lived assets. In performing this analysis, management considers such factors as current results, trends and future prospects, in addition to other economic factors. Income Taxes The Company determines deferred taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), which requires that deferred tax assets and liabilities be computed based on the difference between the financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate. Deferred income tax expenses or credits are based on the changes in the asset or liability from period to period. Foreign Currency Translation The Company translates financial statements denominated in foreign currency by translating balance sheet accounts at the balance sheet date exchange rate and income statement accounts at the average monthly rates of exchange. Translation gains and losses are recorded in stockholders' equity, and transaction gains and losses are reflected in income. Earnings (Loss) per Common Share Earnings (loss) per common share have been determined in accordance with the provisions of Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). Reclassifications Certain prior year amounts have been reclassified to conform with the current year presentation. 29 30 3. Sale of Business Pursuant to its decision in December 2000, the Company sold its Corporate Promotions Group ("CPG") business on February 15, 2001 to Cyrk Holdings, Inc., formerly known as Rockridge Partners, Inc. ("Rockridge"), an investor group led by Gemini Investors LLC, a Wellesley, Massachusetts-based private equity investment firm, pursuant to a Purchase Agreement entered into as of January 20, 2001 (as amended, the "Purchase Agreement") for approximately $14,000, which included the assumption of approximately $3,700 of Company debt. $2,300 of the purchase price was paid with a 10% per annum five-year subordinated note from Rockridge, with the balance being paid in cash. The 2000 financial statements reflect this transaction and include a pre-tax charge of $50,103 due to the loss on the sale of the CPG business, $22,716 of which is associated with the write-off of goodwill attributable to CPG. This charge had the effect of increasing the 2000 net loss available to common stockholders by approximately $48,975 or $3.07 per share. Net sales in 2000 attributable to the CPG business were $146,773, or 19% of consolidated Company revenues. CPG was engaged in the corporate catalog and specialty advertising segment of the promotions industry. The group was formed as a result of Cyrk's acquisitions of Marketing Incentives, Inc. ("MI") and Tonkin, Inc. ("Tonkin") in 1996 and 1997, respectively. Pursuant to the Purchase Agreement, Rockridge purchased from the Company (i) all of the outstanding capital stock of MI and Tonkin, each a wholly-owned subsidiary of the Company, (ii) other certain assets of the Company, including those assets of Cyrk's Danvers and Wakefield, Massachusetts facilities necessary for the operation of the CPG business and (iii) all intellectual property and assumed liabilities of CPG as specified in the Purchase Agreement. Additionally, pursuant to the Purchase Agreement, Cyrk agreed to transfer its name to the buyer upon obtaining all necessary customer, stockholder and stock exchange approvals to change its name. Until such approvals are obtained, the Company will provide the buyer with a non-exclusive, worldwide, royalty-free license to use the name "Cyrk" and any other derivation thereof solely in connection with the Cyrk CPG business. Rockridge extended employment offers to certain former Cyrk employees who had performed various support activities, including accounting, human resources, information technology, legal and other various management functions. There is no material relationship between Rockridge and the Company or any of its affiliates, directors or officers, or any associate thereof, other than the relationship created by the Purchase Agreement and related documents. The sale of CPG effectively terminates the restructuring effort announced by the Company in May 2000 with respect to the CPG business. (See Note 11.) 4. Inventories Inventories consist of the following:
December 31, 2000 1999 ---- ---- Raw materials $ 178 $10,181 Work in process 3,099 14,887 Finished goods 6,898 20,125 ------- ------ $10,175 $45,193 ======= =======
5. Property and Equipment Property and equipment consist of the following:
December 31, 2000 1999 ---- ---- Machinery and equipment $ 8,157 $22,139 Furniture and fixtures 12,943 7,209 Leasehold improvements 7,445 6,205 ------- ------- 28,545 35,553 Less - accumulated depreciation and amortization (16,035) (22,413) ------- ------- $12,510 $13,140 ======= =======
Depreciation and amortization expense on property and equipment totaled $6,078, $5,420 and $5,664 in 2000, 1999 and 1998, respectively. 30 31 6. Investments Current In December 2000, the Company purchased 1,500,000 shares of a marketable security at $5.25 per share. As of December 31, 2000, these shares are stated at fair value of $7,969. In April 1998, the Company exchanged its then 50% interest (with a net book value of $2,589) in Grant & Partners Limited Partnership ("GPLP"), a Boston-based firm specializing in improving the returns on marketing investments, in return for GPLP's rights, title and interest to 1,150,000 shares of common stock of GPLP's Exchange Applications ("EXAP"), a company specializing in software that helps businesses raise profits by targeting marketing campaigns. In December 1998, EXAP completed its initial public offering and the Company sold 1,000,000 shares of its EXAP holdings and realized a gain on the sale of this stock of $7,100. The Company sold an additional 106,630 and 43,370 shares in 1999 and 2000, respectively, and realized gains on the sales of $2,752 and $3,245, respectively. As of December 31, 1999, the shares of EXAP stock owned by the Company were stated at fair value of $2,423. Long-term 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. Periodically, 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 reviews in 2000, the Company has recorded a charge to other expense of $4,500 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. 7. Borrowings The Company maintains worldwide credit facilities with several banks. As of December 31, 2000, the facilities provided the Company with approximately $78,090 in total short-term borrowing capacity which consisted of (i) the Company's $35,000 primary domestic line of credit, (ii) an additional $19,000 domestic line of credit and (iii) a foreign line of credit in the amount of $24,090. As of December 31, 2000, the Company had approximately $61,023 available under these bank facilities. The total outstanding short-term borrowings at December 31, 2000 and 1999 were $5,523 and $8,888, respectively. In December 2000, the Company secured a new facility with a lender for its primary domestic line of credit. Pursuant to the provisions of this line of credit, the Company had commitments for letter of credit and other borrowings as of December 31, 2000 of up to an aggregate amount of $35,000 for the purpose of financing the importation of various products from Asia, for issuing standby letters of credit and for working capital purposes. At December 31, 2000, the Company's borrowing capacity under this facility was $35,000, of which $11,581 in letters of credit were outstanding. The letters of credit expire at various dates through October 2002. Borrowings under the facility bear interest at the lesser of the bank's prime rate plus .5% (10.0% at December 31, 2000) or LIBOR plus 2.25% (8.81% at December 31, 2000), and are collateralized by all of the assets of the Company. The facility contains certain earnings, net worth, equity and capital expenditure covenants. In February 2001, the facility agreement was amended through May 15, 2001 as a result of the sale of the Company's CPG business (see Note 3). Under the amended agreement, the Company has commitments for letter of credit and other borrowings to May 15, 2001 of up to an aggregate amount of $16,228. As a result of the CPG sale, the Company is assessing its overall management and organizational structure and in conjunction with this assessment, is reassessing its financing strategy prior to the expiration of its primary domestic facility. 31 32 In addition to the facility described above, there is another domestic credit facility which provides for borrowings of up to an aggregate amount of $19,000 for working capital requirements. This credit facility, which expires in May 2001, bears interest at the bank's prime rate (9.5% at December 31, 2000) or LIBOR plus 2% (8.56% at December 31, 2000). At December 31, 2000, there were no short-term borrowings or letters of credit outstanding under this facility. The Company has a $24,090 (Deutsche Marks 50,000) working capital line of credit for certain of its European subsidiaries. At December 31, 2000, there were no letters of credit outstanding under this credit facility and no short-term borrowings outstanding. The Company also has bank guarantees in the amounts of $1,792 (British Pounds 1,200) and $293 (Belgian Francs 12,500) to cover future duties and customs in the United Kingdom. Bank guarantees totaling $340 were outstanding at December 31, 2000. The weighted average interest rate on short-term borrowings was 8.81% and 8.24% at December 31, 2000 and 1999, respectively. 8. Lease Commitments The Company leases warehouse, production and administrative facilities and certain machinery and equipment, furniture and fixtures, and motor vehicles under noncancelable operating leases expiring at various dates through December 2010. The approximate minimum rental commitments under all noncancelable leases as of December 31, 2000, adjusted to reflect the February 2001 sale of the CPG business (see Note 3), were as follows: 2001 $ 6,758 2002 5,227 2003 4,845 2004 4,608 2005 3,234 Thereafter 8,996 ------- Total minimum lease payments $33,668 =======
Rental expense for all operating leases was $10,893, $11,286 and $11,719 for the years ended December 31, 2000, 1999 and 1998, respectively. Rent is charged to operations on a straight-line basis for certain leases. 9. Income Taxes The components of the provision (benefit) for income taxes are as follows:
For the Years Ended December 31, 2000 1999 1998 ---- ---- ---- Current: Federal $(4,544) $3,710 $(2,818) State 465 1,074 (2,100) Foreign 2,086 1,041 1,465 ------- ------ ------- (1,993) 5,825 (3,453) ------- ------ ------- Deferred: Federal (258) 2,226 1,298 State 646 349 (12) ------- ------ ------- 388 2,575 1,286 ------- ------ ------- $(1,605) $8,400 $(2,167) ======= ====== =======
32 33 As required by SFAS 109, the Company annually evaluates the positive and negative evidence bearing upon the realizability of its deferred tax assets. The Company has considered the recent and historical results of operations and concluded, in accordance with the applicable accounting methods, that it is more likely than not that a certain portion of the deferred tax assets will not be realizable. To the extent that an asset will not be realizable, a valuation allowance is established. The tax effects of temporary differences giving rise to deferred tax assets and liabilities as of December 31, are as follows:
2000 1999 ---- ---- Deferred tax assets Receivable reserves $ 536 $ 1,329 Inventory capitalization and reserves 179 2,760 Other asset reserves 2,671 2,297 Deferred compensation 1,100 2,778 Capital losses 2,725 -- Foreign tax credits 1,881 3,141 Alternative minimum tax credits 637 -- Net operating losses 7,213 451 Depreciation 469 739 Valuation allowance (5,557) (1,252) ------- ------- $11,854 $12,243 ======= ======= Deferred tax liabilities $ -- $ 954 ======= =======
As of December 31, 2000, the Company has federal and state net operating loss carryforwards of approximately $10,100 and $35,819, respectively. The federal net operating loss carryforward will begin to expire in 2020 and the state net operating loss carryforwards will begin to expire in 2002. As of December 31, 2000, the Company also has foreign tax credit carryforwards of $1,881 that will begin to expire in 2002 and alternative minimum tax credits of $637 which carryforward indefinitely. The following is a reconciliation of the statutory federal income tax rate to the actual effective income tax rate:
2000 1999 1998 ---- ---- ---- Federal tax (benefit) rate (35)% 35% (34)% Increase (decrease) in taxes resulting from: State income taxes, net of federal benefit 1 5 (27) Effect of foreign tax rates and non-utilization of losses (1) 7 (6) (7) Goodwill 1 5 19 Non-deductible loss on sale of business 22 -- -- Meals and entertainment 1 1 4 Other, net 1 3 3 --- --- --- Effective tax (benefit) rate (2)% 43% (42)% === === ===
(1) 1999 and 1998 include utilization of prior year foreign losses. 33 34 10. Accrued Expenses and Other Current Liabilities At December 31, 2000 and 1999, accrued expenses and other current liabilities consisted of the following:
2000 1999 ------- ------- Inventory purchases $19,535 $38,663 Accrued payroll and related and deferred compensation 12,501 15,142 Deferred revenue 4,425 11,578 Royalties 1,833 12,281 Other 14,971 19,473 ------- ------- $53,265 $97,137 ======= =======
11. Nonrecurring Charges A summary of the nonrecurring charges for the years ended December 31, 2000, 1999 and 1998 are as follows:
2000 1999 1998 ------ ------- ------- Restructuring charge $5,735 $ -- $11,813 Settlement charge 660 1,675 -- Severance expense -- -- 2,332 Write-down of long-lived assets -- -- 1,143 ------ ------- ------- $6,395 $1,675 $15,288 ====== ======= =======
2000 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. In association with the consolidation of its product divisions, the Company eliminated a substantial number of inventory SKUs from its product offering. As a result of this action the Company recorded a 2000 pre-tax charge of $6,360 for restructuring expenses. This charge was based on the Company's intentions and best estimates at the time of the restructuring announcement. The original restructuring charge was revised downward to $5,735, or a reversal of $625 of the original accrual, as a result of the sale of the CPG business (see Note 3). The restructuring charge relates principally to involuntary termination costs ($2,970), asset write-downs ($1,965, including $1,695 of inventory write-downs) and the settlement of lease obligations ($800). The Company eliminated approximately 85 positions, or 7% of its domestic workforce. This charge had the effect of increasing the 2000 net loss available to common stockholders by approximately $5,606 or $0.35 per share. The restructuring plan was substantially complete by the end of 2000. A summary of activity in the restructuring accrual is as follows: Balance at January 1, 2000 $ -- Restructuring provision 6,360 Employee termination costs and other cash payments (2,858) Non-cash asset write-downs (1,684) Accrual reversal (625) ------- Balance at December 31, 2000 $ 1,193 =======
1998 Restructuring As a result of its 1998 corporate restructuring, the Company recorded a nonrecurring pre-tax charge to operations of $11,813 for asset write-downs, employee termination costs, lease cancellations and other related exit costs associated with the restructuring. The restructuring charge had the effect of reducing 1998 after tax earnings by $6,875 or $0.46 per share. The restructuring plan was fully executed by the end of 1998. 34 35 2000 Settlement Charge The Company recorded a 2000 nonrecurring pre-tax charge to operations of $660 associated with the settlement of a change in control agreement with an employee of the Company who was formerly an executive officer. 1999 Settlement Charge The Company recorded a 1999 nonrecurring pre-tax charge to operations of $1,675 associated with the settlement of previously issued incentive stock options in a subsidiary which were issued to principals of a previously acquired company. The settlement was reached to facilitate the integration of the acquired company into other operations within one of the Company's divisions. Severance Expense Effective December 31, 1998, Gregory P. Shlopak, former chief executive officer, resigned from the Company. Pursuant to an agreement entered into with Mr. Shlopak, the Company recorded a 1998 pre-tax charge to operations of $2,332. The agreement provides for payments and benefits to Mr. Shlopak payable over a three year period. Write-down of Long-lived Assets In connection with the Company's plan to relocate from its Gloucester, Massachusetts facilities, the Company recorded a 1998 pre-tax charge to operations of $1,143. This charge represented the estimated net book value of leasehold improvements at the anticipated abandonment date. 12. Redeemable Preferred Stock In November 1999, The Yucaipa Companies ("Yucaipa"), a Los Angeles-based investment firm, invested $25,000 in the Company in exchange for preferred stock and a warrant to purchase additional preferred stock. Under the terms of the investment, which was approved at a Special Meeting of Stockholders on November 10, 1999, the Company issued 25,000 shares of a newly authorized senior cumulative participating convertible preferred stock ("preferred stock") to Yucaipa for $25,000. Yucaipa is entitled, at their option, to convert each share of preferred stock into common stock equal to the sum of $1,000 per share plus all accrued and unpaid dividends, divided by $8.25 (3,108,049 shares as of December 31, 2000 and 3,047,431 shares as of December 31, 1999). In connection with the issuance of the preferred stock, the Company also issued a warrant to purchase 15,000 shares of a newly authorized series of preferred stock at a purchase price of $15,000. Each share of this series of preferred stock issued upon exercise of the warrant is convertible, at Yucaipa's option, into common stock equal to the sum of $1,000 per share plus all accrued and unpaid dividends, divided by $9.00 (1,666,666 shares as of December 31, 2000 and December 31, 1999, respectively). The warrant expires on November 10, 2004. Assuming conversion of all of the convertible preferred stock, Yucaipa would own approximately 16% of the then outstanding common shares at December 31, 2000 and December 31, 1999, respectively. Assuming the preceding conversion, and assuming the exercise of the warrant and the conversion of the preferred stock issuable upon its exercise, Yucaipa would own a total of approximately 23% of the then outstanding common shares at December 31, 2000 and December 31, 1999, respectively, making it the Company's largest shareholder. Yucaipa has voting rights equivalent to the number of shares of common stock into which their preferred stock is convertible on the relevant record date. Also, Yucaipa is entitled to receive a quarterly dividend equal to 4% of the base liquidation preference of $1,000 per share outstanding, payable in cash or in-kind at the Company's option. In the event of liquidation, dissolution or winding up of the affairs of the Company, Yucaipa, as holders of the preferred stock, will be entitled to receive the redemption price of $1,000 per share plus all accrued dividends plus (1) (a) 7.5% of the amount that the Company's retained earnings exceeds $75,000 less (b) the aggregate amount of any cash dividends paid on common stock which are not in excess of the amount of dividends paid on the preferred stock, divided by (2) the total number of preferred shares outstanding as of such date (the "adjusted liquidation preference"), before any payment is made to other stockholders. The Company may redeem all or a portion of the preferred stock at a price equal to the adjusted liquidation preference of each share, if the average closing prices of the Company's common stock have exceeded $12.00 for sixty consecutive trading days on or after November 10, 2002, or, any time on or after November 10, 2004. The preferred stock is subject to mandatory redemption if a change in control of the Company occurs. 35 36 In connection with this transaction, the managing partner of Yucaipa was appointed chairman of the Company's board of directors and Yucaipa was entitled to nominate two additional individuals to a seven-person board. Additionally, the Company will pay Yucaipa an annual management fee of $500 for a five-year term for which Yucaipa will provide general business consultation and advice and management services. 13. Stock Plans At December 31, 2000, the Company had three stock-based compensation plans, which are described below. The Company adopted the disclosure provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") and has applied APB Opinion 25 and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized related to such plans. Had compensation cost for the Company's 2000, 1999 and 1998 grants for stock-based compensation plans been determined consistent with SFAS 123, the Company's net income (loss) and earnings (loss) per common share would have been reduced (increased) to the pro forma amounts indicated below:
2000 1999 1998 ---------- ---------- --------- Net income (loss) - as reported $(69,715) $11,136 $(3,016) Net income (loss) - pro forma (71,143) 9,159 (6,395) Earnings (loss) per common share - basic - as reported (4.43) 0.70 (0.20) Earnings (loss) per common share - diluted - as reported (4.43) 0.67 (0.20) Earnings (loss) per common share - basic - pro forma (4.52) 0.58 (0.43) Earnings (loss) per common share - diluted - pro forma (4.52) 0.55 (0.43)
1993 Omnibus Stock Plan Under its 1993 Omnibus Stock Plan (the "Omnibus Plan"), as amended in May 1997, the Company has reserved up to 3,000,000 shares of its common stock for issuance pursuant to the grant of incentive stock options, nonqualified stock options or restricted stock. The Omnibus Plan is administered by the Compensation Committee of the Board of Directors. Subject to the provisions of the Omnibus Plan, the Compensation Committee has the authority to select the optionees or restricted stock recipients and determine the terms of the options or restricted stock granted, including: (i) the number of shares; (ii) the exercise period (which may not exceed ten years); (iii) the exercise or purchase price (which in the case of an incentive stock option cannot be less than the market price of the common stock on the date of grant); (iv) the type and duration of options or restrictions, limitations on transfer and other restrictions; and (v) the time, manner and form of payment. Generally, an option is not transferable by the option holder except by will or by the laws of descent and distribution. Also, generally, no incentive stock option may be exercised more than 60 days following termination of employment. However, in the event that termination is due to death or disability, the option is exercisable for a maximum of 180 days after such termination. Options granted under this plan generally become exercisable in three equal installments commencing on the first anniversary of the date of grant. 1997 Acquisition Stock Plan The 1997 Acquisition Stock Plan (the "1997 Plan") is intended to provide incentives in connection with the acquisitions of other businesses by the Company. The 1997 Plan is identical in all material respects to the Omnibus Plan, except that the number of shares available for issuance under the 1997 Plan is 1,000,000 shares. The fair value of each option grant under the above plans was estimated using the Black-Scholes option pricing model with the following weighted average assumptions for 2000, 1999 and 1998, respectively: expected dividend yield of zero % for all years; expected life of 4.5 years for 2000, 4.4 years for 1999 and 4.5 years for 1998; expected volatility of 70% for 2000, 63% for 1999 and 65% for 1998; and, a risk-free interest rate of 6.7% for 2000, 5.2% for 1999 and 5.6% for 1998. 36 37 The following summarizes the status of the Company's stock options as of December 31, 2000, 1999 and 1998 and changes during the year ended on those dates:
2000 1999 1998 Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price --------------------------- ---------------------------- ---------------------------- Outstanding at beginning of year 2,322,121 $10.17 2,175,927 $11.35 2,343,762 $11.31 Granted 336,931 6.41 462,651 5.67 317,750 10.98 Exercised (19,008) 6.02 -- -- (97,717) 10.53 Canceled (792,596) 10.35 (316,457) 11.68 (387,868) 11.05 ---------- ---------- ---------- Outstanding at end of year 1,847,448 9.45 2,322,121 10.17 2,175,927 11.35 ========== ========== ========== Options exercisable at year-end 1,290,702 10.75 1,390,761 11.26 1,057,031 11.30 ========== ========== ========== Options available for future grant 1,915,140 1,459,475 1,605,669 ========== ========== ========== Weighted average fair value of options granted during the year $ 3.88 $ 3.12 $ 5.97 ========== ========== ==========
The following table summarizes information about stock options outstanding at December 31, 2000:
Options Outstanding Options Exercisable Weighted Average Weighted Weighted Range of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Prices Outstanding Life Price Exercisable Price ------- ----------- ---- ------- ----------- --------- $ 5.38 - $ 8.00 598,564 8.7 years $ 5.82 116,997 $ 5.60 8.75 - 12.88 1,153,217 6.2 10.82 1,078,038 10.87 14.30 - 18.13 90,267 4.4 14.86 90,267 14.86 23.25 - 28.75 5,400 3.3 28.34 5,400 28.34 --------- --------- $ 5.38 - $28.75 1,847,448 6.9 9.45 1,290,702 10.75 ========= =========
Employee Stock Purchase Plan Pursuant to its 1993 Employee Stock Purchase Plan (the "Stock Purchase Plan"), as amended in November 1999, the Company is authorized to issue up to an aggregate of 600,000 shares of its common stock to substantially all full-time employees electing to participate in the Stock Purchase Plan. Eligible employees may contribute, through payroll withholdings or lump sum cash payment, up to 10% of their base compensation during six-month participation periods beginning in January and July of each year. At the end of each participation period, the accumulated deductions are applied toward the purchase of Company common stock at a price equal to 85% of the market price at the beginning or end of the participation period, whichever is lower. Employee purchases amounted to 80,284 shares in 2000, 88,132 shares in 1999 and 61,349 shares in 1998 at prices ranging from $4.72 to $8.71 per share. At December 31, 2000, 248,619 shares were available for future purchases. The fair value of the employees' purchase rights was estimated using the Black-Scholes option pricing model with the following weighted average assumptions for 2000, 1999 and 1998, respectively: expected dividend yield of zero % for all years; expected life of six months for all years; expected volatility of 70% for 2000, 63% for 1999 and 65% for 1998; and, a risk-free interest rate of 5.6%, 4.8% and 5.4% for 2000, 1999 and 1998, respectively. The weighted average fair value of those purchase rights per share granted in 2000, 1999 and 1998 was $1.77, $1.91 and $2.97, respectively. 37 38 Common Stock Purchase Warrants In February 1998, the Company issued 975,610 shares of its common stock and a warrant to purchase up to 100,000 shares of its common stock in a private placement, resulting in net proceeds of approximately $10,000 which will be used for general corporate purposes. The warrant is exercisable at any time from the grant date of February 12, 1998 to February 12, 2003 at an exercise price of $10.25 per share, which represented the fair market value on the grant date. Additionally, in June 1998, the Company issued a warrant to purchase 200,000 shares of the Company's common stock as part of settling a preacquisition contingency of Simon. The warrant is exercisable at any time from the grant date of June 30, 1998 to July 31, 2002 at an exercise price of $11.00 per share, which represented the fair market value on the grant date. 14. Comprehensive Income The Company's comprehensive income consists of net income (loss), foreign currency translation adjustments and unrealized holding gains (losses) on available-for-sale securities, and is presented in the Consolidated Statements of Stockholders' Equity. Components of other comprehensive income (loss) consist of the following:
2000 1999 1998 ------- ----- ------- Change in unrealized gains and losses on investments $(2,196) $(189) $ 2,477 Foreign currency translation adjustments 109 (719) (86) Income tax benefit (expense) related to unrealized gains and losses on investments 954 83 (1,035) ------- ----- ------- Other comprehensive income (loss) $(1,133) $(825) $ 1,356 ======= ===== =======
15. Profit-Sharing Retirement Plan The Company has a qualified profit-sharing plan under Section 401(k) of the Internal Revenue Code that is available to substantially all employees. Under this plan the Company matches one-half of employee contributions up to six percent of eligible payroll. Employees are immediately fully vested for their contributions and vest in the Company contribution ratably over a three-year period. The Company's contribution expense for the years ended December 31, 2000, 1999 and 1998 was $1,194, $1,101 and $988, respectively. 16. Commitments and Contingencies On or about February 15, 1997, Montague Corporation ("Montague") filed an action in Middlesex Superior Court, Commonwealth of Massachusetts, Montague Corporation v. Cyrk, Inc. (Civil Action No. 97-00888) ("Montague action"), alleging a breach of a May 17, 1995 Exclusive Distribution Agreement naming the Company as the exclusive USA distributor for the sale of Montague bicycles in connection with promotional programs. On March 10, 1999, the Company and Montague entered into a Settlement and Joint Venture Agreement ("Settlement"), terminating the Montague action and establishing a joint venture to sell corporate logoed bicycles for use in various corporate sales programs and promotions. Under the terms of the Settlement, the Company may be obligated to pay Montague up to $900 in cash if the joint venture does not achieve certain financial results within three years from the Settlement date. The Company is also involved in other litigation and various legal matters which have arisen in the ordinary course of business. The Company does not believe that the resolution of the above described litigation matters or the ultimate resolution of any other currently pending litigation or other legal matters will have a material adverse effect on its financial condition, results of operations or net cash flows. As a result of the Company's recent restructuring and other events, the Company may be required to make severance payments to two executive officers of the Company pursuant to existing severance agreements with the Company for the aggregate amount of approximately $3,500. 38 39 17. Related Party Transactions The Company leases warehouse facilities under a fifteen-year operating lease agreement which expires December 31, 2011 from a limited liability company which is jointly owned by an officer and a former director of the Company. The agreement provides for annual rent of $462 and for the payment by the Company of all utilities, taxes, insurance and repairs. As a result of the February 2001 sale of the CPG business (see Note 3), the buyer became the primary obligor under this lease, however, the Company remains liable under this lease to the extent that the buyer does not perform any of its obligations under the lease. In accordance with the provisions of an employment agreement between an officer of the Company and the Company, the officer exercised his option in 2000 to borrow $2,000 under a line of credit available to the officer. As of December 31, 2000, the Company had two $1,000 notes receivable from the officer. The notes bear interest at an annual rate of 6.6% and 6.3%, respectively, and are due and payable no later than six months after the Company's annual meeting in 2001. A former director of the Company is chairman of the executive committee of a corporation which supplies certain promotional products to the Company. Purchases from this corporation amounted to $9,027 for the year ended December 31, 1998. 18. Segments and Related Information The Company operates in one industry: the promotional marketing industry. The Company's business in this industry encompasses the design, development and marketing of high-impact promotional products and programs. A significant percentage of the Company's sales is attributable to a small number of customers. In addition, a significant portion of trade accounts receivable relates to these customers. The following summarizes the concentration of sales and trade receivables for customers with sales in excess of 10% of total sales for any of the years ended December 31, 2000, 1999 and 1998, respectively:
% of Sales % of Trade Receivables ---------- ---------------------- 2000 1999 1998 2000 1999 1998 ---- ---- ---- ---- ---- ---- Company A 65 61 57 73 35 32 Company B 9 9 11 15 6 9
The Company conducts its promotional marketing business on a global basis. The following summarizes the Company's net sales for the years ended December 31, 2000, 1999 and 1998, respectively, by geographic area:
2000 1999 1998 --------- -------- -------- United States $505,209 $608,613 $482,200 Asia 106,380 54,661 44,077 Germany 76,015 111,231 35,351 United Kingdom 25,962 153,976 60,524 Other foreign 54,884 60,363 135,701 -------- -------- -------- Consolidated $768,450 $988,844 $757,853 ======== ======== ========
The following summarizes the Company's long-lived assets as of December 31, 2000, 1999 and 1998, respectively, by geographic area:
2000 1999 1998 ------- -------- -------- United States $79,861 $104,073 $ 99,611 Foreign 3,297 3,559 3,101 ------- -------- -------- Consolidated $83,158 $107,632 $102,712 ======= ======== ========
Geographic areas for net sales are based on customer locations. Long-lived assets include property and equipment, excess of cost over net assets acquired and other non-current assets. 39 40 19. 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 SFAS 128:
For the Years Ended December 31, 2000 1999 1998 ----------------------------------- ------------------------------------ ------------------------------------ Income Shares Per Share Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------------------------------- ------------------------------------ ------------------------------------ Basic EPS: Income (loss) available to common stockholders $(70,715) 15,971,537 $(4.43) $10,994 15,624,366 $0.70 $(3,016) 14,962,362 $(0.20) ====== ===== ====== Preferred stock dividends 1,000 142 -- Effect of Dilutive Securities: Common stock equivalents -- 95,444 -- Convertible preferred stock -- 428,195 -- Contingently and non-contingently issuable shares related to acquired companies -- 483,402 -- ---------------------- ----------------------- ---------------------- Diluted EPS: Income (loss) available to common stockholders and assumed conversions $(69,715) 15,971,537 $(4.43) $11,136 16,631,407 $0.67 $(3,016) 14,962,362 $(0.20) ====================== ====== ======================= ===== ====================== ======
For the years ended December 31, 2000 and December 31, 1998, 3,499,226 of convertible preferred stock, common stock equivalents and contingently and non-contingently issuable shares related to acquired companies and 695,317 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. 20. Quarterly Results of Operations (Unaudited) The following is a tabulation of the quarterly results of operations for the years ended December 31, 2000 and 1999, respectively:
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- 2000 Net sales $177,303 $224,333 $178,702 $188,112 Gross profit 32,934 32,353 37,402 41,336 Net income (loss) (668) (9,523) (1,434) (58,090) Earnings (loss) per common share - basic (0.06) (0.61) (0.10) (3.63) Earnings (loss) per common share - diluted (0.06) (0.61) (0.10) (3.63)
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- 1999 Net sales $159,077 $313,523 $258,823 $257,421 Gross profit 29,754 39,696 51,376 51,511 Net income (loss) (3,223) 2,483 7,761 4,115 Earnings (loss) per common share - basic (0.21) 0.16 0.49 0.25 Earnings (loss) per common share - diluted (0.21) 0.15 0.48 0.23
40 41 CYRK, INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 (IN THOUSANDS)
ADDITIONS CHARGED TO DEDUCTIONS ACCOUNTS RECEIVABLE, BALANCE AT COSTS AND (CHARGED AGAINST BALANCE AT ALLOWANCE FOR BEGINNING EXPENSES ACCOUNTS END DOUBTFUL ACCOUNTS OF PERIOD (BAD DEBT EXPENSES) RECEIVABLE) OF PERIOD - ----------------- ----------- ------------------ ----------------- --------- 2000 $4,243 $3,423 $5,592 $2,074 1999 2,682 2,578 1,017 4,243 1998 3,801 1,485 2,604 2,682
DEFERRED INCOME ADDITIONS TAX ASSET BALANCE AT CHARGED TO BALANCE AT VALUATION BEGINNING COSTS AND END ALLOWANCE OF PERIOD EXPENSES DEDUCTIONS OF PERIOD - ---------- ---------- -------- ------------ --------- 2000 $1,252 $4,305 $ -- $5,557 1999 8,193 -- 6,941(1) 1,252 1998 8,193 -- -- 8,193
(1) Represents the tax benefit from adjusting the valuation allowance of the acquired deferred assets. 41 42 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ---------- ----------- 2.1 (10) Securities Purchase Agreement dated September 1, 1999, between the Registrant and Overseas Toys, L.P. 2.2 (15) Purchase Agreement between Cyrk, Inc. and Rockridge Partners, Inc., dated January 20, 2001 as amended by Amendment No. 1 to the Purchase Agreement, dated February 15, 2001 3.1 (4) Restated Certificate of Incorporation of the Registrant 3.2 (2) Amended and Restated By-laws of the Registrant 3.3 (12) Certificate of Designation for Series A Senior Cumulative Participating Convertible Preferred Stock 4.1 (2) Specimen certificate representing Common Stock 10.1 (3)(11) 1993 Employee Stock Purchase Plan, as amended 10.2 (3)(4) 1993 Omnibus Stock Plan, as amended 10.3 (1) Tax Allocation and Indemnity Agreement dated July 6, 1993, among Cyrk, Inc., the Registrant, Gregory P. Shlopak and Patrick D. Brady 10.4 (3)(5) Life Insurance Agreement dated as of November 15, 1994 by and between the Registrant and Patrick D. Brady as Trustee under a declaration of trust dated November 7, 1994 between Gregory P. Shlopak and Patrick D. Brady, Trustee, entitled "The Shlopak Family 1994 Irrevocable Insurance Trust" 10.4.1(3)(5) Assignments of Life Insurance policies as Collateral, each dated November 15, 1994 10.5 (3)(5) Life Insurance Agreement dated as of November 15, 1994 by and between the Registrant and Patrick D. Brady as Trustee under a declaration of trust dated November 7, 1994 between Gregory P. Shlopak and Patrick D. Brady, Trustee, entitled "The Gregory P. Shlopak 1994 Irrevocable Insurance Trust" 10.5.1 (3)(5) Assignments of Life Insurance policies as Collateral, each dated November 15, 1994 10.6 (3)(5) Life Insurance Agreement dated as of November 15, 1994 by and between the Registrant and Walter E. Moxham, Jr. as Trustee under a declaration of trust dated November 7, 1994 between Patrick D. Brady and Walter E. Moxham, Jr., Trustee, entitled "The Patrick D. Brady 1994 Irrevocable Insurance Trust" 10.6.1 (3)(5) Assignments of Life Insurance policies as Collateral, each dated November 15, 1994 10.7 (3)(6) 1997 Acquisition Stock Plan 10.8 (7) Securities Purchase Agreement dated February 12, 1998 by and between Cyrk, Inc. and Ty Warner 10.9 (8) Severance Agreement between Cyrk, Inc. and Gregory P. Shlopak 10.10 (3)(9) Severance Agreement between Cyrk, Inc. and Ted L. Axelrod dated November 20, 1998 10.11 (3)(9) Severance Agreement between Cyrk, Inc. and Dominic F. Mammola dated November 20, 1998 10.11.1 (3)(9) Amendment No. 1 to Severance Agreement between Cyrk, Inc. and Dominic F. Mammola dated March 29, 1999 10.12 (12) Registration Rights Agreement between Cyrk, Inc. and Overseas Toys, L.P. 10.13 (12) Management Agreement between Cyrk, Inc. and The Yucaipa Companies 10.14 (3)(10) Employment Agreement between Cyrk, Inc. and Allan Brown, dated September 1, 1999 10.15 (3)(10) Employment Agreement between Cyrk, Inc. and Patrick Brady, dated September 1, 1999 10.16 (12) Lease agreement dated as of July 29, 1999, between TIAA Realty, Inc. and Cyrk, Inc. 10.17 (3)(12) Life Insurance Agreement dated as of September 29, 1997 by and between Simon Marketing, Inc. and Frederic N. Gaines, Trustee of the Allan I. Brown Insurance Trust, under Declaration of Trust dated September 29, 1997 10.18 (3)(14) Promissory Note and Pledge Agreement by Allan Brown in favor of Cyrk, Inc., dated July 10, 2000 10.19 (3) Promissory Note and Pledge Agreement by Allan Brown in favor of Cyrk, Inc., dated October 18, 2000, filed herewith 10.20 (15) Subordinated Promissory Note by Rockridge Partners, Inc. in favor of Cyrk, Inc., dated February 15, 2001 10.21 Amended and Restated Loan and Security Agreement by and among, Cyrk, Inc., Foothill Capital Corporation and the other signatories thereto, dated as of February 15, 2001, filed herewith 21.1 List of Subsidiaries, filed herewith 23.1 Consent of PricewaterhouseCoopers LLP - Independent Accountants, filed herewith
42 43 99.1 (13) Amended Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 99.2 (3)(10) Termination Agreement among Cyrk, Inc., Patrick Brady, Allan Brown, Gregory Shlopak, Eric Stanton, and Eric Stanton Self-Declaration of Revocable Trust
(1) Filed as an exhibit to the Registrant's Registration Statement on Form S-1 (Registration No. 33-75320) or an amendment thereto and incorporated herein by reference. (2) Filed as an exhibit to the Registrant's Registration Statement on Form S-1 (Registration No. 33-63118) or an amendment thereto and incorporated herein by reference. (3) Management contract or compensatory plan or arrangement. (4) Filed as an exhibit to the Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference. (5) Filed as an exhibit to the Registrant's Registration Statement on Form 10-Q dated March 31, 1995 and incorporated herein by reference. (6) Filed as an exhibit to the Registrant's Registration Statement on Form S-8 (Registration No. 333-45655) and incorporated herein by reference. (7) Filed as an exhibit to the Annual Report on Form 10-K for the year ended December 31, 1997 and incorporated herein by reference. (8) Filed as an exhibit to the Registrant's Report on Form 8-K dated December 31, 1998 and incorporated herein by reference. (9) Filed as an exhibit to the Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference. (10) Filed as an exhibit to the Registrant's Report on Form 8-K dated September 1, 1999 and incorporated herein by reference. (11) Filed as an exhibit to the Registrant's Registration Statement on Form S-8 dated February 1, 2000 and incorporated herein by reference. (12) Filed as an exhibit to the Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated herein by reference. (13) Filed as an exhibit to the Registrant's Registration Statement on Form 10-Q dated June 30, 2000 and incorporated herein by reference. (14) Filed as an exhibit to the Registrant's Registration Statement on Form 10-Q dated September 30, 2000 and incorporated herein by reference. (15) Filed as an exhibit to the Registrant's Report on Form 8-K dated February 15, 2001 and incorporated herein by reference. 43 EX-10.19 2 b38133ciex10-19.txt PROMISSORY NOTE AND PLEDGE AGREEMENT 1 EXHIBIT 10.19 PROMISSORY NOTE AND PLEDGE AGREEMENT $1,000,000 October 18, 2000 FOR VALUED RECEIVED, Allan I. Brown (the "Maker") promises to pay Simon Marketing, Inc., a Delaware corporation (the "Company"), the sum of ONE MILLION and 00/00 Dollars ($1,000,000). SECTION 1. PRINCIPAL AND INTEREST. The unpaid principal balance of this Promissory Note and Pledge Agreement (the "Note") shall be paid in full, together with all accrued but unpaid interest, as provided in Section 11.2 of the Employment Agreement between the Maker and the Company, dated September 1, 1999 (the "EMPLOYMENT AGREEMENT"). This Note shall bear interest (computed on the basis of the actual number of days elapsed over a 365-day year) on the unpaid principal amount hereof at a rate per annum equal to six and three tenths percent (6.3%), compounded annually. Interest shall be based upon the Federal short-term interest rate, and restated on July 1 of each year. All accrued interest shall be payable at maturity of this promissory note. All payments hereunder shall be made in immediately available funds. SECTION 2. PREPAYMENT. The Maker may at any time prepay all or a portion of the unpaid principal amount of this Note without penalty or premium, together with all accrued but unpaid interest on the amount so prepaid to the date of prepayment. SECTION 3. EVENT OF DEFAULT. For the purposes of this Note an "Event of Default": the Maker shall default in the payment of principal of or interest on this Note after the same becomes due and payable; SECTION 4. RIGHTS UPON DEFAULT. Upon the occurrence of an Event of Default, (a) the principal of and accrued interest in respect of this Note shall become due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by the Maker and (b) the Company shall have all of the rights and remedies provided by law, including, without limitation, those provided by the Uniform Commercial Code. In case of an Event of Default and the acceleration of the Maker's obligations hereunder, the Maker will pay to the holder hereof such further amount as shall be sufficient to cover the cost and expense of collection, including, without limitation, reasonable attorney's fees, expenses and disbursements. No delay or omission on the part of the holder hereof in exercising any right shall operate as a waiver or otherwise prejudge the rights of the holder of this Note. No waiver of any single breach or default shall be deemed a waiver or breach of any other right referred to herein or now or hereafter available at law, in equity by, statute or otherwise; all remedies shall by cumulative and not alternative. In case there shall exist an Event of Default, but subject to the provisions of the Uniform Commercial Code or other applicable law, the Company may cause all or any of the Pledged Securities (as hereinafter defined) to be transferred into its name or into the name of its nominee or nominees. 1 Initials: /s/ AB ------- 2 Upon the occurrence of an Event of Default, the Company shall have the right at any time or times thereafter to sell, resell, assign and deliver all or any of the Pledged Securities in one or more parcels at any exchange or broker's board or at public or private sale. Unless the Pledged Securities threaten to decline speedily in value or are of a type customarily sold on a recognized market, the Company will give the Maker at least ten (10) days prior written notice of the time and place of any public sale thereof or of the time after which any private sale or any other intended disposition thereof is to be made. Any such notice shall be deemed to meet any requirements hereunder or under any applicable law (including the Uniform Commercial Code) that reasonable notification by given of the time and place of such sale or other disposition. Such notice may be given without any demand of performance or other demand, all such demands being hereby expressly waived by the Maker. All such sakes shall be at such commercially reasonable price or prices, as the Company shall deem best and either for cash or on credit or for future delivery (without assuming any responsibility for credit risk). At any such sale or sales the Company may purchase any or all of the Pledged Securities to be sold thereat upon such terms as the Company may deem best. Upon any such sale or sales the Pledged Securities so purchased shall be held by the purchaser absolutely free from any claims or rights of whatsoever kind or nature, including any equity or redemption and any similar rights, all such equity of redemption and any similar rights being hereby expressly waived and released by the Maker, other than restrictions under applicable securities law. In the event of consent, approval or authorization of any governmental agency will necessary to effectuate any such sale or sales, the Maker shall execute all such applications or other instruments as may be required. The proceeds of any such sale or sales, together with any other additional collateral security at the time received and held hereunder, shall be received and applied: first, to the payment all costs and expenses of such sale, including reasonable attorneys' fees; second, to the payment of the amount owed hereunder to which the Company does not have recourse against the Maker; third, to the payment of the amount owed hereunder to which the Company does have recourse against the Maker, and any surplus thereafter remaining shall be paid to the Maker or to whomever may be legally entitled thereto (including, if applicable, any subordinated creditor of the Maker). The Maker recognizes that the Company may be unable to effect a public sale of all or a part of the Pledged Securities by reason of certain prohibitions contained in the Securities Act of 1933, as amended (the "SECURITIES ACT") but may be compelled to resort to one or more private sales to a restricted group of purchasers, each of whom will be obligated to agree, among other things, to acquire such Pledged Securities for its own account, for investment and not with a view to the distribution or resale thereof. The Maker acknowledges that private sales so made may be at prices and upon other terms less favorable to the seller than if such Pledged Securities were sold at public sales, and that the Company has no obligation to delay sale of any such Pledged Securities for the period of time necessary to permit such Pledged Securities to be registered for public sale under the Securities Act. The Maker agrees that any such private sales shall not be deemed to have been made in a commercially unreasonable manner solely because they shall have been made under the foregoing circumstances. SECTION 5. PLEDGE OF PLEDGED SECURITIES: FULL RECOURSE. For the purposes of securing payment of this Note, the Maker pledges, but shall not deliver, to the Company the property described below (the "Pledged Securities") and grants to the Company a security interest therein: 2 Initials: /s/ AB ------- 3 666,667 shares of the Company's Common Stock, $.01 par value per share. In addition to the Pledged Securities, the Company shall have full recourse to the Maker for all amounts due hereunder. SECTION 6. REPRESENTATION AND WARRANTIES OF THE MAKER. The Maker hereby represents, warrants and covenants to the Company that: (a) The Maker has good title to the Pledged Securities, free and clear of all claims, mortgages, pledges, liens, security interests and other encumbrances of every nature whatsoever other than those under applicable securities law or set forth herein. (b) The Maker will not sell, convey or otherwise dispose of any of the Pledged Securities, nor will the Maker create, incur or permit to exist any pledge, mortgage, lien, charge, encumbrance or any security interest whatsoever with respect to any of the Pledged Securities or the proceeds thereof, other than liens on and security interests in the Pledged Securities created hereby and restrictions under applicable securities laws. SECTION 7. NOTICES. All communications under this Note shall be in writing and shall be hand delivered or sent prepaid by first class mail or recognized overnight delivery service to the respective addresses set forth below (or such other addresses as may be furnished in writing by the Maker and the Company): (a) To the Company: Cyrk, Inc. 101 Edgewater Drive Wakefield, MA 01880 Attention: Patricia J. Landgren, Esq. Choate, Hall & Stewart Exchange Place 53 State Street Boston, MA 02109 Attention: Cameron "Bunk" Read, Esq. (b) To the Maker: Allan I. Brown c/o Simon Marketing, Inc. 1900 Avenue of the Stars, Suite 550 Los Angeles, CA 90067 3 Initials: /s/ AB ------- 4 Irell & Manella LLP 1800 Avenue of the Stars Suite 900 Los Angeles, CA 90067-4276 Attn: Martin Gelfand SECTION 8. WAIVER AND AMENDMENTS. The provisions of this Note may be waived or amended only within the written approval of the Company and the Maker and shall only be effective to the extent specifically set forth in said writing. SECTION 9. GOVERNING LAW. This Note shall be governed by the internal laws of the Commonwealth of Massachusetts, without giving effect to conflicts of law principals, and is executed as a sealed instrument. IN WITNESS WHEREOF, the undersigned has executed this Promissory Note and Pledge Agreement this 29 day of June, 2000. /s/ Allan I. Brown ------------------ 4 Initials: /s/ AB ------- EX-10.21 3 b38133ciex10-21.txt AMENDED & RESTATED LOAN AND SECURITY AGREEMENT 1 Exhibit 10.21 AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT BY AND AMONG CYRK, INC. AND EACH OF ITS SUBSIDIARIES THAT ARE SIGNATORIES HERETO AS BORROWERS, AND FOOTHILL CAPITAL CORPORATION AS LENDER DATED AS OF FEBRUARY 15, 2001 ================================================================================ 2 AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT THIS AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (this "Agreement"), is entered into as of February 15, 2001, between and among FOOTHILL CAPITAL CORPORATION, a California corporation ("Lender"), CYRK, INC. a Delaware corporation ("PARENT"), and each of Parent's Subsidiaries identified on the signature pages hereof (such Subsidiaries, together with Parent, are referred to hereinafter each individually as a "BORROWER" and, collectively, jointly and severally, as the "BORROWERS"). RECITALS A. Lender, Borrowers, Tonkin, Inc., a Delaware corporation ("Tonkin"), and Cyrk Acquisition Corp., a Delaware corporation ("Marketing Incentives"), are parties to a Loan and Security Agreement dated as of December 28, 2000 (the "December 2000 Loan Agreement"). B. Parent has entered into a Purchase Agreement dated as of January 20, 2001 (the "Purchase Agreement") with Cyrk Holdings, Inc. (formerly Rockridge Partners, Inc.), a Massachusetts corporation (the "Buyer"). Pursuant to the Purchase Agreement, Buyer has agreed to purchase, and Parent has agreed to sell, certain of its assets, including the Stock of Tonkin and Marketing Incentives owned by it. C. In connection with the Purchase Agreement, Parent, Cyrk.com, Inc., Tonkin and Marketing Incentives have requested Lender to (i) release its liens on the assets to be sold by Parent to Buyer, and (ii) restructure the credit facility evidenced by the December 2000 Loan Agreement such that, among other things, only Parent and Cyrk.com, Inc. remain as borrowers thereunder. D. Lender has agreed to such restructuring on the terms and conditions set forth below. The parties agree as follows: 1. DEFINITIONS AND CONSTRUCTION. 1.1 DEFINITIONS. As used in this Agreement, the following terms shall have the following definitions: "ACCEPTABLE PURCHASE ORDER" means a purchase order issued to a Borrower by Philip Morris or Ty, or any other Person whose credit standing is acceptable to Lender in its Permitted Discretion, for the sale of goods by a Borrower in the ordinary course of its business to Philip Morris, Ty or such other Person, as the case may be, which: 3 (i) purchase order, (a) has been accepted by such Borrower, (b) provides that the subject goods will be shipped to, or taken delivery of by, Philip Morris, Ty or such other Person directly from such Borrower (or its agent) at a location in the continental United States after such goods have cleared customs in the continental United States, (c) otherwise is in a form approved by Lender, including terms satisfactory to Lender in its Permitted Discretion, and (e) is valid, binding and enforceable against Philip Morris, Ty or such other Person; and (ii) which goods, (x) must be purchased by such Borrower prior to such sale to Philip Morris, TY or such other Person, which purchase by such Borrower will involve the issuance of a Letter of Credit, and (y) upon title passing to such Borrower, shall constitute Eligible In-Transit Inventory. "ACCEPTABLE PURCHASE ORDER LETTER OF CREDIT" means a Qualified Import Letter of Credit issued in connection with an Acceptable Purchase Order. "ACCOUNT DEBTOR" means any Person who is or who may become obligated under, with respect to, or on account of, an Account, chattel paper, or a General Intangible. "ACCOUNTS" means all of Borrowers' now owned or hereafter acquired right, title, and interest with respect to "accounts" (as that term is defined in the Code), and any and all supporting obligations in respect thereof. "ACKNOWLEDGMENT AND ASSET SEGREGATION LETTER" means a letter executed and delivered by Borrowers, Buyer, Tonkin and Marketing Incentives, the form and substance of which is satisfactory to Lender. "ACTIVE DOMESTIC SUBSIDIARY" means a Domestic Subsidiary of a Borrower which is not an Inactive Subsidiary. "ADDITIONAL DOCUMENTS" has the meaning set forth in SECTION 4.4. "ADJUSTED LETTER OF CREDIT USAGE" means, as of the date of determination, the sum of (a) 100% of the undrawn amount of outstanding Letters of Credit (other than Acceptable Purchase Order Letters of Credit, Letters of Credit supported by the Back to Back Standby Letter of Credit and Letters of Credit - 2 - 4 (other than Acceptable Purchase Order Letters of Credit) which are cash collateralized in accordance with SECTION 2.12(I) or SECTION 3.1(P)), plus (b) without duplication, 100% of the amount of outstanding time drafts accepted by an Underlying Issuer as a result of drawings under Underlying Letters of Credit. "ADMINISTRATIVE BORROWER" has the meaning set forth in SECTION 16.10. "ADVANCES" has the meaning set forth in SECTION 2.1. "Advances" under the December 2000 Loan Agreement which are outstanding as of the date hereof shall be deemed to be Advances hereunder. "AFFILIATE" means, as applied to any Person, any other Person who, directly or indirectly, controls, is controlled by, or is under common control with, such Person. For purposes of this definition, "control" means the possession, directly or indirectly, of the power to direct the management and policies of a Person, whether through the ownership of Stock, by contract, or otherwise; PROVIDED, HOWEVER, that, in any event: (a) any Person which owns directly or indirectly 10% or more of the securities having ordinary voting power for the election of directors or other members of the governing body of a Person or 10% or more of the partnership or other ownership interests of a Person (other than as a limited partner of such Person) shall be deemed to control such Person; (b) each director (or comparable manager) of a Person shall be deemed to be an Affiliate of such Person; and (c) each partnership or joint venture in which a Person is a partner or joint venturer shall be deemed to be an Affiliate of such Person. "AGREEMENT" has the meaning set forth in the preamble hereto. "ASSIGNEE" has the meaning set forth in SECTION 14.1(A). "AUTHORIZED PERSON" means any officer or other employee of Administrative Borrower. "AVAILABILITY" means, as of any date of determination, if such date is a Business Day, and determined at the close of business on the immediately preceding Business Day, if such date of determination is not a Business Day, the amount that Borrowers are entitled to borrow as Advances under SECTION 2.1 (after giving effect to all then outstanding Obligations and all sublimits and reserves applicable hereunder). "BACK TO BACK STANDBY LETTER OF CREDIT" means an irrevocable standby letter of credit in the amount of $668,396.71 issued to Lender, which standby letter of credit is (a) issued by a bank or other financial institution reasonably satisfactory to Lender, (b) in form satisfactory to Lender, and (c) payable to Lender in the event any draw is made on any Existing Other Underlying Letter of Credit. - 3 - 5 "BANKRUPTCY CODE" means the United States Bankruptcy Code, as in effect from time to time. "BASE LIBOR RATE" means the rate per annum, determined by Lender in accordance with its customary procedures, and utilizing such electronic or other quotation sources as it considers appropriate (rounded upwards, if necessary, to the next 1/16%), on the basis of the rates at which Dollar deposits are offered to major banks in the London interbank market on or about 11:00 a.m. (California time) 2 Business Days prior to the commencement of the applicable Interest Period, for a term and in amounts comparable to the Interest Period and amount of the LIBOR Rate Loan requested by Administrative Borrower in accordance with this Agreement, which determination shall be conclusive in the absence of manifest error. "BASE RATE" means, the rate of interest publicly announced by Wells Fargo at its principal office in San Francisco as its "prime rate", with the understanding that the "prime rate" is one of Wells Fargo's base rates (not necessarily the lowest of such rates) and serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto and is evidenced by the recording thereof after its announcement in such internal publication or publications as Wells Fargo may designate. "BASE RATE LOAN" means each portion of an Advance that bears interest at a rate determined by reference to the Base Rate. "BASE RATE MARGIN" means one-half of one percentage point. "BENEFIT PLAN" means a "defined benefit plan" (as defined in SECTION 3(35) of ERISA) for which any Borrower or any Subsidiary or ERISA Affiliate of any Borrower has been an "employer" (as defined in SECTION 3(5) of ERISA) within the past six years. "BOARD OF DIRECTORS" means the board of directors (or comparable managers) of Parent or any committee thereof duly authorized to act on behalf thereof. "BOOKS" means all of each Borrower's now owned or hereafter acquired books and records (including all of its Records indicating, summarizing, or evidencing its assets (including the Collateral) or liabilities, all of its Records relating to its business operations or financial condition, and all of its goods or General Intangibles related to such information). "BORROWER" and "BORROWERS" have the respective meanings set forth in the preamble to this Agreement. "BORROWING" means a borrowing hereunder of an Advance. - 4 - 6 "BORROWING BASE" has the meaning set forth in SECTION 2.1. "BORROWING BASE CERTIFICATE" means a certificate in the form of EXHIBIT B-1. "BUSINESS DAY" means any day that is not a Saturday, Sunday, or other day on which national banks are authorized or required to close, except that, if a determination of a Business Day shall relate to a LIBOR Rate Loan, the term "Business Day" also shall exclude any day on which banks are closed for dealings in Dollar deposits in the London interbank market. "BUYER" has the meaning set forth in the Recitals hereof. "BUYER NOTE" means that certain Subordinated Promissory Note, dated the date hereof, in the original principal amount of $2,300,000, made by Buyer in favor of Parent. "CAPITAL LEASE" means a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP. "CAPITALIZED LEASE OBLIGATION" means any Indebtedness represented by obligations under a Capital Lease. "CASH COLLATERAL RESERVE" means any cash collateral held by Lender to secure the Obligations, including contingent reimbursement obligations of Borrowers relating to outstanding Letters of Credit. "CASH COLLATERAL AGREEMENT" means a cash collateral agreement relating to the Cash Collateral Reserve executed and delivered by Parent, the form and substance of which is satisfactory to Lender. "CASH EQUIVALENTS" means (a) marketable direct obligations issued or unconditionally guaranteed by the United States or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within 1 year from the date of acquisition thereof, (b) marketable direct obligations issued by any state of the United States or any political subdivision of any such state or any public instrumentality thereof maturing within 1 year from the date of acquisition thereof and, at the time of acquisition, having a rating in one of the two highest rating categories obtainable from either S&P or Moody's, (c) commercial paper maturing no more than 1 year from the date of acquisition thereof and, at the time of acquisition, having a rating of A-1 or P-1, or better, from S&P or Moody's, and (d) certificates of deposit or bankers' acceptances maturing within 1 year from the date of acquisition thereof either (i) issued by any bank organized under the laws of the United States or any state thereof which bank has a rating of A or A2, or better, from S&P or Moody's, or (ii) certificates of deposit less than or - 5 - 7 equal to $100,000 in the aggregate issued by any other bank insured by the Federal Deposit Insurance Corporation. "CASH MANAGEMENT BANK" has the meaning set forth in Section 2.7(a). "CASH MANAGEMENT ACCOUNT" has the meaning set forth in Section 2.7(a). "CASH MANAGEMENT AGREEMENTS" means those certain cash management service agreements, in form and substance satisfactory to Lender, each of which is among Administrative Borrower, Lender, and one of the Cash Management Banks. "CHANGE OF CONTROL" means (a) any "person" or "group" (within the meaning of Sections 13(d) and 14(d) of the Exchange Act) other than Overseas Toys, becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 20%, or more, of the Stock of Parent having the right to vote for the election of members of the Board of Directors, or (b) a majority of the members of the Board of Directors do not constitute Continuing Directors, or (c) any Borrower ceases to directly own and control 100% of the outstanding capital Stock of each of its Subsidiaries extant as of the Closing Date, except to the extent such cessation of ownership and control results from a transaction permitted by SECTION 7.3(B). "CLOSING DATE" means the date of the making of the initial Advance (or other extension of credit) hereunder or the date on which Lender sends Borrowers a written notice that each of the conditions precedent set forth in SECTION 3.1 either have been satisfied or have been waived. "CODE" means the Uniform Commercial Code, as adopted and as in effect from time to time in the Commonwealth of Massachusetts. "COLLATERAL" means all of each Borrower's now owned or hereafter acquired right, title, and interest in and to each of the following: (a) Accounts, (b) Books, (c) Equipment, (d) General Intangibles, (e) Inventory, (f) Investment Property, (g) Negotiable Collateral, - 6 - 8 (h) Real Property Collateral, (i) money or other assets of each such Borrower that now or hereafter come into the possession, custody, or control of Lender, and (j) the proceeds and products, whether tangible or intangible, of any of the foregoing, including proceeds of insurance covering any or all of the foregoing, and any and all Accounts, Books, Equipment, General Intangibles, Inventory, Investment Property, Negotiable Collateral, Real Property, money, deposit accounts, or other tangible or intangible property resulting from the sale, exchange, collection, or other disposition of any of the foregoing, or any portion thereof or interest therein, and the proceeds thereof. "COLLATERAL ACCESS AGREEMENT" means a landlord waiver, bailee letter, or acknowledgement agreement of any lessor, warehouseman, processor, consignee, or other Person in possession of, having a Lien upon, or having rights or interests in the Equipment or Inventory, in each case, in form and substance reasonably satisfactory to Lender. "COLLATERAL ASSIGNMENT" means a collateral assignment of undertakings under the Purchase Documents executed and delivered by Parent and Lender, the form and substance of which is satisfactory to Lender. "COLLECTIONS" means all cash, checks, notes, instruments, and other items of payment (including insurance proceeds, proceeds of cash sales, rental proceeds, and tax refunds) of Borrowers. "COMPLIANCE CERTIFICATE" means a certificate substantially in the form of EXHIBIT C-1 delivered by the chief financial officer of Parent to Lender. "CONTINUING DIRECTOR" means (a) any member of the Board of Directors who was a director (or comparable manager) of Parent on the Closing Date, and (b) any individual who becomes a member of the Board of Directors after the Closing Date if such individual was nominated and recommended for election to the Board of Directors pursuant to Section 4.5(e) of the Overseas Toys Securities Purchase Agreement, or was appointed or nominated for election to the Board of Directors by a majority of the Continuing Directors, but excluding any such individual originally proposed for election in opposition to the Board of Directors in office at the Closing Date in an actual or threatened election contest relating to the election of the directors of Parent (as such terms are used in Rule 14a-11 under the Exchange Act) and whose initial assumption of office resulted from such contest or the settlement thereof. "CONTROL AGREEMENT" means a control agreement, in form and substance satisfactory to Lender. - 7 - 9 "COPYRIGHT SECURITY AGREEMENT" means an amended and restated copyright security agreement in form and substance satisfactory to Lender executed and delivered by each Borrower, which amends and restates that certain Copyright Security Agreement, dated as of December 28, 2000, executed and delivered by the Borrowers, Tonkin, Marketing Incentives and Lender in connection with the December 2000 Loan Agreement. "DAILY BALANCE" means, with respect to each day during the term of this Agreement, the amount of an Obligation owed at the end of such day. "DDA" means any checking or other demand deposit account maintained by any Borrower. "DEFAULT" means an event, condition, or default that, with the giving of notice, the passage of time, or both, would be an Event of Default. "DECEMBER 2000 FEE AGREEMENT" means that certain Fee Agreement, dated as of December 28, 2000, executed and delivered by Borrowers, Tonkin, Marketing Incentives and Lender in connection with the December 2000 Loan Agreement. "DECEMBER 2000 LOAN AGREEMENT" has the meaning set forth in the Recitals hereof. "DESIGNATED ACCOUNT" means account number 268-94227 of Administrative Borrower maintained with the Designated Account Bank, or such other deposit account of Administrative Borrower (located within the United States) that has been designated as such, in writing, by Administrative Borrower to Lender. "DESIGNATED ACCOUNT BANK" means Fleet National Bank, whose office is located at 100 Federal Street, Boston, MA 02110 and whose ABA number is 011-000-138. "DILUTION" means, as of any date of determination, a percentage, based upon the experience of the immediately prior 90 days (or such time period as determined by Lender in the exercise of its Permitted Discretion), that is the result of dividing the Dollar amount of (a) bad debt write-downs, discounts, advertising allowances, credits, or other dilutive items with respect to the Accounts during such period, by (b) Borrowers' Collections with respect to Accounts during such period (excluding extraordinary items) plus the Dollar amount of clause (a). "DILUTION RESERVE" means, as of any date of determination, an amount sufficient to reduce the advance rate against Eligible Accounts by one percentage point for each percentage point by which Dilution is in excess of 5%. - 8 - 10 "DISBURSEMENT LETTER" means an instructional letter executed and delivered by Administrative Borrower to Lender regarding the extensions of credit to be made on the Closing Date, the form and substance of which is satisfactory to Lender. "DOLLARS" or "$" means United States dollars. "DOMESTIC SUBSIDIARY" means a Subsidiary of a Borrower (other than another Borrower) which is incorporated or organized under the laws of any state of the United States. "DUE DILIGENCE LETTER" means the due diligence letter sent by Lender's counsel to Administrative Borrower in connection with the December 2000 Loan Agreement, together with Administrative Borrower's completed responses to the inquiries set forth therein, the form and substance of such responses to be satisfactory to Lender. "ELIGIBLE ACCOUNTS" means those Accounts created by one of Borrowers in the ordinary course of its business, that arise out of its sale of goods or rendition of services, that comply with each of the representations and warranties respecting Eligible Accounts made by Borrowers under the Loan Documents, and that are not excluded as ineligible by virtue of one or more of the criteria set forth below; PROVIDED, HOWEVER, that such criteria may be fixed and revised from time to time by Lender in Lender's Permitted Discretion to address the results of any audit performed by Lender from time to time after the Closing Date. In determining the amount to be included, Eligible Accounts shall be calculated net of customer deposits, unapplied cash remitted to Borrowers, and reserves for unissued credit memoranda. Eligible Accounts shall not include the following: (a) Accounts that the Account Debtor has failed to pay within 90 days of original invoice date or Accounts with selling terms of more than 30 days, (b) Accounts owed by an Account Debtor (or its Affiliates) where 50% or more of all Accounts owed by that Account Debtor (or its Affiliates) are deemed ineligible under clause (a) above, (c) Accounts with respect to which the Account Debtor is an employee, Affiliate, or agent of any Borrower, (d) Accounts arising in a transaction wherein goods are placed on consignment or are sold pursuant to a guaranteed sale, a sale or return, a sale on approval, a bill and hold, or any other terms by reason of which the payment by the Account Debtor may be conditional, (e) Accounts that are not payable in Dollars, - 9 - 11 (f) Accounts with respect to which the Account Debtor either (i) does not maintain its chief executive office in the United States or Canada, (ii) is not organized under the laws of the United States, any state thereof, Canada or any province thereof or (iii) is the government of any foreign country or sovereign state, or of any state, province, municipality, or other political subdivision thereof, or of any department, agency, public corporation, or other instrumentality thereof, unless (y) the Account is supported by an irrevocable letter of credit satisfactory to Lender (as to form, substance, and issuer or domestic confirming bank) that has been delivered to Lender and is directly drawable by Lender, or (z) the Account is covered by credit insurance in form, substance, and amount, and by an insurer, reasonably satisfactory to Lender, (g) Accounts with respect to which the Account Debtor is either (i) the United States or any department, agency, or instrumentality of the United States (exclusive, however, of Accounts with respect to which the applicable Borrower has complied, to the reasonable satisfaction of Lender, with the Assignment of Claims Act, 31 USC ss. 3727), or (ii) any state of the United States (exclusive, however, of (y) Accounts owed by any state that does not have a statutory counterpart to the Assignment of Claims Act or (z) Accounts owed by any state that does have a statutory counterpart to the Assignment of Claims Act as to which the applicable Borrower has complied to Lender's reasonable satisfaction), (h) Accounts with respect to which the Account Debtor is a creditor of any Borrower, has or has asserted a right of setoff, has disputed its liability, or has made any claim with respect to its obligation to pay the Account, to the extent of such claim, right of setoff, or dispute, (i) Accounts with respect to an Account Debtor (other than Philip Morris) whose total obligations owing to Borrowers exceed 10% of all Eligible Accounts, to the extent of the obligations owing by such Account Debtor in excess of such percentage, (j) Accounts with respect to which the Account Debtor is subject to an Insolvency Proceeding, is not Solvent, has gone out of business, or as to which (i) a Borrower has received notice of an imminent Insolvency Proceeding or (ii) a material impairment of the financial condition of such Account Debtor, in Lender's Permitted Discretion, has occurred, (k) Accounts with respect to which the Account Debtor is located in the states of New Jersey, Minnesota, or West Virginia (or any other state that requires a creditor to file a business activity report or similar document in order to bring suit or otherwise enforce its remedies against such Account Debtor in the courts or through any judicial process of such state), unless the applicable Borrower has qualified to do business in New Jersey, Minnesota, West Virginia, or such other states, or has filed a business activities - 10 - 12 report with the applicable division of taxation, the department of revenue, or with such other state offices, as appropriate, for the then-current year, or is exempt from such filing requirement, (l) Accounts, the collection of which, Lender, in its Permitted Discretion, believes to be doubtful by reason of the Account Debtor's financial condition, (m) Accounts that are not subject to a valid and perfected first priority Lender's Lien, (n) Accounts with respect to which (i) the goods giving rise to such Account have not been shipped and billed to the Account Debtor, (ii) the services giving rise to such Account have not been performed and billed to the Account Debtor, or (iii) invoices for services rendered which do not include appropriate supporting documentation, (o) Accounts that represent the right to receive progress payments or other advance billings that are due prior to the completion of performance by the applicable Borrower of the subject contract for goods or services (p) Accounts in respect of which an Account Debtor has made a prepayment, to the extent of such prepayment, or (q) Accounts with respect to Ty (as Account Debtor) until Lender shall have received a copy of a signed agreement between Ty and Parent relating to the discontinued 1998-1999 "Beanie Baby" program pursuant to which Parent and Ty acknowledge and agree on the obligations owing by Parent to Ty, which agreement shall be in form and substance reasonably satisfactory to Lender; thereafter, to the extent of the obligations owing by Parent to Ty. "ELIGIBLE IN-TRANSIT INVENTORY" means those items of Inventory that otherwise qualify as Eligible Landed Inventory, but as to which: (a) the Inventory was acquired by a Borrower (which title may be held through or by an agent of such Borrower) to fill an Acceptable Purchase Order and was the subject of a Qualified Import Letter of Credit, (b) such Inventory currently is in transit (whether by vessel, air, or land) from a location outside of the continental United States to an Imported Inventory Customer at a location within the continental United States, (c) title to such Inventory has passed to, and is exclusively held by a Borrower, and such Inventory is not subject to any Lien (other than a Permitted Lien in favor of a carrier), - 11 - 13 (d) such Inventory is insured against types of loss, damage, hazards, and risks, and in amounts, satisfactory to Lender in its Permitted Discretion, pursuant to a policy of insurance issued by underwriters reasonably satisfactory to Lender, under which policy Lender is named as an additional insured, (e) such Inventory is the subject of a negotiable bill of lading, which in the case of shipments from any port or terminal outside the continental United States to any port or terminal in the continental United States, must be a through intermodal bill of lading providing for transportation of such Inventory to a terminal in Illinois, Iowa, Ohio, or another state in the continental United States approved by Lender (such approval not to be unreasonably withheld or delayed) and in respect of which Lender will have a first priority perfected security interest in any Inventory of such Borrower located therein, all originals of which (i) were issued by a common carrier respecting the subject Inventory, and (ii) are in the possession of Lender in the United States, (f) the sale thereof to the subject Imported Inventory Customer shall give rise to an Eligible Account, (g) the Underlying Letter of Credit has been drawn upon partially or in full (as applicable) and the Underlying Issuer has honored such drawing and Lender has honored its obligations to the Underlying Issuer under the applicable Qualified Import Letter of Credit or, if the Underlying Letter of Credit provided for the presentation of a time draft to the Underling Issuer, such time draft has been presented and accepted by the Underlying Issuer, and (h) the subject customs broker or brokers of Borrowers in the United States has or have delivered to Lender a Collateral Access Agreement. "ELIGIBLE INVENTORY" means Eligible In-Transit Inventory. "ELIGIBLE LANDED INVENTORY" means Inventory of Borrowers, consisting of first quality finished goods, that complies with each of the representations and warranties respecting Eligible Inventory made by Borrowers in the Loan Documents, and that is not excluded as ineligible by virtue of the one or more of the criteria set forth below; PROVIDED, HOWEVER, that such criteria may be fixed and revised from time to time by Lender in Lender's Permitted Discretion to address the results of any audit or appraisal performed by Lender from time to time after the Closing Date. In determining the amount to be so included, unless otherwise provided, Inventory shall be valued at the lower of cost or market on a basis consistent with Borrowers' historical accounting practices net of reserves for inventory count variances. An item of Inventory shall not be included in Eligible Landed Inventory if: (a) a Borrower does not have good, valid, and marketable title thereto, - 12 - 14 (b) it is not subject to a valid and perfected first priority Lender's Lien, (c) it consists of goods returned or rejected by a Borrower's customers, (d) it consists of goods that are obsolete or slow moving, work-in-process, raw materials, or goods that constitute spare parts, packaging and shipping materials, supplies used or consumed in a Borrower's business, bill and hold goods, defective goods, "seconds," Inventory acquired on consignment, or customized goods that relate to programs that are to be discontinued or have been discontinued (including, without limitation, Inventory from the discontinued 1998-1999 "Beanie Baby" program), or (e) it is Inventory subject to an Acceptable Purchase Order from sPhilip Morris in respect of which Philip Morris has made a prepayment. "ELIGIBLE TRANSFEREE" means (a) a commercial bank organized under the laws of the United States, or any state thereof, and having total assets in excess of $1,000,000,000, (b) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development or a political subdivision of any such country and which has total assets in excess of $1,000,000,000, provided that such bank is acting through a branch or agency located in the United States, (c) a finance company, insurance company, or other financial institution or fund that is engaged in making, purchasing, or otherwise investing in commercial loans in the ordinary course of its business and having (together with its Affiliates) total assets in excess of $250,000,000 (provided that if Lender intends to assign all of the Obligations and other rights and obligations of Lender hereunder and under the Loan Documents, then any such finance company, insurance company, or other financial institution or fund only shall be an Eligible Transferee if it is engaged in the ordinary course of its business in the making of commercial loans and issuing of letters of credit in the manner required of Lender hereunder and it otherwise complies with this clause (c)), (d) any Affiliate (other than individuals) of Lender, (e) so long as no Event of Default has occurred and is continuing, any other Person approved by Lender and Administrative Borrower, and (f) during the continuation of an Event of Default, any other Person approved by Lender; PROVIDED, HOWEVER, in no event shall an Eligible Transferee be a direct competitor of Borrowers. It is acknowledged and agreed by Borrowers that Persons enumerated in clauses (a) through (c) are not direct competitions of Borrowers. "ENVIRONMENTAL ACTIONS" means any complaint, summons, citation, notice, directive, order, claim, litigation, investigation, judicial or administrative proceeding, judgment, letter, or other communication from any Governmental Authority, or any third party involving violations of Environmental Laws or - 13 - 15 releases of Hazardous Materials from (a) any assets, properties, or businesses of any Borrower or any predecessor in interest, (b) from adjoining properties or businesses, or (c) from or onto any facilities which received Hazardous Materials generated by a Borrower or any predecessor in interest. "ENVIRONMENTAL LAW" means any applicable federal, state, provincial, foreign or local statute, law, rule, regulation, ordinance, code, binding and enforceable guideline, binding and enforceable written policy or rule of common law now or hereafter in effect and in each case as amended, or any judicial or administrative interpretation thereof, including any judicial or administrative order, consent decree or judgment, to the extent binding on a Borrower, relating to the environment, employee health and safety, or Hazardous Materials, including CERCLA; RCRA; the Federal Water Pollution Control Act, 33 USC.ss.1251 ET SEQ; the Toxic Substances Control Act, 15 USC,ss. 2601 ET SEQ; the Clean Air Act, 42 USC.ss.7401 ET SEQ.; the Safe Drinking Water Act, 42 USC.ss.3803 ET SEQ.; the Oil Pollution Act of 1990, 33 USC.ss. 2701 ET SEQ.; the Emergency Planning and the Community Right-to-Know Act of 1986, 42 USC.ss. 11001 ET SEQ.; the Hazardous Material Transportation Act, 49 USC.ss. 1801 ET SEQ.; and the Occupational Safety and Health Act, 29 USC.ss.651 ET SEQ. (to the extent it regulates occupational exposure to Hazardous Materials); any state and local or foreign counterparts or equivalents, in each case as amended from time to time. "ENVIRONMENTAL LIABILITIES AND COSTS" means all liabilities, monetary obligations, Remedial Actions, losses, damages, punitive damages, consequential damages, treble damages, costs and expenses (including all reasonable fees, disbursements and expenses of counsel, experts, or consultants and costs of investigation and feasibility studies), fines, penalties, sanctions, and interest incurred as a result of any claim or demand by any Governmental Authority or any third party, and which relate to any Environmental Action. "ENVIRONMENTAL LIEN" means any Lien in favor of any Governmental Authority for Environmental Liabilities and Costs. "EQUIPMENT" means all of Borrowers' now owned or hereafter acquired right, title, and interest with respect to equipment, machinery, machine tools, motors, furniture, furnishings, fixtures, vehicles (including motor vehicles), tools, parts, goods (other than consumer goods, farm products, or Inventory), wherever located, including all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and any successor statute thereto. - 14 - 16 "ERISA AFFILIATE" means (a) any Person subject to ERISA whose employees are treated as employed by the same employer as the employees of a Borrower under IRC Section 414(b), (b) any trade or business subject to ERISA whose employees are treated as employed by the same employer as the employees of a Borrower under IRC Section 414(c), (c) solely for purposes of Section 302 of ERISA and Section 412 of the IRC, any organization subject to ERISA that is a member of an affiliated service group of which a Borrower is a member under IRC Section 414(m), or (d) solely for purposes of Section 302 of ERISA and Section 412 of the IRC, any Person subject to ERISA that is a party to an arrangement with a Borrower and whose employees are aggregated with the employees of a Borrower under IRC Section 414(o). "EVENT OF DEFAULT" has the meaning set forth in SECTION 8. "EXCESS AVAILABILITY" means the amount, as of the date any determination thereof is to be made, equal to Availability minus the aggregate amount, if any, of all trade payables of Borrowers aged in excess of their historical levels with respect thereto and all book overdrafts in excess of their historical practices with respect thereto, in each case as determined by Lender in its Permitted Discretion. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as in effect from time to time. "EXISTING UNDERLYING ACCEPTABLE PURCHASE ORDER LETTERS OF CREDIT" means those outstanding Underlying Letters of Credit described on SCHEDULE E-1. "EXISTING STANDBY UNDERLYING LETTERS OF CREDIT" means those outstanding standby Underlying Letters of Credit which are (a) not Existing Other Underlying Letters of Credit, and (b) described on SCHEDULE E-2. "EXISTING OTHER UNDERLYING LETTERS OF CREDIT" means those outstanding Underlying Letters of Credit described on SCHEDULE E-3. "FEE LETTER" means that certain fee letter, dated as of even date herewith, between Borrowers and Lender, in form and substance satisfactory to Lender. "FEIN" means Federal Employer Identification Number. "FOREIGN SUBSIDIARY" means a Subsidiary of a Borrower (other than another Borrower) which is not a Domestic Subsidiary. "FUNDING DATE" means the date on which a Borrowing occurs. "FUNDING LOSSES" has the meaning set forth in SECTION 2.13(b)(ii). - 15 - 17 "GAAP" means generally accepted accounting principles as in effect from time to time in the United States, consistently applied. "GENERAL INTANGIBLES" means all of Borrowers' now owned or hereafter acquired right, title, and interest with respect to general intangibles (including payment intangibles, contract rights, rights to payment, rights arising under common law, statutes, or regulations, choses or things in action, goodwill, patents, trade names, trademarks, servicemarks, copyrights, blueprints, drawings, purchase orders, customer lists, monies due or recoverable from pension funds, route lists, rights to payment and other rights under any royalty or licensing agreements, infringement claims, computer programs, information contained on computer disks or tapes, software, literature, reports, catalogs, money, deposit accounts, insurance premium rebates, tax refunds, and tax refund claims), and any and all supporting obligations in respect thereof, and all of Borrowers' now owned or hereafter acquired right, title, and interest with respect to any other personal property other than goods, Accounts, Investment Property, and Negotiable Collateral. "GOVERNING DOCUMENTS" means, with respect to any Person, the certificate or articles of incorporation, by-laws, or other organizational documents of such Person. "GOVERNMENTAL AUTHORITY" means any federal, state, local, or other governmental or administrative body, instrumentality, department, or agency or any court, tribunal, administrative hearing body, arbitration panel, commission, or other similar dispute-resolving panel or body. "HAZARDOUS MATERIALS" means (a) substances that are defined or listed in, or otherwise classified pursuant to, any applicable laws or regulations as "hazardous substances," "hazardous materials," "hazardous wastes," "toxic substances," or any other formulation intended to define, list, or classify substances by reason of deleterious properties such as ignitability, corrosivity, reactivity, carcinogenicity, reproductive toxicity, or "EP toxicity", (b) oil, petroleum, or petroleum derived substances, natural gas, natural gas liquids, synthetic gas, drilling fluids, produced waters, and other wastes associated with the exploration, development, or production of crude oil, natural gas, or geothermal resources, (c) any flammable substances or explosives or any radioactive materials, and (d) asbestos in any form or electrical equipment that contains any oil or dielectric fluid containing levels of polychlorinated biphenyls in excess of 50 parts per million. "IMPORTED INVENTORY CUSTOMER" means the non-Borrower party to an Acceptable Purchase Order. "INACTIVE SUBSIDIARY" means a Subsidiary of a Borrower which conducts no business and does not own assets with a book value greater than $10,000. - 16 - 18 "INDEBTEDNESS" means (a) all obligations of a Borrower for borrowed money, (b) all obligations of a Borrower evidenced by bonds, debentures, notes, or other similar instruments and all reimbursement or other obligations of a Borrower in respect of letters of credit, bankers acceptances, interest rate swaps, or other financial products, (c) all obligations of a Borrower under Capital Leases, (d) all obligations or liabilities of others secured by a Lien on any asset of a Borrower, irrespective of whether such obligation or liability is assumed, and (e) all obligations of a Borrower for the deferred purchase price of assets (other than trade debt incurred in the ordinary course of a Borrower's business and repayable in accordance with customary trade practices), and (f) any obligation of a Borrower guaranteeing or intended to guarantee (whether directly or indirectly guaranteed, endorsed, co-made, discounted, or sold with recourse to a Borrower) any obligation of any other Person. "INDEMNIFIED LIABILITIES" has the meaning set forth in SECTION 11.3. "INDEMNIFIED PERSON" has the meaning set forth in SECTION 11.3. "INSOLVENCY PROCEEDING" means any proceeding commenced by or against any Person under any provision of the Bankruptcy Code or under any other state or federal bankruptcy or insolvency law (including any receivership or like proceeding) assignments for the benefit of creditors, formal or informal moratoria, compositions, extensions generally with creditors, or proceedings seeking reorganization, arrangement, or other similar relief. "INTANGIBLE ASSETS" means, with respect to any Person, that portion of the book value of all of such Person's assets that would be treated as intangibles under GAAP. "INTERCOMPANY NOTE" has the meaning set forth in the definition of "Permitted Investments." "INTEREST PERIOD" means, with respect to each LIBOR Rate Loan, a period commencing on the date of the making of such LIBOR Rate Loan and ending 1, 2, 3 or 6 months thereafter; PROVIDED, HOWEVER, that (a) if any Interest Period would end on a day that is not a Business Day, such Interest Period shall be extended (subject to clauses (c)-(e) below) to the next succeeding Business Day, (b) interest shall accrue at the applicable rate based upon the LIBOR Rate from and including the first day of each Interest Period to, but excluding, the day on which any Interest Period expires, (c) any Interest Period that would end on a day that is not a Business Day shall be extended to the next succeeding Business Day unless such Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Business Day, (d) with respect to an Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period), the Interest - 17 - 19 Period shall end on the last Business Day of the calendar month that is 1, 2, 3 or 6 months after the date on which the Interest Period began, as applicable, and (e) Borrowers (or Administrative Borrower on behalf thereof) may not elect an Interest Period which will end after the Maturity Date. "INVENTORY" means all of Borrowers' now owned or hereafter acquired right, title, and interest with respect to inventory, including goods held for sale or lease or to be furnished under a contract of service, goods that are leased by a Borrower as lessor, goods that are furnished by a Borrower under a contract of service, and raw materials, work in process, or materials used or consumed in a Borrower's business. "INVENTORY CERTIFICATE" means a certificate to Lender from Administrative Borrower pursuant to which Administrative Borrower certifies that, to the best knowledge of Borrowers, all Eligible In-Transit Inventory meets all of Borrowers' representations and warranties contained in the Loan Documents concerning Eligible Inventory, that it knows of no reason why such Inventory would not be accepted by the subject Imported Inventory Customer or Customers) when it arrives in the state of Illinois, Iowa, Ohio, or such other state in the United States approved by Lender as set forth in the definition of "Eligible In-Transit Inventory," as applicable, and that the shipment documents conform to the related order documents. "INVESTMENT" means, with respect to any Person, any investment by such Person in any other Person (including Affiliates) in the form of loans, guarantees, advances, or capital contributions (excluding (a) commission, travel, and similar advances to officers and employees of such Person made in the ordinary course of business, and (b) bona fide Accounts arising from the sale of goods or rendition of services in the ordinary course of business consistent with past practice), purchases or other acquisitions for consideration of Indebtedness or Stock, and any other items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP. "INVESTMENT PROPERTY" means all of Borrowers' now owned or hereafter acquired right, title, and interest with respect to "investment property" as that term is defined in the Code, and any and all supporting obligations in respect thereof. "IRC" means the Internal Revenue Code of 1986, as in effect from time to time. "L/C" has the meaning set forth in SECTION 2.12(a). "L/C DISBURSEMENT" means a payment made by Lender pursuant to a Letter of Credit. - 18 - 20 "L/C UNDERTAKING" has the meaning set forth in SECTION 2.12(a). "LENDER" has the meaning set forth in the preamble to this Agreement. "LENDER'S ACCOUNT" means an account at a bank designated by Lender from time to time as the account into which Borrowers shall make all payments to Lender under this Agreement and the other Loan Documents; unless and until Lender notifies Administrative Borrower, Lender's Account shall be that certain deposit account bearing account number 323-266193 and maintained by Lender with The Chase Manhattan Bank, 4 New York Plaza, 15th Floor, New York, New York 10004, ABA #021000021. "LENDER'S LIENS" means the Liens granted by Borrowers to Lender under this Agreement, the December 2000 Loan Agreement or the other Loan Documents. "LENDER EXPENSES" means all (a) costs or expenses (including taxes, and insurance premiums) required to be paid by a Borrower under any of the Loan Documents that are paid or incurred by Lender in accordance with the terms hereof, (b) reasonable fees or charges paid or incurred by Lender in connection with Lender's transactions with Borrowers, including, fees or charges for photocopying, notarization, couriers and messengers, telecommunication, public record searches (including tax lien, litigation, and UCC searches and including searches with the patent and trademark office, the copyright office, or the department of motor vehicles), filing, recording, publication, appraisal (including periodic Collateral appraisals or business valuations to the extent of the fees and charges (and up to the amount of any limitation) contained in this Agreement, real estate surveys, real estate title policies and endorsements, and environmental audits, (c) costs and expenses incurred by Lender in the disbursement of funds to or for the account of Borrowers (by wire transfer or otherwise), (d) charges paid or incurred by Lender resulting from the dishonor of checks, (e) reasonable costs and expenses paid or incurred by Lender to correct any default or enforce any provision of the Loan Documents, or in gaining possession of, maintaining, handling, preserving, storing, shipping, selling, preparing for sale, or advertising to sell the Collateral, or any portion thereof, irrespective of whether a sale is consummated, (f) audit fees and expenses of Lender related to audit examinations of the Books to the extent of the fees and charges (and up to the amount of any limitation) contained in this Agreement, (g) reasonable costs and expenses of third party claims or any other suit paid or incurred by Lender in enforcing or defending the Loan Documents or in connection with the transactions contemplated by the Loan Documents or Lender's relationship with any Borrower or any guarantor of the Obligations, (h) Lender's reasonable fees and expenses (including reasonable attorneys fees) incurred in advising, structuring, drafting, reviewing, administering, or amending the Loan Documents, and (i) Lender's reasonable fees and expenses (including reasonable attorneys fees) incurred in terminating, enforcing - 19 - 21 (including attorneys fees and expenses incurred in connection with a "workout," a "restructuring," or an Insolvency Proceeding concerning any Borrower or in exercising rights or remedies under the Loan Documents), or defending the Loan Documents, irrespective of whether suit is brought, or in taking any Remedial Action concerning the Collateral. "LENDER-RELATED PERSON" means Lender, Lender's Affiliates, and the officers, directors, employees, and agents of Lender. "LETTER OF CREDIT" means an L/C or an L/C Undertaking, as the context requires. For avoidance of doubt, Letter of Credit includes an Acceptable Purchase Order Letter of Credit and a Qualified Import Letter of Credit. Any "L/C" and "L/C Undertaking" issued under the December 2000 Loan Agreement which is outstanding on the date hereof shall be deemed a Letter of Credit hereunder. "LETTER OF CREDIT STANDBY RESERVE" means the undrawn amount of the Back to Back Standby Letter of Credit. "LETTER OF CREDIT USAGE" means, as of any date of determination, the sum of (a) the aggregate undrawn amount of all outstanding Letters of Credit (other than Letters of Credit supported by the Back to Back Standby Letter of Credit), plus (b) without duplication, 100% of the amount of outstanding time drafts accepted by an Underlying Issuer as a result of drawings under Underlying Letters of Credit. "LIBOR DEADLINE" has the meaning set forth in SECTION 2.13(b)(i). "LIBOR NOTICE" means a written notice in the form of EXHIBIT L-1. "LIBOR OPTION" has the meaning set forth in SECTION 2.13(a). "LIBOR RATE" means, for each Interest Period for each LIBOR Rate Loan, the rate per annum determined by Lender (rounded upwards, if necessary, to the next 1/16%) by dividing (a) the Base LIBOR Rate for such Interest Period, by (b) 100% minus the Reserve Percentage. The LIBOR Rate shall be adjusted on and as of the effective day of any change in the Reserve Percentage. "LIBOR RATE LOAN" means each portion of an Advance that bears interest at a rate determined by reference to the LIBOR Rate. "LIBOR RATE MARGIN" means two and one-quarter percentage points. "LIEN" means any interest in an asset securing an obligation owed to, or a claim by, any Person other than the owner of the asset, whether such interest shall be based on the common law, statute, or contract, whether such interest shall be recorded or perfected, and whether such interest shall be contingent - 20 - 22 upon the occurrence of some future event or events or the existence of some future circumstance or circumstances, including the lien or security interest arising from a mortgage, deed of trust, encumbrance, pledge, hypothecation, assignment, deposit arrangement, security agreement, conditional sale or trust receipt, or from a lease, consignment, or bailment for security purposes and also including reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases, and other title exceptions and encumbrances affecting Real Property. "LOAN ACCOUNT" has the meaning set forth in SECTION 2.10. "LOAN DOCUMENTS" means this Agreement, the Cash Collateral Agreement, the Cash Management Agreements, the Collateral Assignment, the Control Agreements, the Copyright Security Agreement, the Disbursement Letter, the Due Diligence Letter, the Fee Letter, the Letters of Credit, the Officers' Certificate, the Patent Security Agreement, the Stock Pledge Agreement, the Trademark Security Agreement, any note or notes executed by a Borrower in connection with this Agreement and payable to Lender, and any other agreement entered into, now or in the future, by any Borrower and Lender in connection with this Agreement. "MARKETING INCENTIVES" has the meaning set forth in the Recitals hereof. "MATERIAL ADVERSE CHANGE" means (a) a material adverse change in the business, prospects, operations, results of operations, assets, liabilities or condition (financial or otherwise) of Borrowers and their Subsidiaries taken as a whole, (b) a material impairment of a Borrower's ability to perform its obligations under the Loan Documents to which it is a party or of Lender's ability to enforce the Obligations or realize upon the Collateral, or (c) a material impairment of the enforceability or priority of the Lender's Liens with respect to the Collateral as a result of an action or failure to act on the part of a Borrower. "MATURITY DATE" has the meaning set forth in SECTION 3.4. "MAXIMUM REVOLVER AMOUNT" means $6,000,000. "NEGOTIABLE COLLATERAL" means all of Borrowers' now owned and hereafter acquired right, title, and interest with respect to letters of credit, letter of credit rights, instruments, promissory notes, drafts, documents, and chattel paper (including electronic chattel paper and tangible chattel paper), and any and all supporting obligations in respect thereof. "OBLIGATIONS" means all (a) loans, Advances, debts, principal, interest (including any interest that, but for the provisions of the Bankruptcy Code, would have accrued), (b) contingent reimbursement obligations with respect to outstanding Letters of Credit, premiums, liabilities (including all amounts charged to Borrowers' Loan Account pursuant hereto), obligations, fees - 21 - 23 (including the fees provided for in the Fee Letter), charges, costs, and (c) Lender Expenses (including any fees or expenses that, but for the provisions of the Bankruptcy Code, would have accrued), lease payments, guaranties, covenants, and duties of any kind and description owing by Borrowers to Lender pursuant to or evidenced by the Loan Documents and irrespective of whether for the payment of money, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, and including all interest not paid when due and all Lender Expenses that Borrowers are required to pay or reimburse by the Loan Documents, by law, or otherwise. Any reference in this Agreement or in the Loan Documents to the Obligations shall include all amendments, changes, extensions, modifications, renewals replacements, substitutions, and supplements, thereto and thereof, as applicable, both prior and subsequent to any Insolvency Proceeding. For avoidance of doubt, Obligations includes all "Obligations" under the December 2000 Loan Agreement. "OFFICERS' CERTIFICATE" means the representations and warranties of officers form submitted by Lender to Administrative Borrower, together with completed responses to the inquiries set forth therein from Parent and Cyrk.com, delivered to Lender in connection with the closing of the December 2000 Loan Agreement. "OVERADVANCE" has the meaning set forth in SECTION 2.5. "OVERSEAS TOYS" means Overseas Toys, L.P., a Delaware limited partnership. "OVERSEAS TOYS SECURITIES PURCHASE AGREEMENT" means the Securities Purchase Agreement by and among Overseas Toys and Parent dated as of September 1, 1999. "PARENT" has the meaning set forth in the preamble to this Agreement. "PARTICIPANT" has the meaning set forth in SECTION 14.1(d). "PATENT SECURITY AGREEMENT" means an amended and restated patent security agreement in form and substance satisfactory to Lender executed and delivered by each Borrower, which amends and restates that certain Patent Security Agreement, dated as of December 28, 2000, executed and delivered by Borrowers, Tonkin, Marketing Incentives and Lender in connection with the December 2000 Loan Agreement. "PERMITTED DISCRETION" means a determination made in good faith and in the exercise of reasonable (from the perspective of a secured asset-based lender) business judgment. - 22 - 24 "PERMITTED DISPOSITIONS" means (a) sales or other dispositions by Borrowers of Equipment that is surplus to the applicable Borrower's business needs, or is substantially worn, damaged, or obsolete in the ordinary course of the applicable Borrower's business, (b) sales by Borrowers of Inventory to buyers in the ordinary course of business, (c) the use or transfer of money or Cash Equivalents by Borrowers in a manner that is not prohibited by the terms of this Agreement or the other Loan Documents, (d) sales or other dispositions of assets (other than Accounts) by a Borrower to another Borrower, and (e) the licensing by Borrowers, on a non-exclusive basis, of patents, trademarks, copyrights, and other intellectual property rights in the ordinary course of the applicable Borrower's business. For purposes of SECTION 6.6 only, (1) the terms "Inventory" and "Equipment" in the foregoing definition also shall refer to inventory and equipment of Cyrk (H.K.) Limited and Cyrk Europe Limited, (2) clause (c) above also shall refer to cash and Cash Equivalents of Cyrk (H.K.) Limited and Cyrk Europe Limited, and (3) the term "Borrowers" in clauses (a), (b) and (c) above also shall include Cyrk (H.K.) Limited and Cyrk Europe Limited. "PERMITTED INVESTMENTS" means (a) Investments in Cash Equivalents, (b) Investments in negotiable instruments for collection, (c) advances made in connection with purchases of goods or services in the ordinary course of business, (d) Investments of Parent in Cyrk (H.K.) Limited for working capital needs not to exceed an aggregate of $500,000 at any one time, (e) Investments of Parent in Cyrk Europe Limited for working capital needs not to exceed an aggregate of $500,000 at any one time, and (f) other Investments of Borrowers existing as of the Closing Date and set forth in SCHEDULE I-1; PROVIDED, HOWEVER, an Investment in the form of Indebtedness permitted by clause (d), (e) or (f) shall not become a Permitted Investment until a promissory note (an "INTERCOMPANY NOTE") in form and substance reasonably satisfactory to Lender has been executed in favor of the Person to whom such Indebtedness is owed and such note shall have been endorsed and delivered to Lender. "PERMITTED LIENS" means (a) Liens held by Lender, (b) Liens for unpaid taxes that either (i) are not yet delinquent, or (ii) do not constitute an Event of Default hereunder and are the subject of Permitted Protests, (c) Liens set forth on SCHEDULE P-1, (d) the interests of lessors under operating leases and Capital Leases (to the extent interests under the Capital Leases secure Permitted Purchase Money Indebtedness and so long as such Lien attaches only to the asset acquired and the proceeds thereof), (e) purchase money Liens to the extent that such Liens or interests secure Permitted Purchase Money Indebtedness and so long as each such Lien attaches only to the asset purchased or acquired and the proceeds thereof, (f) Liens arising by operation of law in favor of warehousemen, landlords, carriers, mechanics, materialmen, laborers, or suppliers, incurred in the ordinary course of Borrowers' business and not in connection with the borrowing of money, and which Liens either (i) are for sums not yet delinquent, or (ii) are the subject of Permitted Protests, - 23 - 25 (g) Liens arising from deposits made in connection with obtaining worker's compensation or other unemployment insurance, (h) Liens or deposits to secure performance of bids, tenders, or leases incurred in the ordinary course of Borrowers' business and not in connection with the borrowing of money, (i) Liens granted as security for surety or appeal bonds in connection with obtaining such bonds in the ordinary course of Borrowers' business, (j) Liens resulting from any judgment or award that is not an Event of Default hereunder, (k) Liens with respect to the Real Property Collateral that are exceptions to the commitments for title insurance issued in connection with any mortgage in favor of Lender, as accepted by Lender, and (l) with respect to any Real Property that is not part of the Real Property Collateral, easements, rights of way, and zoning restrictions that do not materially interfere with or impair the use or operation thereof by Borrowers. "PERMITTED PROTEST" means the right of the applicable Borrower to protest any Lien (other than any such Lien that secures the Obligations), taxes (other than payroll taxes or taxes that are the subject of a United States federal tax lien), or rental payment, provided that (a) a reserve with respect to such obligation is established on the Books in such amount as is required under GAAP, (b) any such protest is instituted promptly and prosecuted diligently by the applicable Borrower in good faith, and (c) Lender is reasonably satisfied that, while any such protest is pending, there will be no material impairment of the enforceability, validity, or priority of any of the Lender's Liens. "PERMITTED PURCHASE MONEY INDEBTEDNESS" means, as of any date of determination, Purchase Money Indebtedness incurred after the Closing Date in an aggregate amount outstanding at any one time not in excess of $800,000. "PERSON" means natural persons, corporations, limited liability companies, limited partnerships, general partnerships, limited liability partnerships, joint ventures, trusts, land trusts, business trusts, or other organizations, irrespective of whether they are legal entities, and governments and agencies and political subdivisions thereof. "PERSONAL PROPERTY COLLATERAL" means all Collateral other than Real Property. "PHILIP MORRIS" means Philip Morris Incorporated, a Virginia corporation. "PURCHASE AGREEMENT" has the meaning set forth in the Recitals hereof. "PURCHASE DOCUMENTS" means the Purchase Agreement and the other agreements, documents and instruments listed on SCHEDULE D-1, together with (a) any amendments, modifications or supplements to any of the foregoing, and (b) any agreements or documents executed by either of Borrowers or Buyer subsequent to the date hereof. - 24 - 26 "PURCHASE MONEY INDEBTEDNESS" means Indebtedness (other than the Obligations, but including Capitalized Lease Obligations), incurred at the time of, or within 20 days after, the acquisition of any fixed assets for the purpose of financing all or any part of the acquisition cost thereof. "QUALIFIED IMPORT LETTER OF CREDIT" means a Letter of Credit that (a) is issued to facilitate the purchase by a Borrower of Eligible Inventory, (b) is in form and substance acceptable to Lender, and (c) is issued to support an Underlying Letter of Credit that only is drawable by the beneficiary thereof by the presentation of customary documents, including an inspection certificate. "REAL PROPERTY" means any estates or interests in real property now owned or hereafter acquired by any Borrower and the improvements thereto. "REAL PROPERTY COLLATERAL" means any Real Property hereafter acquired by a Borrower. "RECORD" means information that is inscribed on a tangible medium or which is stored in an electronic or other medium and is retrievable in perceivable form. "REMEDIAL ACTION" means all actions taken to (a) clean up, remove, remediate, contain, treat, monitor, assess, evaluate, or in any way address Hazardous Materials in the indoor or outdoor environment, (b) prevent or minimize a release or threatened release of Hazardous Materials so they do not migrate or endanger or threaten to endanger public health or welfare or the indoor or outdoor environment, (c) perform any pre-remedial studies, investigations, or post-remedial operation and maintenance activities, or (d) conduct any other actions authorized by 42 USC ss. 9601. "REPORT" has the meaning set forth in SECTION 16.17. "REQUIRED AVAILABILITY" means Excess Availability and unrestricted cash and Cash Equivalents in an amount of not less than $5,000,000. "RESERVE PERCENTAGE" means, on any day, for Lender, the maximum percentage prescribed by the Board of Governors of the Federal Reserve System (or any successor Governmental Authority) for determining the reserve requirements (including any basic, supplemental, marginal, or emergency reserves) that are in effect on such date with respect to eurocurrency funding (currently referred to as "eurocurrency liabilities") of that Lender, but so long as Lender is not required or directed under applicable regulations to maintain such reserves, the Reserve Percentage shall be zero. "REVOLVER USAGE" means, as of any date of determination, the sum of (a) the then extant amount of outstanding Advances, plus (b) the then extant amount of the Letter of Credit Usage. - 25 - 27 "SALE ASSETS" means the assets of Parent which are being sold by Parent to Buyer pursuant to the Purchase Documents. "SALE TRANSACTION" means the sale of the Sale Assets by Parent to Buyer pursuant to the Purchase Documents. "SEC" means the United States Securities and Exchange Commission and any successor thereto. "SECURITIES ACCOUNT" means a "securities account" as that term is defined in the Code. "SMI" means Simon Marketing, Inc., a Delaware corporation. "SOLVENT" means, with respect to any Person on a particular date, that such Person is not insolvent (as such term is defined in the Uniform Fraudulent Transfer Act). "START UP INVESTMENTS" means the Investments reflected in item 2 of SCHEDULE I-1. "STOCK" means all shares, options, warrants, interests, participations, or other equivalents (regardless of how designated) of or in a Person, whether voting or nonvoting, including common stock, preferred stock, or any other "equity security" (as such term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated by the SEC under the Exchange Act). "STOCKHOLDER EQUITY (SMI)" means total stockholder equity of SMI, calculated in accordance with GAAP. "STOCK PLEDGE AGREEMENT" means an amended and restated pledge agreement in form and substance satisfactory to Lender executed and delivered by each Borrower, which amends and restates that certain Pledge Agreement, dated as of December 28, 2000, executed and delivered by Borrowers, Tonkin, Marketing Incentives and Lender in connection with the December 2000 Loan Agreement. "SUBSIDIARY" of a Person means a corporation, partnership, limited liability company, or other entity in which that Person directly or indirectly owns or controls the shares of Stock having ordinary voting power to elect a majority of the board of directors (or appoint other comparable managers) of such corporation, partnership, limited liability company, or other entity; PROVIDED, HOWEVER, for purposes hereof, neither SMI nor any of its Subsidiaries shall constitute a Subsidiary of Parent. "TAXES" has the meaning set forth in SECTION 16.5. - 26 - 28 "TONKIN" has the meaning set forth in the Recitals hereof. "TRADE BANK" means Wells Fargo HSBC Trade Bank, N.A. "TRADEMARK SECURITY AGREEMENT" means an amended and restated trademark security agreement in form and substance satisfactory to Lender executed and delivered by each Borrower, which amends and restates that certain Trademark Security Agreement, dated as of December 28, 2000, executed and delivered by Borrowers, Tonkin, Marketing Incentives and Lender in connection with the December 2000 Loan Agreement. "TY" means Ty Inc., a Delaware corporation. "UNDERLYING ISSUER" means a third Person which is the beneficiary of an L/C Undertaking and which has issued a letter of credit at the request of Lender for the benefit of Borrowers. "UNDERLYING LETTER OF CREDIT" means a letter of credit that has been issued by an Underlying Issuer. Any "Underlying Letter of Credit" issued in connection with the December 2000 Loan Agreement which is outstanding on the date hereof shall be deemed an Underlying Letter of Credit hereunder. "VOIDABLE TRANSFER" has the meaning set forth in SECTION 16.8. 1.2 ACCOUNTING TERMS. All accounting terms not specifically defined herein shall be construed in accordance with GAAP. When used herein, the term "financial statements" shall include the notes and schedules thereto. Whenever the term "Borrowers" or the term "Parent" is used in respect of a financial covenant or a related definition, it shall be understood to mean Parent and its Subsidiaries on a consolidated basis unless the context clearly requires otherwise. 1.3 CODE. Any terms used in this Agreement that are defined in the Code shall be construed and defined as set forth in the Code unless otherwise defined herein. 1.4 CONSTRUCTION. Unless the context of this Agreement or any other Loan Document clearly requires otherwise, references to the plural include the singular, references to the singular include the plural, the term "including" is not limiting, and the term "or" has, except where otherwise indicated, the inclusive meaning represented by the phrase "and/or." The words "hereof," "herein," "hereby," "hereunder," and similar terms in this Agreement or any other Loan Document refer to this Agreement or such other Loan Document, as the case may be, as a whole and not to any particular provision of this Agreement or such other Loan Document, as the case may be. Section, subsection, clause, schedule, and exhibit references herein are to this Agreement unless otherwise specified. Any reference in this Agreement or in - 27 - 29 the other Loan Documents to any agreement, instrument, or document shall include all alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions, joinders, and supplements, thereto and thereof, as applicable (subject to any restrictions on such alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions, joinders, and supplements set forth herein). Any reference herein to any Person shall be construed to include such Person's successors and assigns. Any requirement of a writing contained herein or in the other Loan Documents shall be satisfied by the transmission of a Record and any Record transmitted shall constitute a representation and warranty as to the accuracy and completeness of the information contained therein. 1.5 SCHEDULES AND EXHIBITS. All of the schedules and exhibits attached to this Agreement shall be deemed incorporated herein by reference. 2. LOAN AND TERMS OF PAYMENT. 2.1 REVOLVER ADVANCES. (a) Subject to the terms and conditions of this Agreement, and during the term of this Agreement, Lender agrees to make advances ("ADVANCES") to Borrowers in an amount at any one time outstanding not to exceed an amount equal to the lesser of (i) the Maximum Revolver Amount less the Letter of Credit Usage, or (ii) the Borrowing Base less the Adjusted Letter of Credit Usage. For purposes of this Agreement, "BORROWING BASE," as of any date of determination, shall mean the lesser of (1) clause (w) plus clause (x) minus clause (y), or (2) clause (z), where (w), (x), (y) and (z) are as follows: (w) = 75% of the amount of Eligible Accounts, less the amount, if any, of the Dilution Reserve. (x) = the sum of: (1) the lesser of (a) 42% of Eligible In-Transit Inventory subject to Acceptable Purchase Orders, and (b) 75% of the selling price for such Inventory. (y) = the aggregate amount of reserves, if any, established by Lender under SECTION 2.1(B). (z) = 75% of Borrowers' Collection with respect to Accounts for the immediately preceding 90-day period. - 28 - 30 (b) Anything to the contrary in this SECTION 2.1 notwithstanding, Lender shall have the right to establish reserves in such amounts as Lender in its Permitted Discretion shall deem necessary or appropriate with respect to such matters which likely would result in a Lien senior in priority to any of the Lender's Liens or which otherwise would adversely effect the value of the Collateral (in each case, as determined by Lender in the exercise of its Permitted Discretion), including reserves with respect to (i) sums that Borrowers are required to pay (such as taxes, assessments, insurance premiums, or, in the case of leased assets, rents or other amounts payable under such leases) and have failed to pay under any Section of this Agreement or any other Loan Document, and (ii) amounts owing by a Borrower to any Person to the extent secured by a Lien on, or trust over, any of the Collateral (other than any existing Permitted Lien set forth on SCHEDULE P-1 which is specifically identified thereon as entitled to have priority over the Lender's Liens), such as Liens or trusts in favor of landlords, warehousemen, carriers, mechanics, materialmen, laborers, or suppliers, or Liens or trusts for ad valorem, excise, sales, or other taxes where given priority under applicable law). (c) Lender shall have no obligation to make additional Advances hereunder to the extent such additional Advances would cause the Revolver Usage to exceed the Maximum Revolver Amount. (d) Amounts borrowed pursuant to this Section may be repaid and, subject to the terms and conditions of this Agreement, reborrowed at any time during the term of this Agreement. (e) In no event shall Availability at any time be less than $500,000. 2.2 INTENTIONALLY OMITTED. 2.3 BORROWING PROCEDURES AND SETTLEMENTS. (a) PROCEDURE FOR BORROWING. Each Borrowing shall be made by a written request by an Authorized Person delivered to Lender (which notice must be received by Lender no later than 10:00 a.m. (California time) on a Business Day specifying (i) the amount of such Borrowing, and (ii) the requested Funding Date, which shall be a Business Day. At Lender's election, in lieu of delivering the above-described request in writing, any Authorized Person may give Lender telephonic notice of such request by the required time, with such telephonic notice to be confirmed in writing within 24 hours of the giving of such notice. The provisions of this clause (a) are subject to the provisions of SECTION 2.13(B). (b) MAKING OF ADVANCES. If Lender has received a timely request for a Borrowing in accordance with the provisions hereof, and subject to the satisfaction of the applicable terms and conditions set forth herein, - 29 - 31 Lender shall make the proceeds of such Advance available to Borrowers on the applicable Funding Date by transferring available funds equal to such proceeds to Administrative Borrower's Designated Account. 2.4 PAYMENTS. (a) PAYMENTS BY BORROWERS. Except as otherwise expressly provided herein, all payments by Borrowers shall be made to Lender's Account and shall be made in immediately available funds no later than 11:00 a.m. (California time) on the date specified herein. Any payment received by Lender later than 11:00 a.m. (California time), shall be deemed to have been received on the following Business Day and any applicable interest or fee shall continue to accrue until such following Business Day. (b) APPLICATION OF PAYMENTS. (i) All payments shall be remitted to Lender and all such payments (other than payments received while no Default or Event of Default has occurred and is continuing and which relate to the payment of principal or interest of specific Obligations or which relate to the payment of specific fees), and all proceeds of Accounts or other Collateral received by Lender, shall be applied as follows: (A) FIRST, to pay any Lender Expenses then due to Lender under the Loan Documents, until paid in full, (B) SECOND, to pay any fees then due to Lender under the Loan Documents until paid in full, (C) THIRD, to pay interest due in respect of Advances until paid in full, (D) FOURTH, to pay the principal of all Advances until paid in full, (E) FIFTH, if an Event of Default has occurred and is continuing, to be held by Lender as cash collateral in an amount equal to 105% of the then extant Letter of Credit Usage until paid in full, (F) SIXTH, to pay any other Obligations until paid in full, and (G) SEVENTH, to Borrowers (to be wired to the Designated Account) or such other Person entitled thereto under applicable law. - 30 - 32 (ii) In each instance, so long as no Default or Event of Default has occurred and is continuing, SECTION 2.4(b) shall not be deemed to apply to any payment by Borrowers specified by Borrowers to be for the payment of specific Obligations then due and payable (or prepayable) under any provision of this Agreement. (iii) For purposes of the foregoing, "paid in full" means payment of all amounts owing under the Loan Documents according to the terms thereof, including loan fees, service fees, professional fees, interest (and specifically including interest accrued after the commencement of any Insolvency Proceeding), default interest, interest on interest, and expense reimbursements, whether or not the same would be or is allowed or disallowed in whole or in part in any Insolvency Proceeding. (iv) In the event of a direct conflict between the priority provisions of this SECTION 2.4 and other provisions contained in any other Loan Document, it is the intention of the parties hereto that such priority provisions in such documents shall be read together and construed, to the fullest extent possible, to be in concert with each other. In the event of any actual, irreconcilable conflict that cannot be resolved as aforesaid, the terms and provisions of this SECTION 2.4 shall control and govern. 2.5 OVERADVANCES. If, at any time or for any reason, the amount of Obligations owed by Borrowers to Lender pursuant to SECTIONS 2.1 AND 2.12 is greater than either the Dollar or percentage limitations set forth in SECTIONS 2.1 OR 2.12, (an "OVERADVANCE"), Borrowers immediately shall pay to Lender, in cash, the amount of such excess, which amount shall be used by Lender to reduce the Obligations in accordance with the priorities set forth in SECTION 2.4(b). In addition, Borrowers hereby promise to pay the Obligations (including principal, interest, fees, costs, and expenses) in Dollars in full to Lender as and when due and payable under the terms of this Agreement and the other Loan Documents. 2.6 INTEREST RATES AND LETTER OF CREDIT FEE: RATES, PAYMENTS, AND CALCULATIONS. (a) INTEREST RATES. Except as provided in clause (c) below, all Obligations (except for undrawn Letters of Credit) that have been charged to the Loan Account pursuant to the terms hereof shall bear interest on the Daily Balance thereof as follows (i) if the relevant Obligation is an Advance that is a LIBOR Rate Loan, at a per annum rate equal to the LIBOR Rate plus the LIBOR Rate Margin, and (ii) otherwise, at a per annum rate equal to the Base Rate plus the Base Rate Margin. - 31 - 33 (b) LETTER OF CREDIT FEE. Borrowers shall pay Lender a Letter of Credit fee (in addition to the charges, commissions, fees, and costs set forth in Section 2.12(e)) which shall accrue at a rate equal to 1% per annum times the Daily Balance of the undrawn amount of all outstanding Letters of Credit. (c) DEFAULT RATE. Upon the occurrence and during the continuation of an Event of Default, (i) all Obligations (except for undrawn Letters of Credit) that have been charged to the Loan Account pursuant to the terms hereof shall bear interest on the Daily Balance thereof at a per annum rate equal to 3 percentage points above the per annum rate otherwise applicable hereunder, and (ii) the Letter of Credit fee provided for above shall be increased to 2 percentage points above the per annum rate otherwise applicable hereunder. (d) PAYMENT. Interest, Letter of Credit fees, and all other fees payable hereunder shall be due and payable, in arrears, on the first day of each month at any time that Obligations or obligation to extend credit hereunder are outstanding; PROVIDED, HOWEVER, that interest due in respect of LIBOR Rate Loans shall be payable as set forth in Section 2.13(a). Borrowers hereby authorize Lender, from time to time, without prior notice to Borrowers, to charge such interest and fees, all Lender Expenses (as and when incurred), the charges, commissions, fees, and costs provided for in SECTION 2.12(E) (as and when accrued or incurred), the fees and costs provided for in SECTION 2.11 (as and when accrued or incurred), and all other payments as and when due and payable under any Loan Document to Borrowers' Loan Account, which amounts thereafter constitute Advances hereunder and shall accrue interest at the rate then applicable to Advances hereunder. Any interest not paid when due shall be compounded by being charged to Borrowers' Loan Account and shall thereafter constitute Advances hereunder and shall accrue interest at the rate then applicable to Advances that are Base Rate Loans hereunder. (e) COMPUTATION. All interest and fees chargeable under the Loan Documents shall be computed on the basis of a 360 day year for the actual number of days elapsed. In the event the Base Rate is changed from time to time hereafter, the rates of interest hereunder based upon the Base Rate automatically and immediately shall be increased or decreased by an amount equal to such change in the Base Rate. (f) INTENT TO LIMIT CHARGES TO MAXIMUM LAWFUL RATE. In no event shall the interest rate or rates payable under this Agreement, plus any other amounts paid in connection herewith, exceed the highest rate permissible under any law that a court of competent jurisdiction shall, in a final - 32 - 34 determination, deem applicable. Borrowers and Lender, in executing and delivering this Agreement, intend legally to agree upon the rate or rates of interest and manner of payment stated within it; PROVIDED, HOWEVER, that, anything contained herein to the contrary notwithstanding, if said rate or rates of interest or manner of payment exceeds the maximum allowable under applicable law, then, ipso facto, as of the date of this Agreement, Borrowers are and shall be liable only for the payment of such maximum as allowed by law, and payment received from Borrowers in excess of such legal maximum, whenever received, shall be applied to reduce the principal balance of the Obligations to the extent of such excess. 2.7 CASH MANAGEMENT. (a) Borrowers shall (i) establish and maintain cash management services of a type and on terms reasonably satisfactory to Lender at one or more of the banks set forth on SCHEDULE 2.7(a) (each a "CASH MANAGEMENT BANK"), and shall request in writing and otherwise take such reasonable steps to ensure that all of its Account Debtors forward payment of the amounts owed by them directly to such Cash Management Bank, and (ii) deposit or cause to be deposited promptly, and in any event no later than the first Business Day after the date of receipt thereof, all Collections (including those sent directly by Account Debtors to a Cash Management Bank) into a bank account in Lender's name (a "Cash Management Account") at one of the Cash Management Banks. (b) Each Cash Management Bank shall establish and maintain Cash Management Agreements with Lender and Borrowers, in form and substance acceptable to Lender. Each such Cash Management Agreement shall provide, among other things, that (i) all items of payment deposited in such Cash Management Account and proceeds thereof are held by such Cash Management Bank Lender as bailee-in-possession for Lender, (ii) the Cash Management Bank has no rights of setoff or recoupment or any other claim against the applicable Cash Management Account, other than for payment of its service fees and other charges directly related to the administration of such Cash Management Account and for returned checks or other items of payment, and (iii) the Cash Management Bank immediately will forward by daily sweep all amounts in the applicable Cash Management Account to the Lender's Account; PROVIDED, HOWEVER, the daily sweep provision in clause (iii) above will not become operative until the date on which Borrowers first do not have the Required Availability. (c) So long as no Default or Event of Default has occurred and is continuing, Administrative Borrower may amend SCHEDULE 2.7(a) OR (b) to add or replace a Cash Management Account Bank or Cash Management Account; PROVIDED, HOWEVER, that (i) such prospective Cash Management Bank shall be reasonably satisfactory to Lender and Lender shall have consented in writing in advance to the opening of such Cash Management Account with the - 33 - 35 prospective Cash Management Bank (such consent not to be unreasonably withheld or delayed), and (ii) prior to the time of the opening of such Cash Management Account, Borrowers and such prospective Cash Management Bank shall have executed and delivered to Lender a Cash Management Agreement. Borrowers shall close any of their Cash Management Accounts (and establish replacement cash management accounts in accordance with the foregoing sentence) promptly and in any event within 30 days of notice from Lender that the creditworthiness of any Cash Management Bank is no longer acceptable in Lender's reasonable judgment, or as promptly as practicable and in any event within 60 days of notice from Lender that the operating performance, funds transfer, or availability procedures or performance of the Cash Management Bank with respect to Cash Management Accounts or Lender's liability under any Cash Management Agreement with such Cash Management Bank is no longer acceptable in Lender's reasonable judgment. (d) The Cash Management Accounts shall be cash collateral accounts, with all cash, checks and similar items of payment in such accounts securing payment of the Obligations, and in which Borrowers are hereby deemed to have granted a Lien to Lender. 2.8 CREDITING PAYMENTS; FLOAT CHARGE. The receipt of any payment item by Lender (whether from transfers to Lender by the Cash Management Banks pursuant to the Cash Management Agreements or otherwise) shall not be considered a payment on account unless such payment item is a wire transfer of immediately available federal funds made to the Lender's Account or unless and until such payment item is honored when presented for payment. Should any payment item not be honored when presented for payment, then Borrowers shall be deemed not to have made such payment and interest shall be calculated accordingly. Anything to the contrary contained herein notwithstanding, any payment item shall be deemed received by Lender only if it is received into the Lender's Account on a Business Day on or before 11:00 a.m. (California time). If any payment item is received into the Lender's Account on a non-Business Day or after 11:00 a.m. (California time) on a Business Day, it shall be deemed to have been received by Lender as of the opening of business on the immediately following Business Day. 2.9 DESIGNATED ACCOUNT. Lender is authorized to make the Advances, and Lender is authorized to issue the Letters of Credit, under this Agreement based upon telephonic or other instructions received from anyone purporting to be an Authorized Person, or without instructions if pursuant to SECTION 2.6(d). Administrative Borrower agrees to establish and maintain the Designated Account with the Designated Account Bank for the purpose of receiving the proceeds of the Advances requested by Borrowers and made by Lender hereunder. Unless otherwise agreed by Lender and Administrative Borrower, any Advance requested by Borrowers and made by Lender hereunder shall be made to the Designated Account. - 34 - 36 2.10 MAINTENANCE OF LOAN ACCOUNT; STATEMENTS OF OBLIGATIONS. Lender shall maintain an account on its books in the name of Borrowers (the "LOAN ACCOUNT") on which Borrowers will be charged with all Advances made by Lender to Borrowers or for Borrowers' account, the Letters of Credit issued by Lender for Borrowers' account, and with all other payment Obligations hereunder or under the other Loan Documents, including, accrued interest, fees and expenses, and Lender Expenses. In accordance with SECTION 2.8, the Loan Account will be credited with all payments received by Lender from Borrowers or for Borrowers' account, including all amounts received in the Lender's Account from any Cash Management Bank. Lender shall render statements regarding the Loan Account to Administrative Borrower, including principal, interest, fees, and including an itemization of all charges and expenses constituting Lender Expenses owing, and such statements shall be conclusively presumed to be correct and accurate and constitute an account stated between Borrowers and Lender unless, within 30 days after receipt thereof by Administrative Borrower, Administrative Borrower shall deliver to Lender written objection thereto describing the error or errors contained in any such statements. 2.11 FEES. Borrowers shall pay to Lender the following fees and charges, which fees and charges shall be non-refundable when paid (irrespective of whether this Agreement is terminated thereafter): (a) UNUSED LINE FEE. On the first day of each month during the term of this Agreement, an unused line fee in the amount equal to .375% per annum times the result of (a) the Maximum Revolver Amount, less (b) the sum of (i) the average Daily Balance of Advances that were outstanding during the immediately preceding month, plus (ii) the average Daily Balance of the Letter of Credit Usage during the immediately preceding month, (b) FEE LETTER FEES. As and when due and payable under the terms of the Fee Letter, Borrowers shall pay to Lender the fees set forth in the Fee Letter, and (c) AUDIT, APPRAISAL, AND VALUATION CHARGES. Audit, appraisal, and valuation fees and charges as follows, (i) a fee of $750 pay day, per auditor, plus out-of-pocket expenses for each financial audit of a Borrower performed by personnel employed by Lender, (ii) if implemented, a one time charge of $3,000 plus out-of-pocket expenses for expenses for the establishment of electronic collateral reporting systems, (iii) a fee of $1,500 per day per appraiser, plus out-of-pocket expenses, for each appraisal of the Collateral performed by personnel employed by Lender, and (iv) the actual charges paid or incurred by Lender if it elects to employ the services of one or more third Persons to perform financial audits of Borrowers, to appraise the Collateral, or any portion thereof, or to assess a Borrower's business valuation. - 35 - 37 2.12 LETTERS OF CREDIT. (a) Subject to the terms and conditions of this Agreement, Lender agrees to issue letters of credit for the account of Borrowers (each, an "L/C") or to purchase participations or execute indemnities or reimbursement obligations (each such undertaking, an "L/C UNDERTAKING") with respect to letters of credit issued by an Underlying Issuer (as of the Closing Date, the prospective Underlying Issuer is to be the Trade Bank) for the account of Borrowers; PROVIDED, HOWEVER, (i) in no event shall any Underlying Letter of Credit be issued for the benefit of the beneficiary of payment or performance obligations incurred by or of, as applicable, any Subsidiary of any Borrower which is not a Borrower, and (ii) L/C or L/C Undertaking be issued unless it constitutes an Acceptable Purchase Order Letter of Credit. To request the issuance of an L/C or an L/C Undertaking (or the amendment, renewal, or extension of an outstanding L/C or L/C Undertaking), Administrative Borrower shall hand deliver or telecopy (or transmit by electronic communication, if arrangements for doing so have been approved by Lender) to Lender and Lender (reasonably in advance of the requested date of issuance, amendment, renewal, or extension) a notice requesting the issuance of an L/C or L/C Undertaking, or identifying the L/C or L/C Undertaking to be amended, renewed, or extended, the date of issuance, amendment, renewal, or extension, the date on which such L/C or L/C Undertaking is to expire, the amount of such L/C or L/C Undertaking, the name and address of the beneficiary thereof (or of the Underlying Letter of Credit, as applicable), and such other information as shall be necessary to prepare, amend, renew, or extend such L/C or L/C Undertaking. If requested by Lender, Borrowers also shall be an applicant under the application with respect to any Underlying Letter of Credit that is to be the subject of an L/C Undertaking. Lender shall have no obligation to issue a Letter of Credit if any of the following would result after giving effect to the requested Letter of Credit: (i) the Adjusted Letter of Credit Usage would exceed the Borrowing Base less the sum of the then extant amount of outstanding Advances, or (ii) the Letter of Credit Usage would exceed $4,000,000, or (iii) the Letter of Credit Usage would exceed the Maximum Revolver Amount less the sum of the then extant amount of outstanding Advances. (b) Each Letter of Credit (and corresponding Underlying Letter of Credit other than the Existing Other Underlying Letter of Credit which are standby Underlying Letters of Credit) shall have an expiry date no later than 30 days after the Maturity Date and all such Letters of Credit (and corresponding Underlying Letters of Credit) shall be in form and substance acceptable to - 36 - 38 Lender (in the exercise of its Permitted Discretion), including the requirement that the amounts payable thereunder must be payable in Dollars. No Underlying Letter of Credit may be amended more than three times (and no Existing Other Underlying Letter of Credit may be amended without Lender's prior written consent) and, after the date hereof, only Underlying Letters of Credit which are documentary letters of credit will be issued. If Lender is obligated to advance funds under a Letter of Credit, Borrowers immediately shall reimburse such L/C Disbursement to Lender by paying to Lender an amount equal to such L/C Disbursement not later than 11:00 a.m., California time, on the date that such L/C Disbursement is made, if Administrative Borrower shall have received written or telephonic notice of such L/C Disbursement prior to 10:00 a.m., California time, on such date, or, if such notice has not been received by Administrative Borrower prior to such time on such date, then not later than 11:00 a.m., California time, on (i) the Business Day that Administrative Borrower receives such notice, if such notice is received prior to 10:00 a.m., California time, on the date of receipt, and, in the absence of such reimbursement, the L/C Disbursement immediately and automatically shall be deemed to be an Advance hereunder and, thereafter, shall bear interest at the rate then applicable to Advances that are Base Rate Loans under Section 2.6. To the extent an L/C Disbursement is deemed to be an Advance hereunder, Borrowers' obligation to reimburse such L/C Disbursement shall be discharged and replaced by the resulting Advance. (c) Each Borrower hereby agrees to indemnify, save, defend, and hold Lender harmless from any loss, cost, expense, or liability, and reasonable attorneys fees incurred by Lender arising out of or in connection with any Letter of Credit; provided, however, that no Borrower shall be obligated hereunder to indemnify for any loss, cost, expense, or liability that is caused by the gross negligence or willful misconduct of Lender. Each Borrower agrees to be bound by the Underlying Issuer's regulations and interpretations of any Underlying Letter of Credit or by Lender's interpretations of any L/C issued by Lender to or for such Borrower's account, even though this interpretation may be different from such Borrower's own, and each Borrower understands and agrees that Lender shall not be liable for any error, negligence, or mistake, whether of omission or commission, in following Borrowers' instructions or those contained in the Letter of Credit or any modifications, amendments, or supplements thereto (unless, in each case, the same shall constitute gross negligence or willful misconduct). Each Borrower understands that the L/C Undertakings may require Lender to indemnify the Underlying Issuer for certain costs or liabilities arising out of claims by Borrowers against such Underlying Issuer. Each Borrower hereby agrees to indemnify, save, defend, and hold Lender harmless with respect to any loss, cost, expense (including reasonable attorneys fees), or liability incurred by Lender under any L/C Undertaking as a result of Lender's indemnification of any Underlying Issuer; provided, however, that no Borrower shall be obligated hereunder to indemnify - 37 - 39 for any loss, cost, expense, or liability that is caused by the gross negligence or willful misconduct of Lender. (d) Each Borrower hereby authorizes and directs any Underlying Issuer to deliver to Lender all instruments, documents, and other writings and property received by such Underlying Issuer pursuant to such Underlying Letter of Credit and to accept and rely upon Lender's instructions with respect to all matters arising in connection with such Underlying Letter of Credit and the related application. (e) Any and all charges, commissions, fees, and costs incurred by Lender relating to Underlying Letters of Credit shall be Lender Expenses for purposes of this Agreement and immediately shall be reimbursable by Borrowers to Lender for the account of Lender. Borrowers acknowledge and agree that they will pay the Underlying Issuer all fees and charges imposed by the Underlying Issuer in connection with the issuance of Underlying Letters of Credit. (f) If by reason of (i) any change in any applicable law, treaty, rule, or regulation or any change in the interpretation or application thereof by any Governmental Authority, or (ii) compliance by the Underlying Issuer or Lender with any direction, request, or requirement (irrespective of whether having the force of law) of any Governmental Authority or monetary authority including, Regulation D of the Federal Reserve Board as from time to time in effect (and any successor thereto), occurring or issued, as the case may be, after the Closing Date: (i) any reserve, deposit, or similar requirement is or shall be imposed or modified in respect of any Letter of Credit issued hereunder, or (ii) there shall be imposed on the Underlying Issuer or Lender any other condition regarding any Underlying Letter of Credit or any Letter of Credit issued pursuant hereto; and the result of the foregoing is to increase, directly or indirectly, the cost to Lender of issuing, making, guaranteeing, or maintaining any Letter of Credit or to reduce the amount receivable in respect thereof by Lender, then, and in any such case, Lender may, at any time within a reasonable period after the additional cost is incurred or the amount received is reduced, notify Administrative Borrower, and Borrowers shall pay on demand such amounts as Lender may specify to be necessary to compensate Lender for such additional cost or reduced receipt, together with interest on such amount from the date of such demand until payment in full thereof at the rate then applicable to Base Rate Loans hereunder. The determination by Lender of any amount due pursuant to this Section, as set forth in a certificate setting forth - 38 - 40 the calculation thereof in reasonable detail, shall, in the absence of manifest or demonstrable error, be final and conclusive and binding on all of the parties hereto. In determining such amount, Lender may use any reasonable averaging and attribution methods. (g) Each Borrower acknowledges and agrees that (i) certain of the Underlying Letters of Credit may provide for the presentation of time drafts to the Underlying Issuer, and (ii) no such time draft shall have a maturity date beyond 120 days. If an Underlying Issuer accepts such a time draft that is presented under an Underlying Letter of Credit, it is acknowledged and agreed that (i) the Letter of Credit will require Lender to reimburse the Underlying Issuer for amounts paid on account of such time draft on or after the maturity date thereof, (ii) the pricing provisions hereof (including Sections 2.6(b) and 2.12(e)) shall continue to apply, until payment of such time draft on or after the maturity date thereof, as if the Underlying Letter of Credit were still outstanding, and (iii) on the date on which Lender makes payment to the Underlying Issuer of the amounts paid on account of such time draft, Borrowers immediately shall reimburse such amount to Lender and such amount shall constitute an L/C Disbursement hereunder. (h) Simultaneously with a request by Borrowers under clause (a) of this Section, Administrative Borrower shall deliver to Lender an officer's certificate (i) certifying that the requested L/C or L/C Undertaking, upon issuance, will constitute an Acceptable Purchase Order Letter of Credit, and (ii) attached to which shall be a true and correct copy of the subject Acceptable Purchase Order. Within three (3) Business Days, Lender shall notify Administrative Borrower, based on the exercise of its Permitted Discretion, whether the subject L/C or L/C Undertaking constitutes an Acceptable Purchase Order Letter of Credit. If Lender notifies Administrative Borrower that the L/C or L/C Undertaking does not constitute an Acceptable Purchase Order Letter of Credit, Lender shall have no further obligations hereunder with respect to the subject request. If Lender does not so notify Administrative Borrower, the subject L/C or L/C Undertaking automatically then shall be deemed an Acceptable Purchase Order Letter of Credit. (i) Lender shall have no obligation to issue an L/C or L/C Undertaking unless (i) Borrowers have funded the Cash Collateral Reserve in an amount equal to 58% of the amount of the requested L/C or L/C Undertaking, or (ii) the then balance of the Cash Collateral Reserve otherwise is acceptable to Lender. 2.13 LIBOR OPTION. (a) INTEREST AND INTEREST PAYMENT DATES. In lieu of having interest charged at the rate based upon the Base Rate, Borrowers shall have the option (the "LIBOR OPTION") to have interest on all or a portion of the - 39 - 41 Advances be charged at the LIBOR Rate. Interest on LIBOR Rate Loans shall be payable on the earliest of (i) the last day of the Interest Period applicable thereto, (ii) the occurrence of an Event of Default in consequence of which Lender has elected to accelerate the maturity of the Obligations, or (iii) termination of this Agreement pursuant to the terms hereof. On the last day of each applicable Interest Period, unless Administrative Borrower properly has exercised the LIBOR Option with respect thereto, the interest rate applicable to such LIBOR Rate Loan automatically shall convert to the rate of interest then applicable to Base Rate Loans of the same type hereunder. At any time that an Event of Default has occurred and is continuing, Borrowers no longer shall have the option to request that Advances bear interest at the LIBOR Rate and Lender shall have the right to convert the interest rate on all outstanding LIBOR Rate Loans to the rate then applicable to Base Rate Loans hereunder. (b) LIBOR ELECTION. (i) Administrative Borrower may, at any time and from time to time, so long as no Event of Default has occurred and is continuing, elect to exercise the LIBOR Option by notifying Lender prior to 11:00 a.m. (California time) at least 3 Business Days prior to the commencement of the proposed Interest Period (the "LIBOR DEADLINE"). Notice of Administrative Borrower's election of the LIBOR Option for a permitted portion of the Advances and an Interest Period pursuant to this Section shall be made by delivery to Lender of a LIBOR Notice received by Lender before the LIBOR Deadline, or by telephonic notice received by Lender before the LIBOR Deadline (to be confirmed by delivery to Lender of a LIBOR Notice received by Lender prior to 5:00 p.m. (California time) on the same day. (ii) Each LIBOR Notice shall be irrevocable and binding on Borrowers. In connection with each LIBOR Rate Loan, each Borrower shall indemnify, defend, and hold Lender harmless against any loss, cost, or expense incurred by Lender as a result of (a) the payment of any principal of any LIBOR Rate Loan other than on the last day of an Interest Period applicable thereto (including as a result of an Event of Default), (b) the conversion of any LIBOR Rate Loan other than on the last day of the Interest Period applicable thereto, or (c) the failure to borrow, convert, continue or prepay any LIBOR Rate Loan on the date specified in any LIBOR Notice delivered pursuant hereto (such losses, costs, and expenses, collectively, "FUNDING LOSSES"). Funding Losses shall, with respect to Lender, be deemed to equal the amount reasonably determined by Lender to be the excess, if any, of (i) the amount of interest that would have accrued on the principal amount of such LIBOR Rate Loan had such event not occurred, at - 40 - 42 the LIBOR Rate that would have been applicable thereto, for the period from the date of such event to the last day of the then current Interest Period therefor (or, in the case of a failure to borrow, convert or continue, for the period that would have been the Interest Period therefor), minus (ii) the amount of interest that would accrue on such principal amount for such period at the interest rate which Lender would be offered were it to be offered, at the commencement of such period, for Dollar deposits of a comparable amount and period in the London interbank market. A certificate of Lender delivered to Administrative Borrower setting forth any amount or amounts that Lender is entitled to receive pursuant to this Section shall be conclusive absent manifest error. (iii) Borrowers shall have not more than 7 LIBOR Rate Loans in effect at any given time. Borrowers only may exercise the LIBOR Option for LIBOR Rate Loans of at least $500,000 and integral multiples of $500,000 in excess thereof. (c) PREPAYMENTS. Borrowers may prepay LIBOR Rate Loans at any time; PROVIDED, HOWEVER, that in the event that LIBOR Rate Loans are prepaid on any date that is not the last day of the Interest Period applicable thereto, including as a result of any automatic prepayment through the required application by Lender of proceeds of Collections in accordance with SECTION 2.4(B) or for any other reason, including early termination of the term of this Agreement or acceleration of the Obligations pursuant to the terms hereof, Each Borrower shall indemnify, defend, and hold Lender and their Participants harmless against any and all Funding Losses in accordance with clause (b) above. (d) SPECIAL PROVISIONS APPLICABLE TO LIBOR RATE. (i) The LIBOR Rate may be adjusted by Lender on a prospective basis to take into account any additional or increased costs to Lender of maintaining or obtaining any eurodollar deposits or increased costs due to changes in applicable law occurring subsequent to the commencement of the then applicable Interest Period, including changes in tax laws (except changes of general applicability in corporate income tax laws) and changes in the reserve requirements, occurring subsequent to the commencement of the then applicable Interest Period, imposed by the Board of Governors of the Federal Reserve System (or any successor), excluding the Reserve Percentage, which additional or increased costs would increase the cost of funding loans bearing interest at the LIBOR Rate. In any such event, Lender shall give Administrative Borrower notice of such a determination and adjustment and, upon its receipt of the notice from Lender, - 41 - 43 Administrative Borrower may, by notice to Lender (y) require Lender to furnish to Administrative Borrower a statement setting forth the basis for adjusting such LIBOR Rate and the method for determining the amount of such adjustment, or (z) repay the LIBOR Rate Loans with respect to which such adjustment is made (together with any amounts due under clause (b)(ii) above). (ii) In the event that any change in market conditions or any law, regulation, treaty, or directive, or any change therein or in the interpretation of application thereof, shall at any time after the date hereof, in the reasonable opinion of Lender, make it unlawful or impractical for Lender to fund or maintain LIBOR Rate Loans or to continue such funding or maintenance, or to determine or charge interest rates at the LIBOR Rate, Lender shall give notice of such changed circumstances to Administrative Borrower and (y) in the case of any LIBOR Rate Loans that are outstanding, the date specified in Lender's notice shall be deemed to be the last day of the Interest Period of such LIBOR Rate Loans, and interest upon the LIBOR Rate Loans of Lender thereafter shall accrue interest at the rate then applicable to Base Rate Loans, and (z) Borrowers shall not be entitled to elect the LIBOR Option until Lender determines that it would no longer be unlawful or impractical to do so. (e) NO REQUIREMENT OF MATCHED FUNDING. Anything to the contrary contained herein notwithstanding, neither Lender, nor any of its Participants, is required actually to acquire eurodollar deposits to fund or otherwise match fund any Obligation as to which interest accrues at the LIBOR Rate. The provisions of this Section shall apply as if Lender or its Participants had match funded any Obligation as to which interest is accruing at the LIBOR Rate by acquiring eurodollar deposits for each Interest Period in the amount of the LIBOR Rate Loans. 2.14 CAPITAL REQUIREMENTS. If, after the date hereof, Lender reasonably determines that (i) the adoption of or change in any law, rule, regulation or guideline regarding capital requirements for banks or bank holding companies, or any change in the interpretation or application thereof by any Governmental Authority charged with the administration thereof, or (ii) compliance by Lender or its parent bank holding company with any guideline, request or directive becoming effective after the date hereof, of any such entity regarding capital adequacy (whether or not having the force of law), the effect of reducing the return on Lender's or such holding company's capital as a consequence of Lender's obligations hereunder to a level below that which Lender or such holding company could have achieved but for such adoption, change, or compliance (taking into consideration Lender's or such holding company's then existing policies with respect to capital adequacy and - 42 - 44 assuming the full utilization of such entity's capital) by any amount deemed by Lender to be material, then Lender may notify Administrative Borrower thereof. Following receipt of such notice, Borrowers agree to pay Lender on demand the amount of such reduction of return of capital as and when such reduction is determined, payable within 90 days after presentation by Lender of a statement in the amount and setting forth in reasonable detail Lender's calculation thereof and the assumptions upon which such calculation was based (which statement shall be deemed true and correct absent manifest error). In determining such amount, Lender may use any reasonable averaging and attribution methods. 2.15 JOINT AND SEVERAL LIABILITY OF BORROWERS. (a) Each of Borrowers is accepting joint and several liability hereunder and under the other Loan Documents in consideration of the financial accommodations to be provided by Lender under this Agreement, for the mutual benefit, directly and indirectly, of each of Borrowers and in consideration of the undertakings of the other Borrowers to accept joint and several liability for the Obligations. (b) Each of Borrowers, jointly and severally, hereby irrevocably and unconditionally accepts, not merely as a surety but also as a co-debtor, joint and several liability with the other Borrowers, with respect to the payment and performance of all of the Obligations (including, without limitation, any Obligations arising under this Section 2.15), it being the intention of the parties hereto that all the Obligations shall be the joint and several obligations of each Person composing Borrowers without preferences or distinction among them. (c) If and to the extent that any of Borrowers shall fail to make any payment with respect to any of the Obligations as and when due or to perform any of the Obligations in accordance with the terms thereof, then in each such event the other Borrowers will make such payment with respect to, or perform, such Obligation. (d) The Obligations of each Borrower under the provisions of this Section 2.15 constitute the absolute and unconditional, full recourse Obligations of each such Borrower enforceable against each such Borrower to the full extent of its properties and assets, irrespective of the validity, regularity or enforceability of this Agreement or any other circumstances whatsoever. (e) Except as otherwise expressly provided in this Agreement, each Borrower hereby waives notice of acceptance of its joint and several liability, notice of any Advances or Letters of Credit issued under or pursuant to this Agreement, notice of the occurrence of any Default, Event of Default, or of any demand for any payment under this Agreement, notice of any action at - 43 - 45 any time taken or omitted by Lender under or in respect of any of the Obligations, any requirement of diligence or to mitigate damages and, generally, to the extent permitted by applicable law, all demands, notices and other formalities of every kind in connection with this Agreement (except, in each case, as otherwise provided in this Agreement). Each Borrower hereby assents to, and waives notice of, any extension or postponement of the time for the payment of any of the Obligations, the acceptance of any payment of any of the Obligations, the acceptance of any partial payment thereon, any waiver, consent or other action or acquiescence by Lender at any time or times in respect of any default by any Borrower in the performance or satisfaction of any term, covenant, condition or provision of this Agreement, any and all other indulgences whatsoever by Lender in respect of any of the Obligations, and the taking, addition, substitution or release, in whole or in part, at any time or times, of any security for any of the Obligations or the addition, substitution or release, in whole or in part, of any Borrower. Without limiting the generality of the foregoing, each Borrower assents to any other action or delay in acting or failure to act on the part of Lender with respect to the failure by any Borrower to comply with any of its Obligations, including, without limitation, any failure strictly or diligently to assert any right or to pursue any remedy or to comply fully with applicable laws or regulations thereunder, which might, but for the provisions of this Section 2.15 afford grounds for terminating, discharging or relieving any Borrower, in whole or in part, from any of its Obligations under this Section 2.15, it being the intention of each Borrower that, so long as any of the Obligations hereunder remain unsatisfied, the Obligations of such Borrower under this Section 2.15 shall not be discharged except by performance and then only to the extent of such performance. The Obligations of each Borrower under this Section 2.15 shall not be diminished or rendered unenforceable by any winding up, reorganization, arrangement, liquidation, reconstruction or similar proceeding with respect to any Borrower or Lender. The joint and several liability of the Borrower hereunder shall continue in full force and effect notwithstanding any absorption, merger, amalgamation or any other change whatsoever in the name, constitution or place of formation of any of the Borrowers or Lender. (f) Each Borrower represents and warrants to Lender that such Borrower is currently informed of the financial condition of Borrowers and of all other circumstances which a diligent inquiry would reveal and which bear upon the risk of nonpayment of the Obligations. Each Borrower further represents and warrants to Lender that such Borrower has read and understands the terms and conditions of the Loan Documents. Each Borrower hereby covenants that such Borrower will continue to keep informed of Borrowers' financial condition, the financial condition of guarantors, if any, and of all other circumstances which bear upon the risk of nonpayment or nonperformance of the Obligations. - 44 - 46 (g) The provisions of this SECTION 2.15 are made for the benefit of Lender and its respective successors and assigns, and may be enforced by it or them from time to time against any or all of the Borrowers as often as occasion therefor may arise and without requirement on the part of Lender, successor, or assign first to marshal any of its or their claims or to exercise any of its or their rights against any of the Borrowers or to exhaust any remedies available to it or them against any of the Borrowers or to resort to any other source or means of obtaining payment of any of the Obligations hereunder or to elect any other remedy. The provisions of this SECTION 2.15 shall remain in effect until all of the Obligations shall have been paid in full or otherwise fully satisfied. If at any time, any payment, or any part thereof, made in respect of any of the Obligations, is rescinded or must otherwise be restored or returned by Lender upon the insolvency, bankruptcy or reorganization of any of the Borrowers, or otherwise, the provisions of this SECTION 2.15 will forthwith be reinstated in effect, as though such payment had not been made. (h) Each of the Borrowers hereby agrees that it will not enforce any of its rights of contribution, subrogation, reimbursement or indemnity against the other Borrowers with respect to any liability incurred by it hereunder or under any of the other Loan Documents, any payments made by it to Lender with respect to any of the Obligations or any collateral security therefor until such time as all of the Obligations have been paid in full in cash. Any claim which any Borrower may have against any other Borrower with respect to any payments to Lender hereunder or under any other Loan Documents are hereby expressly made subordinate and junior in right of payment, without limitation as to any increases in the Obligations arising hereunder or thereunder, to the prior payment in full in cash of the Obligations and, in the event of any insolvency, bankruptcy, receivership, liquidation, reorganization or other similar proceeding under the laws of any jurisdiction relating to any Borrower, its debts or its assets, whether voluntary or involuntary, all such Obligations shall be paid in full in cash before any payment or distribution of any character, whether in cash, securities or other property, shall be made to any other Borrower therefor. (i) Each of the Borrowers hereby agrees that, after the occurrence and during the continuance of any Default or Event of Default, the payment of any amounts due with respect to the indebtedness owing by any Borrower to any other Borrower is hereby subordinated to the prior payment in full in cash of the Obligations. Each Borrower hereby agrees that after the occurrence and during the continuance of any Default or Event of Default, such Borrower will not demand, sue for or otherwise attempt to collect any indebtedness of any other Borrower owing to such Borrower until the Obligations shall have been paid in full in cash. If, notwithstanding the foregoing sentence, such Borrower shall collect, enforce or receive any amounts in respect of such indebtedness, such amounts shall be collected, enforced and received by such Borrower as trustee for the Lender, and such Borrower shall - 45 - 47 deliver any such amounts to Lender for application to the Obligations in accordance with SECTION 2.4(b). In connection with any receivership, insolvency, bankruptcy proceeding, assignment for the benefit of creditors or any similar proceeding by or against any Borrower, Borrowers irrevocably authorize Lender in any such proceeding or at any related meeting of creditors to (a) prove any claim (by the filing of proof(s) of claim(s) or otherwise) in respect of any indebtedness of any Borrower that is subject to any such proceeding to any other Borrower, either in the name of the creditor Borrower or in the name of Lender, (b) vote claims in respect of any such indebtedness, to accept or reject any plan for liquidation, reorganization, arrangement, composition or extension, and (c) take generally any action in connection with any such proceeding or meeting which any creditor Borrower likely might otherwise take. 3. CONDITIONS; TERM OF AGREEMENT. 3.1 CONDITIONS PRECEDENT TO THE INITIAL EXTENSION OF CREDIT. The obligation of Lender to make the initial Advance (or otherwise to extend any credit provided for hereunder), is subject to the fulfillment, to the satisfaction of Lender, of each of the conditions precedent set forth below: (a) the Closing Date shall occur on or before February 16, 2001; (b) Lender shall have received all financing statements required by Lender, duly executed by the applicable Borrowers, and Lender shall have received searches reflecting the filing of all such financing statements; (c) Lender shall have received each of the following documents, in form and substance satisfactory to Lender, duly executed, and each such document shall be in full force and effect (and filed or recorded, as applicable): (i) an acknowledgment letter regarding the Control Agreement, dated as of December 28, 2000, executed and delivered by Parent, Lender and Wells Fargo Brokerage Services, LLC in connection with the December 2000 Loan Agreement, (ii) the Copyright Security Agreement, (iii) the Disbursement Letter, (iv) the Fee Letter, (v) the Cash Management Agreements, (vi) the Patent Security Agreement, - 46 - 48 (vii) the Stock Pledge Agreement, together with all certificates representing the shares of Stock pledged thereunder, as well as Stock powers with respect thereto endorsed in blank, (viii) the Trademark Security Agreement, (ix) the Buyer Note, endorsed to Lender, (x) the Collateral Assignment, (xi) the Cash Collateral Agreement, (xii) a certificate from the Secretary of Parent attaching true and correct copies of the Purchase Documents (other than the Purchase Documents to be executed subsequent to the date hereof), (xiii) the consummation of the Sale Transaction, to the satisfaction of Lender in its Permitted Discretion, and (xiv) the Acknowledgement and Asset Segregation Letter. (d) Lender shall have received a certificate from the Secretary of each Borrower attesting to the resolutions of such Borrower's Board of Directors authorizing its execution, delivery, and performance of this Agreement and the other Loan Documents to which such Borrower is a party and authorizing specific officers of such Borrower to execute the same; (e) Lender shall have received copies of each Borrower's Governing Documents, as amended, modified, or supplemented to the Closing Date, certified by the Secretary of such Borrower; (f) Lender shall have received a certificate of status with respect to each Borrower, dated within 10 days of the Closing Date, such certificate to be issued by the appropriate officer of the jurisdiction of organization of such Borrower, which certificate shall indicate that such Borrower is in good standing in such jurisdiction; (g) Lender shall have received certificates of status with respect to each Borrower, each dated within 30 days of the Closing Date, such certificates to be issued by the appropriate officer of the jurisdictions (other than the jurisdiction of organization of such Borrower) in which its failure to be duly qualified or licensed would constitute a Material Adverse Change, which certificates shall indicate that such Borrower is in good standing in such jurisdictions; - 47 - 49 (h) Lender shall have received opinions of Borrowers' counsel and a reliance letter in favor of Lender in respect of Buyer's counsel's opinion, each in form and substance (including such Buyer's counsel's opinion) satisfactory to Lender; (i) Lender shall have received satisfactory evidence (including a certificate of the chief financial officer of Parent) that all tax returns required to be filed by Borrowers have been timely filed and all taxes upon Borrowers or their properties, assets, income, and franchises (including Real Property taxes and payroll taxes) have been paid prior to delinquency, except such taxes that are the subject of a Permitted Protest; (j) Borrowers shall have the Required Availability and be in compliance with Section 2.1(e) after giving effect to the initial extensions of credit hereunder; (k) Lender shall have completed its business, legal, and collateral due diligence, including (i) a collateral audit and review of Borrowers' books and records and verification of Borrowers' representations and warranties to Lender, the results of which shall be satisfactory to Lender, (ii) an inspection of each of the locations where Inventory is located, the results of which shall be satisfactory to Lender, (iii) satisfactory legal review of contracts with Borrowers' major customers, and (iv) satisfactory legal review of the Purchase Documents and the transactions contemplated thereby; (l) Borrowers shall pay all Lender Expenses incurred in connection with the transactions evidenced by this Agreement and the December 2000 Loan Agreement; (m) Borrower shall pay all fees due and owing under or in connection with the December 2000 Loan Agreement including any fees owing under the December 2000 Fee Agreement, (n) Borrowers shall have received all licenses, approvals or evidence of other actions required by any Governmental Authority in connection with the execution and delivery by Borrowers of this Agreement or any other Loan Document or with the consummation of the transactions contemplated hereby and thereby; (o) Borrowers shall have funded the Cash Collateral Reserve in an aggregate amount equal to (i) 58% of the undrawn amount of Existing Underlying Acceptable Purchase Order Letters of Credit, and (ii) 100% of the undrawn amount of the Existing Standby Underlying Letters of Credit. (p) the issuance to, and receipt by Lender of, the Back to Back Standby Letter of Credit; and - 48 - 50 (q) all other documents and legal matters in connection with the transactions contemplated by this Agreement shall have been delivered, executed, or recorded and shall be in form and substance reasonably satisfactory to Lender. 3.2 CONDITIONS SUBSEQUENT TO THE INITIAL EXTENSION OF CREDIT. The obligation of Lender to continue to make Advances (or otherwise extend credit hereunder) is subject to the fulfillment, on or before the date applicable thereto, of each of the conditions subsequent set forth below (the failure by Borrowers to so perform or cause to be performed constituting an Event of Default): (a) within 5 days after the Closing Date, Borrowers shall deliver to Lender an original replacement stock certificate representing all of the outstanding shares of Stock of SMI, together with stock powers with respect thereto endorsed in blank. The restrictive legend on the reverse side of the certificate delivered in connection with the December 2000 Loan Agreement shall be replaced on such replacement certificate with the following restrictive legend: THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") OR THE SECURITIES LAWS OF ANY STATE. SUCH SHARES MAY NOT BE OFFERED FOR SALE, SOLD, DELIVERED AFTER SALE, TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS SUCH OFFERING, SALE, DELIVERY, TRANSFER, PLEDGE OR HYPOTHECATION IS IN ACCORDANCE WITH THE REGISTRATION REQUIREMENTS OF THE ACT AND SUCH LAWS OR AN EXEMPTION FROM SUCH REQUIREMENTS OF THE ACT AND SUCH LAWS IS AVAILABLE WITH RESPECT THERETO. (b) within 10 days of the Closing Date, deliver to Lender certified copies of the policies of cargo and property insurance, together with the endorsements thereto, as are required by SECTION 6.8, the form and substance of which shall be reasonably satisfactory to Lender and its counsel; (c) within 10 days of the Closing Date, deliver to Lender Intercompany Notes from Cyrk Europe Limited and Cyrk (H.K.) Limited, respectively, endorsed to Lender; (d) within 15 days of the Closing Date, deliver to Lender a Collateral Access Agreement with respect to 101 Edgewater Drive, Wakefield, MA 01880; (e) within 15 days of the Closing Date, deliver to Lender Collateral Access Agreements for each of the customs brokers of Borrowers in the United States; and - 49 - 51 (f) within 2 days of the Closing Date, deliver a certificate of insurance, together with the endorsements thereto, as are required by SECTION 6.8, the form and substance of which shall be satisfactory to Lende. 3.3 CONDITIONS PRECEDENT TO ALL EXTENSIONS OF CREDIT. The obligation of Lender to make all Advances (or to extend any other credit hereunder) shall be subject to the following conditions precedent: (a) the representations and warranties contained in this Agreement and the other Loan Documents shall be true and correct in all material respects on and as of the date of such extension of credit, as though made on and as of such date (except to the extent that such representations and warranties relate solely to an earlier date); (b) no Default or Event of Default shall have occurred and be continuing on the date of such extension of credit, nor shall either result from the making thereof; (c) no injunction, writ, restraining order, or other order of any nature prohibiting, directly or indirectly, the extending of such credit shall have been issued and remain in force by any Governmental Authority against any Borrower, Lender, or any of their Affiliates; and (d) no Material Adverse Change shall have occurred. 3.4 TERM. This Agreement shall become effective upon the execution and delivery hereof by Borrowers and Lender and shall continue in full force and effect for a term ending on May 15, 2001 (the "MATURITY DATE"). The foregoing notwithstanding, Lender shall have the right to terminate its obligations under this Agreement immediately and without notice upon the occurrence and during the continuation of an Event of Default. 3.5 EFFECT OF TERMINATION. On the date of termination of this Agreement, all Obligations (including contingent reimbursement obligations of Borrowers with respect to any outstanding Letters of Credit) immediately shall become due and payable without notice or demand. No termination of this Agreement, however, shall relieve or discharge Borrowers of their duties, Obligations, or covenants hereunder and the Lender's Liens in the Collateral shall remain in effect until all Obligations have been fully and finally discharged and Lender's obligations to provide additional credit hereunder have been terminated. When this Agreement has been terminated and all of the Obligations have been fully and finally discharged and Lender's obligations to provide additional credit under the Loan Documents have been terminated irrevocably, Lender will, at Borrowers' sole expense, execute and deliver any UCC termination statements, lien releases, mortgage releases, re-assignments of trademarks, discharges of security interests, and other similar discharge or release documents (and, if applicable, in recordable form) as are reasonably - 50 - 52 necessary to release, as of record, the Lender's Liens and all notices of security interests and liens previously filed by Lender with respect to the Obligations. 3.6 EARLY TERMINATION BY BORROWERS. Borrowers have the option, at any time upon 45 days prior written notice by Administrative Borrower to Lender, to terminate this Agreement by paying to Lender, in cash, the Obligations (including either (i) providing cash collateral to be held by Lender in an amount equal to 105% of the then extant Letter of Credit Usage, or (ii) causing the original Letters of Credit to be returned to Lender), in full. If Administrative Borrower has sent a notice of termination pursuant to the provisions of this Section, then Lender's obligations to extend credit hereunder shall terminate and Borrowers shall be obligated to repay the Obligations (including either (i) providing cash collateral to be held by Lender in an amount equal to 105% of the then extant Letter of Credit Usage, or (ii) causing the original Letters of Credit to be returned to Lender), in full, on the date set forth as the date of termination of this Agreement in such notice. 4. CREATION OF SECURITY INTEREST. 4.1 GRANT OF SECURITY INTEREST. Each Borrower hereby grants to Lender a continuing security interest in all of its right, title, and interest in all currently existing and hereafter acquired or arising Personal Property Collateral in order to secure prompt repayment of any and all of the Obligations in accordance with the terms and conditions of the Loan Documents and in order to secure prompt performance by Borrowers of each of their covenants and duties under the Loan Documents. The Lender's Liens in and to the Personal Property Collateral shall attach to all Personal Property Collateral without further act on the part of Lender or Borrowers, other than Personal Property Collateral which is not subject to attachment under the Code and commercial tort claims. Anything contained in this Agreement or any other Loan Document to the contrary notwithstanding, except for Permitted Dispositions, Borrowers have no authority, express or implied, to dispose of any item or portion of the Collateral. 4.2 NEGOTIABLE COLLATERAL. In the event that any Collateral, including proceeds, is evidenced by or consists of Negotiable Collateral, and if and to the extent that perfection of priority of Lender's security interest is dependent on or enhanced by possession, the applicable Borrower, immediately upon the request of Lender, shall endorse and deliver physical possession of such Negotiable Collateral to Lender. 4.3 COLLECTION OF ACCOUNTS, GENERAL INTANGIBLES, AND NEGOTIABLE COLLATERAL. At any time after the occurrence and during the continuation of an Event of Default, Lender or Lender's designee may (a) notify Account Debtors of Borrowers that the Accounts, chattel paper, or General Intangibles have been assigned to Lender or that Lender has a security interest therein, or (b) collect - 51 - 53 the Accounts, chattel paper, or General Intangibles directly and charge the collection costs and expenses to the Loan Account. Each Borrower agrees that it will hold in trust for Lender, as Lender's trustee, any Collections that it receives and immediately will deliver said Collections to Lender or a Cash Management Bank in their original form as received by the applicable Borrower. 4.4 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. At any time, upon the reasonable request of Lender, Borrowers shall execute and deliver to Lender any and all financing statements, initial financing statements in lieu of continuation statements, fixture filings, security agreements, pledges, assignments, endorsements of certificates of title, and all other documents (the "ADDITIONAL DOCUMENTS") that Lender may request in its Permitted Discretion, in form and substance satisfactory to Lender, to perfect and continue perfected or better perfect the Lender's Liens in the Collateral (whether now owned or hereafter arising or acquired), to create and perfect Liens in favor of Lender in any Real Property acquired after the Closing Date, and in order to fully consummate all of the transactions contemplated hereby and under the other Loan Documents. To the maximum extent permitted by applicable law, each Borrower authorizes Lender to execute any such Additional Documents in the applicable Borrower's name and authorize Lender to file such executed Additional Documents in any appropriate filing office. In addition, on such periodic basis as Lender shall reasonably require, Borrowers shall (but not more than once each quarter unless an Event of Default shall have occurred and be continuing) (a) provide Lender with a report of all new patentable, copyrightable, or trademarkable materials acquired or generated by Borrowers during the prior period, (b) cause all material patents, copyrights, and trademarks acquired or generated by Borrowers that are not already the subject of a registration with the appropriate filing office (or an application therefor diligently prosecuted) to be registered with such appropriate filing office in a manner sufficient to impart constructive notice of Borrowers' ownership thereof, and (c) cause to be prepared, executed, and delivered to Lender supplemental schedules to the applicable Loan Documents to identify such material patents, copyrights, and trademarks as being subject to the security interests created thereunder. 4.5 POWER OF ATTORNEY. Each Borrower hereby irrevocably makes, constitutes, and appoints Lender (and any of Lender's officers, employees, or agents designated by Lender) as such Borrower's true and lawful attorney, with power to (a) if such Borrower refuses to, or fails timely to execute and deliver any of the documents described in SECTION 4.4, sign the name of such Borrower on any of the documents described in SECTION 4.4, (b) at any time that an Event of Default has occurred and is continuing, sign such Borrower's name on any invoice or bill of lading relating to the Collateral, drafts against Account Debtors, or notices to Account Debtors, (c) send requests for verification of Accounts, (d) endorse such Borrower's name on any Collection item that may - 52 - 54 come into Lender's possession, provided that if no Event of Default has occurred and is continuing, such item shall be deposited by Lender into a Cash Management Account, (e) at any time that an Event of Default has occurred and is continuing, make, settle, and adjust all claims under such Borrower's policies of insurance and make all determinations and decisions with respect to such policies of insurance, and (f) at any time that an Event of Default has occurred and is continuing, settle and adjust disputes and claims respecting the Accounts, chattel paper, or General Intangibles directly with Account Debtors, for amounts and upon terms that Lender determines to be reasonable in its Permitted Discretion, and Lender may cause to be executed and delivered any documents and releases reasonably determined by Lender in its Permitted Discretion to be necessary. The appointment of Lender as each Borrower's attorney, and each and every one of its rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully and finally repaid and performed and Lender's obligations to extend credit hereunder are terminated. 4.6 RIGHT TO INSPECT. Lender (through any of its respective officers, employees, or agents) shall have the right, from time to time hereafter (but not more than once each quarter unless an Event of Default shall have occurred and be continuing), to inspect the Books and to check, test, and appraise the Collateral in order to verify Borrowers' financial condition or the amount, quality, value, condition of, or any other matter relating to, the Collateral, and/or to conduct an audit. 4.7 CONTROL AGREEMENTS. Each Borrower agrees that it will not transfer assets out of any Securities Accounts other than as permitted under SECTION 7.19 and, if to another securities intermediary, unless each of the applicable Borrower, Lender, and the substitute securities intermediary have entered into a Control Agreement. No arrangement contemplated hereby or by any Control Agreement in respect of any Securities Accounts or other Investment Property shall be modified by Borrowers without the prior written consent of Lender (such consent not to be unreasonably withheld or delayed). Upon the occurrence and during the continuance of a Default or Event of Default, Lender may notify any securities intermediary to liquidate the applicable Securities Account or any related Investment Property maintained or held thereby and remit the proceeds thereof to the Lender's Account. 5. REPRESENTATIONS AND WARRANTIES. In order to induce Lender to enter into this Agreement, each Borrower makes the following representations and warranties to Lender which shall be true, correct, and complete, in all material respects, as of the date hereof, and shall be true, correct, and complete, in all material respects, as of the Closing Date, and at and as of the date of the making of each Advance (or other extension of credit) made thereafter, as though made on and as of the date of - 53 - 55 such Advance (or other extension of credit) (except to the extent that such representations and warranties relate solely to an earlier date) and such representations and warranties shall survive the execution and delivery of this Agreement: 5.1 NO ENCUMBRANCES. Each Borrower has good and indefeasible title to its Collateral and the Real Property, free and clear of Liens except for Permitted Liens. 5.2 ELIGIBLE ACCOUNTS. The Eligible Accounts are bona fide existing payment obligations of Account Debtors created by the sale and delivery of Inventory or the rendition of services to such Account Debtors in the ordinary course of Borrowers' business, owed to Borrowers without defenses, disputes, offsets, counterclaims, or rights of return or cancellation. As to each Eligible Account, such Account is not: (a) owed by an employee, Affiliate, or Lender of a Borrower, (b) on account of a transaction wherein goods were placed on consignment or were sold pursuant to a guaranteed sale, a sale or return, a sale on approval, a bill and hold, or on any other terms by reason of which the payment by the Account Debtor may be conditional, (c) payable in a currency other than Dollars, (d) owed by an Account Debtor that has or has asserted a right of setoff, has disputed its liability, or has made any claim with respect to its obligation to pay the Account, (e) to the actual knowledge of Borrowers, owed by an Account Debtor that is subject to any Insolvency Proceeding or is not Solvent or as to which a Borrower has received notice of an imminent Insolvency Proceeding or a material impairment of the financial condition of such Account Debtor, (f) on account of a transaction as to which the goods giving rise to such Account have not been shipped and billed to the Account Debtor or the services giving rise to such Account have not been performed and accepted by the Account Debtor, (g) a right to receive progress payments or other advance billings that are due prior to the completion of performance by the applicable Borrower of the subject contract for goods or services, and (h) an Account that has not been billed to the customer. - 54 - 56 5.3 ELIGIBLE INVENTORY. All Eligible Inventory is of good and merchantable quality, free from defects. As to each item of Eligible Inventory, such Inventory is (a) owned by a Borrower free and clear of all Liens other than Liens in favor of Lender, (b) not goods that have been returned or rejected by Borrowers' customers, and (c) not goods that are obsolete or slow moving, restrictive or custom items, work-in-process, or that constitute spare parts, packaging and shipping materials, supplies used or consumed in Borrowers' business, bill and hold goods, defective goods, "seconds," or Inventory acquired on consignment. 5.4 EQUIPMENT. All of the Equipment material to any of the Borrowers' business is used or held for use in Borrowers' business and is materially fit for such purposes. 5.5 LOCATION OF INVENTORY AND EQUIPMENT. The Inventory and Equipment are not stored with a bailee, warehouseman, or similar party and are located only at the locations identified on SCHEDULE 5.5. 5.6 INVENTORY RECORDS. Each Borrower keeps correct and accurate records itemizing and describing the type, quality, and quantity of its Inventory and the book value thereof. 5.7 LOCATION OF CHIEF EXECUTIVE OFFICE; FEIN. The chief executive office of each Borrower is located at the address indicated in SCHEDULE 5.7 and each Borrower's FEIN is identified in SCHEDULE 5.7. 5.8 DUE ORGANIZATION AND QUALIFICATION; SUBSIDIARIES. (a) Each Borrower is duly organized and existing and in good standing under the laws of the jurisdiction of its organization and qualified to do business in any state where the failure to be so qualified reasonably could be expected to have a Material Adverse Change. (b) Set forth on SCHEDULE 5.8(b), is a complete and accurate description of the authorized capital Stock of each Borrower, by class, and, as of the Closing Date, a description of the number of shares of each such class that are issued and outstanding. Other than as described on SCHEDULE 5.8(b), there are no subscriptions, options, warrants, or calls relating to any shares of each Borrower's capital Stock, including any right of conversion or exchange under any outstanding security or other instrument. No Borrower is subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or - 55 - 57 retire any shares of its capital Stock or any security convertible into or exchangeable for any of its capital Stock. (c) Set forth on SCHEDULE 5.8(c), is a complete and accurate list of each Borrower's direct and indirect Subsidiaries, showing: (i) the jurisdiction of their organization; (ii) the number of shares of each class of common and preferred Stock authorized for each of such Subsidiaries; and (iii) the number and the percentage of the outstanding shares of each such class owned directly or indirectly by the applicable Borrower. All of the outstanding capital Stock of each such Subsidiary has been validly issued and is fully paid and non-assessable. (d) Except as set forth on SCHEDULE 5.8(c), there are no subscriptions, options, warrants, or calls relating to any shares of any Borrower's Subsidiaries' capital Stock, including any right of conversion or exchange under any outstanding security or other instrument. No Borrower or any of its respective Subsidiaries is subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of any Borrower's Subsidiaries' capital Stock or any security convertible into or exchangeable for any such capital Stock. 5.9 DUE AUTHORIZATION; NO CONFLICT. (a) As to each Borrower, the execution, delivery, and performance by such Borrower of this Agreement and the Loan Documents to which it is a party have been duly authorized by all necessary action on the part of such Borrower. (b) As to each Borrower, the execution, delivery, and performance by such Borrower of this Agreement and the Loan Documents to which it is a party do not and will not (i) violate any provision of federal, state, or local law or regulation applicable to any Borrower, the Governing Documents of any Borrower, or any order, judgment, or decree of any court or other Governmental Authority binding on any Borrower, (ii) conflict with, result in a breach of, or constitute (with due notice or lapse of time or both) a default under any contractual obligation of any Borrower, unless such a default or breach would not have a material adverse effect on the business, finances or operations of any Borrower or the Collateral, (iii) result in or require the creation or imposition of any Lien of any nature whatsoever upon any properties or assets of Borrower, other than Permitted Liens, or (iv) require any approval of any Borrower's stockholders or any approval or consent of any Person under any contractual obligation of any Borrower, unless failure to obtain such approval in regard to any such contractual obligation would not have a material adverse effect on the business, finances or operations of any Borrower or the Collateral. - 56 - 58 (c) Other than the filing of financing statements and fixture filings, the execution, delivery, and performance by each Borrower of this Agreement and the Loan Documents to which such Borrower is a party do not and will not require any registration with, consent, or approval of, or notice to, or other action with or by, any Governmental Authority or other Person. (d) As to each Borrower, this Agreement and the other Loan Documents to which such Borrower is a party, and all other documents contemplated hereby and thereby, when executed and delivered by such Borrower will be the legally valid and binding obligations of such Borrower, enforceable against such Borrower in accordance with their respective terms, except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or limiting creditors' rights generally. (e) The Lender's Liens are validly created, perfected, and first priority Liens, subject only to Permitted Liens. 5.10 LITIGATION. Other than those matters disclosed on SCHEDULE 5.10, there are no actions, suits, or proceedings pending or, to the best knowledge of Borrowers, threatened against Borrowers, or any of their Subsidiaries, as applicable, except for (a) matters that are fully covered by insurance (subject to customary deductibles), and (b) matters arising after the Closing Date that, if decided adversely to Borrowers, or any of their Subsidiaries, as applicable, reasonably would not be expected to result in a Material Adverse Change. 5.11 NO MATERIAL ADVERSE CHANGE. All financial statements relating to Borrowers that have been delivered by Borrowers to Lender have been prepared in accordance with GAAP (except, in the case of unaudited financial statements, for the lack of footnotes and being subject to year-end audit adjustments) and present fairly in all material respects, Borrowers' financial condition as of the date thereof and results of operations for the period then ended. There has not been a Material Adverse Change with respect to Borrowers since the date of the latest financial statements submitted to Lender on or before the Closing Date. 5.12 FRAUDULENT TRANSFER. (a) Other than Cyrk.com, Inc., each Borrower is Solvent. (b) No transfer of property is being made by any Borrower and no obligation is being incurred by any Borrower in connection with the transactions contemplated by this Agreement or the other Loan Documents with the intent to hinder, delay, or defraud either present or future creditors of Borrowers. - 57 - 59 5.13 EMPLOYEE BENEFITS. Except as set forth in SCHEDULE 5.13, none of Borrowers, any of their Subsidiaries, or any of their ERISA Affiliates maintains or contributes to any Benefit Plan. 5.14 ENVIRONMENTAL CONDITION. Except as set forth on SCHEDULE 5.14, (a) to Borrowers' knowledge, none of Borrowers' properties or assets has ever been used by Borrowers or by previous owners or operators in the disposal of, or to produce, store, handle, treat, release, or transport, any Hazardous Materials, where such production, storage, handling, treatment, release or transport was in violation, in any material respect, of applicable Environmental Law, (b) to Borrowers' knowledge, none of Borrowers' properties or assets has ever been designated or identified in any manner pursuant to any environmental protection statute as a Hazardous Materials disposal site, (c) none of Borrowers have received notice that a Lien arising under any Environmental Law has attached to any revenues or to any Real Property owned or operated by Borrowers, and (d) none of Borrowers have received a summons, citation, notice, or directive from the Environmental Protection Agency or any other federal or state governmental agency concerning any action or omission by any Borrower resulting in the releasing or disposing of Hazardous Materials into the environment. 5.15 BROKERAGE FEES. Borrowers have not utilized the services of any broker or finder in connection with Borrowers' obtaining financing from Lender under this Agreement and no brokerage commission or finders fee is payable by Borrowers in connection herewith. 5.16 INTELLECTUAL PROPERTY. Each Borrower owns, or holds licenses in, all trademarks, trade names, copyrights, patents, patent rights, and licenses that are necessary to the conduct of its business as currently conducted. Attached hereto as SCHEDULE 5.16 is a true, correct, and complete listing of all material patents, patent applications, trademarks, trademark applications, copyrights, and copyright registrations as to which each Borrower is the owner or is an exclusive licensee. 5.17 LEASES. Borrowers enjoy peaceful and undisturbed possession under all leases material to the business of Borrowers and to which Borrowers are a party or under which Borrowers are operating. All of such leases are valid and subsisting and no material default by Borrowers exists under any of them. 5.18 DDAS. Set forth on SCHEDULE 5.18 are all of the DDAs of each Borrower, including, with respect to each depository (i) the name and address of such depository, and (ii) the account numbers of the accounts maintained with such depository. - 58 - 60 5.19 COMPLETE DISCLOSURE. All factual information (taken as a whole) furnished by or on behalf of Borrowers in writing to Lender (including all information contained in the Schedules hereto or in the other Loan Documents) for purposes of or in connection with this Agreement, the other Loan Documents or any transaction contemplated herein or therein is, and all other such factual information (taken as a whole) hereafter furnished by or on behalf of Borrowers in writing to the Lender will be, true and accurate, in all material respects, on the date as of which such information is dated or certified and not incomplete by omitting to state any fact necessary to make such information (taken as a whole) not misleading in any material respect at such time in light of the circumstances under which such information was provided. 5.20 INDEBTEDNESS. Set forth on SCHEDULE 5.20 is a true and complete list of all Indebtedness of each Borrower outstanding immediately prior to the Closing Date that is to remain outstanding after the Closing Date and such Schedule accurately reflects the aggregate principal amount of such Indebtedness and the principal terms thereof. 5.21 INACTIVE SUBSIDIARIES. Set forth on SCHEDULE 5.21 is a true and complete list of the Subsidiaries of each Borrower which constitute Inactive Subsidiaries. 5.22 ACTIVE DOMESTIC SUBSIDIARIES. Set forth on SCHEDULE 5.22 is a true and complete list of the Subsidiaries of each Borrower which constitute Active Domestic Subsidiaries. 5.23 IMPORTING OF INVENTORY. The Borrowers have complied with all United States customs laws and regulations in all material respects, including, but not limited to, such laws and regulations that pertain to entry, classification and valuation of merchandise, payment of duties, recordkeeping and country-of-origin marking. 5.24 LETTERS OF CREDIT. Set forth on SCHEDULE 5.24 is a true and complete list and description of all outstanding letters of credit (and the undrawn amounts thereof) issued for the account of each Borrower, Tonkin or Marketing Incentives prior to the closing of the December 2000 Loan Agreement. 5.25 SALE ASSETS. Set forth on SCHEDULE 5.25 is a true and complete list and description of all Sale Assets. 5.26 PURCHASE DOCUMENTS. Lender has received true, correct and complete copies of all Purchase Documents (other than Purchase Documents to be executed subsequent to the date hereof), and the Purchase Documents constitute all of the documents, agreements and instruments executed and delivered by Parent or Cyrk.com, Inc. in connection with the Sale Transaction and the closing of the transaction contemplated thereby. - 59 - 61 6. AFFIRMATIVE COVENANTS. Each Borrower covenants and agrees that, so long as any credit hereunder shall be available and until full and final payment of the Obligations, Borrowers shall and shall, where applicable, cause each of their respective Subsidiaries to do all of the following: 6.1 ACCOUNTING SYSTEM. Maintain a system of accounting that enables Borrowers to produce financial statements in accordance with GAAP and maintain records pertaining to the Collateral that contain information as from time to time reasonably may be requested by Lender. Borrowers also shall keep an inventory reporting system that shows all additions, sales, claims, returns, and allowances with respect to the Inventory. 6.2 COLLATERAL REPORTING. Provide Lender with the following documents at the following times in form satisfactory to Lender: ========================== ======================================================= Weekly (not later than (a) a report as of such date listing all outstanding the 2nd day of each week) Underlying Letters of Credit and time drafts as of such date, and (b) a report as of such date listing Eligible In-Transit Inventory subject to an Acceptable Purchase Order, the date or dates such Inventory became Eligible In-Transit Inventory, the estimated date of arrival at the port of entry, the port of entry and the Underlying Letters of Credit related to such Inventory. - -------------------------- ------------------------------------------------------- Monthly (not later than (c) a sales journal, collection journal, and credit the 2nd day of each register since the last such schedule and a calculation of month) the Borrowing Base as of such date, (d) notice of all returns, disputes, or claims, and (e) an Inventory Certificate regarding Eligible In-Transit Inventory as of such date. - -------------------------- ------------------------------------------------------- Weekly (not later than (f) Inventory reports specifying each Borrower's cost the 2nd day of each week) of its Inventory, by category. - -------------------------- ------------------------------------------------------- Weekly (not later than (g) a detailed calculation of the Borrowing Base the 2nd day of (including detail regarding those Accounts that are not Eligible Accounts), ========================== =======================================================
- 60 - 62 ========================== ======================================================= each week) (h) a detailed aging, by total, of the Accounts, together with a reconciliation to the detailed calculation of the Borrowing Base previously provided to Lender, (i) a summary aging, by vendor, of Borrowers' accounts payable and any book overdraft, and (j) a calculation of Dilution for the prior month. - -------------------------- ------------------------------------------------------- Quarterly (k) a detailed list of each Borrower's customers, and (l) a report regarding each Borrower's accrued, but unpaid, ad valorem taxes. - -------------------------- ------------------------------------------------------- Upon reasonable request (m) copies of invoices in connection with the Accounts, by Lender credit memos, remittance advices, deposit slips, shipping and delivery documents in connection with the Accounts and, for Inventory and Equipment acquired by Borrowers, purchase orders and invoices, and (n) such other reports as to the Collateral, or the financial condition of Borrowers as Lender may reasonably request. ========================== =======================================================
Notwithstanding the foregoing, during any period when Borrowers do not have the Required Availability, Borrowers, at Lender's request, shall provide the documents described in clauses (a) through (i) above on a more frequent basis as reasonably required by Lender. In addition, each Borrower agrees to cooperate fully with Lender to facilitate and implement a system of electronic collateral reporting in order to provide electronic reporting of each of the items set forth above. 6.3 Financial Statements, Reports, Certificates. Deliver to Lender: (a) as soon as available, but in any event within 45 days after the end of each month during each of Parent's fiscal years, (i) a company prepared unaudited consolidated balance sheet, income statement, and statement of cash flow (which cash flow statements only shall be required to be delivered to Lender within 45 days after the end of the last month of each quarter and which only shall cover each such quarter) covering Parent's and its Subsidiaries' operations during such period, (ii) a certificate signed by the chief financial officer of Parent to the effect that: - 61 - 63 (A) the financial statements delivered hereunder in respect of (1) the last month in any fiscal quarter have been prepared in accordance with GAAP (except for the lack of footnotes and being subject to year-end audit adjustments) and fairly present in all material respects the financial condition of Parent and its Subsidiaries and (2) the other months in any such fiscal quarter, to the actual knowledge of such officer after due inquiry, such financial statements do not (except for the lack of footnotes and being subject to year-end audit adjustments) contain any material inaccuracies, (B) the representations and warranties of Borrowers contained in this Agreement and the other Loan Documents are true and correct in all material respects on and as of the date of such certificate, as though made on and as of such date (except to the extent that such representations and warranties relate solely to an earlier date), (C) there does not exist any condition or event that constitutes a Default or Event of Default (or, to the extent of any non-compliance, describing such non-compliance as to which he or she may have knowledge and what action Borrowers have taken, are taking, or propose to take with respect thereto), and (iii) for each month that is the date on which a financial covenant in SECTION 7.20 is to be tested, a Compliance Certificate demonstrating, in reasonable detail, compliance at the end of such period with the applicable financial covenants contained in SECTION 7.20, and (b) as soon as available, but in any event within 120 days after the end of each of Parent's fiscal years, (i) financial statements of Parent and its Subsidiaries for each such fiscal year, audited by independent certified public accountants reasonably acceptable to Lender and certified, without any qualifications, by such accountants to have been prepared in accordance with GAAP (such audited financial statements to include a balance sheet, income statement, and statement of cash flow and, if prepared, such accountants' letter to management), (ii) a certificate of such accountants addressed to Lender stating that such accountants do not have knowledge of the existence of any Default or Event of Default under SECTION 7.20, - 62 - 64 (c) as soon as available, but in any event within 30 days prior to the start of each of Parent's fiscal years, (i) copies of Borrowers' Projections, in form and substance (including as to scope and underlying assumptions) satisfactory to Lender, in its sole discretion, for the forthcoming 2 years, year by year, and for the forthcoming fiscal year, quarter by quarter, certified by the chief financial officer of Parent as being such officer's good faith best estimate of the financial performance of Parent and its Subsidiaries during the period covered thereby, (d) if and when filed by any Borrower, (i) 10-Q quarterly reports, Form 10-K annual reports, and Form 8-K current reports, (ii) any other filings made by any Borrower with the SEC, (iii) copies of Borrowers' federal income tax returns, and any amendments thereto, filed with the Internal Revenue Service, and (iv) any other information that is provided by Parent to its shareholders generally, (e) if and when filed by any Borrower and as requested by Lender, satisfactory evidence of payment of applicable excise taxes in each jurisdictions in which (i) any Borrower conducts business or is required to pay any such excise tax, (ii) where any Borrower's failure to pay any such applicable excise tax would result in a Lien on the properties or assets of any Borrower, or (iii) where any Borrower's failure to pay any such applicable excise tax reasonably could be expected to result in a Material Adverse Change, (f) as soon as a Borrower has knowledge of any event or condition that constitutes a Default or an Event of Default, notice thereof and a statement of the curative action that Borrowers propose to take with respect thereto, and (g) upon the request of Lender, any other report reasonably requested relating to the financial condition of Borrowers. Borrowers agree to deliver financial statements prepared on both a consolidated basis and consolidating (but unaudited) basis and that no Borrower, or any Subsidiary of a Borrower, will have a fiscal year different from that of Parent. Borrowers agree that their independent certified public accountants are authorized to communicate with Lender and to release to - 63 - 65 Lender whatever financial information concerning Borrowers that Lender reasonably may request. 6.4 INTENTIONALLY OMITTED. 6.5 RETURN. Cause returns and allowances as between Borrowers and their Account Debtors, to be on the same basis and in accordance with the usual customary practices of the applicable Borrower, as they exist at the time of the execution and delivery of this Agreement. If, at a time when an Event of Default has occurred and is continuing, any Account Debtor returns any Inventory to any Borrower, the applicable Borrower promptly shall determine the reason for such return and, if Lender consents (which consent shall not be unreasonably withheld or delayed), issue a credit memorandum (with a copy to be sent to Lender) in the appropriate amount to such Account Debtor. 6.6 MAINTENANCE OF PROPERTIES. Except with respect to Permitted Dispositions, maintain and preserve all of its material properties which are necessary or useful in the proper conduct to its business in good working order and condition, ordinary wear and tear excepted, and comply at all times with the provisions of all leases to which it is a party as lessee, so as to prevent any loss or forfeiture thereof or thereunder. 6.7 TAXES. Cause all assessments and taxes, whether real, personal, or otherwise, due or payable by, or imposed, levied, or assessed against Borrowers or any of their assets to be paid in full, before delinquency or before the expiration of any extension period, except to the extent that the validity of such assessment or tax shall be the subject of a Permitted Protest. Borrowers will make timely payment or deposit of all tax payments and withholding taxes required of it by applicable laws, including those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes, and will, upon request, furnish Lender with proof satisfactory to Lender indicating that the applicable Borrower has made such payments or deposits. Borrowers shall deliver satisfactory evidence of payment of applicable excise taxes in each jurisdictions in which any Borrower is required to pay any such excise tax. 6.8 INSURANCE. (a) At Borrowers' expense, maintain insurance respecting its property and assets wherever located, covering loss or damage by fire, theft, explosion, and all other hazards and risks as ordinarily are insured against by other Persons engaged in the same or similar businesses. Borrowers also shall maintain business interruption, public liability, and product liability insurance, as well as insurance against larceny, embezzlement, and criminal misappropriation. All such policies of insurance shall be in such amounts and with such insurance companies as are reasonably satisfactory to Lender (it being agreed that Borrowers' present insurance companies and coverages are - 64 - 66 satisfactory to Lender). Borrowers shall deliver copies of all such policies to Lender with a satisfactory lender's loss payable endorsement naming Lender as sole loss payee or additional insured, as appropriate. Each policy of insurance or endorsement shall contain a clause requiring the insurer to give not less than 30 days prior written notice to Lender in the event of cancellation of the policy for any reason whatsoever. (b) Administrative Borrower shall give Lender prompt notice of any loss in excess of $200,000 covered by such insurance. Lender shall have the exclusive right to adjust any losses payable under any such insurance policies in excess of $200,000, without any liability to Borrowers whatsoever in respect of such adjustments; PROVIDED, HOWEVER, prior to adjusting any such loss, Lender first shall consult with Administrative Borrower in respect thereof. Any monies received as payment for any loss under any insurance policy mentioned above (other than liability insurance policies) or as payment of any award or compensation for condemnation or taking by eminent domain, in each case, to the extent exceeding $200,000, shall be paid over to Lender to be applied at the option of Lender either to the prepayment of the Obligations or shall be disbursed to Administrative Borrower under staged payment terms reasonably satisfactory to Lender for application to the cost of repairs, replacements, or restorations. Any such repairs, replacements, or restorations shall be effected with reasonable promptness and shall be of a value at least equal to the value of the items or property destroyed prior to such damage or destruction. (c) Borrowers shall not take out separate insurance concurrent in form or contributing in the event of loss with that required to be maintained under this SECTION 6.8, unless Lender is included thereon as named insured with the loss payable to Lender under a lender's loss payable endorsement or its equivalent. Administrative Borrower immediately shall notify Lender whenever such separate insurance is taken out, specifying the insurer thereunder and full particulars as to the policies evidencing the same, and copies of such policies promptly shall be provided to Lender. 6.9 LOCATION OF INVENTORY AND EQUIPMENT. Keep the Inventory and Equipment only at the locations identified on SCHEDULE 5.5 (except to the extent the Inventory or Equipment is in transit for a valid business purpose to any such location, between such locations or to a buyer thereof in the ordinary course of business in connection with a purchase that does not contravene the terms hereof); PROVIDED, HOWEVER, that Administrative Borrower may amend SCHEDULE 5.5 so long as such amendment occurs by written notice to Lender not less than 30 days prior to the date on which the Inventory or Equipment is moved to such new location, so long as such new location is within the continental United States, and so long as, at the time of such written notification, the applicable Borrower provides any financing statements or - 65 - 67 fixture filings necessary to perfect and continue perfected the Lender's Liens on such assets and also provides to Lender a Collateral Access Agreement. 6.10 COMPLIANCE WITH LAWS. Comply with the requirements of all applicable laws, rules, regulations, and orders of any Governmental Authority, including the Fair Labor Standards Act and the Americans With Disabilities Act, other laws, rules, regulations, and orders the non-compliance with which, individually or in the aggregate, would not result in and reasonably could not be expected to result in a Material Adverse Change. 6.11 LEASES. Pay when due (inclusive of any grace period) all rents and other amounts payable under any leases to which any Borrower is a party or by which any Borrower's properties and assets are bound, unless such payments are the subject of a Permitted Protest. 6.12 BROKERAGE COMMISSIONS. Pay any and all brokerage commission or finders fees incurred by Borrowers in connection with or as a result of Borrowers' obtaining financing from Lender under this Agreement. Borrowers agree and acknowledge that payment of all such brokerage commissions or finders fees shall be the sole responsibility of Borrowers, and each Borrower agrees to indemnify, defend, and hold Lender harmless from and against any such claim of any broker or finder in respect of any such commissions or fees. 6.13 EXISTENCE. At all times preserve and keep in full force and effect each Borrower's valid existence and good standing and any rights and franchises material to Borrowers' businesses. 6.14 ENVIRONMENTAL. (a) Keep any property either owned or operated by any Borrower free of any Environmental Liens or post bonds or other financial assurances sufficient to satisfy the obligations or liability evidenced by such Environmental Liens, (b) comply, in all material respects, with Environmental Laws and provide to Lender documentation of such compliance which Lender reasonably requests, (c) promptly notify Lender of any release of a Hazardous Material of any reportable quantity from or onto property owned or operated by any Borrower and take any Remedial Actions required to abate said release or otherwise to come into compliance with applicable Environmental Law, and (d) promptly provide Lender with written notice within 10 days of the receipt of any of the following: (i) notice that an Environmental Lien has been filed against any of the real or personal property of any Borrower, (ii) commencement of any Environmental Action or notice that an Environmental Action will be filed against any Borrower, and (iii) notice of a violation, citation, or other administrative order which reasonably could be expected to result in a Material Adverse Change. - 66 - 68 6.15 DISCLOSURE UPDATES. Promptly and in no event later than 5 Business Days after obtaining knowledge thereof, (a) notify Lender if any written information, exhibit, or report furnished to Lender contained any untrue statement of a material fact or omitted to state any material fact necessary to make the statements contained therein not misleading in light of the circumstances in which made, (b) correct any defect or error that may be discovered therein or in any Loan Document or in the execution, acknowledgement, filing, or recordation thereof, and (c) notify Lender if Borrowers change customs broker in Chicago, Illinois, in which case Borrowers shall cause such customs broker to promptly execute and deliver to Lender a Collateral Access Agreement. 6.16 PURCHASE DOCUMENTS. Promptly and in no event later than 3 Business Days after execution of any agreement or document described in clause (b) of the definition of Purchase Documents, deliver to Lender a true and accurate copy of any such agreement or document. 7. NEGATIVE COVENANTS. Each Borrower covenants and agrees that, so long as any credit hereunder shall be available and until full and final payment of the Obligations, Borrowers will not and will not, where applicable, permit any of their respective Subsidiaries to do any of the following: 7.1 INDEBTEDNESS. Create, incur, assume, permit, guarantee, or otherwise become or remain, directly or indirectly, liable with respect to any Indebtedness, except: (a) Indebtedness evidenced by this Agreement and the other Loan Documents, together with Indebtedness owed to Underlying Issuers with respect to Underlying Letters of Credit; (b) Indebtedness set forth on SCHEDULE 5.20; (c) Permitted Purchase Money Indebtedness; (d) refinancings, renewals, or extensions of Indebtedness permitted under clauses (b) and (c) of this SECTION 7.1 (and continuance or renewal of any Permitted Liens associated therewith) so long as: (i) the terms and conditions of such refinancings, renewals, or extensions do not, in Lender's judgment, materially impair the prospects of repayment of the Obligations by Borrowers or materially impair Borrowers' creditworthiness, (ii) such refinancings, renewals, or extensions do not result in an increase in the principal amount of the Indebtedness so refinanced, renewed, or extended, (iii) such refinancings, renewals, or extensions do not result in a shortening of the average weighted maturity of the Indebtedness so refinanced, renewed, or extended, nor are they on terms or conditions, that, taken as a whole, are - 67 - 69 materially more burdensome or restrictive to the applicable Borrower, and (iv) if the Indebtedness that is refinanced, renewed, or extended was subordinated in right of payment to the Obligations, then the terms and conditions of the refinancing, renewal, or extension Indebtedness must be include subordination terms and conditions that are at least as favorable to Lender as those that were applicable to the refinanced, renewed, or extended Indebtedness; (e) intercompany Indebtedness arising out of loans permitted under SECTION 7.13; and (f) other unsecured Indebtedness in an aggregate amount not to exceed $250,000 at any one time. 7.2 LIENS. Create, incur, assume, or permit to exist, directly or indirectly, any Lien on or with respect to any of its assets, of any kind, whether now owned or hereafter acquired, or any income or profits therefrom, except for Permitted Liens (including Liens that are replacements of Permitted Liens to the extent that the original Indebtedness is refinanced, renewed, or extended under SECTION 7.1(D) and so long as the replacement Liens only encumber those assets that secured the refinanced, renewed, or extended Indebtedness). 7.3 RESTRICTIONS ON FUNDAMENTAL CHANGES (a) Enter into any merger, consolidation, reorganization, or recapitalization, or reclassify its Stock; PROVIDED, HOWEVER, that any Borrower may merge or consolidate with any other Borrower so long as after giving effect to such transaction, no Default or Event of Default would exist. (b) Other than an Inactive Subsidiary (provided notice is given to Lender) and except as Lender otherwise consents in writing in advance, liquidate, wind up, or dissolve itself (or suffer any liquidation or dissolution). (c) Convey, sell, lease, license, assign, transfer, or otherwise dispose of, in one transaction or a series of transactions, all or any substantial part of its assets. 7.4 DISPOSAL OF ASSETS. Other than Permitted Dispositions, convey, sell, lease, license, assign, transfer, or otherwise dispose of any of the assets of any Borrower. 7.5 CHANGE NAME. Change any Borrower's name, FEIN, corporate structure or identity, or add any new fictitious name; PROVIDED, HOWEVER, that a Borrower may change its name upon at least 5 days prior written notice by Administrative Borrower to Lender of such change and so long as, at the time of such written notification, such Borrower provides any financing statements or fixture filings necessary to perfect and continue perfected Lender's Liens. - 68 - 70 7.6 GUARANTEE. Guarantee or otherwise become in any way liable with respect to the obligations of any third Person except for guarantees which are permitted under Section 7.1 and except by endorsement of instruments or items of payment for deposit to the account of Borrowers or their Subsidiaries or which are transmitted or turned over to Lender. 7.7 NATURE OF BUSINESS. Make any change in the principal nature of Borrowers' business. 7.8 PREPAYMENTS AND AMENDMENTS. (a) Except in connection with a refinancing permitted by SECTION 7.1(d), prepay, redeem, defease, purchase, or otherwise acquire any Indebtedness of any Borrower, other than the Obligations in accordance with this Agreement, and (b) Except in connection with a refinancing permitted by SECTION 7.1(d), directly or indirectly, amend, modify, alter, increase, or change any of the terms or conditions of any agreement, instrument, document, indenture, or other writing evidencing or concerning Indebtedness permitted under SECTIONS 7.1(b) or (c). 7.9 CHANGE OF CONTROL. Cause, permit, or suffer, directly or indirectly, any Change of Control. 7.10 CONSIGNMENTS. Consign any Inventory or sell any Inventory on bill and hold, sale or return, sale on approval, or other conditional terms of sale in excess of $500,000 in the aggregate at any one time. 7.11 DISTRIBUTIONS. Other than distributions or declaration and payment of dividends by a Borrower to another Borrower, make any distribution or declare or pay any dividends (in cash or other property, other than Stock) on, or purchase, acquire, redeem, or retire any of any Borrower's Stock, of any class, whether now or hereafter outstanding. 7.12 ACCOUNTING METHODS. Modify or change its method of accounting (other than as may be required to conform to GAAP). 7.13 INVESTMENTS. Except for Permitted Investments, directly or indirectly, make or acquire any Investment, or incur any liabilities (including contingent obligations) for or in connection with any Investment; PROVIDED, HOWEVER, that Borrowers shall not have Permitted Investments (other than in the Cash Management Accounts and the Investments described in clauses (d), (e), (f), (g) and (h) in the definition of "Permitted Investments") in excess of $1,000,000 outstanding at any one time unless the applicable Borrower and the applicable securities intermediary or bank have entered into Control Agreements or similar arrangements governing such Permitted Investments, as - 69 - 71 Lender shall determine in its Permitted Discretion, to perfect (and further establish) the Lender's Liens in such Permitted Investments. 7.14 TRANSACTIONS WITH AFFILIATES. Except with respect to transactions among any of Borrowers, directly or indirectly enter into or permit to exist any transaction (a) with any Affiliate of any Borrower (other than an Inactive Subsidiary) except for transactions permitted by SECTION 7.1(b), SECTION 7.1(e), SECTION 7.3, SECTION 7.13 or transactions that are in the ordinary course of Borrowers' business, upon fair and reasonable terms, that are fully disclosed to Lender, and that are no less favorable to Borrowers than would be obtained in an arm's length transaction with a non-Affiliate, or (b) with or between any Inactive Subsidiary. 7.15 SUSPENSION. Suspend or go out of a substantial portion of its business. 7.16 INACTIVE SUBSIDIARIES. Permit to occur the conducting of any business by an Inactive Subsidiary, except as permitted in SECTION 7.3(b). 7.17 USE OF PROCEEDS. Use the proceeds of the Advances for any purpose other than (a) on the Closing Date, (i) to repay in full the outstanding principal, accrued interest, and accrued fees and expenses owing to Existing Lender, and (ii) to pay transactional fees, costs, and expenses incurred in connection with this Agreement, the other Loan Documents, and the transactions contemplated hereby and thereby, and (b) thereafter, consistent with the terms and conditions hereof, for its lawful and permitted purposes. 7.18 CHANGE IN LOCATION OF CHIEF EXECUTIVE OFFICE; INVENTORY AND EQUIPMENT WITH BAILEES. Relocate its chief executive office to a new location without Administrative Borrower providing 5 days prior written notification thereof to Lender and so long as, at the time of such written notification, the applicable Borrower provides any financing statements or fixture filings necessary to perfect and continue perfected the Lender's Liens and also provides to Lender a Collateral Access Agreement with respect to such new location. The Inventory and Equipment shall not at any time now or hereafter be stored with a bailee, warehouseman, or similar party without Lender's prior written consent, except to the extent subject to a Collateral Access Agreement executed in connection with SECTION 5.3(c). 7.19 SECURITIES ACCOUNTS. Establish or maintain any Securities Account unless Lender shall have received a Control Agreement in respect of such Securities Account, except if a Control Agreement is not required under SECTION 7.13. Borrowers agree to not transfer assets out of any Securities Account; PROVIDED, HOWEVER, that, so long as no Event of Default has occurred and is continuing or would result therefrom, Borrowers may use such assets (and the proceeds thereof) to the extent not prohibited by this Agreement. - 70 - 72 7.20 FINANCIAL COVENANTS. (a) STOCKHOLDER EQUITY (SMI). Fail to maintain Stockholder Equity (SMI) of at least the required amount set forth in the following table as of the applicable date set forth opposite thereto:
- --------------------------------------- ---------------------------------------- Applicable Amount Applicable Date - --------------------------------------- ---------------------------------------- $83,000,000 Commencing March 31, 2001 and each month end thereafter - --------------------------------------- ----------------------------------------
(b) Make capital expenditures in excess of (a) $900,000 in respect of Borrowers' enterprise resource planning system between the date hereof and the Maturity Date, and (b) $600,000 in respect of other capital expenditures between the date hereof and the Maturity Date. 7.21 SMI. Notwithstanding anything to the contrary contained herein, without the prior written consent of Lender, (a) sell the Stock of SMI, or (b) permit or cause to be sold substantially all, or a material portion of, the assets of SMI. 7.22 AMENDMENT OF PURCHASE DOCUMENTS. Enter into or consent to any modification, alteration, amendment or supplement of, or waiver of rights under, the Purchase Documents which: (a) is prohibited by the Acknowledgement and Asset Segregation Letter; or (b) in any manner would have an adverse effect upon the interests of Lender, PROVIDED, HOWEVER, prior to entering into or consenting to any modification, alteration, amendment or supplement of, or waiver of rights under, the Purchase Documents which would not have an adverse effect upon the interest of Lender, Borrowers shall give Lender 3 Business Days prior written notice thereof. 8. EVENTS OF DEFAULT. Any one or more of the following events shall constitute an event of default (each, an "EVENT OF DEFAULT") under this Agreement: 8.1 If Borrowers fail to pay when due and payable or when declared due and payable, all or any portion of the Obligations (whether of principal, interest (including any interest which, but for the provisions of the Bankruptcy Code, would have accrued on such amounts), fees and charges due Lender, reimbursement of Lender Expenses, or other amounts constituting Obligations); 8.2 If Borrowers fail to perform the covenants contained in (a) SECTION 6.2, SECTION 6.9, SECTION 6.11, SECTION 6.13, SECTION 6.15 or SECTION 7.13 (with respect to the obligation to enter into a Control Agreement or similar - 71 - 73 arrangement as set forth therein), and any such failure continues for 5 days, (b) SECTION 6.3, SECTION 6.5 or SECTION 6.6, and such failure continues for 10 days, or (c) SECTION 6.1, and any such failure continues for 15 days. 8.3 If Borrowers fail to perform, keep, or observe any other term, provision, condition, covenant, or agreement contained in this Agreement or in any of the other Loan Documents; 8.4 If any material portion of any Borrower's or any of its Subsidiaries' assets is attached, seized, subjected to a writ or distress warrant, levied upon, or comes into the possession of any third Person; 8.5 If an Insolvency Proceeding is commenced by any Borrower or any of its Subsidiaries; 8.6 If an Insolvency Proceeding is commenced against any Borrower, or any of its Subsidiaries, and any of the following events occur: (a) the applicable Borrower or the Subsidiary consents to the institution of the Insolvency Proceeding against it, (b) the petition commencing the Insolvency Proceeding is not timely controverted, (c) the petition commencing the Insolvency Proceeding is not dismissed within 60 calendar days of the date of the filing thereof; PROVIDED, HOWEVER, that, during the pendency of such period, Lender shall be relieved of its obligation to extend credit hereunder, (d) an interim trustee is appointed to take possession of all or any substantial portion of the properties or assets of, or to operate all or any substantial portion of the business of, any Borrower or any of its Subsidiaries, or (e) an order for relief shall have been entered therein; 8.7 If any Borrower or any of its Subsidiaries is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs; 8.8 If a notice of Lien, levy, or assessment is filed of record with respect to any Borrower's or any of its Subsidiaries' assets by the United States, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, or if any taxes or debts owing at any time hereafter to any one or more of such entities becomes a Lien, whether choate or otherwise, upon any Borrower's or any of its Subsidiaries' assets and the same is not paid before such payment is delinquent unless the same shall have been bonded in a manner satisfactory to Lender in the exercise of its Permitted Discretion; 8.9 If a judgment or other claim becomes a Lien or encumbrance upon any material portion of any Borrower's or any of its Subsidiaries' assets unless the same shall have been bonded in a manner satisfactory to Lender in the exercise of its Permitted Discretion or is the subject of a Permitted Protest; - 72 - 74 8.10 If there is a default in any agreement involving a liability or Indebtedness in excess of $250,000 to which any Borrower or any of its Subsidiaries is a party and such default (a) occurs at the final maturity of the obligations thereunder, or (b) results in a right by the other party thereto, irrespective of whether exercised, to accelerate the maturity of the applicable Borrower's or its Subsidiaries' obligations thereunder, to terminate such agreement, or to refuse to renew such agreement pursuant to an automatic renewal right therein; 8.11 If any Borrower or any of its Subsidiaries makes any payment on account of Indebtedness that has been contractually subordinated in right of payment to the payment of the Obligations, except to the extent such payment is permitted by the terms of the subordination provisions applicable to such Indebtedness; 8.12 If any material misstatement or misrepresentation exists now or hereafter in any warranty, representation, statement, or Record made to Lender by any Borrower, its Subsidiaries, or any officer, employee, agent, or director of any Borrower or any of its Subsidiaries; 8.13 If this Agreement or any other Loan Document that purports to create a Lien, shall, for any reason, fail or cease to create a valid and perfected and, except to the extent permitted by the terms hereof or thereof, first priority Lien on or security interest in the Collateral covered hereby or thereby; 8.14 Any provision of any Loan Document shall at any time for any reason be declared to be null and void, or the validity or enforceability thereof shall be contested by any Borrower, or a proceeding shall be commenced by any Borrower, or by any Governmental Authority having jurisdiction over any Borrower, seeking to establish the invalidity or unenforceability thereof, or any Borrower shall deny that any Borrower has any liability or obligation purported to be created under any Loan Document; or 8.15 The Closing Date does not occur on or before February 16, 2001. 9. THE LENDER'S RIGHTS AND REMEDIES. 9.1 RIGHTS AND REMEDIES. Upon the occurrence, and during the continuation, of an Event of Default, Lender (at its election but without notice of its election and without demand) may do any one or more of the following, all of which are authorized by Borrowers: (a) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable; - 73 - 75 (b) Cease advancing money or extending credit to or for the benefit of Borrowers under this Agreement, under any of the Loan Documents, or under any other agreement between Borrowers and Lender; (c) Terminate this Agreement and any of the other Loan Documents as to any future liability or obligation of Lender, but without affecting any of the Lender's Liens in the Collateral and without affecting the Obligations; (d) Settle or adjust disputes and claims directly with Account Debtors for amounts and upon terms which Lender considers advisable, and in such cases, Lender will credit the Loan Account with only the net amounts received by Lender in payment of such disputed Accounts after deducting all Lender Expenses incurred or expended in connection therewith; (e) Cause Borrowers to hold all returned Inventory in trust for Lender, segregate all returned Inventory from all other assets of Borrowers or in Borrowers' possession and conspicuously label said returned Inventory as the property of Lender; (f) Without notice to or demand upon any Borrower, make such payments and do such acts as Lender considers necessary or reasonable to protect its security interests in the Collateral. Each Borrower agrees to assemble the Personal Property Collateral if Lender so requires, and to make the Personal Property Collateral available to Lender at a place that Lender may designate which is reasonably convenient to both parties. Each Borrower authorizes Lender to enter the premises where the Personal Property Collateral is located, to take and maintain possession of the Personal Property Collateral, or any part of it, and to pay, purchase, contest, or compromise any Lien that in Lender's determination appears to conflict with the Lender's Liens and to pay all expenses incurred in connection therewith and to charge Borrowers' Loan Account therefor. With respect to any of Borrowers' owned or leased premises, each Borrower hereby grants Lender a license to enter into possession of such premises and to occupy the same, without charge, in order to exercise any of Lender's rights or remedies provided herein, at law, in equity, or otherwise; (g) Without notice to any Borrower (such notice being expressly waived), and without constituting a retention of any collateral in satisfaction of an obligation (within the meaning of the Code), set off and apply to the Obligations any and all (i) balances and deposits of any Borrower held by Lender (including any amounts received in the Cash Management Accounts), or (ii) Indebtedness at any time owing to or for the credit or the account of any Borrower held by Lender; (h) Hold, as cash collateral, any and all balances and deposits of any Borrower held by Lender, and any amounts received in the Cash - 74 - 76 Management Accounts, to secure the full and final repayment of all of the Obligations; (i) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Personal Property Collateral. Each Borrower hereby grants to Lender a license or other right to use, without charge, such Borrower's labels, patents, copyrights, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Personal Property Collateral, in completing production of, advertising for sale, and selling any Personal Property Collateral and such Borrower's rights under all licenses and all franchise agreements shall inure to Lender's benefit; (j) Sell the Personal Property Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Borrowers' premises) as Lender determines is commercially reasonable. It is not necessary that the Personal Property Collateral be present at any such sale; (k) Lender shall give notice of the disposition of the Personal Property Collateral as follows: (i) Lender shall give Administrative Borrower (for the benefit of the applicable Borrower) a notice in writing of the time and place of public sale, or, if the sale is a private sale or some other disposition other than a public sale is to be made of the Personal Property Collateral, then the time on or after which the private sale or other disposition is to be made; and (ii) The notice shall be personally delivered or mailed, postage prepaid, to Administrative Borrower as provided in SECTION 12, at least 10 days before the earliest time of disposition set forth in the notice; no notice needs to be given prior to the disposition of any portion of the Personal Property Collateral that is perishable or threatens to decline speedily in value or that is of a type customarily sold on a recognized market; (l) Lender may credit bid and purchase at any public sale; (m) Lender may seek the appointment of a receiver or keeper to take possession of all or any portion of the Collateral or to operate same and, to the maximum extent permitted by law, may seek the appointment of such a receiver without the requirement of prior notice or a hearing; (n) Lender shall have all other rights and remedies available to it at law or in equity pursuant to any other Loan Documents; and - 75 - 77 (o) Any deficiency that exists after disposition of the Personal Property Collateral as provided above will be paid immediately by Borrowers. Any excess will be returned, without interest and subject to the rights of third Persons, by Lender to Administrative Borrower (for the benefit of the applicable Borrower). 9.2 REMEDIES CUMULATIVE. The rights and remedies of Lender under this Agreement, the other Loan Documents, and all other agreements shall be cumulative. Lender shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by Lender of one right or remedy shall be deemed an election, and no waiver by Lender of any Event of Default shall be deemed a continuing waiver. No delay by Lender shall constitute a waiver, election, or acquiescence by it. 10. TAXES AND EXPENSES. If any Borrower fails to pay any monies (whether taxes, assessments, insurance premiums, or, in the case of leased properties or assets, rents or other amounts payable under such leases) due to third Persons, or fails to make any deposits or furnish any required proof of payment or deposit, all as required under the terms of this Agreement, then, Lender, in its sole discretion and without prior notice to any Borrower (except, if in its Permitted Discretion, Lender determines that such a failure is not reasonably likely to give rise to a Lien on the Collateral, then Lender shall give 5 days notice thereof to Administrative Borrower, after which Lender), may do any or all of the following: (a) make payment of the same or any part thereof, (b) set up such reserves in Borrowers' Loan Account as Lender deems necessary to protect Lender from the exposure created by such failure, or (c) in the case of the failure to comply with SECTION 6.8 hereof, obtain and maintain insurance policies of the type described in SECTION 6.8 and take any action with respect to such policies as Lender deems prudent. Any such amounts paid by Lender shall constitute Lender Expenses and any such payments shall not constitute an agreement by Lender to make similar payments in the future or a waiver by Lender of any Event of Default under this Agreement. Lender need not inquire as to, or contest the validity of, any such expense, tax, or Lien and the receipt of the usual official notice for the payment thereof shall be conclusive evidence that the same was validly due and owing. 11. WAIVERS; INDEMNIFICATION. 11.1 DEMAND; PROTEST. Each Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment, nonpayment at maturity, release, compromise, settlement, extension, or renewal of documents, instruments, chattel paper, and guarantees at any time held by Lender on which any such Borrower may in any way be liable. - 76 - 78 11.2 LENDER'S LIABILITY FOR COLLATERAL. Each Borrower hereby agrees that: (a) so long as Lender complies with its obligations, if any, under the Code, Lender shall not in any way or manner be liable or responsible for: (i) the safekeeping of the Collateral, (ii) any loss or damage thereto occurring or arising in any manner or fashion from any cause, (iii) any diminution in the value thereof, or (iv) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other Person, and (b) all risk of loss, damage, or destruction of the Collateral shall be borne by Borrowers. 11.3 INDEMNIFICATION. Each Borrower shall pay, indemnify, defend, and hold the Lender-Related Persons, each Participant, and each of their respective officers, directors, employees, agents, and attorneys-in-fact (each, an "INDEMNIFIED PERSON") harmless (to the fullest extent permitted by law) from and against any and all claims, demands, suits, actions, investigations, proceedings, and damages, and all reasonable attorneys fees and disbursements and other costs and expenses actually incurred in connection therewith (as and when they are incurred and irrespective of whether suit is brought), at any time asserted against, imposed upon, or incurred by any of them (a) in connection with or as a result of or related to the execution, delivery, enforcement, performance, or administration of this Agreement, any of the other Loan Documents, or the transactions contemplated hereby or thereby, and (b) with respect to any investigation, litigation, or proceeding related to this Agreement, any other Loan Document, or the use of the proceeds of the credit provided hereunder, but excluding items specifically excluded from Borrower's obligations under SECTION 16.5 (irrespective of whether any Indemnified Person is a party thereto), or any act, omission, event, or circumstance in any manner related thereto (all the foregoing, collectively, the "INDEMNIFIED LIABILITIES"). The foregoing to the contrary notwithstanding, Borrowers shall have no obligation to any Indemnified Person under this SECTION 11.3 with respect to any Indemnified Liability that a court of competent jurisdiction finally determines to have resulted from the gross negligence or willful misconduct of such Indemnified Person. This provision shall survive the termination of this Agreement and the repayment of the Obligations. If any Indemnified Person makes any payment to any other Indemnified Person with respect to an Indemnified Liability as to which Borrowers were required to indemnify the Indemnified Person receiving such payment, the Indemnified Person making such payment is entitled to be indemnified and reimbursed by Borrowers with respect thereto. WITHOUT LIMITATION, THE FOREGOING INDEMNITY SHALL APPLY TO EACH INDEMNIFIED PERSON WITH RESPECT TO INDEMNIFIED LIABILITIES WHICH IN WHOLE OR IN PART CAUSED BY OR ARISE OUT OF ANY NEGLIGENT ACT OR OMISSION OF SUCH INDEMNIFIED PERSON OR OF ANY OTHER PERSON. - 77 - 79 12. NOTICES. Unless otherwise provided in this Agreement, all notices or demands by Borrowers or Lender to the other relating to this Agreement or any other Loan Document shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by registered or certified mail (postage prepaid, return receipt requested), overnight courier, electronic mail (at such email addresses as the Administrative Borrower or Lender, as applicable, may designate to each other in accordance herewith), or telefacsimile to Borrowers in care of Administrative Borrower or to Lender, as the case may be, at its address set forth below: If to Administrative Borrower: CYRK, INC. 101 Edgewater Drive Wakefield, Massachusetts 01880 Attn: Dominic F. Mammola, Chief Financial Officer Fax No. 781.876.5890 with copies to: CHOATE, HALL & STEWART 53 State Street Boston, Massachusetts 02109 Attn: Cameron Read, Esq. Fax No. 617.248.4000 If to Lender: FOOTHILL CAPITAL CORPORATION 2450 Colorado Avenue Suite 3000W Santa Monica, CA 90404 Attn: Business Finance Division Manager Fax No. 310.453.7413 with copies to: HOLLAND & KNIGHT LLP One Beacon Street Boston, Massachusetts 02108 Attn: Kerry S. Kehoe, Esq. Fax No. 617.523.6850 Lender and Borrowers may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other party. All notices or demands sent in accordance with this SECTION 12, other than notices by Lender in connection with enforcement rights against the Collateral under the provisions of the Code, shall be deemed received on the earlier of the date of actual receipt or 3 Business Days after the deposit - 78 - 80 thereof in the mail. Each Borrower acknowledges and agrees that notices sent by Lender in connection with the exercise of enforcement rights against Collateral under the provisions of the Code shall be deemed sent when deposited in the mail or personally delivered, or, where permitted by law, transmitted by telefacsimile or any other method set forth above. 13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER. (a) THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (UNLESS EXPRESSLY PROVIDED TO THE CONTRARY IN ANOTHER LOAN DOCUMENT IN RESPECT OF SUCH OTHER LOAN DOCUMENT), THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF, AND THE RIGHTS OF THE PARTIES HERETO AND THERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR THEREUNDER OR RELATED HERETO OR THERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS. (b) THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE TRIED AND LITIGATED ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF SUFFOLK, THE COMMONWEALTH OF MASSACHUSETTS; PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT LENDER'S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE LENDER ELECTS TO BRING SUCH ACTION OR WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND. BORROWERS AND LENDER WAIVE, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 13(b). BORROWERS AND LENDER HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. BORROWERS AND LENDER REPRESENT THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. - 79 - 81 14. ASSIGNMENTS AND PARTICIPATIONS; SUCCESSORS. 14.1 ASSIGNMENTS AND PARTICIPATIONS. (a) Lender may assign and delegate to an Eligible Transferee (each an "ASSIGNEE") all, or any ratable part of all, of the Obligations and the other rights and obligations of Lender hereunder and under the other Loan Documents; PROVIDED, HOWEVER, that Borrowers may continue to deal solely and directly with Lender in connection with the interest so assigned to an Assignee until written notice of such assignment, together with payment instructions, addresses, and related information with respect to the Assignee, and a copy of the executed assignment agreement between Lender and the Assignee have been given to Administrative Borrower by Lender. (b) From and after the date that Lender provides Administrative Borrower with such written notice and an executed assignment and acceptance agreement, (i) the Assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such assignment and acceptance agreement, shall have the assigned and delegated rights and obligations of Lender under the Loan Documents, and (ii) Lender shall, to the extent that rights and obligations hereunder and under the other Loan Documents have been assigned and delegated by it pursuant to such assignment and acceptance agreement, relinquish its rights (except with respect to SECTION 11.3 hereof) and be released from its obligations under this Agreement (and in the case of an assignment and acceptance agreement covering all or the remaining portion of Lender's rights and obligations under this Agreement and the other Loan Documents, Lender shall cease to be a party hereto and thereto). (c) Immediately upon Borrower's receipt of such fully executed assignment and acceptance agreement, this Agreement shall be deemed to be amended to the extent, but only to the extent, necessary to reflect the addition of the Assignee and the resulting adjustment of the rights and duties of Lender arising therefrom. (d) Lender may at any time sell to one or more commercial banks, financial institutions, or other Persons not Affiliates of Lender (a "PARTICIPANT") participating interests in Obligations and the other rights and interests of Lender hereunder and under the other Loan Documents; PROVIDED, HOWEVER, that (i) Lender shall remain the "Lender" for all purposes of this Agreement and the other Loan Documents and the Participant receiving the participating interest in the Obligations and the other rights and interests of Lender hereunder shall not constitute a "Lender" hereunder or under the other Loan Documents and Lender's obligations under this Agreement shall remain unchanged, (ii) Lender shall remain solely responsible for the performance of such obligations, (iii) Borrowers and Lender shall continue to deal solely and - 80 - 82 directly with each other in connection with Lender's rights and obligations under this Agreement and the other Loan Documents, (iv) Lender shall not transfer or grant any participating interest under which the Participant has the right to approve any amendment to, or any consent or waiver with respect to, this Agreement or any other Loan Document, except to the extent such amendment to, or consent or waiver with respect to this Agreement or of any other Loan Document would (A) extend the final maturity date of the Obligations hereunder in which such Participant is participating, (B) reduce the interest rate applicable to the Obligations hereunder in which such Participant is participating, (C) release all or a material portion of the Collateral or guaranties (except to the extent expressly provided herein or in any of the Loan Documents) supporting the Obligations hereunder in which such Participant is participating, (D) postpone the payment of, or reduce the amount of, the interest or fees payable to such Participant through Lender, or (E) change the amount or due dates of scheduled principal repayments or prepayments or premiums, and (v) all amounts payable by Borrowers hereunder shall be determined as if Lender had not sold such participation, except that, if amounts outstanding under this Agreement are due and unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall be deemed to have the right of set-off in respect of its participating interest in amounts owing under this Agreement to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Agreement. The rights of any Participant only shall be derivative through Lender and no Participant shall have any rights under this Agreement or the other Loan Documents or any direct rights as to Borrowers, the Collections, the Collateral, or otherwise in respect of the Obligations. No Participant shall have the right to participate directly in the making of decisions by Lender. (e) In connection with any such assignment or participation or proposed assignment or participation, a Lender may disclose all documents and information which it now or hereafter may have relating to Borrowers or Borrowers' business. (f) Any other provision in this Agreement notwithstanding, Lender may at any time create a security interest in, or pledge, all or any portion of its rights under and interest in this Agreement in favor of any Federal Reserve Bank in accordance with Regulation A of the Federal Reserve Bank or U.S. Treasury Regulation 31 CFR ss.203.14, and such Federal Reserve Bank may enforce such pledge or security interest in any manner permitted under applicable law. 14.2 SUCCESSORS. This Agreement shall bind and inure to the benefit of the respective successors and assigns of each of the parties; PROVIDED, HOWEVER, that Borrowers may not assign this Agreement or any rights or duties hereunder without Lender's prior written consent and any prohibited - 81 - 83 assignment shall be absolutely void ab initio. No consent to assignment by Lender shall release any Borrower from its Obligations. Lender may assign this Agreement and the other Loan Documents and its rights and duties hereunder and thereunder pursuant to SECTION 14.1 hereof and, except as expressly required pursuant to SECTION 14.1 hereof, no consent or approval by any Borrower is required in connection with any such assignment. 15. AMENDMENTS; WAIVERS. 15.1 AMENDMENTS AND WAIVERS. No amendment or waiver of any provision of this Agreement or any other Loan Document, and no consent with respect to any departure by Borrowers therefrom, shall be effective unless the same shall be in writing and signed by Lender and Administrative Borrower (on behalf of all Borrowers) and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given 15.2 NO WAIVERS; CUMULATIVE REMEDIES. No failure by Lender to exercise any right, remedy, or option under this Agreement or, any other Loan Document, or delay by Lender in exercising the same, will operate as a waiver thereof. No waiver by Lender will be effective unless it is in writing, and then only to the extent specifically stated. No waiver by Lender on any occasion shall affect or diminish Lender's rights thereafter to require strict performance by Borrowers of any provision of this Agreement. Lender's rights under this Agreement and the other Loan Documents will be cumulative and not exclusive of any other right or remedy that Lender may have. 16. GENERAL PROVISIONS. 16.1 EFFECTIVENESS. This Agreement shall be binding and deemed effective when executed by Borrowers and Lender. 16.2 SECTION HEADINGS. Headings and numbers have been set forth herein for convenience only. Unless the contrary is compelled by the context, everything contained in each Section applies equally to this entire Agreement. 16.3 INTERPRETATION. Neither this Agreement nor any uncertainty or ambiguity herein shall be construed against Lender or Borrowers, whether under any rule of construction or otherwise. On the contrary, this Agreement has been reviewed by all parties and shall be construed and interpreted according to the ordinary meaning of the words used so as to accomplish fairly the purposes and intentions of all parties hereto. 16.4 SEVERABILITY OF PROVISIONS. Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision. - 82 - 84 16.5 WITHHOLDING TAXES. All payments made by Borrowers hereunder or under any note will be made without setoff, counterclaim, or other defense, except as required by applicable law other than for Taxes (as defined below). All such payments will be made free and clear of, and without deduction or withholding for, any present or future taxes, levies, imposts, duties, fees, assessments or other charges of whatever nature now or hereafter imposed by any jurisdiction (other than the United States) or by any political subdivision or taxing authority thereof or therein (other than of the United States) with respect to such payments (but excluding, any tax imposed by any jurisdiction or by any political subdivision or taxing authority thereof or therein (i) measured by or based on the net income or net profits of Lender, (ii) to the extent that such tax results from a change in the circumstances of Lender, including a change in the residence, place of organization, or principal place of business of Lender, or a change in the branch or lending office of Lender participating in the transactions set forth herein), or (iii) to the extent that Borrowers are withholding amounts for any payment pursuant to the last sentence of this SECTION 16.15) and all interest, penalties or similar liabilities with respect thereto (all such non-excluded taxes, levies, imposts, duties, fees, assessments or other charges being referred to collectively as "TAXES"). If any Taxes are so levied or imposed, each Borrower agrees to pay the full amount of such Taxes, and such additional amounts as may be necessary so that every payment of all amounts due under this Agreement or under any note, including any amount paid pursuant to this SECTION 16.5 after withholding or deduction for or on account of any Taxes, will not be less than the amount provided for herein; PROVIDED, HOWEVER, that Borrowers shall not be required to increase any such amounts payable to Lender if the increase in such amount payable results from Lender's own willful misconduct or gross negligence. Borrowers will furnish to Lender as promptly as possible after the date the payment of any Taxes is due pursuant to applicable law certified copies of tax receipts evidencing such payment by Borrowers. If any Assignee is a foreign corporation, foreign partnership, or foreign trust as defined in the IRC, Borrowers shall withhold from each payment to the Assignee such amounts as are required as U.S. withholding tax under Section 1441 or 1442 of the IRC unless such Assignee shall establish an exemption from, or reduction of, such withholding tax amount by submitting appropriate information as required by the IRC that is satisfactory to Borrowers. Borrowers shall remit to the U.S. Treasury any amounts withheld from payments to the Assignee pursuant to this provision. 16.6 AMENDMENTS IN WRITING. This Agreement only can be amended by a writing signed by Lender and each of Borrowers. 16.7 COUNTERPARTS; TELEFACSIMILE EXECUTION. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one - 83 - 85 and the same Agreement. Delivery of an executed counterpart of this Agreement by telefacsimile shall be equally as effective as delivery of an original executed counterpart of this Agreement. Any party delivering an executed counterpart of this Agreement by telefacsimile also shall deliver an original executed counterpart of this Agreement but the failure to deliver an original executed counterpart shall not affect the validity, enforceability, and binding effect of this Agreement. The foregoing shall apply to each other Loan Document mutatis mutandis. 16.8 REVIVAL AND REINSTATEMENT OF OBLIGATIONS. If the incurrence or payment of the Obligations by any Borrower or the transfer to Lender of any property should for any reason subsequently be declared to be void or voidable under any state or federal law relating to creditors' rights, including provisions of the Bankruptcy Code relating to fraudulent transfers, preferences, or other voidable or recoverable payments of money or transfers of property (collectively, a "VOIDABLE TRANSFER"), and if Lender is required to repay or restore, in whole or in part, any such Voidable Transfer, or elects to do so upon the reasonable advice of its counsel, then, as to any such Voidable Transfer, or the amount thereof that Lender is required or elects to repay or restore, and as to all reasonable costs, expenses, and attorneys fees of Lender related thereto, the liability of Borrowers automatically shall be revived, reinstated, and restored and shall exist as though such Voidable Transfer had never been made. 16.9 INTEGRATION. This Agreement, together with the other Loan Documents, reflects the entire understanding of the parties with respect to the transactions contemplated hereby and shall not be contradicted or qualified by any other agreement, oral or written, before the date hereof. 16.10 PARENT AS AGENT FOR BORROWERS. Each Borrower hereby irrevocably appoints Parent as the borrowing agent and attorney-in-fact for all Borrowers (the "ADMINISTRATIVE BORROWER") which appointment shall remain in full force and effect unless and until Lender shall have received prior written notice signed by each Borrower that such appointment has been revoked and that another Borrower has been appointed Administrative Borrower. Each Borrower hereby irrevocably appoints and authorizes the Administrative Borrower (i) to provide Lender with all notices with respect to Advances and Letters of Credit obtained for the benefit of any Borrower and all other notices and instructions under this Agreement and (ii) to take such action as the Administrative Borrower deems appropriate on its behalf to obtain Advances and Letters of Credit and to exercise such other powers as are reasonably incidental thereto to carry out the purposes of this Agreement. It is understood that the handling of the Loan Account and Collateral of Borrowers in a combined fashion, as more fully set forth herein, is done solely as an accommodation to Borrowers in order to utilize the collective borrowing powers of Borrowers in the most efficient and economical manner and at their request, and that Lender shall not incur liability to any Borrower as a result hereof. - 84 - 86 Each Borrower expects to derive benefit, directly or indirectly, from the handling of the Loan Account and the Collateral in a combined fashion since the successful operation of each Borrower is dependent on the continued successful performance of the integrated group. To induce Lender to do so, and in consideration thereof, each Borrower hereby jointly and severally agrees to indemnify and hold harmless each Lender-Related Persons against any and all liability, expense, loss or claim of damage or injury, made against any each such Lender-Related Party by any Borrower or by any third party whosoever, arising from or incurred by reason of (a) the handling of the Loan Account and Collateral of Borrowers as herein provided, (b) Lender's relying on any instructions of the Administrative Borrower, or (c) any other action taken by any Lender-Related Party hereunder or under the other Loan Documents, except that Borrowers will have no liability to a Lender-Related Person under this SECTION 16.10 with respect to any liability that has been finally determined by a court of competent jurisdiction to have resulted solely from the gross negligence or willful misconduct of such Lender-Related Person. 16.11 CONFIDENTIALITY. Lender agrees that it will use its reasonable efforts to keep confidential any non-public information from time to time supplied to it under any Loan Document; PROVIDED, HOWEVER, that nothing herein shall affect the disclosure of any such information to (i) the extent Lender in good faith believes it is required by statute, rule regulation or judicial process, (ii) counsel for such Lender or to its accountants or auditors, (iii) bank examiners or comparable Persons, (iv) any Affiliate of Lender, (v) any Assignee, or participant, or any potential assignee or participant, of all or any portion of any Lender's rights who is notified of the confidential nature of the information and agrees to be bound by this provision or provisions reasonably comparable hereto, or (vi) any other Person in connection with any litigation to which Lender is a party; and PROVIDED, FURTHER that Lender shall hereunder have no obligation under this SECTION 16.11 to the extent any such information becomes available on a non-confidential basis from a source other than a Borrower or that any information becomes publicly available other than by a breach of this Section 16.11. Lender agrees that it will use all confidential information exclusively for the purpose of evaluating, monitoring, selling, protecting or enforcing its rights under the Loan Documents. 17. AMENDMENT AND RESTATEMENT 17.1 AMENDMENT AND RESTATEMENT. This Agreement amends and restates in its entirety the December 2000 Credit Agreement. Notwithstanding any other provision of this Agreement or any provision of any other Loan Document, the execution and delivery of this Agreement (a) shall not be deemed payment of any "Obligations" owing to Lender under the December 2000 Credit Agreement and shall not constitute a novation, and (b) except as provided in the Acknowledgement and Asset Segregation Letter, shall not release, terminate or limit or cause the release, termination or limitation of, the - 85 - 87 liens and security interests granted to Lender pursuant to the December 2000 Loan Agreement, which liens and security interests are hereby ratified and confirmed in all respects. Such liens and security interests continue to secure the Obligations, including, without limitation, the "Obligations" under the December 2000 Loan Agreement. 17.2 DECEMBER 2000 FEE AGREEMENT. Subject to the payment of any fees due under the December 2000 Fee Agreement in accordance with SECTION 3.1(N), such agreement is hereby terminated. [Signature page to follow.] - 86 - 88 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered as of the date first above written. CYRK, INC. a Delaware Corporation By: ------------------------------------ Title: CYRK.COM, INC. a Delaware corporation By: ------------------------------------ Title: FOOTHILL CAPITAL CORPORATION a California corporation By: ------------------------------------ Title: 89 AGREEMENT The undersigned (a) hereby agree and consent to the amendment and restatement of the December 2000 Loan Agreement as set forth herein, (b) acknowledge and agree that they are no longer borrowers and have no rights hereunder, (c) release Lender from any obligations under the December 2000 Loan Agreement, as amended and restated hereby, and (d) waive, release, remise and discharge Lender from all claims, debts, liabilities and obligations of whatever name, kind and nature, whether known or unknown, that either may have against Lender or ever had in connection with or relating to the December 2000 Loan Agreement or otherwise. TONKIN, INC. a Delaware corporation By: ------------------------------------ Title: CYRK ACQUISITION CORP. a Delaware corporation By: ------------------------------------ Title: 90 TABLE OF CONTENTS 1. DEFINITIONS AND CONSTRUCTION..............................................1 1.1 DEFINITIONS......................................................1 1.2 ACCOUNTING TERMS................................................27 1.3 CODE............................................................27 1.4 CONSTRUCTION....................................................27 1.5 SCHEDULES AND EXHIBITS..........................................28 2. LOAN AND TERMS OF PAYMENT................................................28 2.1 REVOLVER ADVANCES...............................................28 2.2 INTENTIONALLY OMITTED...........................................29 2.3 BORROWING PROCEDURES AND SETTLEMENTS............................29 2.4 PAYMENTS........................................................30 2.5 OVERADVANCES....................................................31 2.6 INTEREST RATES AND LETTER OF CREDIT FEE.........................31 2.7 CASH MANAGEMENT.................................................33 2.8 CREDITING PAYMENTS; FLOAT CHARGE................................34 2.9 DESIGNATED ACCOUNT..............................................34 2.10 MAINTENANCE OF LOAN ACCOUNT; STATEMENTS OF OBLIGATIONS..........35 2.11 FEES............................................................35 2.12 LETTERS OF CREDIT...............................................36 2.13 LIBOR OPTION....................................................39 2.14 CAPITAL REQUIREMENTS............................................42 2.15 JOINT AND SEVERAL LIABILITY OF BORROWERS........................43 3. CONDITIONS; TERM OF AGREEMENT............................................46 3.1 CONDITIONS PRECEDENT TO THE INITIAL EXTENSION OF CREDIT.........46 3.2 CONDITIONS SUBSEQUENT TO THE INITIAL EXTENSION OF CREDIT........49 3.3 CONDITIONS PRECEDENT TO ALL EXTENSIONS OF CREDIT................50 3.4 TERM............................................................50 3.5 EFFECT OF TERMINATION...........................................50 3.6 EARLY TERMINATION BY BORROWERS..................................51 4. CREATION OF SECURITY INTEREST............................................51 4.1 GRANT OF SECURITY INTEREST......................................51 4.2 NEGOTIABLE COLLATERAL...........................................51 4.3 COLLECTION OF ACCOUNTS, GENERAL INTANGIBLES, AND NEGOTIABLE COLLATERAL...........................................51 4.4 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED...................51 4.5 POWER OF ATTORNEY...............................................52 4.6 RIGHT TO INSPECT................................................53 4.7 CONTROL AGREEMENTS..............................................53 -i- 91 5. REPRESENTATIONS AND WARRANTIES...........................................53 5.1 NO ENCUMBRANCES.................................................54 5.2 ELIGIBLE ACCOUNTS...............................................54 5.3 ELIGIBLE INVENTORY..............................................55 5.4 EQUIPMENT.......................................................55 5.5 LOCATION OF INVENTORY AND EQUIPMENT.............................55 5.6 INVENTORY RECORDS...............................................55 5.7 LOCATION OF CHIEF EXECUTIVE OFFICE; FEIN........................55 5.8 DUE ORGANIZATION AND QUALIFICATION; SUBSIDIARIES................55 5.9 DUE AUTHORIZATION; NO CONFLICT..................................56 5.10 LITIGATION......................................................57 5.11 NO MATERIAL ADVERSE CHANGE......................................57 5.12 FRAUDULENT TRANSFER.............................................57 5.13 EMPLOYEE BENEFITS...............................................58 5.14 ENVIRONMENTAL CONDITION.........................................58 5.15 BROKERAGE FEES..................................................58 5.16 INTELLECTUAL PROPERTY...........................................58 5.17 LEASES..........................................................58 5.18 DDAS............................................................58 5.19 COMPLETE DISCLOSURE.............................................59 5.20 INDEBTEDNESS....................................................59 5.21 INACTIVE SUBSIDIARIES...........................................59 5.22 ACTIVE DOMESTIC SUBSIDIARIES....................................59 5.23 IMPORTING OF INVENTORY..........................................59 5.24 LETTERS OF CREDIT...............................................59 5.25 SALE ASSETS.....................................................59 5.26 PURCHASE DOCUMENTS..............................................59 6. AFFIRMATIVE COVENANTS....................................................60 6.1 ACCOUNTING SYSTEM...............................................60 6.2 COLLATERAL REPORTING............................................60 6.3 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES.....................61 6.4 INTENTIONALLY OMITTED...........................................64 6.5 RETURN..........................................................64 6.6 MAINTENANCE OF PROPERTIES.......................................64 6.7 TAXES...........................................................64 6.8 INSURANCE.......................................................64 6.9 LOCATION OF INVENTORY AND EQUIPMENT.............................65 6.10 COMPLIANCE WITH LAWS............................................66 6.11 LEASES..........................................................66 6.12 BROKERAGE COMMISSIONS...........................................66 6.13 EXISTENCE.......................................................66 6.14 ENVIRONMENTAL...................................................66 6.15 DISCLOSURE UPDATES..............................................67 6.16 PURCHASE DOCUMENTS..............................................67 -ii- 92 7. NEGATIVE COVENANTS.......................................................67 7.1 INDEBTEDNESS....................................................67 7.2 LIENS...........................................................68 7.3 RESTRICTIONS ON FUNDAMENTAL CHANGES.............................68 7.4 DISPOSAL OF ASSETS..............................................68 7.5 CHANGE NAME.....................................................68 7.6 GUARANTEE.......................................................69 7.7 NATURE OF BUSINESS..............................................69 7.8 PREPAYMENTS AND AMENDMENTS......................................69 7.9 CHANGE OF CONTROL...............................................69 7.10 CONSIGNMENTS....................................................69 7.11 DISTRIBUTIONS...................................................69 7.12 ACCOUNTING METHODS..............................................69 7.13 INVESTMENTS.....................................................69 7.14 TRANSACTIONS WITH AFFILIATES....................................70 7.15 SUSPENSION......................................................70 7.16 INACTIVE SUBSIDIARIES...........................................70 7.17 USE OF PROCEEDS.................................................70 7.18 CHANGE IN LOCATION OF CHIEF EXECUTIVE OFFICE; INVENTORY AND EQUIPMENT WITH BAILEES............................70 7.19 SECURITIES ACCOUNTS.............................................70 7.20 FINANCIAL COVENANTS.............................................71 7.21 SMI.............................................................71 7.22 AMENDMENT OF PURCHASE DOCUMENTS.................................71 8. EVENTS OF DEFAULT........................................................71 9. THE LENDER'S RIGHTS AND REMEDIES.........................................73 9.1 RIGHTS AND REMEDIES.............................................73 9.2 REMEDIES CUMULATIVE.............................................76 10. TAXES AND EXPENSES.......................................................76 11. WAIVERS; INDEMNIFICATION.................................................76 11.1 DEMAND; PROTEST.................................................76 11.2 LENDER'S LIABILITY FOR COLLATERAL...............................77 11.3 INDEMNIFICATION.................................................77 12. NOTICES..................................................................78 13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER...............................79 14. ASSIGNMENTS AND PARTICIPATIONS; SUCCESSORS...............................80 -iii- 93 14.1 ASSIGNMENTS AND PARTICIPATIONS..................................80 14.2 SUCCESSORS......................................................81 15. AMENDMENTS; WAIVERS......................................................82 15.1 AMENDMENTS AND WAIVERS..........................................82 15.2 NO WAIVERS; CUMULATIVE REMEDIES.................................82 16. GENERAL PROVISIONS.......................................................82 16.1 EFFECTIVENESS...................................................82 16.2 SECTION HEADINGS................................................82 16.3 INTERPRETATION..................................................82 16.4 SEVERABILITY OF PROVISIONS......................................82 16.5 WITHHOLDING TAXES...............................................83 16.6 AMENDMENTS IN WRITING...........................................83 16.7 COUNTERPARTS; TELEFACSIMILE EXECUTION...........................83 16.8 REVIVAL AND REINSTATEMENT OF OBLIGATIONS........................84 16.9 INTEGRATION.....................................................84 16.10 PARENT AS AGENT FOR BORROWERS...................................84 16.11 CONFIDENTIALITY.................................................85 17. AMENDMENT AND RESTATEMENT................................................85 17.1 AMENDMENT AND RESTATEMENT.......................................85 17.2 DECEMBER 2000 FEE AGREEMENT.....................................86 -iv- 94 EXHIBITS AND SCHEDULES Exhibit B-1 Form of Borrowing Base Certificate Exhibit C-1 Form of Compliance Certificate Exhibit L-1 Form of LIBOR Notice Schedule E-1 Existing Underlying Acceptable Purchase Order Letters of Credit Schedule E-2 Existing Standby Underlying Letters of Credit Schedule E-3 Existing Standby Other Underlying Letters of Credit Schedule I-1 Permitted Investments Schedule P-1 Permitted Liens Schedule D-1 Purchase Documents Schedule 2.7(a) Cash Management Banks Schedule 5.5 Locations of Inventory and Equipment Schedule 5.7 Chief Executive Office; FEIN Schedule 5.8(b) Capitalization of Borrowers Schedule 5.8(c) Capitalization of Borrowers' Subsidiaries Schedule 5.10 Litigation Schedule 5.13 Employee Benefits Schedule 5.14 Environmental Matters Schedule 5.16 Intellectual Property Schedule 5.18 Demand Deposit Accounts Schedule 5.20 Permitted Indebtedness Schedule 5.21 Inactive Subsidiaries Schedule 5.22 Active Domestic Subsidiaries Schedule 5.24 Letters of Credit Schedule 5.25 Sale Assets -v- EX-21.1 4 b38133ciex21-1.txt SUBSIDIARIES 1 EXHIBIT 21.1 CYRK, INC. SUBSIDIARIES
Name of Subsidiary Jurisdiction of Incorporation Ownership - ----------------- ----------------------------- --------- Cyrk Europe Limited United Kingdom 100% owned by Cyrk, Inc. Cyrk.Com, Inc. Delaware 100% owned by Cyrk, Inc. Cyrk Far East, Inc. British Virgin Islands 100% owned by Cyrk, Inc. Cyrk (H.K.) Limited Hong Kong 100% owned by Cyrk Far East, Inc. Cyrk Marketing Services, Inc. Canada 100% owned by Cyrk, Inc. Cyrk/Tonkin Europe LTD United Kingdom 100% owned by Cyrk, Inc Simon Marketing, Inc. Delaware 100% owned by Cyrk, Inc. Simon Marketing (Hong Kong) Limited Hong Kong 100% owned by Simon Marketing, Inc. Simon Ventures, Inc. California 100% owned by Simon Marketing, Inc. Simon Marketing Consulting (Canada) Limited Canada 100% owned by Simon Ventures, Inc. Simon Marketing International GmbH Germany 100% owned by Simon Ventures International LTD Simon Marketing International Limited United Kingdom 100% owned by Simon Marketing International GmbH Simon Marketing International Services Limited United Kingdom 100% owned by Simon Ventures International LTD Simon Marketing East Limited Hong Kong 100% owned by Simon Marketing (H.K.) LTD Simon Ventures International United Kingdom 100% owned by Simon Ventures, Inc. Limited
EX-23.1 5 b38133ciex23-1.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements of Cyrk, Inc. and subsidiaries on Form S-3 (File Nos. 333-89147, 333-44080, 333-64501 and 333-56863) and Form S-8 (File Nos. 333-95893, 333-45655, 33-75194 and 33-89534) of our report dated February 15, 2001 relating to the audit of the consolidated financial statements and the financial statement schedule of Cyrk, Inc. and subsidiaries as of December 31, 2000 and 1999 and for the three years ended December 31, 2000, 1999 and 1998, which report is included in this Annual Report on Form 10-K. PricewaterhouseCoopers LLP Boston, Massachusetts March 27, 2001 -----END PRIVACY-ENHANCED MESSAGE-----