-----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, QGZc4D0WFSHIvb+9Cj2ZlkhUGNs/LR6x3Jw0l+22VTBTMNaYlVDWE75XGF4sAMaT UJX+BqFCrtI9Xe9p21YtFg== 0000950135-99-003972.txt : 19990816 0000950135-99-003972.hdr.sgml : 19990816 ACCESSION NUMBER: 0000950135-99-003972 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 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-Q SEC ACT: SEC FILE NUMBER: 000-21878 FILM NUMBER: 99686618 BUSINESS ADDRESS: STREET 1: 3 POND RD CITY: GLOUCESTER STATE: MA ZIP: 01930 BUSINESS PHONE: 5082835800 MAIL ADDRESS: STREET 1: 3 POND RD CITY: GLOCESTER STATE: MA ZIP: 01930 FORMER COMPANY: FORMER CONFORMED NAME: CYRK INTERNATIONAL INC DATE OF NAME CHANGE: 19930521 10-Q 1 CYRK INC. 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________ to _________________________ Commission File Number 0-21878 CYRK, INC. (Exact name of Registrant as specified in its charter) DELAWARE 04-3081657 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3 POND ROAD, GLOUCESTER, MASSACHUSETTS 01930 (Address of principal executive offices) (Zip Code) (978) 283-5800 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] At July 30, 1999, 15,740,851 shares of the Registrant's common stock were outstanding. 2 CYRK, INC. FORM 10-Q TABLE OF CONTENTS PART I FINANCIAL INFORMATION PAGE NUMBER Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets - June 30, 1999 and December 31, 1998 3 Consolidated Statements of Operations - For the three and six months ended June 30, 1999 and 1998 4 Consolidated Statements of Comprehensive Income - For the three and six months ended June 30, 1999 and 1998 5 Consolidated Statements of Cash Flows - For the six months ended June 30, 1999 and 1998 6 Notes to Consolidated Financial Statements 7-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-12 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 13 SIGNATURES 14 2 3
PART I - FINANCIAL INFORMATION CYRK, INC. CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands, except share data) JUNE 30, 1999 DECEMBER 31, 1998 ------------- ----------------- ASSETS Current assets: Cash and cash equivalents $ 68,816 $ 75,819 Investment 3,397 2,944 Accounts receivable: Trade, less allowance for doubtful accounts of $3,620 at June 30, 1999 and $2,682 at December 31, 1998 103,881 87,372 Officers, stockholders and related parties 206 204 Inventories 55,601 51,250 Prepaid expenses and other current assets 9,738 7,227 Deferred and refundable income taxes 9,962 9,813 -------- -------- Total current assets 251,601 234,629 Property and equipment, net 12,860 13,285 Excess of cost over net assets acquired, net 81,665 82,771 Other assets 9,645 6,656 -------- -------- $355,771 $337,341 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings $ 22,258 $ 16,929 Accounts payable, trade 56,718 45,950 Accrued expenses and other current liabilities 88,420 83,280 Accrued restructuring expenses -- 953 -------- -------- Total current liabilities 167,396 147,112 Long-term obligations 9,604 12,099 Deferred income taxes 135 475 -------- -------- Total liabilities 177,135 159,686 -------- -------- Commitments and contingencies Stockholders' equity: Preferred stock, $.01 par value; 1,000,000 shares authorized; none issued -- -- Common stock, $.01 par value; 50,000,000 shares authorized; 15,693,846 shares issued and outstanding at June 30, 1999 and 15,453,058 shares issued and outstanding at December 31, 1998 157 155 Additional paid-in capital 140,470 138,784 Retained earnings 36,853 37,593 Accumulated other comprehensive income (loss): Unrealized gain on investment 1,807 1,442 Cumulative translation adjustment (651) (319) -------- -------- Total stockholders' equity 178,636 177,655 -------- -------- $355,771 $337,341 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 3 4
CYRK, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except per share data) For the Three Months For the Six Months Ended June 30, Ended June 30, -------------- -------------- 1999 1998 1999 1998 ---- ---- ---- ---- Net sales $ 313,523 $ 212,609 $ 472,600 $ 381,751 Cost of sales 273,827 180,810 403,150 319,644 --------- --------- --------- --------- Gross profit 39,696 31,799 69,450 62,107 Selling, general and administrative expenses 36,541 31,164 70,405 61,398 Goodwill amortization expense 909 821 1,779 1,639 Restructuring expense -- -- -- 15,486 --------- --------- --------- --------- Operating income (loss) 2,246 (186) (2,734) (16,416) Interest income (727) (671) (1,364) (1,237) Interest expense 539 635 1,155 1,249 Other income (1,179) -- (1,179) -- Equity in loss of affiliates, net -- 489 -- 908 --------- --------- --------- --------- Income (loss) before income taxes 3,613 (639) (1,346) (17,336) Income tax expense (benefit) 1,130 (224) (606) (7,070) ========= ========= ========= ========= Net income (loss) $ 2,483 $ (415) $ (740) $ (10,266) ========= ========= ========= ========= Earnings (loss) per common share - basic $ 0.16 $ (0.03) $ (0.05) $ (0.70) ========= ========= ========= ========= Earnings (loss) per common share - diluted $ 0.15 $ (0.03) $ (0.05) $ (0.70) ========= ========= ========= ========= Weighted average shares outstanding - basic 15,542 14,853 15,514 14,582 ========= ========= ========= ========= Weighted average shares outstanding - diluted 16,133 14,853 15,514 14,582 ========= ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 4 5
CYRK, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (In thousands) For the Three Months For the Six Months Ended June 30, Ended June 30, -------------- -------------- 1999 1998 1999 1998 ---- ---- ---- ---- Net income (loss) $ 2,483 $(415) $(740) $(10,266) ------- ----- ----- -------- Other comprehensive income (loss), before tax: Foreign currency translation adjustments (100) (82) (602) (353) Unrealized holding gains (losses) arising during period (163) -- 662 -- ------- ----- ----- -------- Other comprehensive income (loss), before tax (263) (82) 60 (353) Income tax expense (benefit) related to items of other comprehensive income (loss) (86) (29) 27 (140) ------- ----- ----- -------- Other comprehensive income (loss), net of tax (177) (53) 33 (213) ======= ===== ===== ======== Comprehensive income (loss) $ 2,306 $(468) $(707) $(10,479) ======= ===== ===== ========
The accompanying notes are an integral part of the consolidated financial statements. 5 6
CYRK, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) For the Six Months Ended June 30, ------------------- 1999 1998 ---- ---- Cash flows from operating activities: Net loss $ (740) $(10,266) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 4,174 4,380 Loss (gain) on sale of property and equipment 106 (297) Realized gain on sale of investments (1,179) (215) Provision for doubtful accounts 1,169 428 Deferred income taxes 2,858 (140) Equity in loss of affiliates -- 1,123 Non-cash restructuring charges 854 9,265 Increase (decrease) in cash from changes in working capital items: Accounts receivable (17,599) 53 Inventories (5,124) (293) Prepaid expenses and other current assets (2,495) 3,188 Refundable income taxes (3,347) (2,969) Accounts payable 10,818 (10,087) Accrued expenses and other current liabilities 4,820 1,932 -------- -------- Net cash used in operating activities (5,685) (3,898) -------- -------- Cash flows from investing activities: Purchase of property and equipment (2,090) (2,807) Proceeds from sale of property and equipment 26 814 Repayments from affiliates, net -- 568 Purchase of investment (2,000) -- Proceeds from sale of investments 1,387 529 Additional consideration related to acquisitions (665) (1,960) Other, net (989) (664) -------- -------- Net cash used in investing activities (4,331) (3,520) -------- -------- Cash flows from financing activities: Proceeds from short-term borrowings, net 5,329 1,196 Repayments of long-term obligations (2,495) (2,287) Proceeds from issuance of common stock 275 11,287 -------- -------- Net cash provided by financing activities 3,109 10,196 -------- -------- Effect of exchange rate changes on cash (96) (10) -------- -------- Net increase (decrease) in cash and cash equivalents (7,003) 2,768 Cash and cash equivalents, beginning of year 75,819 42,513 -------- -------- Cash and cash equivalents, end of period $ 68,816 $ 45,281 ======== ======== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 1,007 $ 1,090 ======== ======== Income taxes $ 1,089 $ 1,639 ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 6 7 CYRK, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation The accompanying unaudited financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes in accordance with generally accepted accounting principles for complete financial statements and should be read in conjunction with the audited financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. In the opinion of management, the accompanying unaudited financial statements contain all adjustments, consisting only of those of a normal recurring nature, necessary for fair presentation of the Company's financial position, results of operations and cash flows at the dates and for the periods presented. The operating results for the six months ended June 30, 1999 are not necessarily indicative of the results to be expected for the full year. Certain prior period amounts have been reclassified to conform with the current period presentation. 2. Inventories Inventories consist of the following (in thousands): JUNE 30, 1999 DECEMBER 31, 1998 ------------- ----------------- Raw materials $16,813 $13,622 Work in process 13,743 9,034 Finished goods 25,045 28,594 ------ ------ $55,601 $51,250 ======= ======= 3. Short-Term Borrowings The Company has available several worldwide bank letters of credit and revolving credit facilities which expire at various dates beginning in August 1999. In July 1999, the Company secured a revised facility with the bank for its primary domestic line of credit. The Company has commitments for letter of credit borrowings through July 2000 of up to an aggregate amount of $50 million for the purpose of financing the importation of various products from Asia and for issuing standby letters of credit. The revised facility contains certain net income, working capital and debt to net worth covenants. As of June 30, 1999, the Company's borrowing capacity was $88.5 million, of which $21.8 million of short-term borrowings and $16.3 million in letters of credit were outstanding. Borrowings under these facilities are collateralized by all assets of the Company. 4. Restructuring As a result of its 1998 corporate restructuring, the Company recorded a 1998 charge to operations of $11.8 million for asset write-downs, employee termination costs, lease cancellations and other related exit costs associated with the restructuring. The restructuring plan was fully executed by the end of 1998. A summary of activity in the restructuring accrual is as follows (in thousands): Balance at January 1, 1998 $ -- Restructuring provision 15,486 Employee termination costs and other cash payments (2,305) Non-cash asset write-downs (8,555) Accrual reversal (3,673) -------- Balance at December 31, 1998 953 Miscellaneous cash payments (99) Non-cash asset write-downs (854) -------- Balance at June 30, 1999 $ -- ======== 7 8 5. Earnings Per Share Disclosure The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computation for "income (loss) available to common stockholders" and other related disclosures required by Statement of Financial Accounting Standards No. 128, "Earnings per Share" (in thousands, except share data):
For the Quarters Ended June 30, 1999 1998 ----------------------------------------- --------------------------------------- Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------- ------------- --------- ----------- ------------- --------- Basic EPS: Income (loss) available to common stockholders $ 2,483 15,542,450 $ 0.16 $(415) 14,853,076 $(0.03) ====== ====== Effect of Dilutive Securities: Common stock equivalents 124,775 -- Contingently and non-contingently issuable shares 465,941 -- --------- ---------- ----- ---------- Diluted EPS: Income (loss) available to common stockholders and assumed conversions $ 2,483 16,133,166 $ 0.15 $(415) 14,853,076 $(0.03) ========= ========== ====== ===== ========== ======
For the quarter ended June 30, 1998, 981,114 of common stock equivalents and contingently and non-contingently issuable shares related to acquired companies were not included in the computation of diluted EPS because to do so would have been antidilutive.
For the Six Months Ended June 30, 1999 1998 ----------------------------------------- --------------------------------------- Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------- ------------- --------- ----------- ------------- --------- Basic and diluted EPS: Income (loss) available to common stockholders $ (740) 15,513,519 $(0.05) $(10,266) 14,581,688 $(0.70) ========= ========== ====== ======== ========== ======
For the six months ended June 30, 1999 and 1998, 682,539 and 809,730 of common stock equivalents and contingently and non-contingently issuable shares related to acquired companies were not included in the computation of diluted EPS because to do so would have been antidilutive. 8 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion of the financial condition and results of operations of the Company for the three and six month periods ended June 30, 1999 as compared to the same periods in the previous year. This discussion should be read in conjunction with the Consolidated Financial Statements of the Company and related Notes included elsewhere in this Form-10Q. FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS From time to time, the Company may provide forward-looking information such as forecasts of expected future performance or statements about the Company's plans and objectives. These forward-looking statements are based largely on the Company's expectations and are subject to a number of risks and uncertainties, certain of which are beyond the Company's control. The Company wishes to caution readers that actual results may differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company as a result of factors described in the Company's Amended Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995, filed as Exhibit 99.1 to the Company's first quarter 1999 Report on Form 10-Q which is incorporated herein by reference. GENERAL The Company is a full-service, integrated provider of marketing and promotional products and services. As such, the Company generates revenue from the sale of promotional products and the development of marketing programs. The majority of the Company's revenue is derived from the sale of promotional products to consumer product companies seeking to promote their brand and build customer loyalty. The Company's business is heavily concentrated with two customers, McDonald's Corporation ("McDonald's") and Philip Morris Incorporated ("Philip Morris"). Purchases of promotional products by McDonald's and Philip Morris in 1998 accounted for 57% and 11% of net sales, respectively. Net sales to McDonald's and Philip Morris accounted for 67% and 7% respectively, of total net sales in the first six months of 1999. The Company's business with McDonald's and Philip Morris (as well as other promotional customers) is based upon purchase orders placed from time to time during the course of promotions. There are no written agreements which commit them to make a certain level of purchases. The actual level of purchases depends on a number of factors, including the duration of the promotion and consumer redemption rates. Consequently, the Company's level of net sales is difficult to predict accurately and can fluctuate greatly from quarter to quarter. The Company expects that a significant percentage of its net sales in 1999 will be to McDonald's and Philip Morris. Philip Morris solicits competitive bids for its promotional programs. The Company's profit margin depends, to a great extent, on its competitive position when bidding and its ability to manage its costs after being awarded bids. Increased competition is expected to continue and may adversely impact the Company's profit margin on Philip Morris promotions in the future. A settlement agreement between 46 states and certain tobacco companies, including Philip Morris, prohibits the use of brand names by tobacco companies in connection with promotional programs relating to tobacco products beginning on July 1, 1999. The settlement agreement, however, does not prohibit the use of Philip Morris's corporate name in promotional programs. Due to the restrictions on the use of brand names, and the other limitations imposed by the settlement agreement on the tobacco industry, the settlement agreement could have a material adverse effect on the Company's business with Philip Morris and on its results of operations. In December 1997, the Company entered into a license agreement ("the Agreement") with Ty, Inc. ("Ty"), the world's largest manufacturer and marketer of plush toys (sold under the name Beanie Babies(R)). The Agreement granted the Company the exclusive right to develop and market licensed Beanie Babies products in connection with the Beanie Babies(R) Official Club(TM), a consumer membership kit. In May 1999, the parties mutually agreed in principle to modify the Agreement and to enter into a new arrangement in which the Company's rights in connection with the Beanie Babies Official Club are non-exclusive in order to enable Ty to market and distribute Beanie Babies products in connection with the Club in cooperation with the Company commencing in July 1999. Under the new arrangement, Cyrk will continue to provide creative and sourcing services for Ty in collaboration with Ty. While the terms of the new arrangement have not yet been finalized, the Company does not expect it will have a material adverse effect on the Company's anticipated sales of Beanie Babies products for the balance of 1999. 9 10 Sales of Beanie Babies related products accounted for 7% of the Company's consolidated net sales for 1998 and 8% of the Company's consolidated net sales in the first six months of 1999. The Company expects that 1999 revenues and profitability will be significantly benefited by sales of Beanie Babies products, of which the majority will be derived in the second half of the year. At June 30, 1999, the Company had written purchase orders for $342.6 million as compared to $242.5 million at June 30, 1998. The Company's purchase orders are generally subject to cancellation with limited penalty and are also subject to agreements with certain customers that limit gross margin levels. Therefore, the Company cautions that the backlog amounts may not necessarily be indicative of future revenues or earnings. CORPORATE RESTRUCTURING As a result of its 1998 corporate restructuring, the Company recorded a 1998 charge to operations of $11.8 million for asset write-downs, employee termination costs, lease cancellations and other related exit costs associated with the restructuring. The restructuring plan was fully executed by the end of 1998. The Company expects the discontinuance of certain businesses as a result of the restructuring plan to provide an annualized benefit to future results of approximately $9 million primarily attributable to the elimination of operating losses associated with these businesses and, to a lesser extent, as a result of cost savings from positions eliminated in its core ongoing promotional business. See notes to consolidated financial statements. RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998 Net sales increased $100.9 million, or 47%, to $313.5 million in the second quarter ended June 30, 1999 from $212.6 million in the second quarter of 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 $7.9 million, or 25%, to $39.7 million in the second quarter of 1999 from $31.8 million in the second quarter of 1998. As a percentage of net sales, the second quarter gross profit decreased to 12.7% in 1999 from 15.0% in 1998. This decrease 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. Selling, general and administrative expenses totaled $37.5 million in the second quarter of 1999 as compared to $32.0 million in the second quarter of 1998. As a percentage of net sales, selling, general and administrative costs totaled 11.9% as compared to 15.0% in the second quarter of 1998. The Company's increased spending was attributable to an increase in the commissions paid to field sales representatives associated with the Company's premium incentives and licensed product businesses as well as to increased client service cost. SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998 Net sales increased $90.8 million, or 24%, to $472.6 million in the first six months of 1999 from $381.8 million in the first six months of 1998. The increase in net sales was primarily attributable to revenues associated with McDonald's and Beanie Babies related products. Gross profit increased $7.3 million, or 12%, to $69.5 million in the first six months of 1999 from $62.1 million in the first six months of 1998. As a percentage of net sales, gross profit decreased to 14.7% in 1999 from 16.3% in 1998. This decrease was primarily the result of a higher concentration of sales volume associated with certain promotional programs in the second quarter that are subject to agreements with certain customers that limit gross margin levels. Selling, general and administrative expenses totaled $72.2 million in the first six months of 1999 as compared to $63.0 million in the first six months of 1998. As a percentage of net sales, selling, general and administrative costs totaled 15.3% as compared to 16.5% in the first six months of 1998. The Company's increased spending was attributable to an increase in the commissions paid to field sales representatives associated with the Company's premium incentives and licensed product businesses as well as to increased client service costs. 10 11 In connection with its February 1998 announcement to restructure worldwide operations, the Company recorded a restructuring charge in the first quarter of 1998 of $15.5 million attributable to asset write-downs, employee termination costs, lease cancellations and other related exit costs. Subsequent to the first quarter of 1998, the Company adjusted its original restructuring charge downward to $11.8 million to reflect the actual scope and extent of the exit costs of various operating facilities and activities. See notes to consolidated financial statements. LIQUIDITY AND CAPITAL RESOURCES Working capital at June 30, 1999 was $84.2 million compared to $87.5 million at December 31, 1998. Net cash used in operating activities during the first six months of 1999 was $5.7 million, due principally to a $17.6 million increase in accounts receivable which was partially offset by a $10.8 million increase in accounts payable. Net cash used in investing activities was $4.3 million, which was primarily attributable to $2.1 million for purchases of property and equipment and a $2.0 million purchase of an investment in the first quarter. In the first six months of 1998, net cash used in investing activities was $3.5 million, which was primarily attributable to $2.8 million for purchases of property and equipment and an increase of $2.0 million in intangible assets. As a result of the Company's decision to embark on the implementation of an enterprise resource planning ("ERP") system in 1999, the Company anticipates that its 1999 purchases of property and equipment could be substantially higher than the 1998 levels. The cost of the ERP system is expected to approximate $4.5 million and the Company anticipates utilizing external financing for this capital investment. The timing of the cash outlays remains subject to modifications to project timelines. Net cash provided by financing activities in the first six months of 1999 was $3.1 million primarily resulting from the net proceeds of short-term borrowings. In the first six months of 1998, net cash provided by financing activities was $10.2 million, which was primarily attributable to $11.3 million of proceeds from the issuance of common stock. In February 1998, the Company issued 975,610 shares of its common stock and a warrant to purchase up to 100,000 shares of its common stock in a private placement, resulting in net proceeds of approximately $10.0 million which is being used for general corporate purposes. Since inception, the Company has financed its working capital and capital expenditure requirements through cash generated from operations, public and private sales of common stock, bank borrowings and capital equipment leases. The Company currently has available several worldwide bank letters of credit and revolving credit facilities which expire at various dates beginning in August 1999. As of June 30, 1999, the Company's borrowing capacity was $88.5 million, of which $21.8 million of short-term borrowings and $16.3 million in letters of credit were outstanding. Borrowings under these facilities are collateralized by all assets of the Company. In July 1999, the Company secured a revised facility with the bank for its primary domestic line of credit. The Company has commitments for letter of credit borrowings through July 2000 of up to an aggregate amount of $50 million for the purpose of financing the importation of various products from Asia and for issuing standby letters of credit. Management believes that the Company's existing cash position and credit facilities combined with internally generated cash flow will satisfy its liquidity and capital needs through the end of 1999. The Company anticipates the majority of its internal cash flow will be derived in the second half of 1999. The Company's ability to generate internal cash flow is highly dependent upon its continued relationships with McDonald's, Philip Morris and Ty. Any material adverse change from the Company's current expectations of 1999 revenues attributable to its major business relationships could adversely affect the Company's cash position and capital availability. The Company may seek additional financing during the next twelve months. Any additional equity financing could result in additional dilution to existing investors. IMPACT OF THE YEAR 2000 ISSUE General The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. Based on an assessment conducted in 1997, the Company determined that it was necessary to modify or 11 12 replace portions of its software so that its computer systems will properly utilize dates beyond December 31, 1999. To address these problems, the Company initiated a Year 2000 Compliance Program which is described below. The Company does not anticipate that the addressing of the Year 2000 problem for its internal information systems and current and future products will have a material impact on its operations or financial results. However, there can be no assurance that these costs will not be greater than anticipated, or that corrective actions undertaken will be completed before any Year 2000 problems occur. The Year 2000 issue could lower demand for the Company's products while increasing the Company's costs. These combining factors, while not quantified, could have a material adverse impact on the Company's financial results. State of Readiness To manage its Year 2000 program, the Company has divided its efforts into three program areas--Information Technology (computer hardware, software, and electronic data interchange (EDI) interfaces), Physical Plant (manufacturing equipment and facilities) and Extended Enterprise (suppliers and customers). For each of these program areas, the Company is using a four-step approach: Ownership (creating awareness, assigning tasks); Inventory (listing items to be assessed for Year 2000 readiness); Assessment (prioritizing the inventoried items, assessing their Year 2000 readiness, planning corrective actions, making initial contingency plans); and, Corrective Action Deployment (implementing corrective actions, verifying implementation, finalizing and executing contingency plans). In December 1998, the Ownership, Inventory and Assessment steps were essentially complete for all program areas. The target completion date for Corrective Action Deployment is September 1999. To date, the Company has achieved approximately 90 percent of its Corrective Action Deployment goals for its three program areas. The Company expects to complete its Year 2000 assessments, modifications and conversions by September 1999. The status for each program area is as follows: * Information Technology: Substantially all of the Company's business strategic information systems (financial, distribution and marketing) have been assessed, corrected and verified, and corrected systems are expected to be completed by September 1999. * Physical Plant: Facilities and manufacturing equipment assessment has been completed with no corrective action necessary. * Extended Enterprise: As a result of discussions with its computer software program suppliers, the Company has been assured that all of its current software will be modified or replaced to be Year 2000 compliant. In addition, the Company has initiated a formal Year 2000 compliance document where the Company's software suppliers will certify their plans and action steps for modification or replacement of existing Company software to ensure timely Year 2000 compliance. The Company has initiated formal communications with its key customers and suppliers to determine the extent to which the Company may be vulnerable to the failure of those third parties to address their own Year 2000 issues. At this time, the Company cannot determine the impact the Year 2000 will have on its key customers or suppliers. If the Company's customers or suppliers do not convert their systems to become Year 2000 compliant, the Company may be materially adversely affected. Costs to Address Year 2000 Issues Currently, the Company expects that the costs associated with becoming Year 2000 compliant will not exceed $.3 million, of which approximately $.2 million has been expended to date. Risks of Year 2000 Issues and Contingency Plans The Company continues to assess the Year 2000 issues relating to its physical plant, suppliers and customers. The Company is developing, and will continue to develop, contingency plans for dealing with any adverse effect that becomes likely in the event the Company's remediation plans are not successful or third parties fail to remediate their own Year 2000 issues. The Company's contingency planning process is intended to mitigate worst-case business disruptions. 12 13 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 Financial Data Schedule (b) No reports on Form 8-K were filed during the quarter for which this report is filed. 13 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: August 12, 1999 CYRK, INC. /s/Dominic F. Mammola ---------------------------------------------------- Dominic F. Mammola Executive Vice President and Chief Financial Officer (duly authorized officer and principal financial and accounting officer) 14 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 1 68,816 3,397 107,501 3,620 55,601 251,601 32,729 19,869 355,771 167,396 0 0 0 157 178,479 355,771 472,600 472,600 403,150 403,150 0 1,169 1,155 (1,346) (606) (740) 0 0 0 (740) (.05) (.05)
-----END PRIVACY-ENHANCED MESSAGE-----