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UNITED STATES
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, 2002
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
SIMON WORLDWIDE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation or
organization)
04-3081657
(I.R.S. Employer
Identification No.)
1888 CENTURY PARK EAST
LOS ANGELES, CALIFORNIA 90067
(Address of principal executive offices)
(310) 552-6800
(Registrant's telephone number, including area code)
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 NONE
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 [ ] No [X]
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. [ ]
Indicate by a check mark whether registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act). [ ]
At June 30, 2002, the aggregate market value of voting stock held by
non-affiliates of the registrant was $1,398,615.
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At June 30, 2003, 16,653,193 shares of the registrant's common stock were
outstanding.
PART I
NOTE: FOR THE REASONS DESCRIBED UNDER ITEM 15(A)1 FINANCIAL STATEMENTS, THE
CONSOLIDATED FINANCIAL STATEMENTS OF THE REGISTRANT FOR THE YEAR ENDED
DECEMBER 31, 2000 CONTAINED IN THIS REPORT ARE UNAUDITED AND, AS SUCH, DO
NOT COMPLY WITH THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934.
ITEM 1. BUSINESS.
GENERAL
In August 2001, Simon Worldwide, Inc. ("Simon Worldwide" or "the Company")
experienced the loss of its two largest customers: McDonald's Corporation
("McDonald's") and, to a lesser extent, Philip Morris Incorporated ("Philip
Morris"), now known as Altria Inc. (see Loss of Customers, Resulting Events and
Going Concern section below). Since August 2001, the Company has concentrated
its efforts on reducing its costs and settling numerous claims, contractual
obligations and pending litigation. As a result of these efforts the Company has
been able to resolve a significant number of outstanding liabilities that
existed at that time or arose subsequent to that date. As of December 31, 2002,
the Company had reduced its worldwide workforce to 9 employees from 136
employees as of December 31, 2001.
At December 31, 2002, the Company had a stockholders' deficit of $17,225,000.
For the year ended December 31, 2002, the Company had a net loss of $9,286,000.
The Company continues to incur losses in 2003 for the general and administrative
expenses incurred to manage the affairs of the Company and resolve outstanding
legal matters. Management believes it has sufficient capital resources and
liquidity to operate the Company for the foreseeable future. However, as a
result of the loss of its major customers, along with the resulting legal
matters discussed further below, there is substantial doubt about the Company's
ability to continue as a going concern. The accompanying financial statements do
not include any adjustments that might result from the outcome of these
uncertainties.
By April 2002, the Company effectively eliminated a majority of its ongoing
operations and was in the process of disposing its assets and settling its
liabilities related to the promotions business. The process is ongoing and will
continue throughout 2003 and possibly into 2004. During the second quarter of
2002, the discontinued activities of the Company, consisting of revenues,
operating costs, certain general and administrative costs and certain assets and
liabilities associated with the Company's promotions business, were classified
as discontinued operations for financial reporting purposes. The Board of
Directors of the Company continues to consider various alternative courses of
action for the Company going forward, including possibly acquiring one or more
operating businesses, selling the Company or distributing its net assets, if
any, to shareholders. The decision on which course to take will depend upon a
number of factors including the outcome of the significant litigation matters in
which the Company is involved. See Item 3. Legal Proceedings. To date, the Board
of Directors has made no decision on which course of action to take.
Until the unanticipated events of August 2001 occurred, Simon Worldwide, a
Delaware corporation that was founded in 1976, had been operating as a
multi-national full-service promotional marketing company, specializing in the
design and development of high-impact promotional products and sales promotions.
The majority of the Company's revenue was derived from the sale of products to
consumer products and services companies seeking to promote their brand names
and corporate identities and build brand loyalty. Net sales to McDonald's and
Philip Morris accounted for 78% and 8% and 65% and 9% of total net sales in 2001
and 2000, respectively. The Company had no sales during 2002.
Beginning in 1996, the Company grew as a result of a series of acquisitions of
companies engaged in the corporate catalog and advertising specialty segment of
the promotions industry. Certain of these acquired companies operated within the
Company's Corporate Promotions Group ("CPG") and had a history of disappointing
financial results. As a result, the Company sold these businesses in February of
2001 (see 2001 Sale of Business section below).
In 1997, the Company expanded into the consumer promotion arena with its
acquisition of Simon Marketing, Inc. ("Simon Marketing"), a Los Angeles-based
marketing and promotion agency. The Company conducted its business with
McDonald's through its Simon Marketing subsidiary. Simon Marketing designed and
implemented marketing promotions for McDonald's, which included premiums, games,
sweepstakes, events, contests, coupon offers, sports marketing, licensing and
promotional retail items.
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In May 2000, Simon Worldwide announced that it would restructure the Company by
integrating and streamlining the operations of its Custom Product and Licensing
group, its division that provided custom designed products for large consumer
promotions, and its CPG division into one product-focused business unit. As a
result of the subsequent February 2001 sale of its integrated CPG business, the
Company implemented a second quarter 2001 restructuring plan with the objective
of restoring consistent profitability through a more rationalized,
cost-efficient business model for the remaining business.
LOSS OF CUSTOMERS, RESULTING EVENTS AND GOING CONCERN
On August 21, 2001, the Company was notified by McDonald's that they were
terminating their approximately 25-year relationship with Simon Marketing as a
result of the arrest of Jerome P. Jacobson ("Mr. Jacobson"), a former employee
of Simon Marketing who subsequently plead guilty to embezzling winning game
pieces from McDonald's promotional games administered by Simon Marketing. No
other Company employee was found or alleged to have any knowledge of or
complicity in his illegal scheme. The Second Superseding Indictment filed
December 7, 2001 by the U.S. Attorney in the United States District Court for
the Middle District of Florida charged that Mr. Jacobson "embezzled more than
$20 million worth of high value winning McDonald's promotional game pieces from
his employer, [Simon]". Simon Marketing was identified in the Indictment, along
with McDonald's, as an innocent victim of Mr. Jacobson's fraudulent scheme.
(Also, see section, Legal Actions Associated with the McDonald's Matter, below.)
Further, on August 23, 2001, the Company was notified that its second largest
customer, Philip Morris, was also ending their approximately nine year
relationship with the Company. Net sales to McDonald's and Philip Morris
accounted for 78% and 8% and 65% and 9% of total net sales in 2001 and 2000,
respectively. The Company's financial condition, results of operations and net
cash flows have been and will continue to be materially adversely affected by
the loss of the McDonald's and Philip Morris business, as well as the loss of
its other customers. At December 31, 2002 and 2001, Simon Worldwide had no
customer backlog as compared to $236.9 million of written customer purchase
orders at December 31, 2000. In addition, the absence of business from
McDonald's and Philip Morris has adversely affected the Company's relationship
with and access to foreign manufacturing sources.
As a result of actions taken in the second half of 2001, the Company recorded
third and fourth quarter pre-tax charges totaling approximately $80.3 million in
2001. These charges relate principally to the write-down of goodwill
attributable to Simon Marketing ($46.7 million) and to a substantial reduction
of its worldwide infrastructure, including asset write-downs ($22.4 million),
lump-sum severance costs associated with the termination of approximately 377
employees ($6.3 million), lease cancellations ($1.8 million), legal fees ($1.7
million) and other costs associated with the McDonald's and Philip Morris
matters ($1.4 million). During 2002, the Company also recorded a pre-tax net
charge totaling approximately $4.6 million associated with the loss of
customers. Charges totaling $8.6 million, primarily related to asset write-downs
($3.6 million), professional fees ($4.3 million), labor and other costs ($.7
million), were partially offset by recoveries of certain assets, totaling $1.3
million (see note 6 of notes to consolidated financial statements), that had
been written off and included in the 2001 charges attributable to the loss of
significant customers, and other gains ($2.7 million).
In order to induce their continued commitment to provide vital services to the
Company in the wake of the events of August 2001, in the third quarter of 2001
the Company entered into retention arrangements with its Chief Executive
Officer, each of the three non-management members of the Company's Board of
Directors (the "Board") and key members of management of Simon Marketing (which
are described below). As a further inducement to the Company's directors to
continue their services to the Company, and to provide assurances that the
Company will be able to fulfill its obligations to indemnify directors, officers
and agents of the Company and its subsidiaries ("Indemnitees") under Delaware
law and pursuant to various contractual arrangements, in March 2002 the Company
entered into an Indemnification Trust Agreement ("Agreement") for the benefit of
the Indemnitees. (See notes to consolidated financial statements.) Pursuant to
this Agreement, the Company has deposited a total of $2.7 million with an
independent trustee in order to fund any indemnification amounts owed to an
Indemnitee, which the Company is unable to pay. These arrangements, and the
severance arrangements described below, were negotiated by the Company on an
arms-length basis with the advice of the Company's counsel and other advisors.
In connection with the loss of its customers and pursuant to negotiations that
began in the fourth quarter of 2001, the Company entered into a Termination,
Severance and General Release Agreement ("Agreement") with its Chief Executive
Officer ("CEO") in March 2002. In accordance with the terms of this Agreement,
the CEO's employment with the Company terminated in March 2002 (the CEO remains
on the Company's Board of Directors) and substantially all other agreements,
obligations and rights existing between the CEO and the Company were terminated,
including the CEO's Employment Agreement dated September 1, 1999, as amended,
and his retention agreement dated August 29, 2001. The ongoing
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operations of the Company and Simon Marketing are being managed by the Executive
Committee of the Board consisting of Messrs. George Golleher and Anthony Kouba,
in consultation with outside financial, accounting, legal and other advisors. As
a result of the foregoing, the Company recorded a 2001 fourth quarter pre-tax
charge of $4.6 million, relating principally to the forgiveness of indebtedness
of the CEO to the Company, a lump-sum severance payment and the write-off of an
asset associated with an insurance policy on the life of the CEO. The Company
received a full release from the CEO in connection with this Agreement, and the
Company provided the CEO with a full release. Additionally, the Agreement called
for the CEO to provide consulting services to the Company for a period of six
months after the CEO's employment with the Company terminated in exchange for a
fee of $46,666 per month, plus specified expenses. See notes to consolidated
financial statements and Executive Compensation.
On August 28, 2001, the Company entered into retention letter agreements with
each of Messrs. Golleher and Kouba and Joseph Bartlett, then the non-management
members of the Board, pursuant to which the Company paid each of them a
retention fee of $150,000 in exchange for their agreement to serve as a director
of the Company for at least six months. If a director resigned before the end of
the six-month period, the director would have been required to refund to the
Company the pro rata portion of the retention fee equal to the percentage of the
six-month period not served. Additionally, the Company agreed to compensate
these directors at an hourly rate of $750 for services outside of Board and
committee meetings (for which they were paid $2,000 per meeting in accordance
with existing Company policy). These agreements, including the hourly rate for
services, have subsequently been replaced by Executive Services Agreements dated
May 30, 2003. See Item 11. Executive Compensation.
In addition, retention agreements were entered into in September and October
2001 with certain key employees which provided for retention payments ranging
from 8% to 100% of their respective salaries conditioned upon continued
employment through specified dates and/or severance payments of up to 100% of
these employee's respective annual salaries should such employees be terminated
within the parameters of their agreements (for example, termination without
cause). In the first quarter of 2002, additional similar agreements were entered
into with certain employees of one of the Company's subsidiaries. The terms of
these agreements were generally consistent with the terms of the employees'
prior retention agreements. Payments under these agreements have been made at
various dates from September 2001 through March 2002. The Company's obligations
under these agreements were approximately $3.1 million. Approximately $1.7
million of these commitments had been segregated in separate cash accounts in
October 2001, in which security interests had been granted to certain employees,
and were released back to the Company in 2002 when all such retention and
severance payments were made to these applicable employees.
LEGAL ACTIONS ASSOCIATED WITH THE MCDONALD'S MATTER
See Item 3. Legal Proceedings.
OUTLOOK
As a result of the loss of its McDonald's and Philip Morris business, along with
the resulting legal matters as discussed in Item 3. below, there is substantial
doubt about the Company's ability to continue as a going concern. The
accompanying financial statements do not include any adjustments that might
result from the outcome of these uncertainties. The Company has taken
significant actions and will continue to take further action to reduce its cost
structure. The Board of Directors of the Company continues to consider various
alternative courses of action for the Company going forward, including possibly
acquiring one or more operating businesses, selling the Company or distributing
its net assets, if any, to shareholders. The decision on which course to take
will depend upon a number of factors including the outcome of the significant
litigation matters in which the Company is involved. See Item 3. Legal
Proceedings. To date, the Board of Directors has made no decision on which
course of action to take. Management believes it has sufficient capital
resources and liquidity to operate the Company for the foreseeable future.
For additional information related to certain matters discussed in this section,
reference is made to the Company's Reports on Form 8-K dated August 21, 2001,
September 17, 2001 and March 18, 2002.
4
1999 EQUITY INVESTMENT
In November 1999, Overseas Toys L.P., an affiliate of the Yucaipa Companies
("Yucaipa"), a Los Angeles-based investment firm, invested $25 million into the
Company in exchange for 25,000 shares of a new series A convertible preferred
stock (initially convertible into 3,030,303 shares of Company common stock) and
a warrant to purchase an additional 15,000 shares of series A convertible
preferred stock (initially convertible into 1,666,667 shares of Company common
stock). The net proceeds ($20.6 million) from this transaction, which was
approved by Simon Worldwide's stockholders, were used for general corporate
purposes. As of December 31, 2002, assuming conversion of all of the convertible
preferred stock, Overseas Toys L.P. 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, Overseas Toys L.P. would own a total of approximately 23% of the
then outstanding common shares.
In connection with the investment, Simon Worldwide's Board of Directors was
increased to seven and three designees of Yucaipa, including Yucaipa's managing
partner, Ronald W. Burkle, were elected to Simon Worldwide's board and Mr.
Burkle was elected chairman. Pursuant to a Voting Agreement, dated September 1,
1999, among Yucaipa, Patrick Brady, Allan Brown, Gregory Shlopak, the Shlopak
Foundation, Cyrk International Foundation and the Eric Stanton Self-Declaration
of Revocable Trust, each of Messrs. Brady, Brown, Shlopak and Stanton have
agreed to vote all of the shares beneficially held by them to elect the three
members nominated by Yucaipa. Mr. Burkle and Erika Paulson, a Yucaipa
representative on the Board of Directors, subsequently resigned from Simon
Worldwide's Board of Directors in August 2001, one day after the Company's
receipt of the notice of termination by McDonald's.
Additionally, in November 1999, the Company entered into a Management Agreement
with Yucaipa whereby Yucaipa agreed to provide Simon Worldwide with management
and consultation services in exchange for a fee of $500,000 per year for a term
of five (5) years which would automatically renew unless either party elected in
advance not to renew in which case, under the terms of the agreement, a $2.5
million termination fee was due. On October 17, 2002, the Management Agreement
was terminated and a payment was made to Yucaipa of $1.5 million and each party
was released from further obligations thereunder. See Item 13. Certain
Relationships and Related Transactions and notes to consolidated financial
statements.
2000 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 and recorded a 2000 pre-tax charge to operations of approximately $5.7
million principally for involuntary termination costs, asset write-downs and the
settlement of lease obligations. 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. See notes to consolidated
financial statements.
2001 SALE OF BUSINESS
In February 2001, the Company sold its CPG business to Cyrk, Inc. ("Cyrk"),
formerly known as Rockridge Partners, Inc., for approximately $14 million, which
included the assumption of approximately $3.7 million of Company debt. Two
million three hundred thousand dollars ($2,300,000) of the purchase price was
paid with a 10% per annum five-year subordinated note from Cyrk, with the
balance being paid in cash. The 2000 financial statements reflected this
transaction and included a pre-tax charge recorded in the fourth quarter of 2000
of $50.1 million due to the loss on the sale of the CPG business, $22.7 million
of which was 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. Net sales in the first quarter of 2001, for the
period through February 14, 2001, attributable to the CPG business, were $17.7
million, or 17% of consolidated Company revenues. Net sales in the first quarter
of 2000 attributable to the CPG business were $33.6 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 the Company's acquisitions of Marketing Incentives, Inc.
("Marketing Incentives") and Tonkin, Inc. ("Tonkin") in 1996 and 1997,
respectively.
5
Pursuant to the Purchase Agreement, Cyrk purchased from the Company (i) all of
the outstanding capital stock of Cyrk Acquisition Corp. ("CAC"), successor to
the business of Marketing Incentives, and Tonkin, each a wholly owned subsidiary
of the Company, (ii) certain other assets of the Company, including those assets
at the Company's Danvers and Wakefield, Massachusetts facilities necessary for
the operation of the CPG business and (iii) all intellectual property of the CPG
business as specified in the Purchase Agreement. Cyrk assumed certain
liabilities of the CPG business as specified in the Purchase Agreement and all
of the assets and liabilities of CAC and Tonkin and, pursuant to the Purchase
Agreement, the Company agreed to transfer its former name, Cyrk, to the buyer.
Cyrk extended employment offers to certain former employees of the Company who
had performed various support activities, including accounting, human resources,
information technology, legal and other various management functions. There is
no material relationship between Cyrk 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 terminated the restructuring effort announced by the Company in May
2000 with respect to the CPG business.
Following the closing of the sale of the CPG business, certain disputes arose
between the Company and Cyrk. In March 2002, the Company entered into a
settlement agreement with Cyrk. Under the settlement agreement: (1) the Company
contributed $500,000 towards the settlement of a lawsuit against the Company and
Cyrk made by a former employee, (2) the Company cancelled the remaining
indebtedness outstanding under Cyrk's subordinated promissory note in favor of
the Company in the original principal amount of $2.3 million, (3) Cyrk agreed to
vacate the Danvers, Massachusetts facility by June 15, 2002 and that lease
terminated as of June 30, 2002, thereby terminating the Company's substantial
lease liability thereunder (see Item 2. Properties below), (4) Cyrk and the
Company each released the other from all known and unknown claims (subject to
limited exceptions) including Cyrk's release of all indemnity claims made
against the Company arising out of its purchase of the CPG business, and (5) a
letter of credit in the amount of $500,000 was provided by Cyrk for the benefit
of the Company to support a portion of a $4.2 million letter of credit provided
by the Company to secure an obligation assumed by Cyrk in connection with Cyrk's
purchase of the CPG business. If Cyrk fails to perform its obligations under
this agreement, or fails to perform and discharge liabilities assumed in
connection with its purchase of the CPG business, then all or a portion of
Cyrk's indebtedness to the Company under the subordinated promissory note may be
reinstated. The Company's 2001 financial statements have been adjusted to
reflect the settlement, and include a pre-tax charge of $2.3 million associated
with the write-off of the subordinated note.
The $4.2 million letter of credit provided by the Company supports Cyrk's
obligations to Winthrop Resources Corporation. This letter of credit is secured,
in part, by $3.7 million of restricted cash of the Company. Cyrk had previously
agreed to indemnify the Company if Winthrop made any draw under this letter of
credit. These letters of credit have annual expirations until the underlying
obligation is satisfied.
In the fourth quarter of 2002, Cyrk informed the Company that it (1) was
suffering substantial financial difficulties, (2) may not be able to discharge
its obligations secured by the Company's $4.2 million letter of credit and (3)
would be able to obtain a $2.5 million equity infusion if it were able to
decrease Cyrk's liability for these obligations. As a result, in December 2002,
the Company granted Cyrk an option until April 20, 2003 (extended to May 7,
2003) to pay the Company $1.5 million in exchange for the Company's agreement to
apply its $3.7 million restricted cash to discharge Cyrk's obligations to
Winthrop, with any remainder to be turned over to Cyrk. The option was only to
be exercised after the satisfaction of several conditions, including the
Company's confirmation of Cyrk's financial condition, Cyrk and Simon obtaining
all necessary third party consents, Cyrk and its subsidiaries providing Simon
with a full release of all known and unknown claims, and the Company having no
further liability to Winthrop as a guarantor of Cyrk's obligations. To the
extent Cyrk were to exercise this option, the Company would incur a loss ranging
from between $2.2 million to $3.7 million. Cyrk was unable to satisfy all
conditions to the option, and it expired unexercised.
2001 RESTRUCTURING
After the February 2001 sale of its CPG business, the Company implemented a
second quarter 2001 restructuring plan to shutdown or consolidate certain
businesses, sell certain assets and liabilities related to its legacy corporate
catalog business in the United Kingdom and eliminate approximately two-thirds
(40 positions) of its Wakefield, Massachusetts corporate office workforce.
Additionally, the Company announced the resignation of its co-chief executive
officer and two other executive officers, including the Company's chief
financial officer. Consequently, the Company announced that all responsibilities
for the chief executive officer position had been consolidated under Allan I.
Brown, who had served as co-chief executive officer since November 1999 and as
the chief executive officer of Simon Marketing since 1975.
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As a result of these actions, the Company recorded a second quarter 2001 pre-tax
charge of approximately $20.2 million for restructuring expenses. The second
quarter charge relates principally to employee termination costs ($10.5
million), asset write-downs which were primarily attributable to the
consolidation of its Wakefield, Massachusetts workspace ($6.5 million), a loss
on the sale of the United Kingdom business ($2.1 million) and the settlement of
certain lease obligations ($1.1 million). Total cash outlays related to
restructuring activities were approximately $12.9 million during 2000 and 2001.
The restructuring plan was substantially complete by the end of 2001. See notes
to consolidated financial statements.
ITEM 2. PROPERTIES.
As a result of the loss of its two major customers in 2001, the Company has
taken action to significantly reduce its worldwide infrastructure and its global
property commitments. During 2002, the Company negotiated early terminations of
all its domestic, Asian and European office, warehouse and distribution facility
leases and settled all of its outstanding remaining real estate lease
obligations, except for approximately $70,000 of unpaid rent. During 2002, the
Company has made aggregate payments totaling approximately $2.9 million related
to the early termination of these leases. See notes to consolidated financial
statements.
In May 2002, the Company entered into an 18-month lease agreement for 4,675
square feet of office space in Los Angeles, California (with a monthly rent of
approximately $8,600) into which it has relocated its remaining scaled-down
operations. For a summary of the Company's minimum rental commitments under all
noncancelable operating leases as of December 31, 2002, see notes to
consolidated financial statements.
ITEM 3. LEGAL PROCEEDINGS.
LEGAL ACTIONS ASSOCIATED WITH THE MCDONALD'S MATTER
Subsequent to August 21, 2001, numerous consumer class action and representative
action lawsuits (hereafter variously referred to as, "actions", "complaints" or
"lawsuits") have been filed in Illinois, the headquarters of McDonald's, and in
multiple jurisdictions nationwide and in Canada. Plaintiffs in these actions
asserted diverse causes of action, including negligence, breach of contract,
fraud, restitution, unjust enrichment, misrepresentation, false advertising,
breach of warranty, unfair competition and violation of various state consumer
fraud statutes. Complaints filed in federal court in New Jersey also alleged a
pattern of racketeering.
Plaintiffs in many of these actions alleged, among other things, that
defendants, including the Company, its subsidiary Simon Marketing, and
McDonald's, misrepresented that plaintiffs had a chance at winning certain
high-value prizes when in fact the prizes were stolen by Mr. Jacobson.
Plaintiffs seek various forms of relief, including restitution of monies paid
for McDonald's food, disgorgement of profits, recovery of the "stolen" game
prizes, other compensatory damages, attorney's fees, punitive damages and
injunctive relief.
The class and/or representative actions filed in Illinois state court were
consolidated in the Circuit Court of Cook County, Illinois (the "Boland" case).
Numerous class and representative actions filed in California have been
consolidated in California Superior Court for the County of Orange (the
"California Court"). Numerous class and representative actions filed in federal
courts nationwide have been transferred by the Judicial Panel on Multidistrict
Litigation (the "MDL Panel") to the federal district court in Chicago, Illinois
(the "MDL Proceedings"). Numerous of the class and representative actions filed
in state courts other than in Illinois and California were removed to federal
court and transferred by the MDL Panel to the MDL Proceedings.
On April 19, 2002, McDonald's entered into a Stipulation of Settlement (the
"Boland Settlement") with certain plaintiffs in the Boland case pending in the
Circuit Court of Cook County, Illinois (the "Illinois Circuit Court"). The
Boland Settlement purports to settle and release, among other things, all claims
related to the administration, execution and operation of the McDonald's
promotional games, or to "the theft, conversion, misappropriation, seeding,
dissemination, redemption or non-redemption of a winning prize or winning game
piece in any McDonald's Promotional Game," including without limitation claims
brought under the consumer protection statutes or laws of any jurisdiction, that
have been or could or might have been alleged by any class member in any forum
in the United States of America, subject to a right of class members to opt out
on an individual basis, and includes a full release of the Company and Simon
Marketing, as well as their officers, directors, employees, agents, and vendors.
Under the terms of the Boland Settlement, McDonald's agrees to sponsor and run a
"Prize
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Giveaway" in which a total of fifteen (15) $1 million prizes, payable in twenty
installments of $50,000 per year with no interest, shall be randomly awarded to
persons in attendance at McDonald's restaurants. The Company has been informed
that McDonald's, in its capacity as an additional insured, has tendered a claim
to Simon Marketing's Errors & Omissions insurance carriers to cover some or all
of the cost of the Boland Settlement, including the cost of running the "Prize
Giveaway," of the prizes themselves, and of attorney's fees to be paid to
plaintiffs' counsel up to an amount of $3 million.
On June 6, 2002, the Illinois Circuit Court issued a preliminary order approving
the Boland Settlement and authorizing notice to the class. On August 28, 2002,
the opt-out period pertaining thereto expired. The Company has been informed
that approximately 250 persons in the United States and Canada purport to have
opted out of the Boland Settlement. Furthermore, actions may move forward in
Canada and in certain of the cases asserting claims not involving the Jacobson
theft. On January 3, 2003, the Illinois Circuit Court issued an order approving
the Boland Settlement and overruling objections thereto and on April 8, 2003 a
final order was issued approving plaintiffs' attorneys' fees in the amount of
$2.8 million. Even if the Boland Settlement is approved and is enforceable to
bar claims of persons who have not opted out, individual claims may be asserted
by those persons who are determined to have properly opted out of the Boland
Settlement. Claims may also be asserted in Canada and by individuals whose
claims do not involve the Jacobson theft if a court were to determine the claim
to be distinguishable from and not barred by the Boland Settlement.
The remaining cases in the MDL Proceedings were dismissed on April 29, 2003,
other than a case originally filed in federal district court in Kentucky, in
which the plaintiff has opted out of the Boland Settlement. The plaintiff in
that case asserts that McDonald's and Simon Marketing failed to redeem a
purported $1,000,000 winning ticket. This case has been ordered to arbitration.
In the California Court, certain of the California plaintiffs purported to have
opted out of the Boland Settlement individually and also on behalf of all
California consumers. In its final order approving the Boland Settlement, the
Illinois court rejected the attempt by the California plaintiffs to opt out on
behalf of all California consumers. On June 2, 2003, the California Court
granted the motion of McDonald's and Simon Marketing to dismiss all class and
representative claims as having been barred by the Boland Settlement. Even with
the Boland Settlement, individual claims may go forward as to those plaintiffs
who are determined to have properly opted out of the Boland Settlement or who
have asserted claims not involving the Jacobson theft. The Company does not know
which California and non-California claims will go forward notwithstanding the
Boland Settlement.
On or about August 20, 2002, an action was filed against Simon Marketing in
Florida State Court alleging that McDonald's and Simon Marketing deliberately
diverted from seeding in Canada game pieces with high-level winning prizes in
certain McDonald's promotional games. The plaintiffs are Canadian citizens and
seek restitution and damages on a class-wide basis in an unspecified amount.
Simon Marketing and McDonald's removed this action to federal court on September
10, 2002 and the MDL Panel has transferred the case to the MDL Proceedings in
Illinois, where it was dismissed on April 29, 2003. The plaintiffs in this case
did not opt out of the Boland Settlement.
On or about September 13, 2002, an action was filed against Simon Marketing in
Ontario Provincial Court in which the allegations are similar to those made in
the above Florida action. On October 28, 2002, an action was filed against Simon
Marketing in Ontario Provincial Court containing similar allegations. The
plaintiffs in the aforesaid actions seek an aggregate of $110 million in damages
and an accounting on a class-wide basis. Simon Marketing has retained Canadian
local counsel to represent it in these actions. The Company believes that the
plaintiffs in these actions did not opt out of the Boland Settlement. The
Company and McDonald's have filed motions to dismiss or stay these cases on the
basis of the Boland Settlement. There has been no ruling on this motion and the
actions are in the earliest stages.
On October 23, 2001, the Company and Simon Marketing filed suit against
McDonald's in California Superior Court for the County of Los Angeles. The
complaint alleges, among other things, fraud, defamation and breach of contract
in connection with the termination of Simon Marketing's relationship with
McDonald's.
Also on October 23, 2001, the Company and Simon Marketing were named as
defendants, along with Mr. Jacobson, and certain other individuals unrelated to
the Company or Simon Marketing, in a complaint filed by McDonald's in the United
States District Court for the Northern District of Illinois. The complaint
alleges that Simon Marketing had engaged in fraud, breach of contract, breach of
fiduciary obligations and civil conspiracy and alleges that McDonald's is
entitled to indemnification and damages of an unspecified amount. The federal
lawsuit by McDonald's has been dismissed for lack of federal jurisdiction.
Subsequently, a substantially similar lawsuit was filed by McDonald's in
Illinois state court which the
8
Company has moved to dismiss as a compulsory counter-claim which must properly
be filed in the Company's California state court action. As of the date of
filing of this report, there had been no ruling on the Company's motion.
The Company is unable to predict the outcome of the lawsuits against the Company
and their ultimate effects, if any, on the Company's financial condition,
results of operations or net cash flows.
On November 13, 2001, the Company filed suit against Philip Morris in California
Superior Court for the County of Los Angeles, asserting numerous causes of
action arising from Philip Morris' termination of the Company's relationship
with Philip Morris. Subsequently, the Company dismissed the action without
prejudice, so that the Company and Philip Morris could attempt to resolve this
dispute outside of litigation. During 2002, a settlement was reached resulting
in a payment of $1.5 million by Philip Morris to the Company.
In March 2002, Simon Marketing initiated a lawsuit against certain suppliers and
agents of McDonald's in California Superior Court for the County of Los Angeles.
The complaint alleges, among other things, breach of contract and intentional
interference with contractual relations. In July 2002, a stay was granted in the
case on the basis of "forum non conveniens", which would require the case to be
refiled in Illinois state court. The Company has filed an appeal of the stay.
On March 29, 2002, Simon Marketing filed a lawsuit against
PricewaterhouseCoopers LLP ("PWC") and two other accounting firms, citing the
accountants' failure to oversee, on behalf of Simon Marketing, various steps in
the distribution of high-value game pieces for certain McDonald's promotional
games. The complaint alleges that this failure allowed the misappropriation of
certain of these high-value game pieces by Mr. Jacobson. The lawsuit, filed in
Los Angeles Superior Court, seeks unspecified actual and punitive damages
resulting from economic injury, loss of income and profit, loss of goodwill,
loss of reputation, lost interest, and other general and special damages. The
defendants' motion to dismiss for "forum non conveniens" has been denied in the
case and, following demurrers by the defendants, the Company subsequently filed
a first amended complaint against two firms, PWC and one of the two other
accounting firms named as defendants in the original complaint, KPMG LLP. The
defendants' demurrer to the first amended complaint was sustained in part, and a
second amended complaint was filed. The date for filing an answer has not yet
been set pending a status conference on the case, the date for which has not yet
been determined.
As a result of this lawsuit, PWC resigned as the Company's independent public
accountants on April 17, 2002. In addition, on April 17, 2002, PWC withdrew its
audit report dated March 26, 2002 filed with the Company's original 2001 Annual
Report on Form 10-K. PWC has also indicated that it is unable to re-issue an
audit report covering the Company's statement of operations for the year ended
December 31, 2000 that have been reclassified for disclosure of discontinued
operations. See Item 15(a)1. Financial Statements. PWC indicated that it
believed the lawsuit resulted in an impairment of its independence in connection
with the audit of the Company's 2001 financial statements which also precludes
it from performing any additional audit procedures in the current period in
connection with the reclassified 2000 financial statements. The Company does not
believe that PWC's independence was impaired. On June 6, 2002, the Company
engaged BDO Seidman, LLP as the Company's new independent public accountants.
For additional information related to certain matters discussed in this section,
reference is made to the Company's Reports on Form 8-K dated April 17, 2002, and
June 6, 2002.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Until May 3, 2002, the Company's stock traded on The Nasdaq Stock Market under
the symbol SWWI. On May 3, 2002, Company's stock was delisted from the Nasdaq
Stock Market by Nasdaq due to Simon Worldwide's failure to comply with certain
Nasdaq listing requirements. The following table presents, for the periods
indicated, the high and low sales prices of the Company's common stock as
reported by Nasdaq until May 3, 2002 and thereafter on the over-the-counter
market as reported in the Pink Sheets. Such over-the-counter market quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not necessarily represent actual transactions.
2002 2001
------------------- -------------------
High Low High Low
------ ----- ------ -----
First Quarter $0.17 $0.13 $4.13 $2.00
Second Quarter 0.13 0.04 2.99 1.72
Third Quarter 0.12 0.08 3.34 0.16
Fourth Quarter 0.12 0.06 0.37 0.09
As of June 30, 2003, the Company had approximately 402 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 June 30, 2003 was
$.06.
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.
ITEM 6. SELECTED FINANCIAL DATA
By April 2002, the Company had effectively eliminated a majority of its
operations. Accordingly, the discontinued activities of the Company have been
classified as discontinued operations. The selected financial data for prior
periods has been reclassified to conform to current period presentation. The
following selected financial data should be read in conjunction Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Item 8. Financial Statements and Supplementary Data.
For the Years Ended December 31,
-----------------------------------------------------------------------
(unaudited) (unaudited) (unaudited)
Selected Income Statement Data: 2002 2001 2000 1999 1998 (6)
----------- --------- --------- --------- ---------
(In thousands, except per share data)
Continuing Operations:
Net Sales $ -- $ -- $ -- $ -- $ --
Net Income (loss) (15,406) (7,916) (8,179) (2,954) (2,675)
Earnings (loss) per common share available
to common shareholders - basic and diluted (0.99) (0.54) (0.57) (0.20) (0.18)
Discontinued Operations:
Net Sales $ -- $ 324,040 $ 768,450 $ 988,844 $ 757,753
Net Income (loss) 6,120 (114,429)(2) (61,536)(3) 14,090(4) (341)(5)
Earnings (loss) per common share available
to common shareholders - basic and diluted 0.37(1) (6.95)(2) (3.85)(3) 0.90(4) (0.02)(5)
10
December 31,
--------------------------------------------------------
(unaudited) (unaudited) (unaudited)
Selected Balance Sheet Data: 2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(In thousands)
Total Assets 26,440 77,936 252,436 369,148 337,341
Long-term obligations -- 6,785 6,587 9,156 12,099
Redeemable preferred stock 27,616 26,538 25,500 25,000 --
Stockholder's (deficit) equity $(17,225) $(11,497) $116,176 $186,077 $177,655
(1) Includes $4,574 of pre-tax charges attributable to loss of significant
customers and $12,023 of pre-tax net gain on settlement of vendor payables and
$4,432 on settlement of lease and other obligations. See notes to consolidated
financial statements.
(2) Includes $46,671 of pre-tax impairment of intangible asset, $33,644 of
pre-tax charges attributable to loss of significant customers and $20,212 of
pre-tax restructuring and nonrecurring charges. See notes to consolidated
financial statements.
(3) 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.
(4) Includes $1,675 of pre-tax nonrecurring charges. See notes to consolidated
financial statements.
(5) Includes $15,288 of pre-tax restructuring and nonrecurring charges.
(6) Includes the results of operations of acquired companies from the
acquisition dates.
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 this Report on Form 10-K for the year ended
December 31, 2002.
BUSINESS CONDITIONS
In August 2001, the Company experienced the loss of its two largest customers:
McDonald's Corporation ("McDonald's") and, to a lesser extent, Philip Morris
Incorporated ("Philip Morris"). See Loss of Customers, Resulting Events and
Going Concern discussed in Item 1. Since August 2001, the Company has
concentrated its efforts on reducing its costs and settling
11
numerous claims, contractual obligations and pending litigation. As a result of
these efforts the Company has been able to resolve a significant number of
outstanding liabilities that existed at that time or arose subsequent to that
date. As of December 31, 2002, the Company had reduced its worldwide workforce
to 9 employees from 136 employees as of December 31, 2001.
At December 31, 2002, the Company had a stockholders' deficit of $17,225,000.
For the year ended December 31, 2002, the Company had a net loss of $9,286,000.
The Company continues to incur losses in 2003 for the general and administrative
expenses incurred to manage the affairs of the Company and resolve outstanding
legal matters. Management believes it has sufficient capital resources and
liquidity to operate the Company for the foreseeable future. However, as a
result of the loss of its major customers, along with the resulting legal
matters discussed further below, there is substantial doubt about the Company's
ability to continue as a going concern. The accompanying financial statements do
not include any adjustments that might result from the outcome of these
uncertainties.
By April 2002, the Company had effectively eliminated a majority of its ongoing
operations and was in the process of disposing its assets and settling its
liabilities related to the promotions business. The process is ongoing and will
continue throughout 2003 and possibly into 2004. During the second quarter of
2002, the discontinued activities of the Company, consisting of revenues,
operating costs, certain general and administrative costs and certain assets and
liabilities, associated with the Company's promotions business were classified
as discontinued operations for financial reporting purposes. The Board of
Directors of the Company continues to consider various alternative courses of
action for the Company going forward, including possibly acquiring one or more
operating businesses, selling the Company or distributing its net assets, if
any, to shareholders. The decision on which course to take will depend upon a
number of factors including the outcome of the significant litigation matters in
which the Company is involved (See Item 3. Legal Proceedings). To date, the
Board of Directors has made no decision on which course of action to take.
Until the unanticipated events of August 2001 occurred, the Company had been
operating as a multi-national full-service promotional marketing company,
specializing in the design and development of high-impact promotional products
and sales promotions. The majority of the Company's revenue was derived from the
sale of products to consumer products and services companies seeking to promote
their brand names and corporate identities and build brand loyalty. Net sales to
McDonald's and Philip Morris accounted for 78% and 8% and 65% and 9% of total
net sales in 2001 and 2000, respectively. The Company had no sales during 2002.
Beginning in 1996, the Company grew as a result of a series of acquisitions of
companies engaged in the corporate catalog and advertising segment of the
promotion industry. Certain of these acquired companies operated within the
Company's Corporate Promotions Group ("CPG") and had a history of disappointing
financial results. As a result, the Company sold these businesses in February of
2001 (See 2001 Sale of Business under Item 1. Business).
OUTLOOK
As a result of the loss of its McDonald's and Philip Morris business, along with
the resulting legal matters as discussed above, there is substantial doubt about
the Company's ability to continue as a going concern. The accompanying financial
statements do not include any adjustments that might result from the outcome of
these uncertainties. The Company has taken significant actions and will continue
to take further action to reduce its cost structure. The Board of Directors of
the Company continues to consider various alternative courses of action for the
Company going forward, including possibly acquiring one or more operating
businesses, selling the Company or distributing its net assets, if any, to
shareholders. The decision on which course to take will depend upon a number of
factors including the outcome of the significant litigation matters in which the
Company is involved (See Item 3. Legal Proceedings). To date, the Board of
Directors has made no decision on which course of action to take. Management
believes it has sufficient capital resources and liquidity to operate the
Company for the foreseeable future.
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of financial condition and results of
operations is based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, management evaluates
its estimates and bases its estimates on historical
12
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates.
Management applies the following critical accounting policies in the preparation
of the Company's consolidated financial statements:
ACCOUNTS RECEIVABLE/ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company evaluates the collectibility of its accounts receivable on a
specific identification basis. In circumstances where the Company is aware of a
customer's inability or unwillingness to pay outstanding amounts, the Company
records a specific reserve for bad debts against amounts due to reduce the
receivable to its estimated collectible balance. During 2002, the Company
recorded no bad debt expense but recovered $.9 million of accounts receivable
balances that had been fully reserved as of December 31, 2001. The allowance for
doubtful accounts at December 31, 2002, of approximately $13.4 million, includes
a reserve to cover amounts due primarily from McDonald's. See Loss of Customers,
Resulting Events and Going Concern in Item 1. Business and notes to consolidated
financial statements.
LONG-TERM INVESTMENTS
The Company has made strategic and venture investments in a portfolio of
privately held companies that are being accounted for under the cost method.
These investments are in Internet-related companies that are at varying stages
of development, including startups, and were intended to provide the Company
with an 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 the Internet. 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.
In June 2002, certain events occurred which indicated an impairment of its
investment in Alliance Entertainment Corp. ("Alliance"), an indirect investment
through a limited liability company that is owned by Yucaipa. Yucaipa is
believed to be indirectly a significant shareholder in Alliance, which is a home
entertainment product distribution, fulfillment, and infrastructure company
providing both brick-and-mortar and e-commerce home entertainment retailers with
complete business-to-business solutions. This investment had a carrying value of
$10.0 million at December 31, 2001. The Company recorded a pre-tax non-cash
charge of $10.0 million in June 2002 to write-down its investment. During the
third quarter of 2002, the Company also received a final return of capital,
totaling approximately $.3 million, on an investment with a carrying value
totaling approximately $.5 million as of December 31, 2001. A loss of
approximately $.2 million was recorded in connection with this final
distribution
The book value of the Company's investment portfolio totaled $.5 million as of
December 31, 2002, which the Company believes is the investment portfolio's net
realizable value based on the Company's year-end internal evaluation. 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.
ACCOUNTS PAYABLE, TRADE AND ACCRUED EXPENSES
The Company's trade payables at year-end represent specific amounts due to a
variety of suppliers and vendors (collectively "vendors") worldwide for products
and services delivered to and/or provided to the Company through December 31,
2002. Additionally, accrued expenses at year-end include specific Company
liabilities and contingent payment obligations to various vendors and former
employees, respectively. As a result of the loss of its two largest customers
(as well as its other customers) (see Loss of Customers, Resulting Events and
Going Concern in Item 1. Business and notes to consolidated financial
statements), during 2002 the Company negotiated settlements related to many
liabilities that were outstanding as of December 31, 2001. The negotiated
settlements were on terms generally more favorable to the Company than required
by the original terms of these obligations. See notes to consolidated financial
statements.
13
RECENTLY ISSUED ACCOUNTING STANDARDS
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets". This statement supersedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of". The statement retains the previously existing
accounting treatments related to the recognition and measurement of the
impairment of long-lived assets to be held and used while expanding the
measurement requirements of long-lived assets to be disposed of by sale to
include discontinued operations. It also expands the previously existing
reporting requirements for discontinued operations to include a component of an
entity that either has been disposed of or is classified as held for sale. The
Company implemented SFAS No. 144 on January 1, 2002. During the second quarter
of 2002, the Company had effectively eliminated a majority of its ongoing
operations and was in the process of disposing its assets and settling its
liabilities related to the promotions business. The process is ongoing and will
continue throughout 2003 and possibly into 2004. During the second quarter of
2002, the discontinued activities of the Company, consisting of revenues,
operating costs, certain general and administrative costs and certain assets and
liabilities, associated with the Company's promotions business were classified
as discontinued operations for financial reporting purposes.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 requires companies to recognize
costs associated with exit or disposal activities initiated by the Company after
December 31, 2002. Management does not expect this statement to have a material
impact on the Company's consolidated financial position or results of
operations.
In November 2002, the FASB issued FASB Interpretation (FIN) No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN No. 45 clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. The initial
recognition and initial measurement provisions of FIN No. 45 are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002,
while the disclosure requirements became applicable in 2002. The company is
complying with the disclosure requirements of FIN No. 45. The other requirements
did not materially affect the Company's financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair-value-based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. As provided
for in SFAS No. 123, the company has elected to apply APB No. 25 "Accounting for
Stock Issued to Employees" and related interpretations in accounting for its
stock-based compensation plans. APB No. 25 does not require options to be
expensed when granted with an exercise price equal to fair market value. The
company is complying with the disclosure requirements of SFAS No. 148.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities, an Interpretation of ARB 51." The primary objectives of FIN No. 46 are
to provide guidance on the identification of entities for which control is
achieved through means other than through voting rights ("variable interest
entities" or "VIEs") and how to determine when and which business enterprise
should consolidate the VIE. This new model for consolidation applies to an
entity for which either: (a) the equity investors (if any) do not have a
controlling financial interest; or (b) the equity investment at risk is
insufficient to finance that entity's activities without receiving additional
subordinated financial support from other parties. In addition, FIN No. 46
requires that both the primary beneficiary and all other enterprises with a
significant variable interest in a VIE make additional disclosures. The Company
is required to apply FIN No. 46 to all new variable interest entities created or
acquired after January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, the company is required to apply FIN No. 46
on July 1, 2003. The Company does not anticipate that FIN No. 46 will materially
affect the its consolidated financial statements.
In June 2003 the FASB issued FASB No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". This statement
established standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify the following financial instruments as
liabilities (or assets in some circumstances) in its financial statements:
instruments issued in the form of shares that are manditorily redeemable through
the transfer of company assets at a specified date or upon an event that is
likely to
14
occur, an instrument (other than an outstanding share) that embodies an
obligation to repurchase the issuer's equity shares and that requires or may
require the issuer settle the obligation through the transfer of assets, an
instrument that embodies an unconditional obligation or an instrument (other
than an outstanding share) that embodies a conditional obligation that the
issuer must or may settle by issuing a variable number of equity shares.
FASB No. 150 is effective for financial instruments entered into or modified
after May 31, 2003 and is otherwise effective at the beginning of the first
interim period beginning after June 15, 2003. The Company is currently assessing
the impact of this statement on its consolidated financial statements.
SIGNIFICANT CONTRACTUAL OBLIGATIONS
The following table includes certain significant contractual obligations of the
Company at December 31, 2002. See notes to consolidated financial statements for
additional information related to these and other obligations.
Payments Due by Period
---------------------------------------------------------
Less Than 1-3 4-5 After 5
Total 1 Year Years Years Years
--------- --------- --------- --------- ---------
(In thousands)
Operating leases (1) $ 78 $ 78 $ -- $ -- $ --
Contingent Payment Obligations 53 53 -- -- --
Other long-term obligations 4,122 1,031 1,545 1,031 515
--------- --------- --------- --------- ---------
Total contractual cash obligations $ 4,253 $ 1,162 $ 1,545 $ 1,031 $ 515
========= ========= ========= ========= =========
(1) Payments for operating leases are recognized as an expense in the
Consolidated Statement of Operations as incurred.
OTHER COMMERCIAL COMMITMENTS
The following table includes certain commercial commitments of the Company at
December 31, 2002. See notes to consolidated financial statements for additional
information related to these and other commitments.
Total
Committed at
December 31, Less Than 1-3 4-5 After 5
2002 1 Year Years Years Years
------------ --------- --------- --------- ---------
(in thousands)
Standby letters of credit $ 4,940 $ 4,624 $ 2,264 $ 1,243 $ 285
============ ========= ========= ========= =========
The $4,940 of standby letters of credit committed at December 31, 2002 primarily
relate to a letter of credit provided by the Company to support Cyrk's
obligations to Winthrop Resources Corporation ($4,595), furniture ($200),
facilities lease ($60), and insurance ($85).
RESULTS OF CONTINUING AND DISCONTINUED OPERATIONS
In April 2002, the Company had effectively eliminated a majority of its ongoing
operations and was in the process of disposing its assets and settling its
liabilities related to the promotions business. Accordingly, the discontinued
activities of the Company have been classified as discontinued operations in the
accompanying consolidated financial statements. Continuing operations represent
the direct costs required to maintain the Company's current corporate
infrastructure that will enable the Board of Directors to pursue various
alternative courses of action going forward. These costs primarily consist of
the salaries and benefits of executive management and corporate finance staff,
professional fees, board of director fees, space and facility costs and losses
on certain investments. The Company's continuing operations and discontinued
operations will be discussed separately, based on the respective financial
results contained in the accompanying consolidated financial statements and the
notes thereto.
15
CONTINUING OPERATIONS
2002 COMPARED TO 2001
Selling, general and administrative expenses totaled $5.2 million in 2002 as
compared to $4.8 million in 2001, primarily due to an increase in insurance
expense ($.7 million) and Board of Director fees ($.4 million) partially offset
by a decrease in employee salaries and insurance ($.3 million), accounting and
audit fees ($.2 million) and legal expenses ($.2 million). Investment losses in
2002 and 2001 represents charges related to an other-than-temporary investment
impairment associated with the Company's venture portfolio, totaling $10.3
million and $3.2 million respectively. As of December 31, 2002, a majority of
the Company's investments have been fully reserved.
2001 COMPARED TO 2000
Selling, general and administrative expenses totaled $4.8 million in 2001 as
compared to $3.7 million in 2000, primarily due to increases in Board of
Director fees of $.9 million and accounting and audit fees of $.2 million.
Investment losses in 2001 and 2000 represents charges related to an
other-than-temporary investment impairment associated with the Company's venture
portfolio, totaling $3.2 million and $4.5 million, respectively.
DISCONTINUED OPERATIONS
2002 COMPARED TO 2001
Net sales decreased $324.0 million to $0 million in 2002 primarily attributable
to the effects associated with the loss of its McDonald's and Philip Morris
business, followed by the Company's termination of most of its employees.
Gross profit decreased $71.7 million to $0 in 2002. Gross profit as a percentage
of net sales was 22% in 2001. The decrease in the Company's gross margin is
primarily attributable to effects associated with the loss of its McDonald's and
Philip Morris business.
Selling, general and administrative expenses totaled $3.5 million in 2002 as
compared to $74.5 million in 2001. The Company's spending was decreased to $7.9
million due principally to the effects associated with the loss of its
McDonald's and Philip Morris business. These costs were further reduced by the
favorable settlement of certain obligations, totaling $4.4 million, recorded as
a reduction to selling, general, and administrative expenses in 2002. In 2002,
selling, general and administrative costs consisted primarily of promotion
related activities, many of which were ceased by April 2002. In 2001, selling,
general and administrative costs were 23.0% of net sales.
During 2002, the Company recorded a pre-tax net charge totaling approximately
$4.6 million associated with the loss of customers. Charges totaling $8.6
million, primarily related to asset write-downs ($3.6 million), professional
fees ($4.3 million), labor and other costs ($.7 million), were partially offset
by recoveries of accounts receivable balances, totaling $1.3 million, that had
been written off in previous periods and other gains ($2.7 million). A similar
charge of $33.6 million was recorded during 2001.
During 2002 the Company negotiated settlements related to outstanding
liabilities with many of its suppliers. During this period, the Company also
settled all of its outstanding domestic and international real estate and
equipment lease obligations and relocated its remaining scaled-down operations
to smaller office space in Los Angeles, California. These settlements were on
terms generally more favorable to the Company than required by the existing
terms of the liabilities. The difference between the final settlement payment
and the outstanding obligations was recorded as a gain, totaling approximately
$12.0 million related to vendor settlements, included in Gain on Settlement of
Obligations and $4.4 million related to lease obligation and other settlements
recorded as a reduction to selling, general, and administrative expenses and
disclosed in note 4 to the consolidated financial statements. No such gains were
recorded by the Company during 2001. See notes to consolidated financial
statements.
As a result of 2001 restructuring activities, the Company recorded a second
quarter 2001 pre-tax charge of approximately $20.2 million for restructuring
expenses. The second quarter charge relates principally to employee termination
costs ($10.5 million), asset write-downs which were primarily attributable to a
consolidation of its Wakefield, Massachusetts workspace ($6.5 million), a loss
on the sale of the United Kingdom business ($2.1 million) and the settlement of
certain lease obligations ($1.1 million). The restructuring plan was complete by
the first quarter of 2002. During 2002, the Company revised its initial estimate
of future restructuring activities and, as a result, recorded a $.75 million
reduction to the restructuring accrual outstanding as of December 31, 2001.
16
2001 COMPARED TO 2000
Net sales decreased $444.4 million, or 58%, to $324.0 million in 2001 from
$768.4 million in 2000. The decrease in net sales was primarily attributable to
the loss of revenues associated with McDonald's ($246.7 million) and Philip
Morris ($43.3 million) and revenues associated with the CPG business ($129.1
million) sold in February 2001.
Gross profit decreased $72.3 million, or 50%, to $71.7 million in 2001 from
$144.0 million in 2000. As a percentage of net sales, gross profit increased to
22.1% in 2001 from 18.7% in 2000. The decrease in gross margin dollars is
primarily attributable to the decrease in revenues associated with McDonald's
and Philip Morris and the revenues associated with the CPG business. The
increase in the gross margin percentage was due to the sales mix associated with
certain promotional programs.
Selling, general and administrative expenses totaled $74.5 million in 2001 as
compared to $153.8 million in 2000. The Company's decreased spending was due
principally to the effects of the sale of the CPG business and the effects
associated with the loss of its McDonald's and Philip Morris business. As a
percentage of net sales, selling, general and administrative costs totaled 23.0%
in 2001 as compared to 20.0% in 2000 primarily as a result of a lower sales
base.
During 2001, the Company recorded a pre-tax net charge totaling approximately
$80.3 million associated with the loss of customers. This total includes a $46.7
million write-down in goodwill and a $33.6 million in charges attributable to
the loss of significant customers representing asset write-downs, professional
fees, labor costs and certain lease termination costs.
In connection with its May 2000 announcement to restructure its promotional
product divisions, the Company recorded a pre-tax restructuring charge of $5.7
million, of which $1.7 million represented an inventory write-down charged
against gross profit. 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. As a result of 2001
restructuring activities, the Company recorded a second quarter 2001 pre-tax
charge of approximately $20.2 million for restructuring expenses. The second
quarter charge relates principally to employee termination costs ($10.5
million), asset write-downs which were primarily attributable to a consolidation
of its Wakefield, Massachusetts workspace ($6.5 million), a loss on the sale of
the United Kingdom business ($2.1 million) and the settlement of certain lease
obligations ($1.1 million). The restructuring plan was complete by the first
quarter of 2002.
Other income in 2001 and 2000 represents gains, totaling $4.2 million and $3.2
million, respectively, that were realized in connection with the sale of certain
investments. See notes to consolidated financial statements.
Pursuant to a March 2002 settlement agreement with Cyrk as described above, the
Company recorded a 2001 pre-tax loss of $2.3 million associated with the
write-off of a subordinated note from Cyrk, included in Loss on Sale of
Business. 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.
As required by Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes", the Company periodically evaluates the positive and negative
evidence bearing upon the realizability of its deferred tax assets. The Company
has considered recent events (see notes to consolidated financial statements)
and results of operations and concluded, in accordance with the applicable
accounting methods, that it is more likely than not that the deferred tax assets
are not realizable. To the extent that these assets have been deemed to likely
be unrealizable, a valuation allowance and tax provision of $22.6 million was
recorded in the third quarter of 2001. See notes to consolidated financial
statements.
LIQUIDITY AND CAPITAL RESOURCES
The matters discussed in the Loss of Customers, Resulting Events and Going
Concern section in Item 1. Business, which have had and will continue to have a
substantial adverse impact on the Company's cash position, raise substantial
doubts about the Company's ability to continue as a going concern. The
accompanying financial statements do not include any adjustments that might
result from the outcome of these uncertainties. The Company has taken and will
continue to take action to reduce its cost structure. Since inception, the
Company had financed its working capital and capital expenditure
17
requirements through cash generated from operations, and investing and financing
activities such as public and private sales of common and preferred stock, bank
borrowings, asset sales and capital equipment leases. The Company continues to
incur losses in 2003 for the general and administrative expenses incurred to
manage the affairs of the Company and outstanding legal matters. Inasmuch as the
Company no longer generates operating income and is unable to borrow funds, the
source of current and future working capital is expected to be cash on hand, the
recovery of certain long-term investments and any future proceeds from
litigation. Management believes it has sufficient capital resources and
liquidity to operate the Company for the foreseeable future. The Board of
Directors of the Company continues to consider various alternative courses of
action for the Company going forward, including possibly acquiring one or more
operating businesses, selling the Company or distributing its net assets, if
any, to shareholders. The decision on which course to take will depend upon a
number of factors including the outcome of the significant litigation matters in
which the Company is involved (See Item 3. Legal Proceedings). To date, the
Board of Directors has made no decision on which course of action to take.
CONTINUING OPERATIONS
Working capital attributable to continuing operations at December 31, 2002 was
$9.5 million compared to $3.7 million at December 31, 2001. Net cash used in
operating activities from continuing operations during 2002 totaled $4.6
million, primarily due to a loss from continuing operations of $15.4 million
reduced by a charge for impaired assets and investments of $.4 million and $10.3
million, respectively. Net cash used in operating activities from continuing
operations totaled $6.4 million during 2001, primarily due to a loss from
continuing operations of $7.9 million and an .8 million increase in prepaid
expenses and other current assets, partially offset by a charge for impaired
investments of $2.3 million. Net cash used in operating activities from
continuing operations during 2000 totaled $3.5 million, primarily due to a loss
from continuing operations of $8.2 million, partially offset by a charge for
impaired investments of $4.5 million and a $.2 million decrease in prepaid
expenses and other current assets.
Net cash used in investing activities from continuing operations during 2002
totaled $5.0 million, primarily due to an increase in restricted cash balances,
totaling 4.8 million. Net cash used in investing activities during 2001 totaled
$2.9 million primarily related to an increase in restricted cash. During 2000,
net cash used in investing activities from continuing operations totaled $4.5
million pertaining to the purchase of investments. There were no financing cash
flows from continuing operations during 2002, 2001 and 2000.
In March 2002, the Company, Simon Marketing and a Trustee entered into an
Indemnification Trust Agreement (the "Trust"), which requires the Company and
Simon Marketing to fund an irrevocable trust in the amount of $2.7 million. The
Trust was set up and will be used to augment the Company's existing insurance
coverage for indemnifying directors, officers and certain described consultants,
who are entitled to indemnification against liabilities arising out of their
status as directors, officers and/or consultants. See notes to consolidated
financial statements.
Restricted cash included within continuing operations at December 31, 2002
totaled $7.6 million, primarily consisted of amounts deposited in an irrevocable
trust, totaling $2.7 million and amounts deposited with lenders to satisfy the
company's obligations pursuant to its standby letters of credit, totaling $4.9
million. Restricted cash included within continuing operations at December 31,
2001 totaled $2.9 million and primarily consisted of amounts deposited with
lenders to satisfy the company's obligations pursuant to its standby letters of
credit.
DISCONTINUED OPERATIONS
Working capital attributed to discontinued operations at December 31, 2002 was
$(1.1) million compared to $.9 million at December 31, 2001. Net cash provided
by discontinued operations during 2002 totaled $10.8 million, which was
primarily due to net cash provided by investing activities of $7.3 million and a
reallocation of funds, totaling approximately $27.6 million, between continuing
and discontinued operations due to changes in minimum working capital
requirements, partially offset by net cash used in operating activities of $22.6
million and net cash used in financing activities of $1.6 million.
18
Net cash used in discontinued operations during 2001 totaled $51.2 million,
which was primarily due to net cash used in operating activities of $15.8
million, net cash used in investing activities of $.3 million, net cash used in
financing activities of $4.2 million and a reallocation of funds, totaling
approximately $33.2 million, between continuing and discontinued operations due
to changes in minimum working capital requirements. Net cash used in
discontinued operations during 2000 totaled $31.3 million, which was primarily
due to net cash used in operating activities of $8.3 million, net cash used in
investing activities of $9.4 million, net cash used in financing activities of
$5.8 million and a reallocation of funds, totaling approximately $7.7 million,
between continuing and discontinued operations due to changes in minimum working
capital requirements.
Net cash used in operating activities of discontinued operations during 2002 of
$22.6 million primarily consisted of a gain on settlement of vendor payables and
lease and other obligations of $12.0 million and $4.4 million, respectively, a
reversal of a restructuring accrual of $.8 million, and a net decrease in
working capital items of $14.9 million. These changes were partially offset by
income from discontinued operations of $6.1 million, depreciation and
amortization expense of $.4 million and a charge for impaired assets of $2.9
million. The reduction in working capital items was primarily caused by the
pay-down of accounts payable, accrued expenses and other current liabilities in
connection with the discontinuance of the promotions business. Net cash used in
operating activities of discontinued operations during 2001 of $15.8 million
primarily consisted of a loss from discontinued operations of $114.4 million,
and a realized gain on the sale of investments of $4.2 million partially offset
by depreciation and amortization expense of $5.2 million, provision for doubtful
accounts of $2.1 million, loss on sale of business of $2.3 million, change in
deferred income taxes of $11.9 million, net charge for impaired assets and
investments of $70.0 million, non-cash restructuring charge of $9.0 million,
issuance of common stock related to acquisition agreement of $.6 million, and a
net change in working capital items of $1.8 million. Net cash used in operating
activities of discontinued operations during 2000 of $8.3 million primarily
consisted of a loss from discontinued operations of $61.5 million, a realized
gain on the sale of investments of $3.2 million and a net change in working
capital items of $6.2 million, partially offset by depreciation and amortization
expense of $9.6 million, provision for doubtful accounts of $3.4 million, loss
on sale of business of $47.9 million, change in deferred income taxes of $.4
million, non-cash restructuring charge of $.7 million, and the issuance of
common stock related to acquisition agreement of $.6 million.
Net cash provided by investing activities of discontinued operations during 2002
of $7.3 million primarily consisted of a decrease in restricted cash of $5.9
million, proceeds from the sale of investments of $.1 million, and a $1.3
million net change in other investments. Net cash used in investing activities
during 2001 of $2.5 million primarily consisted of $7.9 million related to the
purchase of a marketable security, $2.9 million of property and equipment
purchases, an $5.9 million increase in restricted cash, and a net change in
other investments of .3 million, partially offset by $8.4 million of proceeds
from the sale of the CPG business, and $11.1 million of proceeds from the sale
of investments. Net cash used in investing activities of discontinued operations
during 2000 of $9.4 million primarily consisted of $12.8 million of property and
equipment purchases, partially offset by proceeds from the sale of investments
of $3.3 million.
Net cash used in financing activities of discontinued operations during 2002 of
$1.6 million primarily consisted of repayments of short and long-term
borrowings. Net cash used in financing activities of discontinued operations
during 2001 of $4.2 million primarily consisted of $5.1 million related to
repayments of short-term borrowings partially offset by $.2 million of proceeds
from long-term obligations and $.6 million of proceeds from the issuance of
common stock. Net cash used in financing activities of discontinued operations
during 2000 of $5.9 million primarily consisted of repayments of short and
long-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. Two million three hundred thousand dollars ($2,300,000) of
the purchase price was paid with a 10% per annum five-year subordinated note,
with the balance being paid in cash. Pursuant to a March 2002 settlement
agreement between the Company and Cyrk, this note has been cancelled. See 2001
Sale of Business section within Item 1 and the notes to consolidated financial
statements.
During 2002, related to the loss of its two largest customers, as well as the
loss of its other customers, (see notes to consolidated financial statements),
the Company negotiated early terminations on many of its facility and
non-facility operating leases, and has also negotiated settlements related to
liabilities with many of its suppliers. During 2002, approximately $22.0 million
of the Company's recorded liabilities were settled. These settlements were on
terms generally more favorable to the Company than required by the existing
terms of these obligations.
As a result of the precipitous drop in the value of the Company's common stock
after the announcement of the loss of its two largest customers (see notes to
consolidated financial statements), the Company recorded a $5.0 million charge
in the third quarter of 2001 to accelerate the recognition of contingent payment
obligations (due in June 2002) arising from the acquisition of Simon Marketing
in 1997. Pursuant to Separation, Settlement and General Release Agreements
entered into during 2002 with former employees, the Company settled its
contingent payment obligations for an amount less than its recorded liability.
See notes to the accompanying consolidated financial statements.
The Company's Credit and Security Agreements, which provided for working capital
and other financing arrangements, expired on May 15, 2002. At December 31, 2002
the Company had various pre-existing letters of credit outstanding, which are
cash collateralized and have various expiration dates through August 2007. As a
result of the loss of its McDonald's and
19
Philip Morris business (see Note 1 of notes to consolidated financial
statements), the Company no longer has the ability to borrow under any of its
existing credit facilities without it being fully cash collateralized. As of
December 31, 2002, the Company has approximately $5.4 million in outstanding
letters of credit, which include $5.1 million of letters of credit provided by
the Company to support Cyrk's obligations to Winthrop Resources Corporation.
These letters of credit are secured, in part, by $4.6 million of restricted cash
of the Company. Cyrk had previously agreed to indemnify the Company if Winthrop
made any draw under these letters of credit. The remaining letters of credit,
totaling approximately $.3 million are fully cash collateralized.
Restricted cash included within discontinued operations at December 31, 2002 and
December 31, 2001 totaled $0 million and $5.9 million, respectively, primarily
consisting of amounts deposited with lenders to satisfy the Company's
obligations pursuant to its outstanding standby letters of credit.
In the fourth quarter of 2002, Cyrk informed the Company that it (1) was
suffering substantial financial difficulties, (2) would not be able to discharge
its obligations secured by the Company's $4.2 million letters of credit and (3)
would be able to obtain a $2.5 million equity infusion if it were able to
decrease Cyrk's liability for these obligations. As a result, in December 2002,
the Company granted Cyrk an option until April 20, 2003 (extended to May 7,
2003) to pay the Company $1.5 million in exchange for the Company's agreement to
apply its $3.7 million restricted cash to discharge Cyrk's obligations to
Winthrop, with any remainder to be turned over to Cyrk. The option was only to
be exercised after the satisfaction of several conditions, including the
Company's confirmation of Cyrk's financial condition, Cyrk and the Company
obtaining all necessary third party consents, Cyrk and its subsidiaries
providing the Company with a full release of all known and unknown claims, and
the Company having no further liability to Winthrop as a guarantor of Cyrk's
obligations. To the extent Cyrk were to exercise this option, the Company would
incur a loss ranging from between $2.2 million to $3.7 million. Cyrk was unable
to satisfy all conditions to the option, and it expired unexercised.
The Company's second quarter 2001 restructuring actions (see notes to
consolidated financial statements) have had an adverse impact on the Company's
cash position. Total cash outlays related to restructuring activities totaled
approximately $10.9 million during 2001 and 2002.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The disclosure required by this Item is not material to the Company because the
Company does not currently have any exposure to market rate sensitive
instruments, as defined in this Item.
Part of the Company's discontinued operations consists of certain consolidated
subsidiaries that are denominated in foreign currencies. As the assets of these
subsidiaries are largely offset by liabilities, the Company is not materially
exposed to foreign currency exchange risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
NOTE: FOR THE REASONS DESCRIBED UNDER ITEM 15(A)1 FINANCIAL STATEMENTS, THE
FINANCIAL STATEMENTS OF THE REGISTRANT FOR THE YEAR ENDED DECEMBER 31,
2000 CONTAINED IN THIS REPORT ARE UNAUDITED AND, AS SUCH, DO NOT COMPLY
WITH THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934.
Page
----
Report of Independent Certified Public Accountants 37
Consolidated Balance Sheets as of December 31, 2002 and 2001 38
Consolidated Statements of Operations for the years ended
December 31, 2002, 2001 and 2000 39
Consolidated Statements of Stockholder's (Deficit) Equity for the years ended
December 31, 2002, 2001 and 2000 40
Consolidated Statements of Cash Flows for the years ended 41
20
December 31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements 42-65
Schedule II: Valuation and Qualifying Accounts 66
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
See disclosure in Item 3. Legal Proceedings regarding the resignation of
PricewaterhouseCoopers, LLP ("PWC") as the Company's independent public
accountants. For additional information, please see the Company's Forms 8-K
dated April 17, 2002 and June 6, 2002, which are incorporated herein by
reference.
21
PART III
ITEM 10. DIRECTORS OF THE REGISTRANT.
The Company's certificate of incorporation provides that the number of directors
shall be determined from time to time by the Board of Directors (but shall be no
less than three and no more than fifteen) and that the Board shall be divided
into three classes. On September 1, 1999, the Company entered into a Securities
Purchase Agreement with Overseas Toys, L.P., an affiliate of Yucaipa, the holder
of all of the Company's outstanding series A senior cumulative participating
convertible preferred stock, pursuant to which the Company agreed to fix the
size of the Board at seven members, of which Yucaipa currently has the right to
designate three individuals to the Board.
Pursuant to a Voting Agreement, dated September 1, 1999, among Yucaipa, Mr.
Brady, Mr. Brown, Mr. Shlopak, the Shlopak Foundation, Cyrk International
Foundation and the Eric Stanton Self-Declaration of Revocable Trust, each of
Messrs. Brady, Brown, Shlopak and Stanton have agreed to vote all of the shares
beneficially held by them to elect the three members nominated by Yucaipa. On
November 10, 1999, Ronald W. Burkle, George G. Golleher and Richard Wolpert were
the three Yucaipa nominees elected to the Company's Board, of which Mr. Burkle
became Chairman. Mr. Wolpert resigned from the Board on February 7, 2000.
Thereafter, Yucaipa requested that Erika Paulson be named as its third designee
to the Board and on May 25, 2000 the Board elected Ms. Paulson to fill the
vacancy created by Mr. Wolpert's resignation. On August 24, 2001, Mr. Burkle and
Ms. Paulson resigned from the Board and Yucaipa has not subsequently designated
replacement nominees to the Board. On June 15, 2001, Patrick D. Brady resigned
from the Board.
The following table sets forth the names and ages of the directors, the year in
which each individual was first elected a director and the year his term
expires:
Name Age Class Year Term Expires Director Since
- -------------------- ----- ----- ----------------- --------------
Joseph W. Bartlett 69 I 2003 1993
Allan I. Brown 63 I 2003 1999
Joseph Anthony Kouba 55 III 2002 1997
George G. Golleher 55 II 2004 1999
No stockholders meeting to elect directors was held in 2002. In accordance with
Delaware law and the Company's by-laws, Mr. Kouba's term as a director continues
until his successor is elected and qualified.
BUSINESS HISTORY OF DIRECTORS
MR. BARTLETT is engaged in the private practice of law as of counsel to the law
firm of Fish & Richardson. From 1996 through 2002, he had been a partner in the
law firm of Morrison & Foerster LLP. He was a partner in the law firm of Mayer,
Brown & Platt from July 1991 until March 1996. From 1969 until November 1990,
Mr. Bartlett was a partner of, and from November 1990 until June 1991 he was of
counsel to, the law firm of Gaston & Snow. Mr. Bartlett served as Under
Secretary of the United States Department of Commerce from 1967 to 1968 and as
law clerk to the Chief Justice of the United States in 1960.
MR. BROWN had been the Company's Chief Executive Officer and President from July
2001 until March 2002 when his employment with the Company was terminated. Mr.
Brown remains on the Company's Board of Directors. (See Executive Compensation.)
Prior to July 2001, Mr. Brown served as the Company's Co-Chief Executive Officer
and Co-President since November 1999. Since March 2000, Mr. Brown was
responsible for the global operations of Simon Worldwide's traditional
businesses, including the Company's Simon Marketing subsidiary. Since November
of 1975, Mr. Brown had also served as the Chief Executive Officer of Simon
Marketing. Since 1992, Mr. Brown had also served as President of Simon
Marketing. Mr. Brown is party to a Voting Agreement with Yucaipa, Patrick D.
Brady, Gregory P. Shlopak, the Shlopak Foundation, Cyrk International Foundation
and the Eric Stanton Self-Declaration of Revocable Trust, pursuant to which Mr.
Brown and each of Messrs. Brady, Shlopak and Stanton have agreed to vote all of
the shares beneficially held by them to elect Yucaipa's nominees to the
Company's Board.
MR. GOLLEHER is a consultant and private investor. Mr. Golleher served as
President and Chief Operating Officer of Fred Meyer, Inc. from March 1998 to
June 1999, and also served as a member of its Board of Directors. Mr. Golleher
served as
22
Chief Executive Officer of Ralphs Grocery Company from January 1996 to March
1998 and was Vice Chairman from June 1995 to January 1996. Mr. Golleher serves
as Chairman of the Board of American Restaurant Group and also serves on the
Board of Directors of Rite-Aid Corporation.
MR. KOUBA has been, since prior to 1996, a private investor and is engaged in
the business of real estate, hospitality and outdoor advertising. He has been an
attorney and a member of the Bar in California since 1972.
The Company does not currently have any executive officers. The Company's
ongoing operations are now being managed by an Executive Committee of the Board
of Directors consisting of Messrs. Golleher and Kouba, in consultation with
financial, accounting, legal and other advisors.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
In March 2001, Messrs. Bartlett, Golleher and Kouba were each granted options to
purchase 5,000 shares of the Company's Common Stock at a price of $2.00 per
share in connection with their service as outside directors of the Company. The
Form 5 reports of those grants were due to be filed with the Commission by
February 14, 2002 and were not filed until April 8, 2002.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth the compensation the Company paid or accrued for
services rendered in 2002, 2001 and 2000, respectively, by the individuals who
have the responsibility for the roles of the executive officers of the Company.
Summary Compensation Table
Long-Term
Annual Compensation (1) Compensation
-------------------------------------------- Securities
Name and Other Annual Underlying All Other
Principal Position Year Salary Bonus Compensation Options Compensation
- ---------------------------- ---- -------- --------- ------------ ------------ ------------
Allan I. Brown 2002 $181,434 $ 457,137(2)
Chief Executive 2001 $750,000 $ 500,000 167,000 $ 5,373,053(3)
Officer and President 2000 $628,846 $ 800,000 $ 1,213,508
J. Anthony Kouba 2002 $100,000(5) $ 740,926(4)
Executive Committee-Director 2001 5,000 $ 479,671(4)(6)
George Golleher 2002 $100,000(5) $ 636,495(4)
Executive Committee-Director 2001 5,000 $ 462,500(4)(6)
Greg Mays 2002 $ 50,000(5) $ 587,139(7)
Chief Financial Officer 2001 $ 346,288(7)
1. In accordance with the rules of the Securities and Exchange
Commission, other compensation in the form of perquisites and other
personal benefits have been omitted for all of the executive
officers, except for Mr. Brown, because the aggregate amount of such
perquisites and other personal benefits constituted less than the
lesser of $50,000 or 10% of the total annual salary and bonuses for
such executive officers for 2002, 2001 and 2000.
2. Represents (1) $279,996 of consulting fees pursuant to his March
2002 severance agreement, (2) $127,313 paid by the Company on behalf
of Mr. Brown for medical, legal, accounting and other expenses, (3)
$46,750 director's fee and (4) $3,079 contributed by the Company to
its 401K plan on behalf of Mr. Brown. Mr. Brown resigned from his
position as Chief Executive Officer and President of the Company in
March 2002. Mr. Brown remains on the Company's Board of Directors.
(See Employment and Severance Agreements.)
3. Represents (1) $3,452,546 in forgiveness of indebtedness of Mr.
Brown to the Company (of which $2,652,546 was forgiven pursuant to
his March 2002 severance agreement (effective as of December 31,
2001) (2) $5,100 contributed by the Company to its 401(k) plan on
behalf of Mr. Brown, (3) $182,283 of other compensation paid
23
directly by the Company to Mr. Brown or on his behalf, (4) $273,460
paid by the Company on behalf of Mr. Brown for medical, legal,
accounting and other expenses, (5) $449,664, the benefit to Mr.
Brown of the payment in 2001 with respect to a split dollar life
insurance policy, calculated as the present value of an interest
free loan of the premiums to Mr. Brown over his present actuarial
life expectancy, and (6) a $1,010,000 lump sum payment made by the
Company to Mr. Brown pursuant to his March 2002 severance agreement
(effective as of December 31, 2001).
4. Includes compensation paid by the Company based on the rate of
$2,000 per Board of Directors or committee meeting pursuant to
existing Company policy and an hourly rate of $750 for services
outside of Board and committee meetings paid pursuant to the
retention letter agreements.
5. Includes compensation of $100,000 paid to each Mr. Golleher and Mr.
Kouba for responsibility for the roles of Co-Chief Executive
Officers of the Company and compensation of $50,000 paid to Greg
Mays for responsibility for the role of Chief Financial Officer of
the Company.
6. Includes $150,000 retention fee paid pursuant to the retention
letter agreements.
7. Represents compensation for consulting services at the rate of $400
per hour plus an initial commitment fee of $25,000 paid in 2001.
OPTION GRANTS IN THE LAST FISCAL YEAR
There were no option grants during the last fiscal year.
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
There were no exercises of stock options during 2002. All stock options held by
the Company's former executive officers expired in September 2002.
SEVERANCE AND EXECUTIVE SERVICES AGREEMENTS
In March 2002, pursuant to negotiations that began in the fourth quarter of
2001, the Company entered into a Termination, Severance and General Release
Agreement ("Agreement") with Allan Brown. Pursuant to this Agreement, Mr.
Brown's employment with the Company terminated in March 2002 (Mr. Brown remains
on the Company's Board of Directors) and substantially all other agreements,
obligations and rights existing between Mr. Brown and the Company were
terminated, including Mr. Brown's Employment Agreement dated September 1, 1999,
as amended, the Company's obligation to fund his split-dollar life insurance
policy and his retention agreement dated August 29, 2001. (For additional
information related to Mr. Brown's retention agreement, see the Company's
September 30, 2001 Form 10-Q.) Pursuant to this Agreement, the Company made a
lump-sum payment to Mr. Brown of $1,010,000, Mr. Brown agreed to transfer to the
Company 52,904 shares of the Company's common stock in payment of Mr. Brown's
non-recourse loan for the principal amount of $575,000, and the Company
cancelled $2,652,546 of indebtedness of Mr. Brown to the Company. The Company
received a full release from Mr. Brown in connection with this Agreement, and
the Company provided Mr. Brown with a full release. Additionally, the Agreement
called for Mr. Brown to provide consulting services to the Company for a period
of six months after Mr. Brown's employment with the Company terminated in
exchange for a fee of $46,666 per month, plus specified expenses. The Agreement
also restricts Mr. Brown from certain future business endeavors. See notes to
consolidated financial statements and Executive Compensation.
In May 2003 the Company entered into Executive Services Agreements with Messrs.
Bartlett, Brown, Golleher, Kouba, Mays and Terrence Wallock, acting general
counsel of the Company. The purpose of the Agreements was to substantially lower
the administrative costs of the Company going forward while at the same time
retaining the availability of experienced executives knowledgeable about the
Company for ongoing administration as well as future opportunities. The
Agreements replace the letter agreements with Messrs. Bartlett, Golleher and
Kouba dated August 28, 2001. See Directors' Compensation. The Agreements can be
terminated at any time by the Company, by the lump sum payment of 180 days
compensation and by the Executive upon 180 days prior notice, except in certain
limited circumstances, and provide for compensation at the rate of $1,000 per
month to Messrs. Bartlett and Brown, $6,731 per week to Messrs. Golleher and
24
Kouba, $4,040 per week to Mr. Mays and $3,365 per week to Mr. Wallock.
Additional hourly compensation is provided for time spent in litigation after
termination of the Agreements and, in some circumstances during the term, for
extensive commitments of time for litigation and merger and acquisition
activities. The Agreements call for the payment of health insurance benefits and
provide for a mutual release upon termination
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Until March 2002, decisions concerning executive compensation were made by the
Compensation Committee of the Board, which during 2002 consisted of Messrs.
Bartlett and Kouba. Neither Messrs. Bartlett nor Kouba is or was an officer or
employee of the Company or any of its subsidiaries during such period. In 2002,
none of the Company's executive officers served as an executive officer, or on
the Board of Directors, of any entity of which Messrs. Bartlett or Kouba also
served as an executive officer or as a member of its Board of Directors.
After March 2002, the Company ceased to have any executive officers and
decisions concerning the compensation of Messrs. Kouba and Golleher, the members
of the Executive Committee of the Board who serve, in effect, as the principal
executive officers of the Company, were made by the non-Executive Committee
members of the Board. The compensation of Mr. Mays, who serves, in effect, as
the Company's principal financial officer, was determined by the Board of
Directors. In 2002, none of Messrs. Kouba, Golleher and Mays served as an
executive officer, or on the Board of Directors, of any entity of which any of
the other members of the Board of Directors served as an executive officer or as
a member of its Board of Directors.
DIRECTORS' COMPENSATION
During 2002, Directors were paid an annual retainer of $25,000. Commencing April
2003, Directors are paid an annual retainer of $50,000. In 2002 and 2003,
Directors also receive a fee of $2,000 for each Board of Directors, Audit or
Compensation Committee meeting attended.
On August 28, 2001, following the resignation of two Board members designated by
Yucaipa, including the Chairman, the Chief Financial Officer, the Controller,
and certain other officers of the Company, the Company entered into retention
letter agreements with each of Joseph Bartlett, George Golleher and Anthony
Kouba, the non-management members of the Board, pursuant to which the Company
paid each of them a retention fee of $150,000 in exchange for their agreement to
serve as a director of the Company for at least six months. If a director
resigned before the end of the six-month period, the director would have been
required to refund to the Company the pro rata portion of the retention fee
equal to the percentage of the six-month period not served. Additionally, the
Company agreed to compensate these directors at an hourly rate of $750 for
services outside of Board and committee meetings (for which they are paid $2,000
per meeting in accordance with existing Company policy). These agreements,
including the hourly rate for services, have been replaced by the Executive
Services Agreements described in Severance and Executive Services Agreements.
On February 7, 2003, the Company entered into additional agreements with Messrs.
Golleher and Kouba in order to induce them to continue to serve as members of
the Executive Committee of the Board and to compensate them for the additional
obligations, responsibilities and potential liabilities of such service,
including responsibilities imposed under the federal securities laws by virtue
of the fact that, as members of the Executive Committee, they serve, in effect,
as the chief executive officers of the Company since the Company has no
executive officers. The agreements provide for a fee of $100,000 to each of
Messrs. Golleher and Kouba for each of 2002 and 2003. Also on that date the
Company entered into a similar agreement with Mr. Mays who provides financial
and accounting services to the Company as a consultant but, in effect, serves as
the Company's chief financial officer. The agreement provides for a fee of
$50,000 to Mr. Mays for each of 2002 and 2003.
In 2002, payments totaling $61,063, $736,495 and $840,926 were made to Messrs.
Bartlett, Golleher and Kouba, respectively.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following tables set forth certain information regarding beneficial
ownership of the Company's common stock at May 31, 2003. Except as otherwise
indicated in the footnotes, the Company believes that the beneficial owners of
its common stock
25
listed below, based on information furnished by such owners, have sole
investment and voting power with respect to the shares of the Company's common
stock shown as beneficially owned by them.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth each person known by the Company (other than
directors and executive officers) to own beneficially 5% or more of the
outstanding common stock.
Number of Shares
Name And Address Of Common Stock Percentage Of
Of Beneficial Owner (1) Beneficially Owned Class
- -------------------------------------------- ------------------ -------------
Yucaipa and affiliates (2):
Overseas Toys, L.P.
OA3, LLC
Multi-Accounts, LLC
Ronald W. Burkle 5,014,061 23.1%
Dimensional Fund Advisors, Inc. (3) (4)
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401 1,174,500 7.05%
Gotham International Advisors, L.L.C.(3) (5)
Gotham Partners, L.P.
Gotham Partners III, L.P.
110 East 42nd Street
18th Floor
New York, NY 10017 1,742,851 10.47%
H. Ty Warner (3)
P.O. Box 5377
Oak Brook, IL 60522 975,610 5.9%
Eric Stanton (3) (6)
39 Gloucester Road
6th Floor
Wanchai
Hong Kong 1,123,023 6.7%
Gregory P. Shlopak (3) (7)
63 Main Street
Gloucester, MA 01930 1,064,900 6.4%
1. The number of shares beneficially owned by each stockholder is determined
in accordance with the rules of the Securities and Exchange Commission and is
not necessarily indicative of beneficial ownership for any other purpose. Under
these rules, beneficial ownership includes those shares of common stock that the
stockholder has sole or shared voting or investment power and any shares of
common stock that the stockholder has a right to acquire within sixty (60) days
after December 31, 2002 through the exercise of any option, warrant or other
right (including the conversion of the series A preferred stock). The percentage
ownership of the outstanding common stock, however, is based on the assumption,
expressly required by the rules of the Securities and Exchange Commission, that
only the person or entity whose ownership is being reported has converted
options, warrants or other rights into shares of common stock (including the
conversion of the series A preferred stock).
26
2. Represents approximately 3,347,394 shares of common stock issuable upon
conversion of 27,616 shares of series A preferred stock outstanding as of
December 31, 2002 and 1,666,667 shares of common stock issuable upon conversion
of 15,000 shares of series A preferred stock issuable pursuant to a warrant,
which is currently exercisable. Percentages are based on common stock
outstanding, plus all such convertible shares. Overseas Toys, L.P. is an
affiliate of Yucaipa and is the holder of record of all the outstanding shares
of series A preferred stock and the warrant to acquire the shares of series A
preferred stock. Multi-Accounts, LLC is the sole general partner of Overseas
Toys, L.P., and OA3, LLC is the sole managing member of Multi-Accounts, LLC.
Ronald W. Burkle is the sole managing member of OA3, LLC. The address of each of
Overseas Toys, L.P., Multi-Accounts, LLC, OA3, LLC, and Ronald W. Burkle is 9130
West Sunset Boulevard, Los Angeles, California 90069.
Overseas Toys, L.P. is party to a Voting Agreement, dated September 1, 1999,
with Patrick D. Brady, Allan I. Brown, Gregory P. Shlopak, the Shlopak
Foundation, Cyrk International Foundation and the Eric Stanton Self-Declaration
of Revocable Trust, pursuant to which Overseas Toys, L.P., Multi-Accounts, LLC,
OA3, LLC, and Ronald W. Burkle may be deemed to have shared voting power over
9,475,104 shares for the purpose of election of certain nominees of Yucaipa to
the Company's Board, and may be deemed to be members of a "group" for the
purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended.
Overseas Toys, L.P., Multi-Accounts, LLC, OA3, LLC and Ronald W. Burkle disclaim
beneficial ownership of any shares, except for the shares as to which they
possess sole dispositive and voting power.
3. Based on 16,653,193 shares of common stock outstanding as of December 31,
2002.
4. The information concerning this holder is based solely on information
contained in filings it has made with the Securities and Exchange Commission
pursuant to Sections 13(d) and 13(g) of the Securities Exchange Act of 1934, as
amended. Dimensional Fund Advisors Inc., or Dimensional, is a registered
investment advisor for four investment companies and also serves as investment
manager to certain other investment vehicles. In its roles as investment advisor
and investment manager, Dimensional has indicated that it has the sole power to
vote, or to direct the vote of, and the sole power to dispose, or direct the
disposition of, all of the shares. Dimensional disclaims beneficial ownership of
all of the shares.
5. The information concerning these holders is based solely on information
contained in joint filings they have made with the Securities and Exchange
Commission pursuant to Sections 13(d) and 13(g) of the Securities Exchange Act
of 1934, as amended. Gotham International Advisors, L.L.C., or Gotham, serves as
investment manager to Gotham Partners International, Ltd., or International,
with respect to the shares of common stock directly owned by International. In
its role as investment manager, Gotham has indicated that it has the sole power
to vote, or to direct the vote of, and the sole power to dispose, or direct the
disposition of, all of the 1,163,420 shares owned directly by International.
Gotham Partners, L.P. and Gotham Partners III, L.P each has indicated that it
has the sole power to vote, or to direct the vote of, and the sole power to
dispose, or direct the disposition of, all the 550,459 and 28,972 shares
directly owned by each of them, respectively.
6. Eric Stanton, as trustee of the Eric Stanton Self-Declaration of Revocable
Trust, has the sole power to vote, or to direct the vote of, and the sole power
to dispose, or to direct the disposition of, 1,123,023 shares. Mr. Stanton, as
trustee of the Eric Stanton Self-Declaration of Revocable Trust, is a party to a
Voting Agreement, dated September 1, 1999, with Yucaipa and Messrs. Brown, Brady
and Shlopak, and the Shlopak Foundation Trust and the Cyrk International
Foundation Trust pursuant to which Messrs. Brady, Brown, Shlopak and Stanton and
the trusts have agreed to vote in favor of certain nominees of Yucaipa to the
Company's Board. Mr. Stanton expressly disclaims beneficial ownership of any
shares except for the 1,123,023 shares as to which he possesses sole voting and
dispositive power.
7. The information concerning this holder is based solely on information
contained in filings Mr. Shlopak has made with the Securities and Exchange
Commission pursuant to Sections 13(d) and 13(g) of the Securities Exchange Act
of 1934, as amended. Includes 84,401 shares held by a private charitable
foundation as to which Mr. Shlopak, as trustee, has sole voting and dispositive
power. Mr. Shlopak is a party to a Voting Agreement, dated September 1, 1999,
with Yucaipa, Patrick D. Brady, Allan I. Brown, the Shlopak Foundation, Cyrk
International Foundation and the Eric Stanton Self-Declaration of Revocable
Trust, pursuant to which Messrs. Brady, Brown, Shlopak and Stanton and the
trusts have agreed to vote in favor of certain nominees of Yucaipa to the
Company's Board. Mr. Shlopak expressly disclaims beneficial ownership of any
shares except for the 1,064,900 shares as to which he possesses sole voting and
dispositive power.
27
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information at December 31, 2002 regarding the
beneficial ownership of the Company's common stock (including common stock
issuable upon the exercise of stock options exercisable within 60 days of
December 31, 2002) by each director and each executive officer named in the
Summary Compensation Table, and by all of the Company's directors and executive
officers as a group.
Number of Shares
Name And Address Of Common Stock Percentage Of
Of Beneficial Owner (1) Beneficially Owned Class (2)
- -------------------------------------------- ------------------ -------------
Allan I. Brown(3) 1,113,023 6.7%
Joseph W. Bartlett(4) 77,500 *
Joseph Anthony Kouba(5) 37,500 *
George G. Golleher(6) 22,500 *
Greg Mays -- --
All directors and
executive officers as a
group (5 persons) 1,250,523 7.4%
* Represents less than 1%
(1) The address of each of the directors and executive officers is c/o Simon
Worldwide, Inc., 1888 Century Park East, Suite 222, Los Angeles, California,
90067. The number of shares beneficially owned by each stockholder is determined
in accordance with the rules of the Securities and Exchange Commission and is
not necessarily indicative of beneficial ownership for any other purpose. Under
these rules, beneficial ownership includes those shares of common stock that the
stockholder has sole or shared voting or investment power and any shares of
common stock that the stockholder has a right to acquire within sixty (60) days
after December 31, 2002 through the exercise of any option, warrant or other
right (including the conversion of the series A preferred stock). The percentage
ownership of the outstanding common stock, however, is based on the assumption,
expressly required by the rules of the Securities and Exchange Commission, that
only the person or entity whose ownership is being reported has converted
options, warrants or other rights (including the conversion of the series A
preferred stock into shares of common stock).
(2) Based on 16,653,193 shares of common stock outstanding as of December 31,
2002.
(3) Mr. Brown has the sole power to vote, or to direct the vote of, and the
sole power to dispose, or to direct the disposition of, 1,113,023 shares. Mr.
Brown is party to a Voting Agreement, dated September 1, 1999, with Yucaipa, Mr.
Brady, Mr. Shlopak, the Shlopak Foundation, Cyrk International Foundation and
the Eric Stanton Self-Declaration of Revocable Trust, pursuant to which Messrs.
Brady, Brown, Shlopak and Stanton and the trusts have agreed to vote in favor of
certain nominees of Yucaipa to the Company's Board. Mr. Brown expressly
disclaims beneficial ownership of any shares except for the 1,113,023 shares as
to which he possesses sole voting and dispositive power.
(4) The 77,500 shares are issuable pursuant to stock options exercisable
within 60 days of December 31, 2002.
(5) The 37,500 shares are issuable pursuant to stock options exercisable
within 60 days of December 31, 2002.
(6) Includes 7,500 shares issuable pursuant to stock options exercisable
within 60 days of December 31, 2002.
28
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets forth information as of December 31, 2002, regarding
the Company's 1993 Omnibus Stock Plan (the "1993 Plan") and 1997 Acquisition
Stock Plan (the "1997 Plan"). The Company's stockholders previously approved the
1993 Plan and the 1997 Plan and all amendments that were subject to stockholder
approval. As of December 31, 2002, options to purchase 130,000 shares of Common
Stock were outstanding under the 1993 Plan and no options were outstanding under
the 1997 Plan. The Company's 1993 Employee Stock Purchase Plan was terminated
effective December 31, 2001 and no shares of the Company's Common Stock are
issuable under that plan.
Number of Shares
of Common Stock
Remaining
Number of Shares Available for
of Common Stock Weighted- Future Issuance
to be Issued Upon Average (excluding those
Exercise of Exercise Price in column (a))
Outstanding Stock of Outstanding Under the Stock
Options Stock Options Option Plans
----------------- --------------- ----------------
Plans Approved by Stockholders 130,000 $9.16 per share 2,456,389
Plans Not Approved by Stockholders Not applicable Not applicable Not applicable
TOTAL 130,000 $9.16 per share 2,456,389
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The following sets forth certain transactions, or series of similar
transactions, between the Company and any director, executive officer or
beneficial owner of more than 5% of the Company's outstanding shares of common
stock or series A preferred stock.
REAL ESTATE MATTERS
The Company leased a warehouse and distribution facility in Danvers,
Massachusetts under the terms of a lease agreement from a limited liability
company, which was owned by Messrs. Brady and Shlopak. The lease was triple net
and the aggregate annual rent under the lease was approximately $462,000.
Pursuant to a Purchase Agreement dated February 15, 2001, the Company sold its
CPG business. Pursuant to the terms of the Purchase Agreement, the buyer assumed
the lease for the facility in Danvers, however, the Company remained liable
under the lease to the extent that the buyer did not perform its obligations
under the lease. Pursuant to an Agreement entered into in March 2002, among and
between the Company, the buyer and the landlord, the lease terminated effective
June 30, 2002, along with any and all obligations of the Company under the
lease.
VC Experts, Inc., an entity affiliated with Joseph Bartlett, a director of the
Company, is indebted to the Company in the amount of $20,125 for space it
sub-leased in the Company's New York office for the period September 2001
through January 2002.
TRANSACTIONS WITH CERTAIN STOCKHOLDERS
Pursuant to a Management Agreement with Yucaipa, Yucaipa agreed to provide the
Company with management and financial consultation services in exchange for an
annual fee of $500,000 per year. In addition, under the Management Agreement,
the Company agreed to pay Yucaipa a consulting fee equal to one percent (1%) of
the total purchase price for any acquisition or disposition transaction by the
Company in which Yucaipa provided consultation to the Company. The Company
agreed to reimburse Yucaipa up to $500,000 per year for all of its reasonable
out-of-pocket expenses incurred in connection with the performance of its duties
under the Management Agreement. The term of the Management Agreement
29
was for five years, with automatic renewals for successive five year terms at
the end of each year unless either the Company or Yucaipa elect not to renew and
upon termination, a payment of $2.5 million became due. No management fee had
been paid after November 2001. On October 17, 2002, the Management Agreement
between the Company and Yucaipa was terminated by the payment to Yucaipa of $1.5
million and each party was released from further obligations thereunder.
Pursuant to a consulting agreement among Eric Stanton, Simon Worldwide and Simon
Marketing, Mr. Stanton provided consulting services to Simon Marketing in 2001
in exchange for $350,000. In the first quarter of 2002, the Company entered into
an Amended Consulting Agreement and General Release ("Agreement") with Mr.
Stanton. Pursuant to the terms of the Agreement, Mr. Stanton's consulting
relationship with the Company terminated on June 30, 2002. Additionally, the
Company received a full release from Mr. Stanton in connection with this
Agreement, and the Company provided Mr. Stanton with a full release.
Mr. Stanton's wife, Vivian Foo, was employed by the Company's Simon Marketing
(Hong Kong) Limited subsidiary until the first quarter of 2002. In the first
quarter of 2002, the Company entered into a Settlement and General Release
Agreement ("Agreement") with Ms. Foo. Pursuant to the terms of the Agreement,
Ms. Foo's employment with the Company terminated in March 2002 and all other
agreements, obligations and rights existing between Ms. Foo and the Company
(including the agreement described in the next paragraph) were terminated in
exchange for a lump-sum payment of approximately $759,000. Additionally, the
Company received a full release from Ms. Foo in connection with this Agreement,
and the Company provided Ms. Foo with a full release.
The Company entered into an agreement with Ms. Foo in connection with the
Company's 1997 acquisition of Simon Marketing. Pursuant to this agreement, Ms.
Foo had received annual payments of cash and the Company's common stock (based
on the average closing price of the Company's common stock for the 20 trading
days immediately preceding each June 9) in the aggregate amount of $600,000.
Accordingly, the Company issued 113,895 of its shares of common stock to Ms. Foo
in 2001 as the common stock portion of such payment. In 2001, Ms. Foo's annual
base salary and bonus was $1,148,383 in the aggregate. In addition, pursuant to
Ms. Foo's agreement, she was entitled to certain employee benefits in connection
with her expatriate status. In 2001, these benefits had an aggregate value of
$490,215.
ITEM 14. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES: Within 90 days before filing this Report,
the Company evaluated the effectiveness and design and operation of its
disclosure controls and procedures. The Company's disclosure controls and
procedures are the controls and other procedures that the Company designed to
ensure that it records, processes, summarizes and reports in a timely manner the
information that it must disclose in reports that the Company files with or
submits to the Securities and Exchange Commission. Anthony Kouba and George
Golleher, the members of the Executive Committee, which has the responsibility
for the role of chief executive officer of the Company, and Greg Mays, who has
assumed the role of Chief Financial Officer, reviewed and participated in this
evaluation. Based on this evaluation, the Company's disclosure controls were
effective.
INTERNAL CONTROLS: Since the date of the evaluation described above, there have
not been any significant changes in the Company's internal controls or in other
factors that could significantly affect those controls.
PART IV
ITEM 15. 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, 2002 and
2001
Consolidated Statements of Operations for the years
ended December 31, 2002, 2001 and 2000*
Consolidated Statements of Stockholders' (Deficit)
Equity for the years ended December 31, 2002, 2001 and
2000
Consolidated Statements of Cash Flows for the years
ended December 31, 2002, 2001 and 2000*
Notes to Consolidated Financial Statements
* For the following reasons, the financial statements for the year ended
December 31, 2000 contained in this report are unaudited and, as such, do not
comply with the requirements of the Securities Exchange Act of 1934:
Commencing in April 2002, the Company reclassified the financial results of its
promotions business as "discontinued operations" for all periods to be presented
within its 2002 filings with the Securities and Exchange Commission. The current
and historical financial results of the promotions business were incorporated
within the books and records of both Simon Worldwide and Simon Marketing and, as
a result, had not been separately reported or audited by PriceWaterhouseCoopers
LLP ("PWC"), the Company's former auditors, or BDO Seidman, LLP ("BDO"), the
Company's current auditors. Consequently, management of the Company was required
to perform a detailed analysis of the Company's books and records to determine
the appropriate amounts to be included within continuing and discontinued
operations. However, PWC has indicated that it is unable to issue an audit
report covering the Company's revised statement of operations for the year ended
December 31, 2000, citing independence issues. PWC has indicated that
management's reclassification of the 2000 financial statements for discontinued
operations requires PWC to perform audit procedures in the current period to
enable it to issue an audit report on the Company's 2000 statement of
operations. Since PWC considers its independence to have been impaired since
March 29, 2002 (the date of the lawsuit filed against PWC - see Item 3, Legal
Proceedings), it believes it cannot perform such audit procedures. The Company
has attempted to get the information audited by other auditors; however, the
Company has been unable to do so. BDO has informed the Company that, because of
inaccessibility of former key personnel and limited access to records for 2000,
due to downsizing of the Company, it is unable to perform the required audit
procedures and the Company believes that further attempts to engage other
auditors would result in the same conclusion.
2. FINANCIAL STATEMENT SCHEDULES FOR THE FISCAL YEARS ENDED
DECEMBER 31, 2002, 2001 AND 2000:
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.
31
3. EXHIBITS
Reference is made to the Exhibit Index, which follows
Schedule II to the consolidated financial statements in
this report on Form 10-K.
32
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. The Executive Committee of
the Board of Directors has the responsibility for the role of the principal
executive officer of the registrant.
Date: July 25, 2003 SIMON WORLDWIDE, INC.
/s/ George G. Golleher /s/ J. Anthony Kouba
---------------------- --------------------
GEORGE G. GOLLEHER J. ANTHONY KOUBA
Member of Executive Member of Executive
Committee Committee
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/ Joseph W. Bartlett Director July 25, 2003
- ----------------------
JOSEPH W. BARTLETT
/s/ Allan I. Brown Director July 25, 2003
- ------------------
ALLAN I. BROWN
/s/ George G. Golleher Director and Member of July 25, 2003
- ---------------------- Executive Committee
GEORGE G. GOLLEHER
/s/ J. Anthony Kouba Director and Member of July 25, 2003
- -------------------- Executive Committee
J. ANTHONY KOUBA
/s/ Greg Mays Principal Financial Officer July 25, 2003
- -------------
GREG MAYS
33
I, George G. Golleher, a member of the Executive Committee of the Board of
Directors, which has responsibility for the role of principal executive officer
of the Company, certify that:
1. I have reviewed the annual report on Form 10-K of the Company.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report.
4. The Company's other certifying officers and I am responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a - 14 and 15d - 14) for the Company and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which the annual
report is being prepared;
b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to filing this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Company's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the Company's Board
of Directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the Company's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Company's
internal controls; and
6. The Company's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
July 25, 2003 BY: /s/ George G. Golleher
--------------------------
GEORGE G. GOLLEHER
34
I, J. Anthony Kouba, a member of the Executive Committee of the Board of
Directors, which has responsibility for the role of principal executive officer
of the Company, certify that:
1. I have reviewed the annual report on Form 10-K of the Company.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report.
4. The Company's other certifying officers and I am responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a - 14 and 15d - 14) for the Company and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which the annual
report is being prepared;
b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to filing this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Company's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the Company's Board
of Directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the Company's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Company's
internal controls; and
6. The Company's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
July 25, 2003 BY: /s/ J. Anthony Kouba
------------------------
J. ANTHONY KOUBA
35
I, Greg Mays, principal financial officer of the Company, certify that:
1. I have reviewed the annual report on Form 10-K of the Company.
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report.
4. The Company's other certifying officers and I am responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a - 14 and 15d - 14) for the Company and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which the annual
report is being prepared;
b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to filing this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Company's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the Company's Board
of Directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the Company's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Company's
internal controls; and
6. The Company's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
July 25, 2003 BY: /s/ Greg Mays
-----------------
GREG MAYS
36
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders of
Simon Worldwide, Inc.:
We have audited the accompanying consolidated balance sheets of Simon Worldwide,
Inc. and its subsidiaries as of December 31, 2002 and 2001 and the related
consolidated statements of operations, stockholders' (deficit) equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Simon Worldwide Inc.
and its subsidiaries as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has a stockholders' deficit, has
suffered significant losses from operations, has suffered the loss of major
customers and faces numerous legal actions that raise substantial doubt about
its ability to continue as a going concern. Management's plans in regards to
these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of these
uncertainties.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule as of and for the years
ended December 31, 2002 and 2001 listed in the index to the consolidated
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rule and is not a required part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in our audits of the basic financial statements and, in our opinion, is fairly
stated in all material respects in relation to the basic financial statements
taken as a whole.
BDO Seidman, LLP /s/
Los Angeles, California
June 6, 2003
37
SIMON WORLDWIDE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31, December 31,
2002 2001
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 1,181 $ --
Restricted cash 7,640 2,868
Prepaid expenses and other current assets 1,394 1,077
Assets from discontinued operations to be disposed of - current 14,255 56,737
--------- ---------
Total current assets 24,470 60,682
Property and equipment, net 67 124
Investments 500 10,500
Other assets 293 767
--------- ---------
25,330 72,073
Assets from discontinued operations to be disposed of - non-current 1,110 5,863
--------- ---------
$ 26,440 $ 77,936
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable:
Trade $ 51 $ 20
Affiliates 155 141
Accrued expenses and other current liabilities 478 134
Liabilities from discontinued operations - current 15,365 55,815
--------- ---------
16,049 56,110
Liabilities from discontinued operations - non-current -- 6,785
--------- ---------
16,049 62,895
Commitments and contingencies
Mandatorily redeemable preferred stock, Series A1 senior cumulative
participating convertible, $.01 par value, 27,616 shares issued and
outstanding at December 31, 2002 and 26,538 shares issued and outstanding
at December 31, 2001, stated at redemption value of $1,000 per share 27,616 26,538
Stockholders' deficit:
Common stock, $.01 par value; 50,000,000 shares authorized; 16,653,193 shares
issued and outstanding at December 31, 2002 and
16,653,193 shares issued and outstanding at December 31, 2001 167 167
Additional paid-in capital 138,500 135,966
Retained deficit (155,892) (145,515)
Accumulated other comprehensive loss:
Cumulative translation adjustment -- (2,115)
--------- ---------
Total stockholders' deficit (17,225) (11,497)
--------- ---------
$ 26,440 $ 77,936
========= =========
See the accompanying Report of Independent Certified Public Accountants and
the notes to the consolidated financial statements.
38
SIMON WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
2002 2001 2000
--------- --------- ---------
Revenues $ -- $ -- $ --
General and administrative expenses 5,156 4,757 3,679
Investment losses 10,250 3,159 4,500
--------- --------- ---------
Loss from continuing operations before income taxes (15,406) (7,916) (8,179)
Income tax provision -- -- --
--------- --------- ---------
Net loss from continuing operations (15,406) (7,916) (8,179)
Income (loss) from discontinued operations, net of tax
of $(3,486), $12,374 and $(1,605) 6,120 (114,429) (61,536)
--------- --------- ---------
Net loss (9,286) (122,345) (69,715)
Preferred stock dividends 1,091 1,042 1,000
--------- --------- ---------
Net loss available to common stockholders $ (10,377) $(123,387) $ (70,715)
========= ========= =========
Loss per share from continuing operations available
to common stockholders:
Loss per common share - basic and diluted $ (0.99) $ (0.54) $ (0.57)
========= ========= =========
Weighted average shares outstanding - basic and diluted 16,653 16,455 15,972
========= ========= =========
Income (loss) per share from discontinued operations:
Income (loss) per common share - basic and diluted $ 0.37 $ (6.95) $ (3.85)
========= ========= =========
Weighted average shares outstanding - basic and diluted 16,653 16,455 15,972
========= ========= =========
Net loss available to common stockholders:
Net loss per common share - basic and diluted $ (0.62) $ (7.50) $ (4.43)
========= ========= =========
Weighted average shares outstanding - basic and diluted 16,653 16,455 15,972
========= ========= =========
See the accompanying Report of Independent Certified Public Accountants and
the notes to the consolidated financial statements.
39
SIMON WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
For the years ended December 31, 2002, 2001 and 2000
(In thousands)
Common Additional Retained
Stock Paid-in (Deficit) Comprehensive
($.01 Par Value) Capital Earnings Loss
--------- --------- --------- ---------
Balance, December 31, 1999 (unaudited) $ 157 $ 137,035 $ 48,587
Comprehensive loss:
Net loss (unaudited) (69,715) $ (69,715)
---------
Other comprehensive loss, net of income taxes:
Net unrealized loss on available-for-sale
securities (unaudited) (1,242)
Translation adjustment (unaudited) 109
---------
Other comprehensive loss (unaudited) (1,133)
---------
Comprehensive loss (unaudited) $ (70,848)
=========
Dividends on preferred stock (unaudited) (1,000)
Issuance of shares under employee stock option
and stock purchase plans (unaudited) 2 533
Issuance of shares for businesses acquired
(unaudited) 2 1,410
--------- --------- ---------
Balance, December 31, 2000 (unaudited) 161 138,978 (22,128)
Options compensation
Comprehensive loss:
Net loss (122,345) $(122,345)
---------
Other comprehensive loss, net of income taxes:
Net unrealized loss on available-for-sale
securities (94)
Translation adjustment (1,186)
---------
Other comprehensive loss (1,280)
---------
Comprehensive loss $(123,625)
=========
Dividends on preferred stock (1,042)
Phantom shareholder contingent obligation (5,042)
Options compensation 459
Issuance of shares under employee stock option
and stock purchase plans 1 164
Issuance of shares for businesses acquired 5 1,407
--------- --------- ---------
Balance, December 31, 2001 167 135,966 (145,515)
Comprehensive loss:
Net loss (9,286) $ (9,286)
---------
Other comprehensive loss, net of income taxes:
Translation adjustment 2,115
---------
Other comprehensive loss 2,115
---------
Comprehensive loss $ (7,171)
=========
Dividends on preferred stock (1,091)
Phantom shareholder contingent obligation 2,994
Options compensation (460)
--------- --------- ---------
Balance, December 31, 2002 $ 167 $ 138,500 $(155,892)
========= ========= =========
Accumulated
Other Total
Comprehensive Stockholders'
Income (Loss) (Deficit) Equity
--------- ---------
Balance, December 31, 1999 $ 298 $ 186,077
Comprehensive loss:
Net loss (unaudited) (69,715)
Other comprehensive loss, net of income taxes:
Net unrealized loss on available-for-sale
securities (unaudited) (1,242)
Translation adjustment (unaudited) 109
Other comprehensive loss (unaudited) (1,133)
Comprehensive loss (unaudited)
Dividends on preferred stock (unaudited) (1,000)
Issuance of shares under employee stock option
and stock purchase plans (unaudited) 535
Issuance of shares for businesses acquired
(unaudited) 1,412
--------- ---------
Balance, December 31, 2000 (835) 116,176
Options compensation
Comprehensive loss:
Net loss (122,345)
Other comprehensive loss, net of income taxes:
Net unrealized loss on available-for-sale
securities (94)
Translation adjustment (1,186)
Other comprehensive loss (1,280)
Comprehensive loss
Dividends on preferred stock (1,042)
Phantom shareholder contingent obligation (5,042)
Options compensation 459
Issuance of shares under employee stock option
and stock purchase plans 165
Issuance of shares for businesses acquired 1,412
--------- ---------
Balance, December 31, 2001 (2,115) (11,497)
Comprehensive loss:
Net loss (9,286)
Other comprehensive loss, net of income taxes:
Translation adjustment 2,115
Other comprehensive loss 2,115
Comprehensive loss
Dividends on preferred stock (1,091)
Phantom shareholder contingent obligation 2,994
Options compensation (460)
--------- ---------
Balance, December 31, 2002 $ -- $ (17,225)
========= =========
See the accompanying Report of Independent Certified Public Accountants and
the notes to the consolidated financial statements.
40
SIMON WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
2002 2001 2000
--------- --------- ---------
Cash flows from operating activities:
Net loss $ (9,286) $(122,345) $ (69,715)
Income (loss) from discontinued operations 6,120 (114,429) (61,536)
--------- --------- ---------
Loss from continuing operations (15,406) (7,916) (8,179)
Adjustments to reconcile net loss to net
cash provided by operating activities from continuing operations:
Depreciation and amortization 58 58 58
Charge for impaired assets, net 432 -- --
Charge for impaired investments 10,250 2,313 4,500
Increase (decrease) in cash from changes
in working capital items:
Prepaid expenses and other current assets (316) (816) 149
Accounts payable 45 (28) 2
Accrued expenses and other current liabilities 345 (40) (25)
--------- --------- ---------
Net cash used in operating activities from continuing operations (4,592) (6,429) (3,495)
--------- --------- ---------
Cash flows from investing activities:
Purchase of investments -- -- (4,500)
Decrease (increase) in restricted cash (4,772) (2,868) --
Other, net (208) -- 28
--------- --------- ---------
Net cash used in investing activities from continuing operations (4,980) (2,868) (4,472)
--------- --------- ---------
--------- --------- ---------
Cash flows from financing activities from continuing operations -- -- --
--------- --------- ---------
Net cash used in continuing operations (9,572) (9,297) (7,967)
Net cash provided by (used in) discontinued operations 10,753 (51,176) (31,258)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 1,181 (60,473) (39,225)
Cash and cash equivalents, beginning of year -- 60,473 99,698
--------- --------- ---------
Cash and cash equivalents, end of period $ 1,181 $ -- $ 60,473
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 22 $ 440 $ 1,167
========= ========= =========
Income taxes $ 72 $ 465 $ 5,262
========= ========= =========
Supplemental non-cash investing activities:
Issuance of additional stock related to acquisitions $ -- $ 1,413 $ 1,413
========= ========= =========
Dividends paid in kind on mandatorily redeemable preferred stock $ 1,078 $ 1,038 $ 500
========= ========= =========
See the accompanying Report of Independent Certified Public Accountants and
the notes to the consolidated financial statements.
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES
The Company sold its CPG business on February 15, 2001 to Cyrk, for
approximately $14 million, which included the assumption of approximately $3.7
million of Company debt. Two million three hundred thousand dollars ($2,300,000)
of the purchase price was paid with a 10% per annum five-year subordinated note
from Cyrk, with the balance being paid in cash. In March 2002, the Company
entered into a settlement agreement with Cyrk whereby the Company cancelled the
remaining indebtedness outstanding under the aforementioned subordinated note
from Cyrk, totaling $2.3 million (see Note 3).
41
SIMON WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except share data and dollar amounts followed immediately by
the word "million")
1. NATURE OF BUSINESS, LOSS OF CUSTOMERS, RESULTING EVENTS AND GOING CONCERN
In August 2001, Simon Worldwide, Inc. ("the Company") experienced the loss of
its two largest customers: McDonald's Corporation ("McDonald's") and, to a
lesser extent, Philip Morris Incorporated ("Philip Morris" now known as Altria,
Inc.). Since August 2001, the Company has concentrated its efforts on reducing
its costs and settling numerous claims, contractual obligations and pending
litigation. As a result of these efforts the Company has been able to resolve a
significant number of outstanding liabilities that existed at December 31, 2001
or arose subsequent to that date. As of December 31, 2001, the Company had 136
employees worldwide and had reduced its worldwide workforce to 9 employees as of
December 31, 2002.
At December 31, 2002, the Company had a stockholders' deficit of $17,225. For
the year ended December 31, 2002, the Company had a net loss of $9,286. The
Company continues to incur losses in 2003 for the general and administrative
expenses being incurred to manage the affairs of the Company and resolve
outstanding legal matters. Management believes it has sufficient capital
resources and liquidity to operate the Company for the foreseeable future.
However, as a result of the loss of these major customers, along with the
resulting legal matters discussed further below, there is substantial doubt
about the Company's ability to continue as a going concern. The accompanying
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
By April 2002, the Company had effectively eliminated a majority of its ongoing
operations and was in the process of disposing of its assets and settling its
liabilities related to the promotions business. The process is ongoing and will
continue throughout 2003 and possibly into 2004. During the second quarter of
2002, the discontinued activities of the Company, consisting of revenues,
operating costs, certain general and administrative costs and certain assets and
liabilities associated with the Company's promotions business, were classified
as discontinued operations for financial reporting purposes. The Board of
Directors of the Company continues to consider various alternative courses of
action for the Company going forward, including possibly acquiring one or more
operating businesses, selling the Company or distributing its net assets, if
any, to shareholders. The decision on which course to take will depend upon a
number of factors including the outcome of the significant litigation matters in
which the Company is involved (See Legal Actions Associated with the McDonald's
Matter below). To date, the Board of Directors has made no decision on which
course of action to take.
Prior to the loss of its two largest customers in August 2001 and the subsequent
loss of its other customers (as noted below), the Company had been operating as
a multi-national full-service promotional marketing company, specializing in the
design and development of high-impact promotional products and sales programs.
On August 21, 2001, the Company was notified by McDonald's that they were
terminating their approximately 25-year relationship with one of the Company's
subsidiaries Simon Marketing, Inc. ("Simon Marketing") as a result of the arrest
of Jerome P. Jacobson ("Mr. Jacobson"), a former employee of Simon Marketing who
subsequently plead guilty to embezzling winning game pieces from McDonald's
promotional games administered by Simon Marketing. No other Company employee was
found or even alleged to have any knowledge of or complicity in his illegal
scheme. The Second Superseding Indictment filed December 7, 2001 by the U.S.
Attorney in the United States District Court for the Middle District of Florida
charged that Mr. Jacobson "embezzled more than $20 million worth of high value
winning McDonald's promotional game pieces from his employer, [Simon]". Simon
Marketing was identified in the Indictment, along with McDonald's, as an
innocent victim of Mr. Jacobson's fraudulent scheme. (See Legal Actions
Associated with the McDonald's Matter, below.) Further, on August 23, 2001, the
Company was notified that its second largest customer, Philip Morris, was also
ending their approximately nine-year relationship with the Company. Net sales to
McDonald's and Philip Morris accounted for 78% and 8% and 65% and 9% of total
net sales in 2001 and 2000, respectively. The Company had no sales during 2002.
The Company's financial condition, results of operations and net cash flows have
been and will continue to be materially adversely affected by the loss of the
McDonald's and Philip Morris business, as well as the loss of its other
customers. At December 31, 2002 and December 31, 2001, the Company had no
customer backlog as compared to $237 of written customer purchase orders at
December 31, 2000. In addition, the absence of business from McDonald's and
Philip Morris has adversely affected the Company's relationship with and access
to foreign manufacturing sources.
42
As a result of actions taken in the second half of 2001, the Company recorded
third and fourth quarter pre tax charges totaling approximately $80,315. These
charges relate principally to the write-down of goodwill attributable to Simon
Marketing ($46,671) and to a substantial reduction of its worldwide
infrastructure, including, asset write-downs ($22,440), lump-sum severance costs
associated with the termination of approximately 377 employees ($6,275), lease
cancellations ($1,788), legal fees ($1,736) and other costs associated with the
McDonald's and Philip Morris matters ($1,405). During 2002, the Company also
recorded a pre-tax net charge totaling approximately $4,574 associated with the
loss of customers. Charges totaling $8,600, primarily related to asset
write-downs ($3,600), professional fees ($4,300), labor and other costs ($736),
were partially offset by a recoveries of certain assets, totaling $1,341 (see
Note 6 for details), that had been written off and included in the 2001 charges
attributable to the loss of significant customers and other gains ($2,730).
In order to induce their continued commitment to provide vital services to the
Company in the wake of the events of August 2001, in the third quarter of 2001
the Company entered into retention arrangements with its Chief Executive
Officer, each of the three non-management members of the Company's Board of
Directors (the "Board") and key members of management of Simon Marketing. As a
further inducement to the Company's directors to continue their service to the
Company, and to provide assurances that the Company will be able to fulfill its
obligations to indemnify directors, officers and agents of the Company and its
subsidiaries ("Indemnitees") under Delaware law and pursuant to various
contractual arrangements, in March 2002 the Company entered into an
Indemnification Trust Agreement ("Agreement") for the benefit of the Indemnitees
(see Note 16). Pursuant to this Agreement, the Company has deposited a total of
$2,700 with an independent trustee in order to fund any indemnification amounts
owed to an Indemnitee, which the Company is unable to pay.
In connection with the loss of its customers and pursuant to negotiations that
began in the fourth quarter of 2001, the Company entered into a Termination,
Severance and General Release Agreement ("Agreement") with its Chief Executive
Officer ("CEO") in March 2002. In accordance with the terms of this Agreement,
the CEO's employment with the Company terminated in March 2002 (the CEO remains
on the Company's Board of Directors) and substantially all other agreements,
obligations and rights existing between the CEO and the Company were terminated,
including the CEO's Employment Agreement dated September 1, 1999, as amended,
and his retention agreement dated August 29, 2001. The ongoing operations of the
Company and Simon Marketing are being managed by the Executive Committee of the
Board consisting of Messrs. Golleher and Kouba, in consultation with outside
financial, accounting, legal and other advisors. As a result of the foregoing,
the Company recorded a 2001 fourth quarter pre-tax charge of $4,563, relating
principally to the forgiveness of indebtedness of the CEO to the Company, a
lump-sum severance payment and the write-off of an asset associated with an
insurance policy on the life of the CEO. The Company received a full release
from the CEO in connection with this Agreement, and the Company provided the CEO
with a full release. Additionally, the Agreement called for the CEO to provide
consulting services to the Company for a period of six months after the CEO's
employment with the Company terminated in exchange for a fee of approximately
$47 per month, plus specified expenses.
On August 28, 2001, the Company entered into retention letter agreements with
each of Messrs. Golleher and Kouba and Joseph Bartlett, the non-management
members of the Board, pursuant to which the Company paid each of them a
retention fee of $150 in exchange for their agreement to serve as a director of
the Company for at least six months. If a director resigned before the end of
the six-month period, the director would have been required to refund to the
Company the pro rata portion of the retention fee equal to the percentage of the
six-month period not served. Additionally, the Company agreed to compensate
these directors at an hourly rate of $0.75 for services outside of Board and
committee meetings (for which they are paid $2 per meeting in accordance
with existing Company policy). These agreements, including the hourly rates for
services, have been replaced by Executive Services Agreements dated May 30,
2003.
In addition, retention agreements were entered into in September and October
2001 with certain key employees which provide for retention payments ranging
from 8% to 100% of their respective salaries conditioned upon continued
employment through specified dates and/or severance payments of up to 100% of
these employee's respective annual salaries should such employees be terminated
within the parameters of their agreements (for example, termination without
cause). In the first quarter of 2002, additional similar agreements were entered
into with certain employees of one of the Company's subsidiaries. Payments under
these agreements have been made at various dates from September 2001 through
March 2002. The Company's obligations under these agreements were approximately
$3,100. Approximately $2,500 of these commitments had been segregated in
separate cash accounts in October 2001, in which security interests had been
granted to certain employees, and released back to the Company in 2002 when all
such retention and severance payments were made to these applicable employees.
43
LEGAL ACTIONS ASSOCIATED WITH THE MCDONALD'S MATTER
Subsequent to August 21, 2001, numerous consumer class action and representative
action lawsuits (hereafter variously referred to as, "actions", "complaints" or
"lawsuits") have been filed in Illinois, the headquarters of McDonald's, and in
multiple jurisdictions nationwide and in Canada. Plaintiffs in these actions
asserted diverse causes of action, including negligence, breach of contract,
fraud, restitution, unjust enrichment, misrepresentation, false advertising,
breach of warranty, unfair competition and violation of various state consumer
fraud statutes. Complaints filed in federal court in New Jersey also alleged a
pattern of racketeering.
Plaintiffs in many of these actions alleged, among other things, that
defendants, including the Company, its subsidiary Simon Marketing, and
McDonald's, misrepresented that plaintiffs had a chance at winning certain
high-value prizes when in fact the prizes were stolen by Mr. Jacobson.
Plaintiffs seek various forms of relief, including restitution of monies paid
for McDonald's food, disgorgement of profits, recovery of the "stolen" game
prizes, other compensatory damages, attorney's fees, punitive damages and
injunctive relief.
The class and/or representative actions filed in Illinois state court were
consolidated in the Circuit Court of Cook County, Illinois (the "Boland" case).
Numerous class and representative actions filed in California have been
consolidated in California Superior Court for the County of Orange (the
"California Court"). Numerous class and representative actions filed in federal
courts nationwide have been transferred by the Judicial Panel on Multidistrict
Litigation (the "MDL Panel") to the federal district court in Chicago, Illinois
(the "MDL Proceedings"). Numerous of the class and representative actions filed
in state courts other than in Illinois and California were removed to federal
court and transferred by the MDL Panel to the MDL Proceedings.
On April 19, 2002, McDonald's entered into a Stipulation of Settlement (the
"Boland Settlement") with certain plaintiffs in the Boland case pending in the
Circuit Court of Cook County, Illinois (the "Illinois Circuit Court"). The
Boland Settlement purports to settle and release, among other things, all claims
related to the administration, execution and operation of the McDonald's
promotional games, or to "the theft, conversion, misappropriation, seeding,
dissemination, redemption or non-redemption of a winning prize or winning game
piece in any McDonald's Promotional Game," including without limitation claims
brought under the consumer protection statutes or laws of any jurisdiction, that
have been or could or might have been alleged by any class member in any forum
in the United States of America, subject to a right of class members to opt out
on an individual basis, and includes a full release of the Company and Simon
Marketing, as well as their officers, directors, employees, agents, and vendors.
Under the terms of the Boland Settlement, McDonald's agrees to sponsor and run a
"Prize Giveaway" in which a total of fifteen (15) $1 million prizes, payable in
twenty installments of $50 per year with no interest, shall be randomly awarded
to persons in attendance at McDonald's restaurants. The Company has been
informed that McDonald's, in its capacity as an additional insured, has tendered
a claim to Simon Marketing's Errors & Omissions insurance carriers to cover some
or all of the cost of the Boland Settlement, including the cost of running the
"Prize Giveaway," of the prizes themselves, and of attorney's fees to be paid to
plaintiffs' counsel up to an amount of $3 million.
On June 6, 2002, the Illinois Circuit Court issued a preliminary order approving
the Boland Settlement and authorizing notice to the class. On August 28, 2002,
the opt-out period pertaining thereto expired. The Company has been informed
that approximately 250 persons in the United States and Canada purport to have
opted out of the Boland Settlement. Furthermore, actions may move forward in
Canada and in certain of the cases asserting claims not involving the Jacobson
theft. On January 3, 2003, the Illinois Circuit Court issued an order approving
the Boland Settlement and overruling objections thereto and on April 8, 2003 a
final order was issued approving plaintiffs' attorney fees in the amount of $2.8
million. Even if the Boland Settlement is approved and is enforceable to bar
claims of persons who have not opted out, individual claims may be asserted by
those persons who are determined to have properly opted out of the Boland
Settlement. Claims may also be asserted in Canada and by individuals whose
claims do not involve the Jacobson theft if a court were to determine the claim
to be distinguishable from and not barred by the Boland Settlement.
The remaining cases in the MDL Proceedings were dismissed on April 29, 2003,
other than a case originally filed in federal district court in Kentucky, in
which the plaintiff has opted out of the Boland Settlement. The plaintiff in
that case asserts that McDonald's and Simon Marketing failed to redeem a
purported $1,000 winning ticket. This case has been ordered to arbitration.
44
In the California Court, certain of the California plaintiffs purported to have
opted out of the Boland Settlement individually and also on behalf of all
California consumers. In its final order approving the Boland Settlement, the
Illinois court rejected the attempt by the California plaintiffs to opt out on
behalf of all California consumers. On June 2, 2003, the California Court
granted the motion of McDonald's and Simon Marketing to dismiss all class and
representative claims as having been barred by the Boland Settlement. Even with
the Boland Settlement, individual claims may go forward as to those plaintiffs
who are determined to have properly opted out of the Boland Settlement or who
have asserted claims not involving the Jacobson theft. The Company does not know
which California and non-California claims will go forward notwithstanding the
Boland Settlement.
On or about August 20, 2002, an action was filed against Simon Marketing in
Florida State Court alleging that McDonald's and Simon Marketing deliberately
diverted from seeding in Canada game pieces with high-level winning prizes in
certain McDonald's promotional games. The plaintiffs are Canadian citizens and
seek restitution and damages on a class-wide basis in an unspecified amount.
Simon Marketing and McDonald's removed this action to federal court on September
10, 2002 and the MDL Panel has transferred the case to the MDL Proceedings in
Illinois, where a motion to dismiss was heard on April 29, 2003. The plaintiffs
in this case did not opt out of the Boland Settlement.
On or about September 13, 2002, an action was filed against Simon Marketing in
Ontario Provincial Court in which the allegations are similar to those made in
the above Florida action. On October 28, 2002, an action was filed against Simon
Marketing in Ontario Provincial Court containing similar allegations. The
plaintiffs in the aforesaid actions seek an aggregate of $110 million in damages
and an accounting on a class-wide basis. Simon Marketing has retained Canadian
local counsel to represent it in these actions. The Company believes that the
plaintiffs in these actions did not opt out of the Boland Settlement. The
Company and McDonald's have filed motions to dismiss or stay these cases on the
basis of the Boland Settlement. There has been no ruling on this motion and the
actions are in the earliest stages.
On October 23, 2001, the Company and Simon Marketing filed suit against
McDonald's in California Superior Court for the County of Los Angeles. The
complaint alleges, among other things, fraud, defamation and breach of contract
in connection with the termination of Simon Marketing's relationship with
McDonald's.
Also on October 23, 2001, the Company and Simon Marketing were named as
defendants, along with Mr. Jacobson, and certain other individuals unrelated to
the Company or Simon Marketing, in a complaint filed by McDonald's in the United
States District Court for the Northern District of Illinois. The complaint
alleges that Simon Marketing had engaged in fraud, breach of contract, breach of
fiduciary obligations and civil conspiracy and alleges that McDonald's is
entitled to indemnification and damages of an unspecified amount. The federal
lawsuit by McDonald's has been dismissed for lack of federal jurisdiction.
Subsequently, a substantially similar lawsuit was filed by McDonald's in
Illinois state court which the Company has moved to dismiss as a compulsory
counter-claim which must properly be filed in the Company's California state
court action. There has been no ruling on the Company's motion.
The Company is unable to predict the outcome of the lawsuits against the Company
and their ultimate effects, if any, on the Company's financial condition,
results of operations or net cash flows.
On November 13, 2001, the Company filed suit against Philip Morris in California
Superior Court for the County of Los Angeles, asserting numerous causes of
action arising from Philip Morris' termination of the Company's relationship
with Philip Morris. Subsequently, the Company dismissed the action without
prejudice, so that the Company and Philip Morris could attempt to resolve this
dispute outside of litigation. During 2002, a settlement was reached resulting
in a payment of $1.5 million by Philip Morris to the Company.
In March 2002, Simon Marketing initiated a lawsuit against certain suppliers and
agents of McDonald's in California Superior Court for the County of Los Angeles.
The complaint alleges, among other things, breach of contract and intentional
interference with contractual relations. In July 2002, a stay was granted in the
case on the basis of "forum non conveniens", which would require the case to be
refiled in Illinois state court. The Company has filed an appeal of the stay.
On March 29, 2002, Simon Marketing filed a lawsuit against
PricewaterhouseCoopers LLP ("PWC") and two other accounting firms, citing the
accountants' failure to oversee, on behalf of Simon Marketing, various steps in
the distribution of high-value game pieces for certain McDonald's promotional
games. The complaint alleges that this failure allowed the misappropriation of
certain of these high-value game pieces by Mr. Jacobson. The lawsuit, filed in
Los Angeles Superior Court, seeks unspecified actual and punitive damages
resulting from economic injury, loss of income and profit, loss of
45
goodwill, loss of reputation, lost interest, and other general and special
damages. The defendants' motion to dismiss for "forum non conveniens" has been
denied in the case and, following demurrers by the defendants, the Company
subsequently filed a first amended complaint against two firms, PWC and one of
the two other accounting firms named as defendants in the original complaint,
KPMG LLP. The defendants' demurrer to the first amended complaint was sustained
in part, and a second amended complaint was filed. The date for filing an answer
has not yet been set pending a status conference on the case, the date for which
has not yet been determined.
As a result of this lawsuit, PWC resigned as the Company's independent public
accountants on April 17, 2002. In addition, on April 17, 2002, PWC withdrew its
audit report dated March 26, 2002 filed with the Company's original 2001 Annual
Report on Form 10-K. PWC has also indicated that it is unable to re-issue an
audit report covering the Company's statement of operations for the year ended
December 31, 2000 that has been reclassified for disclosure of discontinued
operations. See Item 15(a)1. Financial Statements. PWC indicated that it
believed the lawsuit resulted in an impairment of its independence in connection
with the audit of the Company's 2001 financial statements which also precludes
it from performing any additional audit procedures in the current period in
connection with the reclassified 2000 financial statements. The Company does not
believe that PWC's independence was impaired. On June 6, 2002, the Company
engaged BDO Seidman LLP as the Company's new independent public accountants.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company. All intercompany accounts and transactions have been eliminated in
consolidation.
REVENUE RECOGNITION AND RELATED RECEIVABLES
Sales are generally recognized when title to the product passes to the customer,
which occurs when the 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.
The Company evaluates the collectibility of its accounts receivable on a
specific identification basis. In circumstances where the Company is aware of a
customer's inability or unwillingness to pay outstanding amounts, the Company
records a specific reserve for bad debts against amounts due to reduce the
receivable to its estimated collectible balance.
STOCK-BASED COMPENSATION PLANS AND PRO FORMA STOCK-BASED COMPENSATION EXPENSE
At December 31, 2002, the Company had three stock-based compensation plans,
which are described below. The Company adopted the disclosure provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation" 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 2002, 2001 and 2000 grants for stock based compensation
plans been determined consistent with SFAS No. 123, the Company's net loss and
loss per common share would have been increased to the pro forma amounts
indicated below. Since there were no stock option grants during 2002, there is
no impact on net income as reported in the accompanying consolidated financial
statements.
(unaudited)
2002 2001 2000
----------- ----------- -----------
Net loss available for common- as reported $ (10,377) $ (123,387) $ (70,715)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of income taxes -- (843) (1,428)
------- -------- -------
Net loss available for common- pro forma (10,377) (124,230) (72,143)
======= ======== =======
Loss per common share - basic - as reported (0.62) (7.50) (4.43)
Loss per common share - diluted - as reported (0.62) (7.50) (4.43)
Loss per common share - basic - pro forma (0.62) (7.55) (4.52)
Loss per common share - diluted - pro forma (0.62) (7.55) (4.52)
46
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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.
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 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 ("SFAS") 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 accounted for under
the cost method and are carried at the lower of estimated fair value or cost.
PROPERTY AND EQUIPMENT
Historically, 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.
Property and equipment currently have been adjusted to reflect an impairment
charge associated with the Company's loss of its customers (see Note 1). The
cost and accumulated depreciation for property and equipment sold, retired or
otherwise disposed of are relieved from the accounts, and the resulting gains or
losses are reflected in income.
IMPAIRMENT OF LONG-LIVED ASSETS
Periodically, the Company assesses, based on undiscounted cash flows, if there
has been an other than temporary impairment in the carrying value of its
long-lived assets and, if so, the amount of any such impairment by comparing
anticipated undiscounted future cash flows 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 SFAS No. 109,
"Accounting for Income Taxes", 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
47
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 rates of exchange during the period.
Translation gains and losses are recorded in a separate component of
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 SFAS No. 128, "Earnings per Share".
RECENTLY ISSUED ACCOUNTING STANDARDS
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (`SFAS 144"). This statement supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of". The statement retains the previously existing
accounting treatments related to the recognition and measurement of the
impairment of long-lived assets to be held and used while expanding the
measurement requirements of long-lived assets to be disposed of by sale to
include discontinued operations. It also expands the previously existing
reporting requirements for discontinued operations to include a component of an
entity that either has been disposed of or is classified as held for sale. The
Company implemented SFAS No. 144 on January 1, 2002. During the second quarter
of 2002, the Company had effectively eliminated a majority of its ongoing
operations and was in the process of disposing its assets and settling its
liabilities related to the promotions business. The process is ongoing and will
continue throughout 2003 and possibly into 2004. During the second quarter of
2002, the discontinued activities of the Company, consisting of revenues,
operating costs, certain general and administrative costs and certain assets and
liabilities associated with the Company's promotions business, were classified
as discontinued operations for financial reporting purposes.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS 146"). SFAS No. 146 requires companies
to recognize costs associated with exit or disposal activities initiated by the
Company after December 31, 2002. Management does not expect this statement to
have a material impact on the Company's consolidated financial position or
results of operations.
In November 2002, the FASB issued FASB Interpretation (FIN) No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN No. 45 clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. The initial
recognition and initial measurement provisions of FIN No. 45 are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002,
while the disclosure requirements became applicable in 2002. The company is
complying with the disclosure requirements of FIN No. 45. The other requirements
did not materially affect the Company's financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair-value-based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. As provided
for in SFAS No. 123, the company has elected to apply APB No. 25 "Accounting for
Stock Issued to Employees" and related interpretations in accounting for its
stock-based compensation plans. APB No. 25 does not require options to be
expensed when granted with an exercise price equal to fair market value. The
company is complying with the disclosure requirements of SFAS No. 148.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities, an Interpretation of ARB 51." The primary objectives of FIN No. 46 are
to provide guidance on the identification of entities for which control is
achieved through means other than through voting rights ("variable interest
entities" or "VIEs") and how to determine when and which business enterprise
should consolidate the VIE. This new model for consolidation applies to an
entity for which either: (a) the equity investors (if any) do not have a
controlling financial interest; or (b) the equity investment at risk is
insufficient to finance that entity's activities without receiving additional
subordinated financial support from other parties. In addition, FIN No. 46
requires that both the primary beneficiary and all other enterprises with a
significant variable interest in a VIE make additional disclosures. The Company
is required to apply FIN No. 46 to all new variable interest entities created or
acquired
48
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the company is required to apply FIN No. 46 on July 1,
2003. The Company does not anticipate that FIN No. 46 will materially affect the
its consolidated financial statements.
In June 2003 the FASB issued FASB No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". This statement
established standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify the following financial instruments as
liabilities (or assets in some circumstances) in its financial statements:
instruments issued in the form of shares that are manditorily redeemable through
the transfer of company assets at a specified date or upon an event that is
likely to occur, an instrument (other than an outstanding share) that embodies
an obligation to repurchase the issuer's equity shares and that requires or may
require the issuer settle the obligation through the transfer of assets, an
instrument that embodies an unconditional obligation or an instrument (other
than an outstanding share) that embodies a conditional obligation that the
issuer must or may settle by issuing a variable number of equity shares.
FASB No. 150 is effective for financial instruments entered into or modified
after May 31, 2003 and is otherwise effective at the beginning of the first
interim period beginning after June 15, 2003. The Company is currently assessing
the impact of this statement on its consolidated financial statements.
3. SALE OF BUSINESS
In February 2001, the Company sold its Corporate Promotions Group ("CPG")
business to Cyrk, Inc. ("Cyrk"), formerly known as Rockridge Partners, Inc., 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 Cyrk, 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 and 1999
attributable to the CPG business were $146,773 and $134,855, respectively, or
19% and 13%, respectively, of consolidated Company revenues. Net sales in the
first quarter of 2001, for the period through February 14, 2001, attributable to
the CPG business, were approximately $17,700, or 17% of consolidated Company
revenues. Net sales in the first quarter of 2000 attributable to the CPG
business were approximately $33,600, 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 the Company's
acquisitions of Marketing Incentives, Inc. ("MI") and Tonkin, Inc. ("Tonkin") in
1996 and 1997, respectively.
Pursuant to the Purchase Agreement, Cyrk purchased from the Company (i) all of
the outstanding capital stock of Cyrk Acquisition Corp. ("CAC"), successor to
the business of MI, and Tonkin, each a wholly owned subsidiary of the Company,
(ii) certain other assets of the Company, including those assets at the
Company's Danvers and Wakefield, Massachusetts facilities necessary for the
operation of the CPG business and (iii) all intellectual property of the CPG
business as specified in the Purchase Agreement. Cyrk assumed certain
liabilities of the CPG business as specified in the Purchase Agreement and all
of the assets and liabilities of CAC and Tonkin and, pursuant to the Purchase
Agreement, the Company agreed to transfer its former name, Cyrk, to the buyer.
Cyrk extended employment offers to certain former employees of the Company who
had performed various support activities, including accounting, human resources,
information technology, legal and other various management functions. There is
no material relationship between Cyrk 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 completed the restructuring effort announced by the
Company in May 2000 with respect to the CPG business. See Note 15.
Following the closing of the sale of the CPG business, certain disputes arose
between the Company and Cyrk. In March 2002, the Company entered into a
settlement agreement with Cyrk. Under the settlement agreement: (1) the Company
contributed $500 towards the settlement of a lawsuit against the Company and
Cyrk made by a former employee, (2) the
49
Company cancelled the remaining indebtedness outstanding under Cyrk's
subordinated promissory note in favor of the Company in the original principal
amount of $2,300, (3) Cyrk agreed to vacate the Danvers, Massachusetts facility
by June 15, 2002 and that lease would terminate as of June 30, 2002, thereby
terminating the Company's substantial lease liability thereunder, (4) Cyrk and
the Company each released the other from all known and unknown claims (subject
to limited exceptions) including Cyrk's release of all indemnity claims made
against the Company arising out of Cyrk's purchase of the CPG business, and (5)
a letter of credit in the amount of $500 was provided by Cyrk for the benefit of
the Company to support a portion of a $4,200 letter of credit provided by the
Company for the benefit of Cyrk in connection with Cyrk's purchase of the CPG
business. If Cyrk fails to perform its obligations under this agreement, or
fails to perform and discharge liabilities assumed in connection with its
purchase of the CPG business, then all or a portion of Cyrk's indebtedness to
the Company under the subordinated promissory note may be reinstated. Pursuant
to this agreement, the Company's 2001 financial statements reflect the
settlement, and include a pre-tax charge of $3,184 associated with the write-off
of the subordinated note and other charges relating to final sale and
settlement.
4. DISCONTINUED OPERATIONS
As discussed in Note 1, the Company had effectively eliminated a majority of its
ongoing operations related to its promotions business during the second quarter
of 2002. Accordingly, the discontinued activities of the Company, including the
operations of CPG sold in February 2001 (Note 3), have been classified as
discontinued operations in the accompanying consolidated financial statements.
Assets and liabilities relating to discontinued operations as of December 31,
2002 and 2001, as disclosed in the accompanying consolidated financial
statements, consist of the following:
December 31, December 31,
2002 2001
------- -------
Assets:
Cash and cash equivalents $13,236 $40,851
Restricted cash -- 5,865
Investments -- 152
Accounts receivable:
Trade, less allowance for doubtful accounts of $13,416
at December 31, 2002 and $15,616 at December 31, 2001 558 7,253
Prepaid expenses and other current assets 461 2,616
------- -------
Total current assets 14,255 56,737
Property and equipment, net -- 2,690
Other assets 1,110 3,173
------- -------
Assets from discontinued operations to be disposed of $15,365 $62,600
======= =======
Liabilities:
Short-term borrowings $ - $ 457
Accounts payable:
Trade 5,736 21,491
Affiliates -- 42
Accrued expenses and other current liabilities 9,629 31,381
Accrued restructuring expenses -- 2,444
------- -------
Total current liabilities 15,365 55,815
Long-term obligations -- 6,785
------- -------
Liabilities from discontinued operations $15,365 $62,600
======= =======
50
Net loss from discontinued operations for the years ended December 31, 2002,
2001 and 2000, as disclosed in the accompanying consolidated financial
statements, consist of the following:
(unaudited)
----------- ----------- -----------
2002 2001 2000
----------- ----------- -----------
Net sales $ -- $ 324,040 $ 768,450
Cost of sales -- 252,326 622,730
Write-down of inventory in connection with
restructuring -- -- 1,695
----------- ----------- -----------
Gross profit -- 71,714 144,025
Selling, general and administrative
expenses 3,464 74,492 153,750
Goodwill amortization expense -- 1,574 3,547
Related Parties 1,458 619 1,265
Impairment of intangible asset -- 46,671 --
Charges attributable to loss of significant
customers 4,574 33,644 --
Gain on settlement of obligations (12,023) -- --
Restructuring (750) 20,212 4,700
----------- ----------- -----------
Operating income (loss) 3,277 (105,498) (19,237)
Interest income (366) (2,075) (4,269)
Interest expense 35 576 1,315
Other (income) expense 974 (4,244) (3,245)
Loss on sale of business -- 2,300 27,387
Write-off of goodwill attributable to business
sold -- -- 22,716
----------- ----------- -----------
Income (loss) before income taxes 2,634 (102,055) (63,141)
Income tax expense (benefit) (3,486) 12,374 (1,605)
----------- ----------- -----------
Net income (loss) $ 6,120 $ (114,429) $ (61,536)
=========== =========== ===========
5. RESTRICTED CASH
Restricted cash at December 31, 2002 and December 31, 2001 primarily consists of
amounts deposited with lenders to satisfy the Company's obligations pursuant to
its outstanding standby letters of credit (see Note 9). The 2002 restricted cash
balance also includes $2,700 deposited in an irrevocable trust entered into
during 2002 (see Note 16) and is included as part of continuing operations. The
2001 restricted cash balance also includes $2,500 segregated to secure certain
employee retention payments. The $2,500 was released back to the Company in the
first quarter of 2002 upon making of retention and severance payments to these
employees.
6. ACCOUNTS RECEIVABLE
On November 13, 2001, the Company had filed suit against Philip Morris in
California Superior Court for the County of Los Angeles, asserting numerous
causes of action arising from Philip Morris' termination of the Company's
relationship with Philip Morris. Subsequently, the Company dismissed the action
without prejudice, so that the Company and Philip Morris could attempt to
resolve this dispute outside of litigation. During 2002, a settlement was
reached resulting in a payment of $1.5 million by Philip Morris to the Company.
As this payment was in excess of the Company's net outstanding receivable due
from Philip Morris, a gain of approximately $463 was recorded during the second
quarter, included in selling, general, and administrative expenses disclosed in
Note 4. See Note 14 for details. During the second quarter of 2002, the Company
also received payments, totaling approximately $877, relating to accounts
receivable from other former customers that had been previously deemed to be
uncollectible and written off during 2001. The Company also received $464 in
connection with the termination of a retirement plan held by one of its foreign
subsidiaries. These recoveries, totaling $1,341, have been recorded as
reductions to Charges Attributable to Loss of Significant Customers, disclosed
in Note 4. Also see Note 13.
51
7. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
Discontinued Continuing
Operations Operations Total
------------------- -------------------- --------------------
As of December 31,
-------------------------------------------------------------------
2002 2001 2002 2001 2002 2001
-------- -------- -------- -------- -------- --------
Machinery and equipment $ -- $ 3,390 $ 173 $ 173 $ 173 $ 3,563
Furniture and Fixtures -- 7,442 -- -- -- 7,442
Leasehold Improvements -- 165 -- -- -- 165
-------- -------- -------- -------- -------- --------
-- 10,997 173 173 173 11,170
Less: Accumulated depreciation and -- (8,307) (106) (49) (106) (8,356)
amortization
-------- -------- -------- -------- -------- --------
$ -- $ 2,690 $ 67 $ 124 $ 67 $ 2,814
======== ======== ======== ======== ======== ========
At December 31, 2001, property and equipment reflected an impairment charge of
$3,919 associated with the Company's loss of customers (see Note 1). During
2002, the Company recorded additional impairment charges totaling $2,400, which
has been included in Charges Attributable to Loss of Customer in Note 4. See
Note 13 for details. Depreciation and amortization expense on property and
equipment totaled $475, $3,867 and $6,078 in 2002, 2001 and 2000, respectively.
8. INVESTMENTS
CURRENT
In December 2000, the Company purchased 1,500,000 shares of a marketable
security at $5.25 per share. The Company sold 1,310,000 shares in 2001 and
realized a gain on the sale of this stock of $4,249. As of December 31, 2001 and
2000, the shares of stock owned by the Company were stated at fair value of $152
and $7,969, respectively. On December 31, 2001, the Company adjusted the basis
of this investment to recognize an impairment, totaling $851, due to a decline
in market value, which was considered to be other than temporary. During 2002,
the Company sold the remainder of its investment in the stock and recognized a
nominal loss.
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 were intended to provide the Company
with an 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 the 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.
In June 2002, certain events occurred which indicated an impairment of its
investment in Alliance Entertainment Corp. ("Alliance"), an indirect investment
through a limited liability company that is owned by the Yucaipa Companies
("Yucaipa"). This investment had a carrying value of $10,000 at December 31,
2001. Yucaipa is believed to be indirectly a significant shareholder in
Alliance, which is a home entertainment product distribution, fulfillment, and
infrastructure company providing both brick-and-mortar and e-commerce home
entertainment retailers with complete business-to-business solutions. The
Company recorded a pre-tax non-cash charge of $10,000 in 2002 to write-down its
investment, included in Investment Losses in the accompanying consolidated
financial statements. For the years ended December 31, 2001 and December 31,
2000, the Company also recorded impairment charges of $1,500 and $2,500,
respectively, related to other investments in affiliate-controlled partnerships.
During the third quarter of 2002, the Company also received a final return of
52
capital, totaling approximately $275, on an investment with a carrying value
totaling approximately $525 as of December 31, 2001. A loss of approximately
$250 was recorded in connection with this final distribution, included in
investment losses in the accompanying consolidated financial statements.
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.
9. BORROWINGS AND LONG-TERM OBLIGATIONS
As of December 31, 2001, the Company's borrowing capacity was $21.0 million, of
which $.5 million in letters of credit were outstanding. In addition, bank
guarantees totaling $.3 million were outstanding at December 31, 2001.
Borrowings under these facilities were collateralized by substantially all of
the assets of the Company. As a result of the loss of its McDonald's and Philip
Morris business (see Note 1), the Company no longer has the ability to borrow
under any of its existing credit facilities without it being fully cash
collateralized. The Company's Credit and Security Agreements, which provided for
working capital and other financing arrangements expired on May 15, 2002.
At December 31, 2002 the Company had various pre-existing letters of credit
outstanding, which are cash collateralized and have various expiration dates
beginning in February 2003 through August 2007. The Company has approximately
$5,400 in outstanding letters, which includes $5,095 of credit provided by the
Company to support Cyrk's obligations to Winthrop Resources Corporation. These
letters of credit are secured, in part, by $4,595 of restricted cash of the
Company. Cyrk had previously agreed to indemnify the Company if Winthrop made
any draw under this letter of credit. The remaining letters of credit, totaling
approximately $345 million are fully cash collateralized.
As a result of the precipitous drop in the value of the Company's common stock
after the announcement of the loss of its two largest customers (see Note 1),
the Company had recorded a $5,042 adjustment in the third quarter of 2001 to
accelerate the recognition of contingent payment obligations (due in June 2002)
arising from the acquisition of Simon Marketing in 1997. This obligation was
recorded as a charge to Additional Paid in Capital during 2001. Pursuant to
Separation, Settlement and General Release Agreements entered into during 2002,
the Company paid approximately $1,996 to settle this obligation. The remaining
liability, totaling approximately $2,994, was reversed through Additional Paid
in Capital during 2002.
In connection with the discontinuance of the Company's supermarket operations,
the Company filed a lawsuit in 1993 against its former contractual partner.
During 1998 the Company settled the litigation by entering into a Joint Business
Arrangement with the defendant, at which time the Company made a cash payment
and recorded a $2,900 accrual for the maximum potential liability under the
agreement, which is included in other long-term obligations within discontinued
operations in the accompanying 2001 financial statements. During 2002, the
Company paid approximately $2,175 to settle these obligations, resulting in a
settlement gain of $725, recorded as a reduction to selling, general, and
administrative expenses in Note 4.
10. LEASE OBLIGATIONS
During 2002, the Company settled all of its outstanding domestic and
international real estate and equipment lease obligations, except for one
expired warehouse lease with approximately $70 of unpaid rent, and relocated its
remaining scaled-down operations to smaller office space in Los Angeles,
California. As these settlements were on terms generally more favorable to the
Company than required by the existing terms of the liabilities, the Company
recorded a 2002 gain totaling approximately $2,768, recorded as a reduction to
selling, general, and administrative expenses in Note 4.
The approximate minimum rental commitments under all noncancelable leases as of
December 31, 2002 total $78, which are due in 2003.
Rental expense for all operating leases was $2,694, $7,989 and $10,893 for the
years ended December 31, 2002, 2001 and 2000, respectively. Rent is charged to
operations on a straight-line basis for certain leases.
53
11. INCOME TAXES
The components of the provision (benefit) for income taxes, all of which are
related to discontinued operations for all periods, are as follows:
(unaudited)
2002 2001 2000
-------- -------- --------
Current:
Federal $ (3,486) $ 520 $ (4,544)
State -- -- 465
Foreign -- -- 2,086
-------- -------- --------
$ (3,486) $ 520 $ (1,993)
Deferred:
Federal $ - $ 10,702 $ (258)
State -- 1,152 646
-------- -------- --------
-- 11,854 388
-------- -------- --------
$ (3,486) $ 12,374 $ (1,605)
======== ======== ========
As required by SFAS 109, the Company periodically evaluates the positive and
negative evidence bearing upon the realizability of its deferred tax assets. The
Company, however, has considered recent events (see Note 1) and results of
operations and concluded, in accordance with the applicable accounting methods,
that it is more likely than not that the deferred tax assets will not be
realizable. As a result, the Company has determined that a valuation allowance
of approximately $43,715 is required at December 31, 2002. The tax effects of
temporary differences that gave rise to deferred tax assets as of December 31,
were as follows:
2002 2001
-------- --------
Deferred tax assets:
Receivable reserves $ 2,207 $ 864
Inventory capitalization and reserves -- 2,217
Other asset reserves 12,173 7,453
Deferred compensation 19 1,186
Capital Losses 6,894 2,594
Foreign tax credits 1,881 1,881
Alternative minimum tax credits -- 637
Net operating losses 20,582 27,537
Depreciation (41) 1,146
Valuation Allowance (43,715) (45,515)
-------- --------
$ -- $ --
======== ========
As of December 31, 2002, the Company had federal and state net operating loss
carryforwards of approximately $54,277 and $24,076, respectively. The federal
net operating loss carryforward will begin to expire in 2020 and the state net
operating loss carryforwards began to expire in 2002. As of December 31, 2002,
the Company also had foreign tax credit carryforwards of $1,881 that began to
expire in 2002. As of December 31, 2002, the Company had capital loss
carryforwards of approximately $6,894 which begin expiring 2006.
54
The following is a reconciliation of the statutory federal income tax rate to
the actual effective income tax rate:
(unaudited)
2002 2001 2000
-------- -------- --------
Federal tax (benefit) rate (34)% (35)% (35)
Increase (decrease) in taxes resulting
from:
State income, taxes, net of
federal benefit (6) (1) 1
Effect of foreign tax rates and
non-utilization of Federal and
State losses 25 32 7
Release of prior years'
estimated tax
liability accounts (27) -- --
Goodwill -- 16 1
Non-deductible loss on sale of
business 1 -- 22
Meals and Entertainment -- -- 1
Life Insurance 5 -- --
Other, net 9 (1) 1
-------- -------- --------
Effective tax (benefit) rate (27)% 11% (2)%
======== ======== ========
An audit by the Internal Revenue Service covering the tax years 1996 through
2000 was in process during 2002. Based on the Company filing of the 2001 tax
return in September 2002 and preliminary discussions with the IRS, management
believed that the Company had no additional tax obligations.
12. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
At December 31, 2002 and 2001, accrued expenses and other current liabilities
consisted of the following:
Discontinued Continuing
Operations Operations Total
------------------- ------------------- -------------------
As of December 31,
---------------------------------------------------------------
2002 2001 2002 2001 2002 2001
-------- -------- -------- -------- -------- --------
Accrued payroll and related
items and deferred
compensation $ 344 $ 10,400 $ - $ - $ 344 $ 10,400
Inventory Purchases 4,378 6,201 -- -- 4,378 6,201
Lease Obligations -- 2,596 -- -- -- 2,596
Royalties 1,552 2,912 -- -- 1,552 2,912
Administrator Fees -- 2,962 -- -- -- 2,962
Other 3,354 6,310 478 134 3,833 6,444
-------- -------- -------- -------- -------- --------
$ 9,629 $ 31,381 $ 478 $ 134 $ 10,107 $ 31,515
======== ======== ======== ======== ======== ========
Other accrued expenses as of December 31, 2001 included a tax accrual totaling
approximately $3,486. An audit by the Internal Revenue Service covering the tax
years 1996 through 2000 was in process during 2002. Based on the Company filing
of the 2001 tax return in September 2002 and discussions with the IRS,
management believed that the Company had no additional tax obligations.
Therefore, the aforementioned accrual was reversed during 2002 through income
tax provision (benefit) disclosed in Note 11.
During 2002, the Company settled lease obligations that were outstanding as of
December 31, 2001. See Note 10 for further details.
13. CHARGES ATTRIBUTABLE TO LOSS OF CUSTOMERS
During 2002, the Company recorded a pre-tax net charge totaling approximately
$4,574 associated with the loss of customers. Charges totaling $8,645, primarily
related to asset write-downs ($3,575), professional fees ($4,334), labor and
other costs ($736), were partially offset by a recoveries of certain assets,
totaling $1,341 (see Note 6), that had been written off and included in the 2001
charges attributable to the loss of significant customers and other gains
($2,730).
In the second half of 2001, the Company recorded third and fourth quarter
pre-tax charges totaling approximately $33,644. These charges relate principally
to a substantial reduction of its worldwide infrastructure, including, asset
write-downs
55
($22,440), lump-sum severance costs associated with the termination of
approximately 377 employees ($6,275), lease cancellations ($1,788), legal fees
($1,736) and other costs associated with the McDonald's and Philip Morris
matters ($1,405).
14. GAIN ON SETTLEMENT OF OBLIGATIONS
During 2002 the Company negotiated settlements related to outstanding
liabilities with many of its vendors. As these settlements were on terms
generally more favorable to the Company than required by the existing terms of
the liabilities, the Company recorded a gain, totaling approximately $12,023.
This gain is classified as gain on settlement of obligations disclosed in Note
4. No such gains were recorded by the Company during 2001.
15. RESTRUCTURING AND OTHER CHARGES
A summary of the charges for the years ended December 31, 2002, 2001 and 2000
are as follows:
(unaudited)
2002 2001 2000
-------- -------- --------
Restructuring $ (750) $ 20,212 $ 5,735
Settlement charge -- -- 660
-------- -------- --------
$ (750) $ 20,212 $ 6,395
======== ======== ========
2001 RESTRUCTURING
After the February 2001 sale of its CPG business, and its previously announced
intentions, the Company conducted a second quarter 2001 evaluation of its
remaining businesses with the objective of restoring consistent profitability
through a more rationalized, cost-efficient business model. As a result of this
evaluation, and pursuant to a plan approved by its Board of Directors, the
Company has taken action to shutdown or consolidate certain businesses, sell
certain assets and liabilities related to its legacy corporate catalog business
in the United Kingdom and eliminate approximately two-thirds (40 positions) of
its Wakefield, Massachusetts corporate office workforce. Additionally, the
Company announced the resignation of its co-chief executive officer and two
other executive officers, including the Company's chief financial officer.
Consequently, the Company announced that all responsibilities for the chief
executive officer position had been consolidated under Allan I. Brown, who had
served as co-chief executive officer since November 1999 and as the chief
executive officer of Simon Marketing, the Company's wholly owned subsidiary
based in Los Angeles, California since 1975.
As a result of these actions, the Company recorded a second quarter 2001 pre-tax
charge of approximately $20,212 for restructuring expenses. The second quarter
charge relates principally to employee termination costs ($10,484), asset
write-downs which were primarily attributable to a consolidation of its
Wakefield, Massachusetts workspace ($6,500), a loss on the sale of the United
Kingdom business ($2,147) and the settlement of certain lease obligations
($1,081). The restructuring plan was complete by the first quarter of 2002.
During 2002, the Company revised its initial estimate of future restructuring
activities and, as a result, recorded a $304 reduction to the restructuring
accrual outstanding as of December 31, 2001. A summary of activity in the
restructuring accrual related to the 2001 restructuring action is as follows:
56
BALANCE AT JANUARY 1, 2001 $ --
Restructuring provision 20,212
Non-cash asset write-downs (8,874)
Employee termination costs
and other cash payments (9,340)
--------
BALANCE AT DECEMBER 31, 2001 1,998
Employee termination costs
and other cash payments (1,544)
Non-cash asset write-downs (150)
Accrual reversal (304)
--------
BALANCE AT DECEMBER 31 2002 $ --
========
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 complete by
the first quarter of 2002. During 2002, the Company revised its initial estimate
of future restructuring activities and, as a result, recorded a $446 reduction
to the restructuring accrual outstanding as of December 31, 2001. A summary of
activity in the restructuring accrual related to the 2000 restructuring action
is as follows:
BALANCE AT JANUARY 1, 2001 $ 1,193
Employee termination costs
And other cash payments (657)
Non-cash asset write-downs (90)
-------
BALANCE AT DECEMBER 31, 2001 446
Accrual reversal (446)
-------
BALANCE AT DECEMBER 31, 2002 $ --
=======
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.
16. INDEMNIFICATION TRUST AGREEMENT
In March 2002, the Company, Simon Marketing and a Trustee entered into an
Indemnification Trust Agreement (the "Agreement" or the "Trust"), which requires
the Company and Simon Marketing to fund an irrevocable trust in the amount of
$2,700. The Trust was set up and will be used to augment the Company's existing
insurance coverage for indemnifying directors, officers and certain described
consultants, who are entitled to indemnification against liabilities arising out
of their status as directors, officers and/or consultants (individually,
"Indemnitee" or collectively, "Indemnitees"). The Trust will pay Indemnitees for
amounts to which the Indemnitees are legally and properly entitled under the
Company's indemnity obligation and which amounts are not paid to the Indemnitees
by another party. During the term of the Trust, which continues until the
earlier to occur of: (i) the later of: (a) four years from the date of the
Agreement; or (b) as soon thereafter
57
as no claim is pending against any Indemnitee which is indemnifiable under the
Company's indemnity obligations; or (ii) March 1, 2022, the Company is required
to replenish the Trust (up to $2,700) for funds paid out to an Indemnitee. Upon
termination of the Trust, if, after payment of all outstanding claims against
the Trust have been satisfied, there are funds remaining in the Trust, such
funds and all other assets of the Trust shall be distributed to Simon Marketing.
These funds are included in Restricted Cash in the accompanying consolidated
balance sheets.
17. REDEEMABLE PREFERRED STOCK
In November 1999, Overseas Toys, L.P., an affiliate of 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 (3,347,340 shares as of
December 31, 2002 and 3,216,728 shares as of December 31, 2001).
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 (1,666,667 shares as of December 31, 2002 and
December 31, 2001, respectively). The warrant expires on November 10, 2004.
Assuming conversion of all of the convertible preferred stock, Yucaipa would own
approximately 17% and 16% of the then outstanding common shares at December 31,
2002 and December 31, 2001, 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, 2002 and December 31, 2001,
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.
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. In August 2001,
the managing partner of Yucaipa, along with another Yucaipa representative,
resigned from the Company's Board of Directors.
Additionally, the Company paid Yucaipa a management fee of $500 per year for a
five-year term for which Yucaipa provided general business consultation and
advice and management services. On October 17, 2002, the Management Agreement
was terminated and a payment was made to Yucaipa of $1.5 million and each party
was released from further obligations thereunder. See Item 13. Certain
Relationships and Related Transactions and notes to consolidated financial
statements.
58
18. STOCK PLANS
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 2001 and 2000, respectively: expected dividend yield of 0 % for
all years; expected life of 3.0 years for 2001 and 4.5 years for 2000; expected
volatility of 142% for 2001 and 70% for 2000; and, a risk-free interest rate of
4.4% for 2001 and 6.7% for 2000. There were no stock options granted under any
of the plans during 2002.
59
The following summarizes the status of the Company's stock options as of
December 31, 2002, 2001 and 2000 and changes for the years then ended:
(unaudited)
2002 2001 2000
Weighted Weighted Weighted
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------------------------------------------------------------------------
Outstanding at the beginning of 1,176,199 $7.55 1,847,448 $9.45 2,322,121 $ 10.17
year
Granted -- -- 182,000 0.35 336,931 6.41
Exercised -- -- -- -- (19,008) 6.02
Canceled 1,046,199 7.35 (853,249) 10.32 (792,596) 10.35
--------- --------- ---------
Outstanding at end of year 130,000 9.16 1,176,199 7.55 1,847,448 9.45
Options exercisable at year-end 122,500 9.59 844,809 8.96 1,290,702 10.75
--------- --------- ---------
Options available for future grant 2,456,389 2,586,389 1,915,140
--------- --------- ---------
Weighted average fair value of
options granted during the year Not applicable $1.92 $3.88
The following table summarizes information about stock options outstanding at
December 31, 2002:
Options Outstanding Options Exercisable
------------------------------------------ -------------------------
Weighted
Range of Average Weighted Weighted
Exercise Number Remaining Average Number Average
Prices Outstanding Contractual Life Price Exercisable Price
- -------------------------------------------------------------------------------------------------
$ 2.00 - $ 5.38 65,000 6.63 4.60 57,500 4.93
$ 7.56 $ 8.81 25,000 6.85 8.31 25,000 8.31
$12.25 $15.50 25,000 5.04 14.85 25,000 14.85
$16.50 $28.75 15,000 2.24 20.83 15,000 20.83
------- ------
$ 2.00 - 28.75 130,000 5.86 $ 9.16 122,500 $ 9.59
======== ======== ===================================== =======================
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 0
shares in 2002, 57,808 shares in 2001 and 80,284 shares in 2000 at prices
ranging from $2.59 to $6.69 per share. At December 31, 2002, 190,811 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 2001 and 2000, respectively: expected dividend
yield of 0% for all years; expected life of six months for all years; expected
volatility of 142% for 2001 and 70% for 2000; and, a risk-free interest rate of
4.4% and 5.6% for 2001 and 2000, respectively. The weighted average fair value
of those purchase rights per share granted in 2001 and 2000 was $1.69 and $1.77,
respectively. There were no grants during 2002.
60
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 to 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.
19. 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' (Deficit) Equity. Components of other comprehensive income
(loss) consist of the following:
(unaudited)
2002 2001 2000
------- ------- -------
Change in unrealized gains
and losses on investments $ -- $ (94) $(2,196)
Foreign currency translation
adjustments 2,115 (1,186) 109
Income tax benefit (expense) related to
unrealized gains and losses on investments -- -- 954
------- ------- -------
Other comprehensive income (loss) $ 2,115 $(1,280) $(1,133)
======= ======= =======
20. PROFIT-SHARING RETIREMENT PLAN
Until December 2002, the Company had 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, 2002, 2001 and 2000 was $50, $664 and $1,194,
respectively.
21. COMMITMENTS AND CONTINGENCIES
In addition to the legal matters discussed in Note 1, 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 ultimate
resolution of these other litigation and various legal matters will have a
material adverse effect on its financial condition, results of operations or net
cash flows.
22. RELATED PARTY TRANSACTIONS
The Company leased warehouse facilities under a fifteen-year operating lease
agreement, which was to expire December 31, 2011 from a limited liability
company, which is jointly owned by a former officer and a former director of the
Company. The agreement provided 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 remained liable under
this lease to the extent that the buyer did not perform its obligations under
the lease. Pursuant to an agreement entered into in March 2002, among and
between the Company, the buyer and the landlord, the lease terminated effective
June 30, 2002, along with any and all obligations of the Company under the
lease.
In order to induce their continued commitment to provide vital services to the
Company in the wake of the events of August 2001, in the third quarter of 2001
the Company entered into retention arrangements with its CEO, each of the three
non-management members of the Company's Board of Directors (the "Board") and key
members of management of Simon
61
Marketing. As a further inducement to the Company's directors to continue their
service to the Company, and to provide assurances that the Company will be able
to fulfill its obligations to indemnify directors, officers and agents of the
Company and its subsidiaries ("Indemnitees") under Delaware law and pursuant to
various contractual arrangements, in March 2002 the Company entered into an
Indemnification Trust Agreement ("Agreement") for the benefit of the
Indemnitees. Pursuant to this Agreement, the Company has deposited a total of
$2,700 with an independent trustee in order to fund any indemnification amounts
owed to an Indemnitee, which the Company is unable to pay.
In connection with the wind-down of its business operations and pursuant to
negotiations that began in the fourth quarter of 2001, the Company entered into
a Termination, Severance and General Release Agreement ("Agreement") with its
CEO in March 2002. In accordance with the terms of this Agreement, the CEO's
employment with the Company terminated in March 2002 (the CEO remains on the
Company's Board of Directors) and substantially all other agreements,
obligations and rights existing between the CEO and the Company were terminated,
including the CEO's Employment Agreement dated September 1, 1999, as amended,
and his retention agreement dated August 29, 2001. (For additional information
related to the CEO's retention agreement, see the Company's 2001 third quarter
Form 10-Q.) The ongoing operations of the Company and Simon Marketing are being
managed by the Executive Committee of the Board consisting of Messrs. Golleher
and Kouba, in consultation with outside financial, accounting, legal and other
advisors. As a result of the foregoing, the Company recorded a 2001 fourth
quarter pre-tax charge of $4,563, relating principally to the forgiveness of
indebtedness of the CEO to the Company, a lump-sum severance payment and the
write-off of an asset associated with an insurance policy on the life of the
CEO. The Company received a full release from the CEO in connection with this
Agreement, and the Company provided the CEO with a full release. Additionally,
the Agreement calls for the CEO to provide consulting services to the Company
for a period of six months after the CEO's employment with the Company
terminated in exchange for a fee of approximately $47 per month, plus specified
expenses.
On August 28, 2001, the Company entered into retention letter agreements with
each of Joseph Bartlett, George Golleher and Anthony Kouba, the non-management
members of the Board, pursuant to which the Company paid each of them a
retention fee of $150 in exchange for their agreement to serve as a director of
the Company for at least six months. If a director resigned before the end of
the six-month period, the director would have been required to refund to the
Company the pro rata portion of the retention fee equal to the percentage of the
six-month period not served. Additionally, the Company agreed to compensate
these directors at an hourly rate of $750 for services outside Board and
committee meetings (for which they are paid $2,000 per meeting in accordance
with existing Company policy). In 2001, payments totaling approximately $276,
$463, and $480 were made to Messrs. Bartlett, Golleher and Kouba, respectively.
In 2002, payments totaling approximately $61, $736, and $841 were made to
Messrs. Bartlett, Golleher and Kouba, respectively. These agreements, including
the hourly rate for services, have subsequently been replaced by Executive
Services Agreements dated May 30, 2003.
In addition, retention agreements were entered into in September and October
2001 with certain key employees which provide for retention payments ranging
from 8% to 100% of their respective salaries conditioned upon continued
employment through specified dates and/or severance payments up to 100% of these
employee's respective annual salaries should such employees be terminated within
the parameters of their agreements (for example, termination without cause). In
the first quarter of 2002, additional similar agreements were entered into with
certain employees of one of the Company's subsidiaries. Payments under these
agreements have been made at various dates from September 2001 through March
2002. The Company's obligations under these agreements were approximately
$3,100. Approximately $2,500 of these commitments had been segregated in
separate cash accounts in October 2001, in which security interests had been
granted to certain employees, and released back to the Company in 2002 when all
such retention and severance payments were made to these applicable employees.
On October 17, 2002, the Management Agreement between the Company and Yucaipa
was terminated by the payment to Yucaipa of $1,500 and each party was released
from further obligations thereunder. The Company recorded this payment as a
Related Parties expense during 2002. See Note 4 for details.
In the fourth quarter of 2002, Cyrk informed the Company that Cyrk (1) was
suffering substantial financial difficulties, (2) would not be able to discharge
its obligations secured by the Company's $4,200 letters of credit and (3) would
be able to obtain a $2,500 equity infusion if it was able to decrease Cyrk's
liability for these obligations. As a result, in December 2002, the Company
granted Cyrk an option until April 20, 2003 to pay the Company $1,500 in
exchange for the Company's agreement to apply its $3,700 restricted cash to
discharge Cyrk's obligations to Winthrop, with any remainder to be turned over
to Cyrk. The option was only to be exercised after the satisfaction of several
conditions, including the Company's confirmation of Cyrk's financial condition,
Cyrk and the Company obtaining all necessary third party consents, Cyrk and its
62
subsidiaries providing the Company with a full release of all known and unknown
claims, and the Company having no further liability to Winthrop as a guarantor
of Cyrk's obligations. To the extent Cyrk exercises this option, the Company
would incur a loss ranging from between $2,200 to $3,700. Cyrk was unable to
satisfy all conditions to the option, and it expired unexercised.
On February 7, 2003, the Company entered into additional agreements with Messrs.
Golleher and Kouba in order to induce them to continue to serve as members of
the Executive Committee of the Board and to compensate them for the additional
obligations, responsibilities and potential liabilities of such service,
including responsibilities imposed under the federal securities laws by virtue
of the fact that, as members of the Executive Committee, they serve, in effect,
as the chief executive officers of the Company since the Company has no
executive officers. The agreements provide for a fee of $100,000 to each of
Messrs. Golleher and Kouba for each of 2002 and 2003. Also on that date the
Company entered into a similar agreement with Greg Mays who provides financial
and accounting services to the Company as a consultant but, in effect, serves as
the Company's chief financial officer. The agreement provides for a fee of
$50,000 to Mr. Mays for each of 2002 and 2003.
Pursuant to a consulting agreement among Eric Stanton, Simon Worldwide and Simon
Marketing, Mr. Stanton, a stockholder of the Company, provided consulting
services to Simon Marketing in 2001 in exchange for $350,000. In the first
quarter of 2002, the Company entered into an Amended Consulting Agreement and
General Release ("Agreement") with Mr. Stanton. Pursuant to the terms of the
Agreement, Mr. Stanton's consulting relationship with the Company terminated on
June 30, 2002. Additionally, the Company received a full release from Mr.
Stanton in connection with this Agreement, and the Company provided Mr. Stanton
with a full release.
Mr. Stanton's wife, Vivian Foo, was employed by the Company's Simon Marketing
(Hong Kong) Limited subsidiary until the first quarter of 2002. In the first
quarter of 2002, the Company entered into a Settlement and General Release
Agreement ("Agreement") with Ms. Foo. Pursuant to the terms of the Agreement,
Ms. Foo's employment with the Company terminated in March 2002 and all other
agreements, obligations and rights existing between Ms. Foo and the Company
(including the agreement described in the next paragraph) were terminated in
exchange for a lump-sum payment of approximately $759,000. Additionally, the
Company received a full release from Ms. Foo in connection with this Agreement,
and the Company provided Ms. Foo with a full release.
The Company entered into an agreement with Ms. Foo in connection with the
Company's 1997 acquisition of Simon Marketing. Pursuant to this agreement, Ms.
Foo had received annual payments of cash and the Company's common stock (based
on the average closing price of the Company's common stock for the 20 trading
days immediately preceding each June 9) in the aggregate amount of $600,000.
Accordingly, the Company issued 113,895 of its shares of common stock to Ms. Foo
in 2001 as the common stock portion of such payment. In 2001, Ms. Foo's annual
base salary and bonus was $1,148,383 in the aggregate. In addition, pursuant to
Ms. Foo's agreement, she was entitled to certain employee benefits in connection
with her expatriate status. In 2001, these benefits had an aggregate value of
$490,215.
23. SEGMENTS AND RELATED INFORMATION
Up to the events of August 2001 (see Note 1), the Company operated in one
industry: the promotional marketing industry. The Company's business in this
industry encompassed the design, development and marketing of high-impact
promotional products and programs.
A significant percentage of the Company's sales had been attributable to a small
number of customers. In addition, a significant portion of trade accounts
receivable related 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, 2001 and 2000,
respectively. There were no sales during 2002. A majority of the outstanding
receivables as of December 31, 2002 pertain to one customer for which a 100%
reserve has been established.
% of Trade
% of Sales Receivables
-------------- --------------
(unaudited) (unaudited)
2001 2000 2001 2000
---- ---- ---- ----
Company A 78 65 55 73
Company B 8 9 15 15
The Company historically conducted its promotional marketing business on a
global basis. The following summarizes the Company's net sales for the years
ended December 31, 2001 and 2000, respectively, by geographic area. There were
no sales during 2002.
(unaudited)
2001 2000
-------- --------
United States $199,583 $505,209
Germany 45,709 76,015
Asia 45,301 106,380
United Kingdom 13,676 25,962
Other foreign 19,771 54,884
-------- --------
Consolidated $324,040 $768,450
======== ========
The following summarizes the Company's long-lived assets as of December 31,
2002, 2001 and 2000, respectively, by geographic area:
(unaudited)
2002 2001 2000
-------- -------- --------
United States $ 1,949 $ 16,267 $ 79,861
Foreign 21 987 3,297
-------- -------- --------
$ 1,970 $ 17,254 $ 83,158
======== ======== ========
Geographic areas for net sales are based on customer locations. Long-lived
assets include property and equipment, excess of cost over net assets acquired
(in 2001 and 2000) and other non-current assets.
63
24. 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 No.128:
For the Twelve Months Ended December 31,
------------------------------------------------------------------------------------------------------
2002 2001 2000 (unaudited)
--------------------------------- ---------------------------------- --------------------------------
Per Per Per
Income Shares Share Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------- ---------- ------------- ------
Basic and diluted EPS:
Loss from continuing
operations $ (15,406) $(7,916) $(8,179)
Preferred stock dividends 1091 1042 1000
--------- -------- -------
Loss from continuing
operations available
to common stockholders $ (16,497) 16,653,193 $ (0.99) $ (8,958) 16,454,779 $(0.54) $(9,179) 15,971,537 $ (0.57)
========= ========== ======= ======== ========== ====== ======= ========== =======
Income (loss) from
discontinued operations 6,120 16,653,193 $ 0.37 (114,429) 16,454,779 $(6.95) (61,536) 15,971,537 $ (3.85)
========= ========== ======= ======== ========== ====== ======= ========== =======
Net loss (9,286) (122,345) (69,715)
Preferred stock dividends 1,091 1,042 1,000
--------- -------- -------
Net loss available to
common stockholders (10,377) 16,653,193 $(0.62) (123,387) 16,454,779 $(7.50) (70,715) 15,971,537 $ (4.43)
========= ========== ======= ======== ========== ====== ======= ========== =======
For the year ended December 31, 2002, 3,300,225 of convertible preferred stock
were not included in the computation of diluted EPS from continuing operations,
net loss, or net loss available to common stockholders and for the years ended
December 31, 2001 and December 31, 2000, 3,376,032 and 3,499,226, respectively,
of convertible preferred stock, common stock equivalents and contingently and
non-contingently issuable shares related to acquired companies were not included
in the computation of diluted EPS because to do so would have been antidilutive.
25. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
THE FOLLOWING IS A TABULATION OF THE QUARTERLY RESULTS OF OPERATIONS FOR THE
YEARS ENDED DECEMBER 31, 2002 AND 2001, RESPECTIVELY:
First Second Third Fourth
2002 Quarter Quarter Quarter Quarter
- ------------------------------------------------- ------- ------- ------- -------
Continuing Operations:
Net Sales $ -- $ -- $ -- $ --
Gross Profit -- -- -- --
Net income (loss) (1,328) (11,218) (1,318) (1,542)
Loss per common share available to common-
basic & diluted (0.10) (0.69) (0.10) (0.10)
Discontinued Operations:
Net Sales $ -- $ -- $ -- $ --
Gross Profit -- -- -- --
Net income (loss) (3,839) 9,766 (405) 598
Loss per common share available to common-
basic & diluted (0.23) 0.59 (0.02) 0.03
64
First Second Third Fourth
2001 Quarter Quarter Quarter Quarter
- ------------------------------------------ ----------- ----------- ----------- -----------
Continuing Operations:
Net Sales $ -- $ -- $ -- $ --
Gross Profit
Net loss (1,429) (1,189) (1,919) (3,379)
Loss per common share available to common-
basic & diluted (0.10) (0.09) (0.13) (0.22)
Discontinued Operations:
Net Sales $ 106,505 $ 111,089 $ 93,819 $ 12,627
Gross Profit 24,965 18,971 20,398 7,380
Net income (loss) (2,790) (13,665) (65,274) (32,700)
Loss per common share available to
common- basic & diluted (0.17) (0.83) (3.92) (2.03)
65
SCHEDULE II
SIMON WORLDWIDE, INC.
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2002, 2001 and 2000
(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) Recoveries Receivable) Of Period
----------------- --------- ------------------- ---------- ----------- ---------
2002 $ 15,616 $ -- $ 1,733 $ 467 $ 13,416
2001 2,074 15,492(1) -- 1,950 15,616
2000(unaudited) 4,243 3,423 -- 5,592 2,074
Additions
Deferred Income Balance At Charged To Balance At
Tax Asset Beginning Costs And End
Valuation Allowance Of Period Expenses Recoveries Deductions Of Period
- ------------------- --------- -------------------- ---------- ---------- ---------
2002 $ 45,515 $ (1,800) $ -- $ -- $ 43,715
2001 5,557 39,958 -- -- 45,515
2000(unaudited) 1,252 4,305 -- -- 5,557
(1) Approximately $2,101 of the 2001 bad debt expense was recorded as selling,
general and administrative expenses in the accompanying consolidated financial
statements. The remainder, totaling approximately $13,391 was recorded as
charges attributable to loss of significant customers.
66
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
2.1 (9) Securities Purchase Agreement dated September 1, 1999,
between the Registrant and Overseas Toys, L.P.
2.2 (12) Purchase Agreement between the Company and Rockridge
Partners, Inc., dated January 20, 2001 as amended by
Amendment No. 1 to the Purchase Agreement, dated February
15, 2001
2.3 (16) March 12, 2002 Letter Agreement between Cyrk and Simon, as
amended by Letter Agreement dated as of March 22, 2002
2.4 (16) Mutual Release Agreement between Cyrk and Simon
2.5 (17) Letter Agreement Between Cyrk and Simon, dated December 20, 2002
3.1 (3) Restated Certificate of Incorporation of the Registrant
3.2 (1) Amended and Restated By-laws of the Registrant
3.3 (10) Certificate of Designation for Series A Senior Cumulative
Participating Convertible Preferred Stock
4.1 (1) Specimen certificate representing Common Stock
10.1 (2)(3) 1993 Omnibus Stock Plan, as amended
10.2 (2)(4) 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"
10.2.1 (2)(4) Assignments of Life Insurance policies as Collateral, each
dated November 15, 1994
10.3 (2)(4) 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"
10.3.1 (2)(4) Assignments of Life Insurance policies as Collateral, each
dated November 15, 1994
10.4 (2)(4) 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"
67
10.4.1 (2)(4) Assignments of Life Insurance policies as Collateral, each
dated November 15, 1994
10.5 (2)(5) 1997 Acquisition Stock Plan
10.6 (6) Securities Purchase Agreement dated February 12, 1998 by and
between the Company and Ty Warner
10.7 (7) Severance Agreement between the Company and Gregory P.
Shlopak
10.8 (2)(8) Severance Agreement between the Company and Ted L. Axelrod
dated November 20, 1998
10.9 (2)(8) Severance Agreement between the Company and Dominic F.
Mammola dated November 20, 1998
10.9.1 (2)(8) Amendment No. 1 to Severance Agreement between the Company
and Dominic F. Mammola dated March 29, 1999
10.10 (10) . Registration Rights Agreement between the Company and Overseas Toys, L.P.
10.11 (10) Management Agreement between the Company and The Yucaipa
Companies
10.12 (2)(9) Employment Agreement between the Company and Allan Brown,
dated September 1, 1999
10.13 (2)(9) Employment Agreement between the Company and Patrick Brady,
dated September 1, 1999
10.14 (10) Lease agreement dated as of July 29, 1999, between TIAA
Realty, Inc. and the Company
10.15 (2)(10) Life Insurance Agreement dated as of September 29, 1997 by
and between the Company and Frederic N. Gaines, Trustee of
the Allan I. Brown Insurance Trust, under Declaration of
Trust dated September 29, 1997
10.16 (2)(11) Promissory Note and Pledge Agreement by Allan Brown in
favor of the Company dated July 10, 2000
10.17 (2)(13) Promissory Note and Pledge Agreement by Allan Brown in
favor of the Company dated October 18, 2000
10.18 (12) Subordinated Promissory Note by Rockridge Partners, Inc. in
favor of the Company dated February 15, 2001
10.19 (14) Credit and Security Agreement dated as of June 6, 2001 and
entered into by and between the Company and City National
Bank
10.20 (2) (15) Retention and Amendment Agreement dated as of August 29,
2001 between the Company and Allan I. Brown
68
10.21 (2)(15) Form of Retention Agreement dated as of August 28, 2001
between the Company and each of George Golleher,
Anthony Kouba and Joseph Bartlett
10.22 (2) (16) Termination, Severance and General Release Agreement
between the Company and Allan Brown, dated March 18,
2002
10.23 (16) Amended Consulting Agreement and General Release
between the Company and Eric Stanton, dated March 1,
2002
10.24 (16) Settlement and General Release Agreement between the
Company and Vivian Foo, dated March 15, 2002
10.25 (16) Indemnification Trust Agreement between the Company and
Development Specialists, Inc. as Trustee, dated March
1, 2002
10.26 (16) Promissory Note and Pledge Agreement by Allan Brown
in favor of the Company dated June 9, 1997
10.27 (17) Letter Agreement, dated October 9, 2002, to terminate and settle
the Management Agreement between the Company and Yucaipa
10.28 February 7, 2003 letter agreements with George Golleher, Anthony
Kouba and Greg Mays regarding 2002 and 2003 compensation, filed
herewith
10.29 May 30, 2003 Executive Services Agreements with Joseph Bartlett,
Allan Brown, George Golleher, Anthony Kouba, Gregory Mays, and
Terrence Wallock, filed herewith
21.1 (17) List of Subsidiaries
99.1 Amended Cautionary Statement for Purposes of the "Safe
Harbor" Provisions of the Private Securities Litigation
Reform Act of 1995, filed herewith
99.2 (2) (9) Termination Agreement among the Company, Patrick Brady,
Allan Brown, Gregory Shlopak, Eric Stanton, and Eric
Stanton Self-Declaration of Revocable Trust
99.3 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to section 906 of the Sarbanes-Oxley Act of 2002, filed herewith
(1) 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.
(2) Management contract or compensatory plan or arrangement.
(3) Filed as an exhibit to the Annual Report on Form 10-K for the year ended
December 31, 1994 and incorporated herein by reference.
69
(4) Filed as an exhibit to the Registrant's Registration Statement on Form
10-Q dated March 31, 1995 and incorporated herein by reference.
(5) Filed as an exhibit to the Registrant's Registration Statement on Form
S-8 (Registration No. 333-45655) and incorporated herein by reference.
(6) Filed as an exhibit to the Annual Report on Form 10-K for the year ended
December 31, 1997 and incorporated herein by reference.
(7) Filed as an exhibit to the Registrant's Report on Form 8-K dated
December 31, 1998 and incorporated herein by reference.
(8) Filed as an exhibit to the Annual Report on Form 10-K for the year
ended December 31, 1998 and incorporated herein by reference.
(9) Filed as an exhibit to the Registrant's Report on Form 8-K dated
September 1, 1999 and incorporated herein by reference.
(10) Filed as an exhibit to the Annual Report on Form 10-K for the year
ended December 31, 1999 and incorporated herein by reference.
(11) Filed as an exhibit to the Registrant's Registration Statement on Form
10-Q dated September 30, 2000 and incorporated herein by reference.
(12) Filed as an exhibit to the Registrant's Report on Form 8-K dated
February 15, 2001 and incorporated herein by reference.
(13) Filed as an exhibit to the Annual Report on Form 10-K for the year ended
December 31, 2000 and incorporated herein by reference.
(14) Filed as an exhibit to the Registrant's Registration Statement on Form
10-Q dated June 30, 2001 and incorporated herein by reference.
(15) Filed as an exhibit to the Registrant's Registration Statement on Form
10-Q dated September 30, 2001 and incorporated herein by reference.
(16) Filed as an exhibit to the Registrant's original report on Form 10-K
for the year ended December 31, 2001, filed on March 29, 2002, and
incorporated herein by reference.
(17) Filed as an exhibit to the Registrant's report on Form 10-K/A for the
year ended December 31, 2001, dated April 18, 2003, and incorporated
herein by reference.
70