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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2003
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 04-3081657
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1888 CENTURY PARK EAST, LOS ANGELES, CALIFORNIA 90067
(Address of principal executive offices)
(Zip code)
(310) 552-6800
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by a check mark whether registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act). [ ]
At July 31, 2003, 16,653,193 shares of the Registrant's common stock were
outstanding.
SIMON WORLDWIDE, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE NUMBER
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -
June 30, 2003 and December 31, 2002 3
Consolidated Statements of Operations -
For the three and six months ended
June 30, 2003 and 2002 4
Consolidated Statements of Comprehensive Income -
For the three and six months ended
June 30, 2003 and 2002 5
Consolidated Statements of Cash Flows -
For the six months ended June 30, 2003 and 2002 6
Notes to Consolidated Financial Statements 7-16
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17-21
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
Item 4. Controls and Procedures 21
PART II OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23-26
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
SIMON WORLDWIDE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
June 30, December 31,
2003 2002
----------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ - $ 1,181
Restricted cash 6,195 7,640
Prepaid expenses and other current assets 753 1,394
Assets from discontinued operations to be disposed of - current 13,551 14,255
---------- ----------
Total current assets 20,499 24,470
Property and equipment, net 48 67
Investments 500 500
Other assets 293 293
---------- ----------
21,340 25,330
Assets from discontinued operations to be disposed of - non-current 1,168 1,110
---------- ----------
$ 22,508 $ 26,440
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable:
Trade $ 131 $ 51
Affiliates 158 155
Accrued expenses and other current liabilities 6 478
Liabilities from discontinued operations - current 14,719 15,365
---------- ----------
15,014 16,049
Commitments and contingencies
Mandatorily redeemable preferred stock, Series A1 senior cumulative
participating convertible, $.01 par value, 28,171 shares issued and
outstanding at June 30, 2003 and 27,616 shares issued and outstanding
at December 31, 2002, stated at redemption value of $1,000 per share 28,171 27,616
Stockholders' deficit:
Common stock, $.01 par value; 50,000,000 shares authorized;
16,653,193 shares issued and outstanding at June 30, 2003 and
December 31, 2002 167 167
Additional paid-in capital 138,500 138,500
Retained deficit (159,344) (155,892)
---------- ----------
Total stockholders' deficit (20,677) (17,225)
---------- ----------
$ 22,508 $ 26,440
========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
3
SIMON WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
For the three months For the six months
ended June 30, ended June 30,
---------------------- ----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Revenue $ - $ - $ - $ -
General and administrative expenses 1,389 1,218 2,861 2,546
Investment losses -- 10,000 -- 10,000
-------- -------- -------- --------
Loss from continuing operations before income taxes (1,389) (11,218) (2,861) (12,546)
Income tax benefit - - - -
-------- -------- -------- --------
Net loss from continuing operations (1,389) (11,218) (2,861) (12,546)
Income (loss) from discontinued operations, net of tax 85 9,766 (32) 5,927
-------- -------- -------- --------
Net loss (1,304) (1,452) (2,893) (6,619)
Preferred stock dividends 282 269 558 538
-------- -------- -------- --------
Net loss available to common stockholders $ (1,586) $ (1,721) $ (3,451) $ (7,157)
======== ======== ======== ========
Loss per share from continuing operations available to common stockholders:
Loss per common share - basic and diluted $ (0.10) $ (0.69) $ (0.21) $ (0.79)
======== ======== ======== ========
Weighted average shares outstanding - basic and diluted 16,653 16,653 16,653 16,653
======== ======== ======== ========
Income (loss) per share from discontinued operations:
Income (loss) per common share - basic and diluted $ - $ 0.59 $ - $ 0.36
======== ======== ======== ========
Weighted average shares outstanding - basic and diluted 16,653 16,653 16,653 16,653
======== ======== ======== ========
Net loss available to common stockholders:
Loss per common share - basic and diluted $ (0.10) $ (0.10) $ (0.21) $ (0.43)
======== ======== ======== ========
Weighted average shares outstanding - basic and diluted 16,653 16,653 16,653 16,653
======== ======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
4
SIMON WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(in thousands)
For the three months For the six months
ended June 30, ended June 30,
-------------------- --------------------
2003 2002 2003 2002
------- ------- ------- -------
Net loss $(1,304) $(1,452) $(2,893) $(6,619)
------- ------- ------- -------
Other comprehensive income, before tax:
Foreign currency translation adjustments - 1,925 - 2,115
------- ------- ------- -------
Other comprehensive income, before tax - 1,925 - 2,115
Income tax expense related to items of
other comprehensive income - - - -
------- ------- ------- -------
Other comprehensive income, net of tax - 1,925 - 2,115
------- ------- ------- -------
Comprehensive income (loss) $(1,304) $ 473 $(2,893) $(4,504)
======= ======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
5
SIMON WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
For the six months
ended June 30,
----------------------
2003 2002
-------- --------
Cash flows from operating activities:
Net loss $ (2,893) $ (6,619)
Income (loss) from discontinued operations (32) 5,927
-------- --------
Loss from continuing operations (2,861) (12,546)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 31 29
Charge for impaired investments - 10,000
Increase (decrease) in cash from changes
in working capital items:
Prepaid expenses and other current assets 641 414
Accounts payable 83 45
Accrued expenses and other current liabilities (472) 84
-------- --------
Net cash used in operating activities (2,578) (1,974)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (12) -
Decrease (increase) in restricted cash 1,445 (5,272)
-------- --------
Net cash provided by (used in) investing activities 1,433 (5,272)
-------- --------
Net cash provided by financing activities - -
-------- --------
Net cash used in continuing operations (1,145) (7,246)
Net cash provided by (used in) discontinued operations (36) 10,570
-------- --------
Net increase (decrease) in cash and cash equivalents (1,181) 3,324
Cash and cash equivalents, beginning of year 1,181 -
-------- --------
Cash and cash equivalents, end of period $ - $ 3,324
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ - $ 22
======== ========
Income taxes $ 6 $ 72
======== ========
Supplemental non-cash investing activities:
Dividends paid in kind on mandatorily redeemable preferred stock $ 555 $ 533
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
6
SIMON WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except share data and except dollar amounts followed
immediately by the word "million")
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
by Simon Worldwide, Inc. ("the Company") pursuant to the rules and regulations
of the Securities and Exchange Commission regarding interim financial reporting.
Accordingly, they do not include all of the information and footnotes in
accordance with generally accepted accounting principles for complete financial
statements and should be read in conjunction with the financial statements
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2002.
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments, consisting only of those considered
necessary for fair presentation of the Company's financial position, results of
operations and cash flows at the dates and for the periods presented.
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. During the second quarter of
2002, the discontinued activities of the Company, consisting of certain
revenues, operating costs, general and administrative costs and certain assets
and liabilities associated with the Company's promotions business, have been
classified as discontinued operations for financial statement reporting
purposes. Prior period historical financial information, pertaining to the
promotions business, has been reclassified to discontinued operations (see Note
4).
The embezzlement by a former employee caused McDonald's Corporation
("McDonald's") and Philip Morris Incorporated ("Philip Morris", now known as
Altria, Inc.), substantial customers, to terminate their relationships with the
Company (see Note 2). The loss of these customers resulted in the Company no
longer having a business. Prior to the loss of its customers, the Company had
operated as a multi-national full service promotional marketing company.
Substantially all of the Company's assets and liabilities are in the same
business segment. The disposal of the Company's long-lived assets and settlement
of its liabilities is ongoing and will continue throughout 2003 and possibly
into 2004.
At June 30, 2003 and December 31, 2002, the Company had a passive investment in
a limited liability company controlled by an affiliate (see Note 5).
The operating results for the three and six months ended June, 2003 are not
necessarily indicative of the results to be expected for the full year.
2. LOSS OF CUSTOMERS, RESULTING EVENTS AND GOING CONCERN
In August 2001, the Company experienced the loss of its two largest customers:
McDonald's and, to a lesser extent, Philip Morris. 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
(see Note 7). 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 June 30, 2003 and December 31, 2002, the Company had a stockholders' deficit
of $20,677 and $17,225, respectively and a net loss of $2,893 and $6,619 for the
six month periods ended June 30, 2003 and 2002, respectively. Subsequent to
December 31, 2001, the Company continued to incur losses in 2002 and 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. As a result of the stockholders' deficit, loss of
customers and the related legal matters at December 31, 2002, the Company's
independent public accountants have expressed substantial doubt about the
Company's ability to continue as a going concern. The accompanying consolidated
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
As noted above, 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. 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,
7
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). To date, the
Board of Directors has made no decision on which course of action to take.
On August 21, 2001, the Company was notified by McDonald's that they were
terminating their approximately 25-year relationship with Simon Marketing, Inc.
("Simon Marketing"), a subsidiary of the company, 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%, 65% and 9% and 61% and 9%
of total net sales in 2001, 2000 and 1999, 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 June 30, 2003
and December 31, 2002, the Company had no customer backlog as compared to $2,200
of written customer purchase orders at September 30, 2001. 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.
During the six months ended June 30, 2002, the Company recorded a pre-tax net
charge totaling approximately $1,579 associated with the loss of customers,
included within discontinued operations (see Note 4). Charges totaling $5,418,
primarily related to asset write-downs ($2,219), professional fees ($2,507),
labor and other costs ($692), were partially offset by recoveries of accounts
receivable balances that had been written off in previous periods ($1,000), and
other gains ($2,839). No such charges were incurred during the six months ended
June 30, 2003.
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
8
Giveaway" in which a total of fifteen (15) $1 million prizes, payable in twenty
equal annual installments 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 attorneys' 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 million 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 Company had moved to dismiss as a compulsory
counter-claim which must properly be filed in the Company's California state
court action.
9
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.
The Company has entered into a settlement agreement with McDonald's as well as
the aforesaid suppliers and agents of McDonald's in which all parties dismiss
all causes of action against each other and mutually release each other from
all liabilities and obligations. The agreement provides that settlement
payments will not be made nor will the mutual releases be final until the
Effective Date of the Boland Settlement. Although the Boland Settlement has
been approved by the court, its Effective Date is contingent upon the
resolution of certain appeals of the Boland Settlement and of a case filed in
California on behalf of California claimants which was dismissed as barred by
the Boland Settlement. There can be no assurance as to when these conditions
will be satisfied and the Boland Settlement and the settlement with McDonald's
will take effect, but the Company expects it could take up to a year. Under the
terms of the agreement with McDonald's, when the settlement is effective,
McDonald's will pay $6.9 million to the Company and assign to the Company its
rights to certain insurance proceeds, which are expected to be approximately
$9.7 million, resulting in a total payment to the Company of approximately
$16.6 million.
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,
including the dismissal of all claims for punitive damages with no leave to
amend, 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, which has been set
for August 25, 2003.
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 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. 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. In connection with obtaining PWC's
consent to the inclusion of their audit report dated March 26, 2002 in its
annual report on Form 10-K/A for the year ended December 31, 2001, the Company
agreed to indemnify PWC against any legal costs and expenses incurred by PWC in
the successful defense of any legal action that arises as a result of such
inclusion. Such indemnification will be void if a court finds PWC liable for
professional malpractice. The Company has been informed that in the opinion of
the Securities and Exchange Commission indemnification for liabilities arising
under the Securities Act of 1933 is against public policy and therefore
unenforceable. PWC has provided the Company with a copy of a 1995 letter from
the Office of the Chief Accountant of the Commission, which states that, in a
similar situation, his Office would not object to an indemnification agreement
of the kind between the Company and PWC.
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.
3. RECENTLY ISSUED ACCOUNTING STANDARDS
STOCK-BASED COMPENSATION PLANS AND PRO FORMA STOCK-BASED COMPENSATION EXPENSE
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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.
10
At June 30, 2003, the Company had one stock-based compensation plan. 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. Since there were no employee stock option grants during
the three and six month periods ended June 30, 2003 and 2002, there is no impact
on net income as reported in the accompanying consolidated financial statements.
For the three months For the six months
ended June 30, ended June 30,
------------------------ --------- ---------
2003 2002 2003 2002
--------- ---------- --------- ---------
Net loss available to common stockholders $ (1,586) $ (1,721) $ (3,451) $ (7,157)
Deduct: Total stock-based employee compensation
expense determined under fair value based method for
all awards, net of income taxes - - - -
--------- --------- --------- ---------
Net loss available to common stockholders - pro forma ($ 1,586) ($ 1,721) ($ 3,451) ($ 7,157)
========= ========= ========= =========
Loss per common share - basic and diluted - as reported $ (0.10) $ (0.10) $ (0.21) $ (0.43)
========= ========= ========= =========
Loss per common share - basic and diluted - pro forma $ (0.10) $ (0.10) $ (0.21) $ (0.43)
========= ========= ========= =========
OTHER ACCOUNTING PRONOUNCEMENTS
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 consolidated
financial statements.
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
beginning on July 1, 2003. The Company does not anticipate that FIN No. 46 will
materially affect its consolidated financial statements.
In June 2003 the FASB issued SFAS 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 mandatorily redeemable through
the transfer of the issuer's 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 to 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. SFAS
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 has $28,171 and $27,616 of
preferred stock outstanding at June 30, 2003 and December 31, 2002,
respectively. Because such preferred stock is not mandatorily redeemable at a
specified date or upon an event that
11
is likely to occur, the Company does not consider its preferred stock to be
mandatorily redeemable within the scope of SFAS No. 150. Accordingly, the
Company does not expect SFAS No. 150 will have a material impact on its
financial position, results of operations or cash flows.
4. DISCONTINUED OPERATIONS
As discussed in Note 1, by April 2002, the Company had effectively eliminated a
majority of its ongoing operations and was in the process of disposing of all of
its assets and settling its liabilities related to its 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.
Assets and liabilities from discontinued operations as of June 30, 2003 and
December 31, 2002, as disclosed in the accompanying consolidated financial
statements, consist of the following:
June 30, December 31,
2003 2002
--------- ------------
Assets:
Cash and cash equivalents $ 11,759 $ 13,236
Restricted cash 1,022 -
Accounts receivable:
Trade, less allowance for doubtful accounts of $13,567
at June 30, 2003 and $13,416 at December 31, 2002 308 558
Prepaid expenses and other current assets 462 461
--------- ----------
Total current assets 13,551 14,255
Other assets 1,168 1,110
--------- ----------
Assets from discontinued operations to be disposed of $ 14,719 $ 15,365
========= ==========
Liabilities:
Accounts payable - trade $ 5,309 $ 5,736
Accrued expenses and other current liabilities 9,410 9,629
--------- ----------
Total current liabilities 14,719 15,365
--------- ----------
Liabilities from discontinued operations $ 14,719 $ 15,365
========= ==========
12
Net income (loss) from discontinued operations for the three and six months
ended June 30, 2003 and 2002, as disclosed in the accompanying consolidated
financial statements, consists of the following:
For the three months For the six months
ended June 30, ended June 30,
-------------------- --------------------
2003 2002 2003 2002
------- ------- ------- -------
Net sales $ - $ - $ - $ -
Cost of sales - - - -
------- ------- ------- -------
Gross profit - - - -
Selling, general and administrative expenses 49 441 294 4,601
Charges (charges recovered) attributable
to loss of significant customers, net - (329) - 1,579
Gain on settlement of obligations (10) (7,764) (12) (9,263)
Restructuring - (94) - (750)
------- ------- ------- -------
Operating income (loss) (39) 7,746 (282) 3,833
Interest income (100) (97) (174) (206)
Interest expense - - - 35
Other (income) expense (24) 1,563 (76) 1,563
------- ------- ------- -------
Income (loss) before income taxes 85 6,280 (32) 2,441
Income tax benefit - (3,486) - (3,486)
------- ------- ------- -------
Net income (loss) from discontinued operations $ 85 $ 9,766 $ (32) $ 5,927
======= ======= ======= =======
5. 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 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 controlled by The Yucaipa Companies
("Yucaipa"), an affiliate of the Company. This investment had a carrying value
of $0 at June 30, 2003 and December 31, 2002. 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
investment loss of $10,000 during the second quarter of 2002 to write-down its
investment, included as part of the Company's continuing operations. For the
years ended December 31, 2001 and 2000, the Company also recorded impairment
charges of $1,500 and $2,500, respectively, related to other investments in
affiliate-controlled entities. During the third quarter of 2002, the Company
also received a final return of capital, totaling approximately $275, on an
investment with a carrying value totaling approximately $525 as of December 31,
2001. An investment loss of approximately $250 was recorded in connection with
this final distribution, included as part of the Company's continuing
operations.
While the Company will continue to periodically evaluate its Internet-related
investments, there can be no assurance that the companies in which it has
invested will be successful, and thus the Company might not ever realize any
benefits from its portfolio of investments.
13
6. SHORT-TERM BORROWINGS
The Company's Credit and Security Agreements, which provided for working capital
and other financing arrangements expired on May 15, 2002. At June 30, 2003 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 Philip Morris business (see Note 2),
the Company no longer has the ability to borrow under any of its existing credit
facilities without it being fully cash collateralized.
Restricted cash at June 30, 2003 and December 31, 2002 primarily consists of
amounts deposited with lenders to satisfy the Company's obligations pursuant to
its outstanding standby letters of credit. Restricted cash within continuing
operations also includes $2,700 deposited into an irrevocable trust during 2002
(see Note 9).
7. SETTLEMENT OF OBLIGATIONS
During 2002 the Company negotiated settlements related to outstanding
liabilities with many of its suppliers. These settlements were on terms
generally more favorable to the Company than required by the existing terms of
the liabilities. For the six months ended June 30, 2003 and 2002 the difference
between the final settlement payments and the outstanding obligations was $12
and $9,263, respectively, included in Gain on Settlement of Obligations within
discontinued operations (see Note 4).
8. RESTRUCTURING
2001 Restructuring
The Company recorded a second quarter 2001 pre-tax charge of approximately
$20,212 for restructuring expenses principally related to employee termination
costs, asset write-downs, loss on the sale of the United Kingdom business and
settlement of certain lease obligations. During the first quarter of 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. As the restructuring plan was complete by the first
quarter of 2002, there was no activity during the three and six months ended
June 30, 2003. As these restructuring efforts related to the promotions
business, this activity is included within discontinued operations (see Note 4).
A summary of activity in the restructuring accrual is as follows:
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
As a result of its May 2000 restructuring, the Company recorded a net charge to
2000 operations of $5,735 for involuntary termination costs, asset write-downs
and the settlement of lease obligations. 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.
As the restructuring plan was complete by the first quarter of 2002, there was
no activity during the three and six months ended June, 2003. As these
restructuring efforts related to the promotions business, this activity is
included within discontinued operations (see Note 4). A summary of activity in
the restructuring accrual is as follows:
14
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 $ -
=======
9. 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 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 within continuing operations in the accompanying consolidated
balance sheet as of June 30, 2003 and December 31, 2002.
10. EARNINGS PER SHARE DISCLOSURE
The following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computation for "loss available to common stockholders"
and other related disclosures required by SFAS No. 128, "Earnings per Share" (in
thousands, except share data):
For the Three Months Ended June 30,
2003 2002
--------------------------------------- -----------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
Basic and diluted EPS:
Loss from continuing operations $ (1,389) $ (11,218)
Preferred stock dividends 282 269
---------- ----------
Loss from continuing operations available
to common stockholders (1,671) 16,653,193 $ (0.10) (11,487) 16,653,193 $ (0.69)
========== ========== ======== ========== ========== ========
Income from discontinued operations 85 16,653,193 $ - 9,766 16,653,193 $ 0.59
========== ========== ======== ========== ========== ========
Net loss (1,304) (1,452)
Preferred stock dividends 282 269
---------- ----------
Net loss available to common stockholders $ (1,586) 16,653,193 $ (0.10) $ (1,721) 16,653,193 $ (0.10)
========== ========== ======== ========== ========== ========
For the three months ended June 30, 2003 and 2002, 3,399,760 shares of
convertible preferred stock and 3,267,460 shares of convertible preferred stock
and common stock equivalents, respectively, were not included in the computation
of diluted EPS because to do so would have been antidilutive.
15
For the Six Months Ended June 30,
2003 2002
----------------------------------------- ----------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------ ------------- --------- ----------- ------------- ---------
Basic and diluted EPS:
Loss from continuing operations $ (2,861) $ (12,546)
Preferred stock dividends 558 538
------------ -----------
Loss from continuing operations available
to common stockholders (3,419) 16,653,193 $ (0.21) (13,084) 16,653,193 $ (0.79)
============ ========== ======== =========== ========== ========
Income (loss) from discontinued operations (32) 16,653,193 $ - 5,927 16,653,193 $ 0.36
============ ========== ======== =========== ========== ========
Net loss (2,893) (6,619)
Preferred stock dividends 558 538
------------ -----------
Net loss available to common stockholders $ (3,451) 16,653,193 $ (0.21) $ (7,157) 16,653,193 $ (0.43)
============ ========== ======== =========== ========== ========
For the six months ended June 30, 2003 and 2002, 3,373,406 and 3,251,120 shares
of convertible preferred stock, respectively, were not included in the
computation of diluted EPS because to do so would have been antidilutive.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion of the financial condition and results of
operations of Simon Worldwide, Inc. ("the Company") for the three and six months
ended June 30, 2003 as compared to the same periods in the previous year. This
discussion should be read in conjunction with the consolidated financial
statements of the Company and related Notes included elsewhere in this Form
10-Q.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
From time to time, the Company may provide forward-looking information such as
forecasts of expected future performance or statements about the Company's plans
and objectives, including certain information provided below. These
forward-looking statements are based largely on the Company's expectations and
are subject to a number of risks and uncertainties, certain of which are beyond
the Company's control. The Company wishes to caution readers that actual results
may differ materially from those expressed in any forward-looking statements
made by, or on behalf of, the Company including, without limitation, as a result
of factors described in the Company's Amended Cautionary Statement for Purposes
of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act
of 1995, filed as Exhibit 99.1 to the Company's 2002 Annual Report on Form 10-K
which is incorporated herein by reference.
GENERAL
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"), 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. See Notes 2 and
7 in the accompanying consolidated financial statements.
At June 30, 2003 and December 31, 2002, the Company had a stockholders' deficit
of $20.7 million and $17.2 million, respectively and a net loss of $2.9 million
and $6.6 million for the six months ending June 30, 2003 and 2002, respectively.
The Company has continued to incur losses in 2002 and 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. As a result of the stockholders' deficit, loss of customers and the
related legal matters at December 31, 2002, the Company's independent public
accountants have expressed substantial doubt about the Company's ability to
continue as a going concern. The accompanying consolidated 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).
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%, respectively, of total
net sales in 2001.
17
OUTLOOK
As a result of the loss of its McDonald's and Philip Morris business, along with
the resulting legal matters there is substantial doubt about the Company's
ability to continue as a going concern. The accompanying consolidated 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 Legal Actions Associated with the McDonald's Matter).
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.
RESULTS OF CONTINUING AND DISCONTINUED OPERATIONS
By April 2002, the Company had effectively eliminated a majority of its ongoing
operations and was in the process of disposing of all of 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.
RESULTS OF CONTINUING OPERATIONS
THREE MONTHS ENDED JUNE, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002
Selling, general and administrative expenses totaled $1.4 million in the second
quarter of 2003 as compared to $1.2 million in the second quarter of 2002,
primarily due to an increase in insurance premiums. Investment Losses for the
quarter ended June 30, 2002 represents charges related to an
other-than-temporary investment impairment associated with the Company's venture
portfolio, totaling $10.0 million.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002
Selling, general and administrative expenses totaled $2.9 million in the first
six months of 2003 as compared to $2.5 million in the first six months of 2002,
primarily due to an increase in insurance premiums. Investment Losses for the
quarter ended June 30, 2002 represents charges related to an
other-than-temporary investment impairment associated with the Company's venture
portfolio, totaling $10.0 million.
RESULTS OF DISCONTINUED OPERATIONS
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002
The Company generated no sales or gross profits during the three months ended
June 30, 2003 and 2002 due to the loss of its McDonald's and Philip Morris
business in 2001. See notes to consolidated financial statements.
Selling, general and administrative expenses totaled $.05 million in the second
quarter of 2003 as compared to $.4 million in the second quarter of 2002.
Selling, general and administrative expenses in the second quarter of 2002
includes a settlement of lease and other obligations of $.9 million less than
amounts accrued. The Company's decreased spending was due principally to the
effects associated with the Company eliminating a majority of its ongoing
operations related to the promotions business by April 2002.
During the three months ended June 30, 2002, the Company recorded a pre-tax net
gain totaling approximately $.3 million associated with the loss of customers.
Recoveries totaling ($.9 million) and other gains ($.8 million) were partially
offset by professional fees ($1.1 million) and labor costs ($.3 million). No
such charges were incurred during the three months ended June 30, 2003.
During the three months ended June 30, 2002, the Company negotiated settlements
related to outstanding liabilities with many of its suppliers on terms generally
more favorable to the Company than required by the existing terms of the
liabilities.
18
The Company recorded gain totaling approximately $7.8 million during the three
months ended June 30, 2002 in connection with these settlements included in Gain
on Settlement of Obligations disclosed in Note 4 to the consolidated financial
statements. The Company recorded nominal settlement gains during the three
months ended June 30, 2003.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002
The Company generated no sales or gross profits during the six months ended June
30, 2003 and 2002 due to the loss of its McDonald's and Philip Morris business
in 2001. See notes to consolidated financial statements.
Selling, general and administrative expenses totaled $.3 million in the first
six months of 2003 as compared to $4.6 million in the first six months of 2002.
Selling, general and administrative expenses in the first six months of 2002
includes a settlement of lease and other obligations of $3.7 million less than
amounts accrued. The Company's decreased spending was due principally to the
effects associated with the Company eliminating a majority of its ongoing
operations related to the promotions business by April 2002.
During the six months ended June 30, 2002, the Company recorded a pre-tax net
charge totaling approximately $1.6 million associated with the loss of customers
(see Note 4). Charges totaling $5.4 million, primarily related to asset
write-downs ($2.2 million), professional fees ($2.5 million), labor and other
costs ($.7 million), were partially offset by a recoveries of certain assets
that had been written off and included in the 2001 charges attributable to the
loss of significant customers ($1.0 million) and other gains ($2.8 million). No
such charges were incurred during the six months ended June 30, 2003.
During the six months ended June 30, 2002, the Company negotiated settlements
related to outstanding liabilities with many of its suppliers. 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 $9.3 million, included in Gain on Settlement of Obligations
disclosed in Note 4 to the consolidated financial statements. The Company
recorded nominal settlement gains during the six months ended June 30, 2003.
During the six months ended June 30, 2003, the Company dissolved two foreign
subsidiaries pertaining to the promotions business resulting in a net gain of
approximately $.4 million recorded as Other Income within discontinued
operations. This gain resulted from the settlement of obligations and general
accruals for amounts less than the amounts carried on the Company's books. No
such gain was recorded during the six months ended June 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
The matters discussed in the Loss of Customers, Resulting Events and Going
Concern section above (see Note 2), which have 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 consolidated 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. The Company is
focused on resolving all litigation matters in which it is a party and settling
all claims and vendor payables. Subsequent to December 31, 2001, the Company
continued to incur losses in 2002 and 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. 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
long-term assets 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 of 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). To date, the Board of Directors
has made no decisions on which course of action to take.
19
CONTINUING OPERATIONS
Working capital from continuing operations at June 30, 2003 was $6.7 million
compared to $9.5 million at December 31, 2002. Net cash used in operating
activities from continuing operations during the six months ended June 30, 2003
totaled $2.6 million, primarily due to a loss from continuing operations of $2.9
million partially offset by a net change in working capital items of $.3
million. Net cash used in operating activities from continuing operations
totaled $2.0 million during the six months ended June 30, 2002, primarily due to
a loss from continuing operations of $12.5 million partially offset by a charge
for impaired investments of $10.0 million and a change in working capital items
of $.5 million.
Net cash provided by investing activities during the six months ended June 30,
2003 was $1.4 million, primarily related to a decrease in restricted cash. Net
cash used by investing activities during the six months ended June 30, 2002 was
$5.3 million related to an increase in restricted cash. There were no financing
activities from continuing operations during the six months ended June 30, 2003
and 2002.
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 June 30, 2003 and
December 31, 2002 totaled $6.2 million and $7.6 million, respectively, primarily
consisting of amounts deposited with lenders to satisfy the Company's
obligations pursuant to its standby letters of credit and amounts deposited into
an irrevocable trust in 2002 (see Note 9).
DISCONTINUED OPERATIONS
Working capital from discontinued operations at June 30, 2003 was a deficit of
$(1.2) million compared to $(1.1) million at December 31, 2002. Net cash used in
discontinued operations during the six months ended June 30, 2003 totaled $.04
million, which was primarily due to net cash used in operating activities of $.4
million, net cash used in investing activities of $1.1 million, partially offset
by a transfer of funds between continuing and discontinued operations due to
changes in minimum working capital requirements of $1.7 million.
Net cash provided by discontinued operations during the six months ended June
30, 2002 totaled $10.6 million, which was primarily due to net cash provided by
investing activities of $6.6 million and a reallocation of funds, totaling
approximately $20.8 million, between continuing and discontinued operations due
to changes in minimum working capital requirements, partially offset by net cash
used in operating activities of $15.5 million and net cash used in financing
activities of $1.2 million.
Net cash used in operating activities of discontinued operations during the six
months ended June 30, 2003 of $.4 million primarily consisted of a net loss from
discontinued operations of $.03 million and a net change in working capital
items of $.4 million. Net cash used in operating activities of discontinued
operations during the during the six months ended June 30, 2002 of $15.5 million
primarily consisted of a gain on settlement of vendor payables of $9.3 million,
settlement of lease and other obligations of $3.7 million and a decrease in
accounts payable and accrued expenses of $20.1 million, partially offset by net
income from continuing operations of $5.9 million, a decrease in accounts
receivable and prepaid expenses and other current assets of $7.5 million. and a
charge for impaired assets of $2.9 million.
Net cash used by investing activities within discontinued operations during the
six months ended June 30, 2003 of $1.1 million primarily consisted of an
increase in restricted cash. Net cash provided by investing activities of
continuing operations for the six months ended June 30, 2002 of $6.6 million
primarily consisted of a decrease in restricted cash of $5.9 million, proceeds
from the sale of investments of $.1 million, and a $.7 million net change in
other investments.
There were no financing activities within discontinued operations during the six
months ended June 30, 2003. Net cash used in financing activities within
discontinued operations during the six months ended June 30, 2002 of $1.2
million primarily consisted of repayments of short and long-term borrowings.
During 2002, the Company negotiated early terminations on many of its facility
and non-facility operating leases. The Company has also negotiated settlements
related to liabilities with many of its suppliers (see Note 7). As of June 30,
2003, approximately $24.7 million of the Company's recorded net liabilities have
been settled. These settlements were on terms generally more favorable to the
Company than required by the existing terms of these obligations.
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Restricted cash included within discontinued operations at June 30, 2003 and
December 31, 2002 totaled $1.0 million and $0 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, Inc. ("Cyrk"), the entity which acquired
the Company's corporate promotions business in 2001, 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
which was issued in connection with the settlement of certain disputes between
Cyrk and the Company 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 $2.2 million to $3.7 million. Cyrk was
unable to satisfy all conditions to the option, and it expired unexercised.
ITEM 3. 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 4. 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.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See "Legal Actions Associated with the McDonald's Matter" located in Part I of
this Report on Form 10-Q for disclosure related to legal proceedings involving
the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed herewith:
31.1 Certification of George G. Golleher pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of J. Anthony Kouba pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.3 Certification of Greg Mays pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certification of George G. Golleher pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of J. Anthony Kouba pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.3 Certification of Greg Mays pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: August 19, 2003 SIMON WORLDWIDE, INC.
/s/ J. ANTHONY KOUBA
---------------------------
J. Anthony Kouba
Executive Committee Member
(duly authorized signatory)
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