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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 SEPTEMBER 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 September 30, 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. Condensed Financial Statements (Unaudited)
Consolidated Balance Sheets -
September 30, 2003 and December 31, 2002 3
Consolidated Statements of Operations -
For the three and nine months ended
September 30, 2003 and 2002 4
Consolidated Statements of Comprehensive Loss -
For the three and nine months ended
September 30, 2003 and 2002 5
Consolidated Statements of Cash Flows -
For the nine months ended September 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
SIGNATURE 23
2
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
SIMON WORLDWIDE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 30, December 31,
2003 2002
------------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ - $ 1,181
Restricted cash 5,032 7,640
Prepaid expenses and other current assets 348 1,394
Assets from discontinued operations to be disposed of - current 13,691 14,255
--------- ---------
Total current assets 19,071 24,470
Property and equipment, net 48 67
Investments 500 500
Other assets 293 293
--------- ---------
19,912 25,330
Assets from discontinued operations to be disposed of - non-current 1,146 1,110
--------- ---------
$ 21,058 $ 26,440
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable:
Trade $ 75 $ 51
Affiliates 158 155
Accrued expenses and other current liabilities 32 478
Liabilities from discontinued operations - current 14,837 15,365
--------- ---------
15,102 16,049
Commitments and contingencies
Mandatorily redeemable preferred stock, Series A1 senior cumulative
participating convertible, $.01 par value, 28,453 shares issued and
outstanding at September 30, 2003 and 27,616 shares issued and outstanding
at December 31, 2002, stated at redemption value of $1,000 per share 28,453 27,616
Stockholders' deficit:
Common stock, $.01 par value; 50,000,000 shares authorized; 16,653,193 shares
issued and outstanding at September 30, 2003 and December 31, 2002 167 167
Additional paid-in capital 138,500 138,500
Retained deficit (161,164) (155,892)
--------- ---------
Total stockholders' deficit (22,497) (17,225)
--------- ---------
$ 21,058 $ 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 nine months
ended September 30, ended September 30,
---------------------- ----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Revenue $ - $ - $ - $ -
General and administrative expenses 1,228 1,068 4,102 3,614
Investment losses - 250 - 10,250
-------- -------- -------- --------
Loss from continuing operations before income taxes (1,228) (1,318) (4,102) (13,864)
Income tax benefit - - - -
-------- -------- -------- --------
Net loss from continuing operations (1,228) (1,318) (4,102) (13,864)
Income (loss) from discontinued operations, net of tax (311) (405) (330) 5,522
-------- -------- -------- --------
Net loss (1,539) (1,723) (4,432) (8,342)
Preferred stock dividends 282 280 840 818
-------- -------- -------- --------
Net loss available to common stockholders $ (1,821) $ (2,003) $ (5,272) $ (9,160)
======== ======== ======== ========
Loss per share from continuing operations available to common stockholders:
Loss per common share - basic and diluted $ (0.09) $ (0.10) $ (0.30) $ (0.88)
======== ======== ======== ========
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 $ (0.02) $ (0.02) $ (0.02) $ 0.33
======== ======== ======== ========
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 $ (0.11) $ (0.12) $ (0.32) $ (0.55)
======== ======== ======== ========
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 LOSS
(Unaudited)
(in thousands)
For the three months For the nine months
ended September 30, ended September 30,
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net loss $(1,539) $(1,723) $(4,432) $(8,342)
------- ------- ------- -------
Other comprehensive income, before tax:
Foreign currency translation adjustments - - - 2,115
------- ------- ------- -------
Other comprehensive income, before tax - - - 2,115
Income tax expense related to items of
other comprehensive income - - - -
------- ------- ------- -------
Other comprehensive income, net of tax - - - 2,115
------- ------- ------- -------
Comprehensive loss $(1,539) $(1,723) $(4,432) $(6,227)
======= ======= ======= =======
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 nine months
ended September 30,
----------------------
2003 2002
--------- ---------
Cash flows from operating activities:
Net loss $ (4,432) $ (8,342)
Income (loss) from discontinued operations (330) 5,522
-------- --------
Loss from continuing operations (4,102) (13,864)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 46 43
Charge for impaired investments - 10,250
Increase (decrease) in cash from changes in working capital items:
Prepaid expenses and other current assets 1,046 786
Accounts payable 27 45
Accrued expenses and other current liabilities (446) 44
-------- --------
Net cash used in operating activities (3,429) (2,696)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (27) -
Decrease (increase) in restricted cash 2,608 (5,272)
-------- --------
Net cash provided by (used in) investing activities 2,581 (5,272)
-------- --------
Net cash used in continuing operations (848) (7,968)
Net cash provided by (used in) discontinued operations (333) 10,157
-------- --------
Net increase (decrease) in cash and cash equivalents (1,181) 2,189
Cash and cash equivalents, beginning of period 1,181 -
-------- --------
Cash and cash equivalents, end of period $ - $ 2,189
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ - $ 22
======== ========
Income taxes $ 9 $ 72
======== ========
Supplemental non-cash investing activities:
Dividends paid in kind on mandatorily redeemable preferred stock $ 837 $ 804
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
6
SIMON WORLDWIDE, INC.
NOTES TO CONDENSED 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 September 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 nine months ended September 30, 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 September 30, 2003 and December 31, 2002, the Company had a stockholders'
deficit of $22,497 and $17,225, respectively, and a net loss of $4,432 and
$8,342 for the nine month periods ended September 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
7
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, 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 September 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 nine months ended September 30, 2002, the Company recorded a pre-tax
net charge totaling approximately $3,569 associated with the loss of customers,
included within discontinued operations (see Note 4). Charges totaling $6,742,
primarily related to asset write-downs ($2,388), professional fees ($3,531),
labor and other costs ($823), were partially offset by recoveries of accounts
receivable balances that had been written off in previous periods ($1,293), and
other gains ($1,880). No such charges were incurred during the nine months ended
September 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 were 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
8
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 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 of $2.8 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. 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. The Boland Settlement was
conditioned upon a final judgment being issued in the Boland case and in the
case before the California Court. Inasmuch as the appeal periods have expired in
the Boland case, a final judgment has been rendered in the case. However, no
final judgment has yet been rendered by the California Court. Even if the Boland
Settlement 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. An appeal
by the California plaintiffs is currently pending. The Boland Settlement will
become final only when a final judgment is issued by the California Court. 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 September 13, 2002, an action was filed against Simon Marketing and
McDonald's in Ontario Provincial Court alleging that Simon Marketing and
McDonald's deliberately diverted from seeding in Canada game pieces with
high-level winning prizes in certain McDonald's promotional games. The
plaintiffs are Canadian citizens seeking restitution and damages on a class-wide
basis. 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. 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 not yet been a
hearing on this motion.
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 alleged, 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
alleged that Simon Marketing had engaged in fraud, breach of contract, breach of
fiduciary obligations and civil conspiracy and alleged that McDonald's was
entitled to indemnification and damages of an unspecified amount. The federal
lawsuit by McDonald's was 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.
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
9
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 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 remains contingent upon the resolution of the case
before the California Court. There can be no assurance as to when this condition
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 payment to the Company of approximately $16.6
million.
On August 22, 2003 the Company was served with a lawsuit in the State Circuit
Court for Montgomery County Maryland filed by Stone Street Capital, Inc. ("Stone
Street") against Simon Marketing, McDonald's and George Chandler, an individual
convicted as a conspirator with Mr. Jacobson in connection with the theft of
"stolen" McDonald's game pieces. Stone Street alleges that it purchased a
purported winning game ticket from Mr. Chandler from which it received an
assignment of the right to 19 installment payments of $50,000 each. Such
installment payments were terminated after the Jacobson theft was uncovered, and
Stone Street seeks to recover amounts paid by it from McDonald's and Simon
Marketing. The Company has attempted to remove the case to federal court and
transfer it to the MDL Proceedings. Plaintiffs have opposed removal and
transfer, and motions by the parties are pending.
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 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. Subsequently the
defendants' demurrers to the first and a later second amended complaint were
sustained in part, including the dismissal of all claims for punitive damages
with no leave to amend, and a third amended complaint will be filed.
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,
June 6, 2002 and August 19, 2003.
10
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.
At September 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 No. 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 nine month periods ended September 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 nine months
ended September 30, ended September 30,
---------------------- -----------------------
2003 2002 2003 2002
--------- -------- --------- ---------
Net loss available to common stockholders $ (1,821) $(2,003) $ (5,272) $ (9,160)
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 $ (1,821) ($ 2,003) $ (5,272) ($ 9,160)
========= ======== ========= =========
Loss per common share - basic and diluted - as reported $ (0.11) $ (0.12) $ (0.32) $ (0.55)
========= ======== ========= =========
Loss per common share - basic and diluted - pro forma $ (0.11) $ (0.12) $ (0.32) $ (0.55)
========= ======== ========= =========
OTHER ACCOUNTING PRONOUNCEMENTS
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 had $28,453 and $27,616 of
preferred stock outstanding at September 30, 2003 and
11
December 31, 2002, respectively. Because such preferred stock is not mandatorily
redeemable at a specified date or upon an event that 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 to 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 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.
Assets and liabilities from discontinued operations as of September 30, 2003 and
December 31, 2002, as disclosed in the accompanying consolidated financial
statements, consist of the following:
September 30, December 31,
2003 2002
------------ ------------
Assets:
Cash and cash equivalents $ 11,091 $ 13,236
Restricted cash 1,835 -
Accounts receivable:
Trade, less allowance for doubtful accounts of $13,633
at September 30, 2003 and $13,416 at December 31, 2002 312 558
Prepaid expenses and other current assets 453 461
---------- ----------
Total current assets 13,691 14,255
Other assets 1,146 1,110
---------- ----------
Assets from discontinued operations to be disposed of $ 14,837 $ 15,365
========== ==========
Liabilities:
Accounts payable - trade $ 5,313 $ 5,736
Accrued expenses and other current liabilities 9,524 9,629
---------- ----------
Total current liabilities 14,837 15,365
---------- ----------
Liabilities from discontinued operations $ 14,837 $ 15,365
========== ==========
12
Net income (loss) from discontinued operations available to common stockholders
for the three and nine months ended September 30, 2003 and 2002, as disclosed in
the accompanying consolidated financial statements, consists of the following:
For the three months For the nine months
ended September 30, ended September 30,
----------------------- -----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net sales $ - $ - $ - $ -
Cost of sales - - - -
--------- --------- --------- ---------
Gross profit - - - -
Selling, general and administrative expenses 227 (381) 502 4,221
Charges attributable
to loss of significant customers, net - 1,991 - 3,569
Gain on settlement of obligations (17) (369) (23) (9,632)
Restructuring - - - (750)
--------- --------- --------- ---------
Operating income (loss) (210) (1,241) (479) 2,592
Interest income (37) (100) (211) (306)
Interest expense - - - 35
Other (income) expense 138 (736) 62 827
--------- --------- --------- ---------
Income (loss) before income taxes (311) (405) (330) 2,036
Income tax benefit - - - (3,486)
--------- --------- --------- ---------
Net income (loss) from discontinued operations
available to common stockholders $ (311) $ (405) $ (330) $ 5,522
========= ========= ========= =========
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 September 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 September 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 September 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 nine months ended September 30, 2003 and 2002 the
difference between the final settlement payments and the outstanding obligations
was $23 and $9,632, 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 nine months ended
September 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 nine months ended September 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:
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 September 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 September 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 $ (1,228) $ (1,318)
Preferred stock dividends 282 280
--------- ----------
Loss from continuing operations
available to common stockholders $ (1,510) 16,653,193 $ (0.09) $ (1,598) 16,653,193 $ (0.10)
========= ========== ======= ========== ========== =======
Loss from discontinued operations $ (311) 16,653,193 $ (0.02) $ (405) 16,653,193 $ (0.02)
========= ========== ======= ========== ========== =======
Net loss (1,539) (1,723)
Preferred stock dividends 282 280
--------- ----------
Net loss available to common
stockholders $ (1,821) 16,653,193 $ (0.11) $ (2,003) 16,653,193 $ (0.12)
========= ========== ======= ========== ========== =======
For the three months ended September 30, 2003 and 2002, 3,433,921 and 3,299,930
shares of convertible preferred stock, respectively, were not included in the
computation of diluted EPS because to do so would have been antidilutive.
15
For the nine months ended September 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 $ (4,102) $ (13,864)
Preferred stock dividends 840 818
--------- ----------
Loss from continuing operations
available to common stockholders $ (4,942) 16,653,193 $ (0.30) $ (14,682) 16,653,193 $ (0.88)
========= ========== ======= ========== ========== =======
Income (loss) from discontinued
operations $ (330) 16,653,193 $ (0.02) $ 5,522 16,653,193 $ 0.33
========= ========== ======= ========== ========== =======
Net loss (4,432) (8,342)
Preferred stock dividends 840 818
--------- ----------
Net loss available to common
stockholders $ (5,272) 16,653,193 $ (0.32) $ (9,160) 16,653,193 $ (0.55)
========= ========== ======= ========== ========== =======
For the nine months ended September 30, 2003 and 2002, 3,400,121 and 3,267,569
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 nine
months ended September 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 September 30, 2003 and December 31, 2002, the Company had a stockholders'
deficit of $22.5 million and $17.2 million, respectively, and a net loss of $4.4
million and $8.3 million for the nine months ended September 30, 2003 and 2002,
respectively. The Company has continued 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 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 SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2002
Selling, general and administrative expenses totaled $1.2 million and $1.1
million for the three months ended September 30, 2003 and 2002, respectively.
The fluctuation was primarily due to an increase in insurance premiums.
Investment Losses, representing charges related to other-than-temporary
investment impairments associated with the Company's venture portfolio, totaled
$0 and $.3 million for the three months ended September 30, 2003 and 2002,
respectively.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2002
Selling, general and administrative expenses totaled $4.1 million and $3.6
million for the nine months ended September 30, 2003 and 2002, respectively. The
fluctuation was primarily due to an increase in insurance premiums. Investment
Losses, representing charges related to other-than-temporary investment
impairments associated with the Company's venture portfolio, totaled $0 and
$10.3 million for the nine months ended September 30, 2003 and 2002,
respectively.
RESULTS OF DISCONTINUED OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2002
There were no net sales or gross profit for the three months ended September 30,
2003 and 2002. The Company's lack of net sales and gross profit was primarily
attributable to the effects associated with the loss of its McDonald's and
Philip Morris business. See notes to consolidated financial statements.
Selling, general and administrative expenses totaled $.2 million and $(.4)
million for the three months ended September 30, 2003 and 2002, respectively.
Selling, general and administrative expenses of $(.4) million for the three
months ended September 30, 2002 included a settlement of lease and other
obligations of $.4 million less than amounts accrued. The fluctuation was
primarily due to the effect of settlement of lease and other obligations for
amounts less than accrued and other gains included in the three months ended
September 30, 2002 while there were no material items of a similar nature
included in the three months ended September 30, 2003. See notes to consolidated
financial statements.
The Company recorded a pre-tax net charge totaling $2.0 million for the three
months ended September 30, 2002 related to the loss of customers. These charges
were primarily related to asset write-downs ($.2 million), professional fees
($1.0 million) and labor and other costs ($.8 million). There were no such
charges for the three months ended September 30, 2003.
18
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. The Company recorded a gain in
connection with these settlements totaling $.4 million for the three months
ended September 30, 2002, included in Gain on Settlement of Obligations in Note
4 to the accompanying consolidated financial statements. The Company recorded
nominal settlement gains for the three months ended September 30, 2003.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2002
There were no net sales or gross profit for the nine months ended September 30,
2003 and 2002. The Company's lack of net sales and gross profit was primarily
attributable to the effects associated with the loss of its McDonald's and
Philip Morris business. See notes to consolidated financial statements.
Selling, general and administrative expenses totaled $.5 million and $4.2
million for the nine months ended September 30, 2003 and 2002, respectively.
Selling, general and administrative expenses of $4.2 million for the nine months
ended September 30, 2002 includes a settlement of lease and other obligations of
$4.5 million less than the amounts accrued. The Company's decreased spending was
primarily due to the effects associated with the Company eliminating a majority
of its ongoing operations related to the promotions business. See notes to
consolidated financial statements.
The Company recorded a pre-tax net charge totaling approximately $3.6 million
for the nine months ended September 30, 2002 related to the loss of customers
(see Note 4). Charges totaling $6.7 million, primarily related to asset
write-downs ($2.4 million), professional fees ($3.5 million), labor and other
costs ($.8 million), were partially offset by a recovery of certain assets ($1.3
million), that had been written off and included in the 2001 charges
attributable to the loss of significant customers and other gains ($1.8
million).
During the nine months ended September 30, 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, except for one
expired warehouse lease with approximately $.1 million of unpaid rent, 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 $9.6 million related to the
settlement of vendor payables, included in Gain on Settlement of Obligations,
and $4.5 million related to the settlement of lease and other obligations
recorded as a reduction to selling, general, and administrative expenses
disclosed in Note 4 to the consolidated financial statements.
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 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 was $5.1 million at September 30,
2003 compared to $9.5 million at December 31, 2002. Net cash used in operating
activities from continuing operations for the nine months ended September 30,
2003 totaled $3.4 million, primarily due to a loss from continuing operations of
$4.1 million partially offset by a net change in working capital items of $.7
million. Net cash used in operating activities from continuing operations for
the nine months ended September 30, 2002 totaled $2.7 million, primarily due to
a loss from continuing operations of $13.9 million partially offset by a charge
for impaired investments of $10.3 million and a decrease in prepaid expenses and
other current assets of $.8 million.
Net cash provided by investing activities totaled $2.6 million for the nine
months ended September 30, 2003, primarily related to a decrease in restricted
cash. Net cash used by investing activities during the nine months ended
September 30, 2002 was $5.3 million primarily related to an increase in
restricted cash of which $2.7 million related to the establishment of an
indemnification trust (see Note 9). There were no financing activities from
continuing operations for the nine months ended September 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 Note 9.
Restricted cash included within continuing operations at September 30, 2003 and
December 31, 2002 totaled $5.0 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 September 30, 2003 was a deficit
of $(1.1) million compared to a deficit of $(1.1) million at December 31, 2002.
Net cash used in discontinued operations totaled $.3 million during the nine
months ended September 30, 2003, primarily related to net cash used in operating
activities of $.6 million and net cash used in investing activities of $1.8
million partially offset by a reallocation of funds, totaling $2.1 million,
between continuing and discontinued operations due to changes in minimum working
capital requirements.
Net cash provided by discontinued operations during the nine months ended
September 30, 2002 totaled $10.2 million, which was primarily due to net cash
provided by investing activities of $6.6 million and a reallocation of funds,
totaling approximately $21.6 million, between continuing and discontinued
operations due to changes in minimum working capital requirements, partially
offset by net cash used in operating activities of $16.5 million and net cash
used in financing activities of $1.5 million.
Net cash used in operating activities of discontinued operations during the nine
months ended September 30, 2003 of $.6 million primarily related to a loss from
discontinued operations of $.3 million and a net change in working capital items
of $.3 million. Net cash used in operating activities of discontinued operations
for the nine months ended September 30, 2002 of $16.5 million primarily
consisted of a net change in working capital items of $11.2 million, gain on
settlement of vendor payables of $9.6 million and settlement of lease and other
obligations of $4.5 million, partially offset by income from discontinued
operations of $5.5 million, charges for impaired assets of $2.9 million, and
depreciation expense of $.4 million.
Net cash used in investing activities within discontinued operations of $1.8
million for the nine months ended September 30, 2003 primarily related to an
increase in restricted cash. Net cash provided by investing activities within
discontinued operations of $6.6 million for the nine months ended September 30,
2002 primarily related to a decrease in restricted cash of $5.9 million,
proceeds from the sale of investments of $.1 million, and a $.6 million net
change in other investments.
There were no financing activities within discontinued operations for the nine
months ended September 30, 2003. Net cash used in financing activities within
discontinued operations of $1.5 million for the nine months ended September 30,
2002 primarily related to 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 September
30, 2003, approximately $24.8 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 September 30, 2003
and December 31, 2002 totaled $1.8 million and $0 million, respectively,
primarily related to amounts deposited with lenders to satisfy the Company's
obligations pursuant to its outstanding standby letters of credit.
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.
(b) Reports on Form 8-K
The Company filed a Report on Form 8-K dated August 19, 2003 related to
a settlement of the litigation between the Registrant and McDonald's
Corporation.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: November 3, 2003 SIMON WORLDWIDE, INC.
/s/ J. ANTHONY KOUBA
--------------------
J. Anthony Kouba
Executive Committee Member
(duly authorized signatory)
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