SIMON WORLDWIDE INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 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)

(310) 552-6800
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

NONE

Securities registered pursuant to Section 12(g) of the Act:

Title of each class Name of each exchange on which registered
- --------------------------------------- -----------------------------------------

COMMON STOCK, $0.01 PAR VALUE PER SHARE NONE

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

Indicate by a check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). [ ]

At June 30, 2003, the aggregate market value of voting stock held by
non-affiliates of the registrant was $932,410.

At January 31, 2004, 16,653,193 shares of the registrant's common stock were
outstanding.

SIMON WORLDWIDE, INC.
FORK 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
INDEX

PAGE

PART I

Item 1. Business 3
Item 2. Properties 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 8

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 9
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 10
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 19
Item 8. Financial Statements and Supplementary Data 20
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 20
Item 9A. Controls and Procedures 20
PART III

Item 10. Directors of the Registrant 21
Item 11. Executive Compensation 22
Item 12. Security Ownership of Certain Beneficial Owners and Management 25
Item 13. Certain Relationships and Related Transactions 28
Item 14. Principal Accountant Fees and Services 28

PART IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 30

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PART I

ITEM 1. BUSINESS

GENERAL

In August 2001, Simon Worldwide, Inc. (the "Company") experienced the loss of
its two largest customers: McDonald's Corporation ("McDonald's") and, to a
lesser extent, Philip Morris Incorporated ("Philip Morris"), now known as
Altria, Inc. See Loss of Customers, Resulting Events and Going Concern section
below. Since August 2001, the Company has concentrated its efforts on reducing
its costs and settling numerous claims, contractual obligations and pending
litigation. As a result of these efforts, the Company has been able to resolve a
significant number of outstanding liabilities that existed at that time or arose
subsequent to that date. As of December 31, 2003, the Company had reduced its
worldwide workforce to 7 employees from 9 employees and 136 employees as of
December 31, 2002 and 2001, respectively. The Company is currently managed by an
Executive Committee consisting of two members of its Board of Directors, in
consultation with financial, legal and other advisors.

At December 31, 2003, the Company had a stockholders' deficit of $27.2 million.
For the year ended December 31, 2003, the Company had a net loss of $8.9
million. The Company incurred losses in 2003 and continues to incur losses in
2004 for the general and administrative expenses incurred to manage the affairs
of the Company and resolve outstanding legal matters. By utilizing cash which
had been generated from discontinued operations and assuming payments are
received pursuant to the settlement with McDonald's in 2004 (see Item 3),
management believes it has sufficient capital resources and liquidity to operate
the Company for the foreseeable future. However, as a result of the
stockholders' deficit, loss of customers and the related legal matters at
December 31, 2003, the Company's independent certified public accountants have
expressed substantial doubt about the Company's ability to continue as a going
concern. The accompanying financial statements do not include any adjustments
that might result from the outcome of these uncertainties.

By April 2002, the Company effectively eliminated a majority of its ongoing
promotions business operations and was in the process of disposing of its assets
and settling its liabilities related to the promotions business and defending
and pursuing litigation with respect thereto. The process is ongoing and will
continue throughout 2004 and possibly into 2005. During the second quarter of
2002, the discontinued activities of the Company, consisting of revenues,
operating costs, certain general and administrative costs and certain assets and
liabilities associated with the Company's promotions business, were classified
as discontinued operations for financial reporting purposes. The Board of
Directors of the Company continues to consider various alternative courses of
action for the Company going forward, including possibly acquiring one or more
operating businesses, selling the Company or distributing its net assets, if
any, to shareholders. The decision on which course to take will depend upon a
number of factors including the outcome of the significant litigation matters in
which the Company is involved. See Item 3. Legal Proceedings. To date, the Board
of Directors has made no decision on which course of action to take.

Until the unanticipated events of August 2001 occurred, the Company,
incorporated in Delaware and founded in 1976, had been operating as a
multi-national full-service promotional marketing company, specializing in the
design and development of high-impact promotional products and sales promotions.
The majority of the Company's revenue was derived from the sale of products to
consumer products and services companies seeking to promote their brand names
and corporate identities and build brand loyalty. Net sales to McDonald's and
Philip Morris accounted for 78% and 8% and 65% and 9% of total net sales in 2001
and 2000, respectively. The Company had no sales during 2003 or 2002.

Beginning in 1996, the Company grew as a result of a series of acquisitions of
companies engaged in the corporate catalog and advertising specialty segment of
the promotions industry. Certain of these acquired companies operated within the
Company's Corporate Promotions Group ("CPG") and had a history of disappointing
financial results. As a result, the Company sold these businesses in February
2001. See 2001 Sale of Business section below.

In 1997, the Company expanded into the consumer promotion arena with its
acquisition of Simon Marketing, Inc. ("Simon Marketing"), a Los Angeles,
California based marketing and promotion agency. The Company conducted its
business with McDonald's through its Simon Marketing subsidiary. Simon Marketing
designed and implemented marketing promotions for McDonald's, which included
premiums, games, sweepstakes, events, contests, coupon offers, sports marketing,
licensing and promotional retail items.

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LOSS OF CUSTOMERS, RESULTING EVENTS AND GOING CONCERN

On August 21, 2001, the Company was notified by McDonald's that they were
terminating their approximately 25-year relationship with Simon Marketing as a
result of the arrest of Jerome P. Jacobson ("Mr. Jacobson"), a former employee
of Simon Marketing who subsequently plead guilty to embezzling winning game
pieces from McDonald's promotional games administered by Simon Marketing. No
other Company employee was found or alleged to have any knowledge of or
complicity in his illegal scheme. The Second Superseding Indictment filed
December 7, 2001, by the U.S. Attorney in the United States District Court for
the Middle District of Florida charged that Mr. Jacobson "embezzled more than
$20 million worth of high value winning McDonald's promotional game pieces from
his employer, [Simon]". Simon Marketing was identified in the Indictment, along
with McDonald's, as an innocent victim of Mr. Jacobson's fraudulent scheme.
Also, see 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 its approximately nine-year relationship with the
Company. Net sales to McDonald's and Philip Morris accounted for 78% and 8% and
65% and 9% of total net sales in 2001 and 2000, respectively. The Company's
financial condition, results of operations and net cash flows have been and will
continue to be materially adversely affected by the loss of the McDonald's and
Philip Morris business, as well as the loss of its other customers. At December
31, 2003 and 2002, the Company had no customer backlog as compared to $236.9
million of written customer purchase orders at December 31, 2000. In addition,
the absence of business from McDonald's and Philip Morris has adversely affected
the Company's relationship with and access to foreign manufacturing sources.

As a result of actions taken in the second half of 2001, the Company recorded
third and fourth quarter pre-tax charges totaling approximately $80.3 million in
2001. These charges related principally to the write-down of goodwill
attributable to Simon Marketing ($46.7 million) and to a substantial reduction
of its worldwide infrastructure, including asset write-downs ($22.4 million),
lump-sum severance costs associated with the termination of approximately 377
employees ($6.3 million), lease cancellations ($1.8 million), legal fees ($1.7
million) and other costs associated with the McDonald's and Philip Morris
matters ($1.4 million). During 2002, the Company also recorded a pre-tax net
charge totaling approximately $4.6 million associated with the loss of
customers. Charges totaling $8.6 million, primarily related to asset write-downs
($3.6 million), professional fees ($4.3 million), and labor and other costs ($.7
million), were partially offset by recoveries of certain assets, totaling $1.3
million (see Note 6 of Notes to Consolidated Financial Statements), that had
been written off and included in the 2001 charges attributable to the loss of
significant customers, and other gains ($2.7 million).

As an inducement to the Company's directors to continue their services to the
Company, in the wake of the events of August 21, 2001, and to provide assurances
that the Company will be able to fulfill its obligations to indemnify directors,
officers and agents of the Company and its subsidiaries ("Indemnitees") under
Delaware law and pursuant to various contractual arrangements, in March 2002 the
Company entered into an Indemnification Trust Agreement ("Agreement") for the
benefit of the Indemnitees. See Notes to Consolidated Financial Statements.
Pursuant to this Agreement, the Company has deposited a total of $2.7 million
with an independent trustee in order to fund any indemnification amounts owed to
an Indemnitee which the Company is unable to pay. These arrangements, and the
Executive Service Agreements described below, were negotiated by the Company on
an arms-length basis with the advice of the Company's counsel and other
advisors.

The employment of the chief executive officer, Allan Brown, terminated with the
Company in March 2002 but he remains on the Company's Board of Directors. The
ongoing operations of the Company and Simon Marketing are being managed by the
Executive Committee of the Board of Directors consisting of Messrs. George
Golleher and Anthony Kouba, who jointly act as chief executive officers, in
consultation with financial, legal and other advisors. Messrs. Golleher and
Kouba entered into Executive Services Agreements dated May 30, 2003, in
connection with such responsibilities. See Item 11. Executive Compensation.

LEGAL ACTIONS ASSOCIATED WITH THE MCDONALD'S MATTER

See Item 3. Legal Proceedings.

OUTLOOK

As a result of the stockholders' deficit, loss of customers and the related
legal matters at December 31, 2003, the Company's independent certified public
accountants have expressed substantial doubt about the Company's ability to
continue as a going

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concern. The accompanying financial statements do not include any adjustments
that might result from the outcome of these uncertainties. The Company has taken
significant actions and will continue to take further action to reduce its cost
structure. The Board of Directors of the Company continues to consider various
alternative courses of action for the Company going forward, including possibly
acquiring one or more operating businesses, selling the Company or distributing
its net assets, if any, to shareholders. The decision on which course to take
will depend upon a number of factors including the outcome of the significant
litigation matters in which the Company is involved. See Item 3. Legal
Proceedings. To date, the Board of Directors has made no decision on which
course of action to take. By utilizing cash which had been generated from
discontinued operations and assuming payments are received pursuant to the
settlement with McDonald's in 2004 (see Item 3), management believes it has
sufficient capital resources and liquidity to operate the Company for the
foreseeable future.

1999 EQUITY INVESTMENT

In November 1999, Overseas Toys L.P., an affiliate of the Yucaipa Companies
("Yucaipa"), a Los Angeles, California based investment firm, invested $25
million into the Company in exchange for 25,000 shares of a new series A
convertible preferred stock (initially convertible into 3,030,303 shares of
Company common stock) and a warrant to purchase an additional 15,000 shares of
series A convertible preferred stock (initially convertible into 1,666,667
shares of Company common stock). The net proceeds of $20.6 million from this
transaction, which was approved by the Company's stockholders, were used for
general corporate purposes. As of December 31, 2003, assuming conversion of all
of the convertible preferred stock, Overseas Toys L.P. would own approximately
17.4% of the then outstanding common shares. Assuming the preceding conversion,
and assuming the exercise of the warrant and the conversion of the preferred
stock issuable upon its exercise, Overseas Toys L.P. would own a total of
approximately 23.7% of the then outstanding common shares.

In connection with the investment, the Company's Board of Directors was
increased to seven members and three designees of Yucaipa, including Yucaipa's
managing partner, Ronald W. Burkle, were elected to the Company's Board of
Directors and Mr. Burkle was elected chairman. Pursuant to a Voting Agreement,
dated September 1, 1999, among Yucaipa, Patrick Brady, Allan Brown, Gregory
Shlopak, the Shlopak Foundation, Cyrk International Foundation and the Eric
Stanton Self-Declaration of Revocable Trust, each of Messrs. Brady, Brown,
Shlopak and Stanton agreed to vote all of the shares beneficially held by them
to elect the three members nominated by Yucaipa. Mr. Burkle and Erika Paulson, a
Yucaipa representative on the Board of Directors, subsequently resigned from the
Company's Board of Directors in August 2001. Additionally, in November 1999, the
Company entered into a Management Agreement with Yucaipa whereby Yucaipa agreed
to provide the Company with management and consultation services in exchange for
a fee of $500,000 per year for a term of five (5) years which would
automatically renew unless either party elected in advance not to renew in which
case, under the terms of the agreement, a $2.5 million termination fee was due.
On October 17, 2002, the Management Agreement was terminated, a payment of $1.5
million was made by the Company to Yucaipa and each party was released from
further obligations thereunder.

2001 SALE OF BUSINESS

In February 2001, the Company sold its CPG business to Cyrk, Inc. ("Cyrk"),
formerly known as Rockridge Partners, Inc., for approximately $14 million, which
included the assumption of approximately $3.7 million of Company debt. Two
million three hundred thousand dollars ($2,300,000) of the purchase price was
paid with a 10% per annum five-year subordinated note from Cyrk, with the
balance being paid in cash. CPG had been engaged in the corporate catalog and
specialty advertising segment of the promotions industry. The group was formed
as a result of the Company's acquisitions of Marketing Incentives, Inc.
("Marketing Incentives") and Tonkin, Inc. ("Tonkin") in 1996 and 1997,
respectively.

Pursuant to the Purchase Agreement, Cyrk purchased from the Company (i) all of
the outstanding capital stock of Cyrk Acquisition Corp. ("CAC"), successor to
the business of Marketing Incentives, and Tonkin, each a wholly-owned subsidiary
of the Company, (ii) certain other assets of the Company, including those assets
at the Company's Danvers and Wakefield, Massachusetts facilities necessary for
the operation of the CPG business and (iii) all intellectual property of the CPG
business as specified in the Purchase Agreement. Cyrk assumed certain
liabilities of the CPG business as specified in the Purchase Agreement and all
of the assets and liabilities of CAC and Tonkin and, pursuant to the Purchase
Agreement, the Company agreed to transfer its former name, Cyrk, to the buyer.
Cyrk extended employment offers to certain former employees of the Company who
had performed various support activities, including accounting, human resources,
information technology, legal and other various management functions. There is
no material relationship between Cyrk and the Company or any of

5

its affiliates, directors or officers, or any associate thereof, other than the
relationship created by the Purchase Agreement and related documents.

Cyrk assumed the obligations of the Company to Winthrop Resources Corporation
("Winthrop") in connection with its purchase of the CPG business. As a condition
to Cyrk assuming these obligations, however, the Company was required to provide
a $4.2 million letter of credit as collateral for Winthrop in case Cyrk did not
perform the assumed obligations. The available amount under this letter of
credit reduces over time as the underlying obligation to Winthrop reduces. As of
December 31, 2003, the available amount under the letter of credit was $3.7
million which is secured, in part, by $3.2 million of restricted cash of the
Company. Cyrk has agreed to indemnify the Company if Winthrop makes any draw
under this letter of credit. The letter of credit has annual expirations through
August 2007 when the underlying obligation is satisfied. The Company's letter of
credit is also secured, in part, by a $500,000 letter of credit provided by Cyrk
for the benefit of the Company.

In the fourth quarter of 2003, Cyrk informed the Company that it was continuing
to suffer substantial financial difficulties, and that it could not continue to
discharge its obligations to Winthrop which are secured by the Company's letter
of credit. If this occurs, Winthrop has the right to draw upon the Company's
letter of credit, which as of February 29, 2004, was $3.335 million, $2.835
million of which is secured by restricted cash of the Company. The Company's
$3.335 million letter of credit is also secured, in part, by a $500,000 letter
of credit provided by Cyrk for the benefit of the Company. The Company will have
indemnification rights against Cyrk for all losses relating to any default by
Cyrk under the Winthrop lease. No assurances can be made that the Company will
be successful in enforcing those rights or, if successful, collecting damages
from Cyrk. As a result of the foregoing facts, the Company has recorded a charge
of $2.835 million with respect to the liability arising from the Winthrop lease.

ITEM 2. PROPERTIES

As a result of the loss of its two major customers in 2001, the Company took
actions to significantly reduce its worldwide infrastructure and its global
property commitments. During 2002, the Company negotiated early terminations of
all its domestic, Asian and European office, warehouse and distribution facility
leases and settled all of its outstanding remaining real estate lease
obligations, except for approximately $70,000 of unpaid rent. During 2002, the
Company made aggregate payments totaling approximately $2.9 million related to
the early termination of these leases. See Notes to Consolidated Financial
Statements.

In May 2002, the Company entered into an 18-month lease agreement for 4,675
square feet of office space in Los Angeles, California, with a monthly rent of
approximately $8,600, into which it relocated its remaining scaled-down
operations. In October 2003, the Company entered into a new lease agreement for
this same office space for a term of 11 months and a monthly rent of
approximately $11,400. For a summary of the Company's minimum rental commitments
under all noncancelable operating leases as of December 31, 2003, see Notes to
Consolidated Financial Statements.

ITEM 3. LEGAL PROCEEDINGS

CLASS, REPRESENTATIVE AND OTHER THIRD-PARTY ACTIONS AGAINST MCDONALD'S AND THE
COMPANY

As a result of the Jacobson embezzlement described under Loss of Customers,
Resulting Events and Going Concern in Item 1. Business, numerous consumer class
action and representative action lawsuits (hereafter variously referred to as,
"actions", "complaints" or "lawsuits") were 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 sought 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 were consolidated
in California

6

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 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.

On April 8, 2003, the Illinois Circuit Court issued a final order approving the
Boland Settlement. The Boland Settlement was conditioned upon a final judgment
being issued in the Boland case and in the case before the California Court,
both of which have now occurred and, therefore, the Boland Settlement has become
effective. While 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. The Company
has been informed that approximately 250 persons in the United States and Canada
purport to have opted out of the Boland Settlement. Claims may also be asserted
in Canada and elsewhere 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 had been ordered to arbitration.

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. The Canadian Court has
dismissed the case filed in September 2002, but has allowed the October 2002
case to move forward. It is anticipated that McDonalds's and the Company will
appeal the ruling.

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 who purportedly assigned to it
the right to receive 19 installment payments of $50,000 each under the ticket.
Such installment payments were terminated after the Jacobson theft was
uncovered, and Stone Street seeks to recover amounts paid by it for the
assignment from McDonald's and Simon Marketing. An attempt to remove the case to
federal court has been unsuccessful, and the matter is proceeding in Maryland.

LEGAL ACTIONS BETWEEN THE COMPANY AND MCDONALD'S

McDonald's termination of its contractual relationship with the Company led to
various lawsuits between the Company and Simon Marketing on the one hand and
McDonald's and certain of its agents and suppliers on the other which were
commenced between October 2001 and March 2002. In July 2003, all parties to
these lawsuits entered into a settlement agreement.

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Under the settlement, all causes of action between the parties have been
dismissed and mutual releases have been exchanged. In addition, McDonald's will
pay $6.9 million to the Company and will assign to the Company all rights to
insurance proceeds agreed to be paid by the Company's errors and omissions
insurance carriers after payment of expenses relating to the Boland Settlement.
The precise amount of insurance proceeds will not be known until all expenses of
the Boland Settlement have been calculated, but the Company currently estimates
that insurance proceeds will be approximately $9.3 million which would result in
total net proceeds to the Company of approximately $13 million after payment of
attornies' fees relating to the settlement. In addition, both parties will be
mutually released from all obligations to the other party which includes all
related trade payables and accrued expenses which are recorded within
discontinued operations. It is expected that payments made to the Company
pursuant to the settlement with McDonald's will be received by mid-2004.

As a result of this settlement, in consideration for paying an amount in the
settlement equal to the remaining limits of the Company's policies, the errors
and omissions insurance carriers of the Company have been released from any
further obligations to defend the Company, Simon Marketing or any additional
insureds under the policies from any claims brought with respect to the Jacobson
embezzlement or any other promotional games, including the cases pending in
Canada, Maryland and elsewhere described in this Item 3. Legal Proceedings.

OTHER LEGAL ACTIONS ARISING FROM JACOBSON EMBEZZLEMENT

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 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 second amended complaint were sustained in part,
including the dismissal of all claims for punitive damages with no leave to
amend. A third amended complaint was filed, and defendants' demurrer to all
causes of action was sustained without leave to amend. A dismissal of the case
will result. The Company intends to appeal this ruling.

As a result of this lawsuit, PWC resigned as the Company's independent certified
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 consolidated 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 certified public
accountants. In connection with obtaining PWC's agreement to re-release their
audit report dated February 15, 2001, for inclusion in the Company's 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.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

NONE

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Until May 3, 2002, the Company's stock traded on The Nasdaq Stock Market under
the symbol SWWI. On May 3, 2002, the Company's stock was delisted from the
Nasdaq Stock Market by Nasdaq due to the Company's failure to comply with
certain Nasdaq listing requirements. The following table presents, for the
periods indicated, the high and low sales prices of the Company's common stock
as reported by Nasdaq until May 3, 2002, and thereafter on the over-the-counter
market as reported in the Pink Sheets. Such over-the-counter market quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not necessarily represent actual transactions.

2003 2002
--------------------------- ---------------------------
High Low High Low
--------------------------- ---------------------------

First Quarter $0.10 $0.04 $0.17 $0.13
Second Quarter 0.09 0.01 0.13 0.04
Third Quarter 0.15 0.05 0.12 0.08
Fourth Quarter 0.11 0.05 0.12 0.06

As of January 31, 2004, the Company had approximately 431 holders of record of
its common stock. The last reported sale price of the Company's common stock on
February 27, 2004, was $.18.

The Company has never paid cash dividends, other than series A preferred stock
distributions in 2000 and stockholder distributions of Subchapter S earnings
during 1993 and 1992.

ITEM 6. SELECTED FINANCIAL DATA

By April 2002, the Company had effectively eliminated a majority of its ongoing
operations. Accordingly, the discontinued activities of the Company have been
classified as discontinued operations. The selected financial data for prior
periods has been reclassified to conform to current period presentation. The
following selected financial data should be read in conjunction with Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Item 8. Financial Statements and Supplementary Data.

For the Years Ended December 31,
---------------------------------------------------------------------------
(unaudited) (unaudited)
Selected income statement data: 2003 2002 2001 2000 1999
---------------------------- -------------- ------------- -----------
(in thousands, except per share data)

Continuing operations:
Net sales $ - $ - $ - $ - $ -
Net loss (5,270) (15,406) (7,916) (8,179) (2,954)
Loss per common share available
to common shareholders - basic and diluted (0.38) (0.99) (0.54) (0.57) (0.20)

Discontinued operations:

Net sales - - 324,040 768,450 988,844

Net income (loss) (3,591) 6,120 (114,429)(2) (61,536)(3) 14,090(4)
Earnings (loss) per common share available
to common shareholders - basic and diluted (0.22) 0.37(1) (6.95)(2) (3.85)(3) 0.90(4)

9

December 31,
--------------------------------------------------------------------------------
(unaudited) (unaudited)
Selected balance sheet data: 2003 2002 2001 2000 1999
--------------------------------------------------------------------------------
(in thousands)

Cash and cash equivalents (5) $ 10,065 $ 14,417 $ 40,851 $ 68,162 $ 99,698
Total assets 19,838 26,440 77,936 252,436 369,148

Long-term obligations - - 6,785 6,587 9,156
Convertible redeemable preferred stock 28,737 27,616 26,538 25,500 25,000
Stockholders' (deficit) equity (27,213) (17,225) (11,497) 116,176 186,077

(1) Includes $4,574 of pre-tax charges attributable to loss of significant
customers, $12,023 of pre-tax net gain on settlement of vendor payables
and $4,432 on settlement of lease and other obligations. See Notes to
Consolidated Financial Statements.

(2) Includes $46,671 of pre-tax impairment of intangible asset, $33,644 of
pre-tax charges attributable to loss of significant customers and
$20,212 of pre-tax restructuring and nonrecurring charges. See Notes to
Consolidated Financial Statements.

(3) Includes $50,103 of pre-tax loss on sale of business and $6,395 of
pre-tax restructuring and nonrecurring charges.

(4) Includes $1,675 of pre-tax nonrecurring charges.

(5) Includes only non-restricted cash.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

From time to time, the Company may provide forward-looking information such as
forecasts of expected future performance or statements about the Company's plans
and objectives, including certain information provided below. These
forward-looking statements are based largely on the Company's expectations and
are subject to a number of risks and uncertainties, certain of which are beyond
the Company's control. The Company wishes to caution readers that actual results
may differ materially from those expressed in any forward-looking statements
made by, or on behalf of, the Company including, without limitation, as a result
of factors described in the Company's Amended Cautionary Statement for Purposes
of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act
of 1995, filed as Exhibit 99.1 to this Report on Form 10-K for the year ended
December 31, 2003.

BUSINESS CONDITIONS

In August 2001, the Company experienced the loss of its two largest customers:
McDonald's and, to a lesser extent, Philip Morris, now known as Altria, Inc. See
Loss of Customers, Resulting Events and Going Concern discussed in Item 1. Since
August 2001, the Company has concentrated its efforts on reducing its costs and
settling numerous claims, contractual obligations and pending litigation. As a
result of these efforts, the Company has been able to resolve a significant
number of outstanding liabilities that existed at that time or arose subsequent
to that date. As of December 31, 2003, the Company had reduced its worldwide
workforce to 7 employees from 9 employees and 136 employees as of December 31,
2002 and 2001, respectively.

At December 31, 2003, the Company had a stockholders' deficit of $27.2 million.
For the year ended December 31, 2003, the Company had a net loss of $8.9
million. The Company incurred losses in 2003 and continues to incur losses in
2004 for the general and administrative expenses incurred to manage the affairs
of the Company and resolve outstanding legal matters. By utilizing cash which
had been generated from discontinued operations and assuming payments are
received pursuant to the settlement with McDonald's in 2004 (see Item 3),
management believes it has sufficient capital resources and liquidity to operate
the Company for the foreseeable future. However, as a result of the
stockholders' deficit, loss of customers and the related legal matters at
December 31, 2003, the Company's independent certified public accountants have
expressed

10

substantial doubt about the Company's ability to continue as a going concern.
The accompanying financial statements do not include any adjustments that might
result from the outcome of these uncertainties.

By April 2002, the Company had effectively eliminated a majority of its ongoing
promotions business operations and was in the process of disposing of its assets
and settling its liabilities related to the promotions business and defending
and pursuing litigation with respect thereto. The process is ongoing and will
continue throughout 2004 and possibly into 2005. During the second quarter of
2002, the discontinued activities of the Company, consisting of revenues,
operating costs, certain general and administrative costs and certain assets and
liabilities, associated with the Company's promotions business were classified
as discontinued operations for financial reporting purposes. The Board of
Directors of the Company continues to consider various alternative courses of
action for the Company going forward, including possibly acquiring one or more
operating businesses, selling the Company or distributing its net assets, if
any, to shareholders. The decision on which course to take will depend upon a
number of factors including the outcome of the significant litigation matters in
which the Company is involved. See Item 3. Legal Proceedings. To date, the Board
of Directors has made no decision on which course of action to take.

Until the unanticipated events of August 2001 occurred, the Company had been
operating as a multi-national full-service promotional marketing company,
specializing in the design and development of high-impact promotional products
and sales promotions. The majority of the Company's revenue was derived from the
sale of products to consumer products and services companies seeking to promote
their brand names and corporate identities and build brand loyalty. Net sales to
McDonald's and Philip Morris accounted for 78% and 8% and 65% and 9% of total
net sales in 2001 and 2000, respectively. The Company had no sales during 2003
or 2002.

Beginning in 1996, the Company grew as a result of a series of acquisitions of
companies engaged in the corporate catalog and advertising segment of the
promotion industry. Certain of these acquired companies operated within the
Company's CPG business and had a history of disappointing financial results. As
a result, the Company sold these businesses in February 2001. See 2001 Sale of
Business under Item 1. Business.

OUTLOOK

As a result of the loss of its McDonald's and Philip Morris business, along with
the resulting legal matters, there is substantial doubt about the Company's
ability to continue as a going concern. The accompanying financial statements do
not include any adjustments that might result from the outcome of these
uncertainties. The Company has taken significant actions and will continue to
take further action to reduce its cost structure. The Board of Directors of the
Company continues to consider various alternative courses of action for the
Company going forward, including possibly acquiring one or more operating
businesses, selling the Company or distributing its net assets, if any, to
shareholders. The decision on which course to take will depend upon a number of
factors including the outcome of the significant litigation matters in which the
Company is involved. See Item 3. Legal Proceedings. To date, the Board of
Directors has made no decision on which course of action to take. By utilizing
cash which had been generated from discontinued operations and assuming payments
are received pursuant to the settlement with McDonald's in 2004 (see Item 3),
management believes it has sufficient capital resources and liquidity to operate
the Company for the foreseeable future.

CRITICAL ACCOUNTING POLICIES

Management's discussion and analysis of financial condition and results of
operations is based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an ongoing basis, management evaluates its
estimates and bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates.

Management applies the following critical accounting policies in the preparation
of the Company's consolidated financial statements:

11

LONG-TERM INVESTMENTS

The Company has made strategic and venture investments in a portfolio of
privately held companies. These investments were in technology and
Internet-related companies that were at varying stages of development, and were
intended to provide the Company with an expanded technology and 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 technology and the
Internet. 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 companies is subject to the
aforementioned risks. Periodically, the Company performs a review of the
carrying value of all its investments in these companies, and considers such
factors as current results, trends and future prospects, capital market
conditions and other economic factors. The carrying value of the Company's
investment portfolio totaled $500,000 as of December 31, 2003, which is
accounted for under the cost method. While the Company will continue to
periodically evaluate its investments, there can be no assurance that its
investment strategy will be successful, and thus the Company might not ever
realize any benefits from its portfolio of investments.

In June 2002, certain events occurred which indicated an impairment of the
Company's investment in Alliance Entertainment Corp. ("Alliance"), an indirect
investment through a limited liability company that is owned by Yucaipa. Yucaipa
is believed to be indirectly a significant shareholder in Alliance, which is a
home entertainment product distribution, fulfillment, and infrastructure company
providing both brick-and-mortar and e-commerce home entertainment retailers with
complete business-to-business solutions. This investment had a carrying value of
$10.0 million at December 31, 2001. The Company recorded a pre-tax non-cash
charge of $10.0 million in June 2002 to write down its investment.

During the third quarter of 2002, the Company also received a final return of
capital, totaling approximately $275,000, on another investment with a carrying
value totaling approximately $525,000 as of December 31, 2001. A loss of
approximately $250,000 was recorded in connection with this final distribution.

CONTINGENCIES

The Company records an accrued liability and related charge for an estimated
loss from a loss contingency if two conditions are met: (i) information is
available prior to the issuance of the financial statements which indicates that
it is probable that an asset had been impaired or a liability had been incurred
at the date of the financial statements, and (ii) the amount of loss can be
reasonably estimated. Accruals for general or unspecified business risks are not
recorded. Gain contingencies are recognized when realized.

McDonald's termination of its contractual relationship with the Company led to
various lawsuits between the Company and Simon Marketing on the one hand and
McDonald's and certain of its agents and suppliers on the other which were
commenced between October 2001 and March 2002. In July 2003, all parties to
these lawsuits entered into a settlement agreement.

Under the settlement, all causes of action between the parties have been
dismissed and mutual releases have been exchanged. In addition, McDonald's will
pay $6.9 million to the Company and will assign to the Company all rights to
insurance proceeds agreed to be paid by the Company's errors and omissions
insurance carriers after payment of expenses relating to the Boland Settlement.
The precise amount of insurance proceeds will not be known until all expenses of
the Boland Settlement have been calculated, but the Company currently estimates
that insurance proceeds will be approximately $9.3 million which would result in
total net proceeds to the Company of approximately $13 million after payment of
attornies' fees relating to the settlement. In addition, both parties will be
mutually released from all obligations to the other party which includes all
related trade payables and accrued expenses recorded within discontinued
operations. It is expected that payments made to the Company pursuant to the
settlement with McDonald's will be received by mid-2004.

As a result of this settlement, in consideration for paying an amount in the
settlement equal to the remaining limits of the Company's policies, the errors
and omissions insurance carriers of the Company have been released from any
further obligations to defend the Company, Simon Marketing or any additional
insureds under the policies from any claims brought with respect to the Jacobson
embezzlement or any other promotional games, including the cases pending in
Canada, Maryland and elsewhere described in this Item 3. Legal Proceedings.

12

In the fourth quarter of 2003, Cyrk informed the Company that it was continuing
to suffer substantial financial difficulties, and that it could not continue to
discharge its obligations to Winthrop which are secured by the Company's letter
of credit. If this occurs, Winthrop has the right to draw upon the Company's
letter of credit, which as of February 29, 2004, was $3.335 million, $2.835
million of which is secured by restricted cash of the Company. The Company's
$3.335 million letter of credit is also secured, in part, by a $500,000 letter
of credit provided by Cyrk for the benefit of the Company. The Company will have
indemnification rights against Cyrk for all losses relating to any default by
Cyrk under the Winthrop lease. No assurances can be made that the Company will
be successful in enforcing those rights or, if successful, collecting damages
from Cyrk. As a result of the foregoing facts, the Company has recorded a charge
of $2.835 million with respect to the liability arising from the Winthrop lease.

RECENTLY ISSUED ACCOUNTING STANDARDS

In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities."
FIN 46, as amended by FIN 46(R), issued in December 2003, requires an investor
with a majority of the variable interests in a variable interest entity to
consolidate the entity and also requires majority and significant variable
interest investors to provide certain disclosures. A variable interest entity is
an entity in which the equity investors do not have a controlling financial
interest or the equity investment at risk is insufficient to finance the
entity's activities without receiving additional subordinated financial support
from other parties. The provisions of FIN 46(R) are applicable for fiscal years
ending after December 31, 2003, and must be adopted no later than March 15,
2004. The Company does not have any variable interest entities that must be
consolidated.

In June 2003, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("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 manditorily redeemable through
the transfer of company assets at a specified date or upon an event that is
likely to occur, an instrument (other than an outstanding share) that embodies
an obligation to repurchase the issuer's equity shares and that requires or may
require the issuer settle the obligation through the transfer of assets, an
instrument that embodies an unconditional obligation or an instrument (other
than an outstanding share) that embodies a conditional obligation that the
issuer must or may settle by issuing a variable number of equity shares. 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 $28.7 million and $27.6
million of preferred stock outstanding at December 31, 2003 and 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.

SIGNIFICANT CONTRACTUAL OBLIGATIONS

The following table includes certain significant contractual obligations of the
Company at December 31, 2003. See Notes to Consolidated Financial Statements for
additional information related to these and other obligations.

Payments Due by Period
---------------------------------------------------------------------------
Less Than 1-3 4-5 After 5
Total 1 Year Years Years Years
---------------------------------------------------------------------------
(in thousands)

Long-term debt $ - $ - $ - $ - $ -

Capital lease obligations - - - - -

Purchase obligations - - - - -

Operating leases (1) 103 103 - - -

Contingent payment obligations 53 53 - - -

Other obligations 3,608 1,546 1,031 1,031 -
--------- --------- --------- --------- ------
Total contractual cash obligations $ 3,764 $ 1,702 $ 1,031 $ 1,031 $ -
========= ========= ========= ========= ======

13

(1) Payments for operating leases are recognized as an expense in the
Consolidated Statement of Operations as incurred.

OTHER COMMERCIAL COMMITMENTS

The following table includes certain commercial commitments of the Company at
December 31, 2003. See Notes to Consolidated Financial Statements for additional
information related to these and other commitments.

Total
Committed at
December 31, Less Than 1-3 4-5 After 5
2003 1 Year Years Years Years
------------ --------- --------- -------- --------
(in thousands)

Standby letters of credit $ 4,181 $ 3,771 $ 1,076 $ 118 $ 118
========== ========= ========= ======== ========

The $4,181 of standby letters of credit committed at December 31, 2003,
primarily relate to letters of credit provided by the Company to support Cyrk's
and the Company's obligations to Winthrop Resources Corporation ($3,911),
facilities lease ($152), and insurance and other ($118).

In the fourth quarter of 2003, Cyrk informed the Company that it was continuing
to suffer substantial financial difficulties, and that it could not continue to
discharge its obligations to Winthrop which are secured by the Company's letter
of credit. If this occurs, Winthrop has the right to draw upon the Company's
letter of credit, which as of February 29, 2004, was $3.335 million, $2.835
million of which is secured by restricted cash of the Company. The Company's
$3.335 million letter of credit is also secured, in part, by a $500,000 letter
of credit provided by Cyrk for the benefit of the Company. The Company will have
indemnification rights against Cyrk for all losses relating to any default by
Cyrk under the Winthrop lease. No assurances can be made that the Company will
be successful in enforcing those rights or, if successful, collecting damages
from Cyrk. As a result of the foregoing facts, the Company has recorded a charge
of $2.835 million with respect to the liability arising from the Winthrop lease.

RESULTS OF CONTINUING AND DISCONTINUED OPERATIONS

By April 2002, the Company had effectively eliminated a majority of its ongoing
promotions business 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, and space and facility
costs. 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 related notes.

CONTINUING OPERATIONS

2003 COMPARED TO 2002

General and administrative expenses totaled $5.3 million in 2003 as compared to
$5.2 million in 2002, primarily due to an increase in insurance expense ($.44
million) partially offset by a decrease in Board of Director fees ($.35
million). Investment losses in 2002 represented charges related to an
other-than-temporary investment impairment associated with the Company's
investment portfolio, totaling $10.3 million. As of December 31, 2003, a
majority of the Company's investments have been written down.

2002 COMPARED TO 2001

General and administrative expenses totaled $5.2 million in 2002 as compared to
$4.8 million in 2001, primarily due to an increase in insurance expense ($.7
million) and Board of Director fees ($.4 million) partially offset by a decrease
in employee

14

salaries and insurance ($.3 million), accounting and audit fees ($.2
million) and legal expenses ($.2 million). Investment losses in 2002 and 2001
represented charges related to an other-than-temporary investment impairment
associated with the Company's investment portfolio, totaling $10.3 million and
$3.2 million, respectively. As of December 31, 2002, a majority of the Company's
investments have been written down.

DISCONTINUED OPERATIONS

2003 COMPARED TO 2002

There were no net sales or gross profit during 2003 or 2002, which was primarily
attributable to the effects associated with the loss of the Company's McDonald's
and Philip Morris business.

Selling, general and administrative expenses totaled $1.4 million in 2003 as
compared to $3.5 million in 2002. The Company's spending decreased primarily due
to a decrease in labor costs ($3.3 million) and space and facility costs ($1.8
million), depreciation and amortization ($.4 million), and changes in subsidiary
deferred tax accounts and other items ($1.0 million) partially offset by gains
during 2002 related to the favorable settlement of lease and other obligations
($4.4 million) that were recorded as reductions to selling, general, and
administrative expenses. There were no such gains during 2003 reducing selling,
general and administrative expenses. In 2002, selling, general and
administrative expenses consisted primarily of promotion related activities,
many of which were eliminated by April 2002.

In connection with a contingent liability arising from its obligations under the
Winthrop lease (see Note 21), the Company recorded a charge of $2.835 million
during 2003 which is recorded to other expense within discontinued operations
(see Note 4).

During 2002, the Company recorded a pre-tax net charge totaling approximately
$4.6 million related to the loss of customers. Charges totaling $8.6 million,
primarily related to asset write-downs ($3.6 million), professional fees ($4.3
million), labor and other costs ($.7 million), were partially offset by
recoveries of accounts receivable balances, totaling $1.3 million, that had been
written off in previous periods and other gains ($2.7 million).

During 2003 and 2002, the Company negotiated settlements related to outstanding
liabilities with many of its vendors and suppliers. During 2002, the Company
also settled all of its outstanding domestic and international real estate and
equipment lease obligations and relocated its remaining scaled-down operations
to smaller office space in Los Angeles, California. These settlements were on
terms generally more favorable to the Company than required by the existing
terms of the liabilities. During 2002, the difference between the final
settlement payment and the outstanding obligations was recorded as a gain,
totaling approximately $12.0 million related to vendor settlements, included in
gain on settlement of obligations and $4.4 million related to lease obligations
and other settlements recorded as a reduction to selling, general, and
administrative expenses. The Company recorded nominal settlement gains during
2003.

During 2002, the Company revised its initial estimate of future restructuring
activities related to its 2001 restructuring plan as such plan was completed by
the first quarter of 2002 and, as a result, recorded a $.75 million reduction to
the restructuring accrual outstanding as of December 31, 2001.

On October 17, 2002, the Management Agreement between the Company and Yucaipa
was terminated by the payment to Yucaipa of $1.5 million and each party was
released from further obligations thereunder. The Company recorded this payment
to management fees during 2002 (see Note 4).

2002 COMPARED TO 2001

The Company's net sales decreased $324.0 million to $0 in 2002 primarily
attributable to the effects associated with the loss of its McDonald's and
Philip Morris business, followed by the Company's termination of most of its
employees.

Gross profit decreased $71.7 million to $0 in 2002. Gross profit as a percentage
of net sales was 22% in 2001. The decrease in the Company's gross margin is
primarily attributable to the effects associated with the loss of its McDonald's
and Philip Morris business.

15

Selling, general and administrative expenses totaled $3.5 million in 2002 as
compared to $74.5 million in 2001. The Company's spending decreased to $7.9
million due principally to the effects associated with the loss of its
McDonald's and Philip Morris business. These costs were further reduced by the
favorable settlement of certain obligations, totaling $4.4 million, recorded as
a reduction to selling, general, and administrative expenses in 2002. In 2002,
selling, general and administrative expenses consisted primarily of promotion
related activities, many of which were ceased by April 2002. In 2001, selling,
general and administrative expenses were 23.0% of net sales.

During 2002, the Company recorded a pre-tax net charge totaling approximately
$4.6 million associated with the loss of customers. Charges totaling $8.6
million, primarily related to asset write-downs ($3.6 million), professional
fees ($4.3 million), labor and other costs ($.7 million), were partially offset
by recoveries of accounts receivable balances, totaling $1.3 million, that had
been written off in previous periods and other gains ($2.7 million). A similar
charge of $33.6 million was recorded during 2001.

During 2002 the Company negotiated settlements related to outstanding
liabilities with many of its suppliers. During this period, the Company also
settled all of its outstanding domestic and international real estate and
equipment lease obligations and relocated its remaining scaled-down operations
to smaller office space in Los Angeles, California. These settlements were on
terms generally more favorable to the Company than required by the existing
terms of the liabilities. The difference between the final settlement payments
and the outstanding obligations was recorded as a gain, totaling approximately
$12.0 million related to vendor settlements, included in gain on settlement of
obligations and $4.4 million related to lease obligations and other settlements
recorded as a reduction to selling, general, and administrative expenses and
disclosed in Note 4 to the consolidated financial statements. No such gains were
recorded by the Company during 2001. See Notes to Consolidated Financial
Statements.

As a result of 2001 restructuring activities, the Company recorded a second
quarter 2001 pre-tax charge of approximately $20.2 million for restructuring
expenses. The second quarter charge relates principally to employee termination
costs ($10.5 million), asset write-downs which were primarily attributable to a
consolidation of its Wakefield, Massachusetts workspace ($6.5 million), a loss
on the sale of the United Kingdom business ($2.1 million) and the settlement of
certain lease obligations ($1.1 million). The restructuring plan was complete by
the first quarter of 2002. During 2002, the Company revised its initial estimate
of future restructuring activities and, as a result, recorded a $.75 million
reduction to the restructuring accrual outstanding as of December 31, 2001.

LIQUIDITY AND CAPITAL RESOURCES

The matters discussed in the Loss of Customers, Resulting Events and Going
Concern section in Item 1. Business have had and will continue to have a
substantial adverse impact on the Company's cash position. As a result of the
stockholders' deficit, loss of customers and the related legal matters at
December 31, 2003, the Company's independent certified public accountants have
expressed substantial doubt about the Company's ability to continue as a going
concern. The accompanying financial statements do not include any adjustments
that might result from the outcome of these uncertainties. Since inception, the
Company had financed its working capital and capital expenditure requirements
through cash generated from operations, and investing and financing activities
such as public and private sales of common and preferred stock, bank borrowings,
asset sales and capital equipment leases. The Company incurred losses in 2003
and continues to incur losses in 2004 for the general and administrative
expenses incurred to manage the affairs of the Company and outstanding legal
matters. Inasmuch as the Company no longer generates operating income and is
unable to borrow funds, the source of current and future working capital is
expected to be cash on hand, the recovery of certain long-term investments and
any future proceeds from litigation. By utilizing cash which had been generated
from discontinued operations and assuming payments are received pursuant to the
settlement with McDonald's in 2004 (see Item 3), management believes it has
sufficient capital resources and liquidity to operate the Company for the
foreseeable future. The Board of Directors of the Company continues to consider
various alternative courses of action for the Company going forward, including
possibly acquiring one or more operating businesses, selling the Company or
distributing its net assets, if any, to shareholders. The decision on which
course to take will depend upon a number of factors including the outcome of the
significant litigation matters in which the Company is involved. See Item 3.
Legal Proceedings. To date, the Board of Directors has made no decision on which
course of action to take.

16

CONTINUING OPERATIONS

Working capital attributable to continuing operations at December 31, 2003, was
$.7 million compared to $9.5 million at December 31, 2002. Net cash used in
operating activities from continuing operations during 2003 totaled $4.9
million, primarily due to a loss from continuing operations of $5.3 million,
resulting from the general and administrative expenses incurred to manage the
affairs of the Company and resolve outstanding legal matters, partially offset
by a net increase in working capital items of $.3 million. By utilizing cash
which had been generated from discontinued operations and assuming payments are
received pursuant to the settlement with McDonald's in 2004 (see Item 3),
management believes it has sufficient capital resources and liquidity to operate
the Company for the foreseeable future. In addition, the Company does not expect
any significant capital expenditures for the foreseeable future. Net cash used
in operating activities from continuing operations during 2002 totaled $4.6
million, primarily due to a loss from continuing operations of $15.4 million
partially offset by charges for impaired assets and investments of $.4 million
and $10.3 million, respectively. Net cash used in operating activities from
continuing operations totaled $6.4 million during 2001, primarily due to a loss
from continuing operations of $7.9 million and a $.8 million increase in prepaid
expenses and other current assets, partially offset by a charge for impaired
investments of $2.3 million.

Net cash provided by investing activities during 2003 totaled $7.3 million,
primarily due to a decrease in restricted cash. Net cash used in investing
activities from continuing operations during 2002 totaled $5.0 million,
primarily due to an increase in restricted cash balances, totaling $4.8 million.
Net cash used in investing activities during 2001 totaled $2.9 million primarily
related to an increase in restricted cash. There were no financing cash flows
from continuing operations during 2003, 2002 or 2001.

In March 2002, the Company, Simon Marketing and a Trustee entered into an
Indemnification Trust Agreement (the "Trust"), which requires the Company and
Simon Marketing to fund an irrevocable trust in the amount of $2.7 million. The
Trust was set up and will be used to augment the Company's existing insurance
coverage for indemnifying directors, officers and certain described consultants,
who are entitled to indemnification against liabilities arising out of their
status as directors, officers and/or consultants. See Notes to Consolidated
Financial Statements.

Restricted cash included within continuing operations at December 31, 2003 and
2002, totaled $.3 million and $7.6 million, respectively, and primarily
consisted of amounts deposited with lenders to satisfy the Company's obligations
pursuant to its standby letters of credit. Restricted cash at December 31, 2002,
also included amounts deposited into an irrevocable trust, totaling $2.7
million. By utilizing cash which had been generated from discontinued operations
and assuming payments are received pursuant to the settlement with McDonald's in
2004 (see Item 3), management believes it has sufficient capital resources and
liquidity to operate the Company for the foreseeable future.

DISCONTINUED OPERATIONS

Working capital (deficit) attributed to discontinued operations at December 31,
2003, was $(1.1) million compared to $(1.1) million at December 31, 2002. Net
cash used in discontinued operations totaled $3.6 million, primarily due to net
cash used in operating activities of $.2 million, net cash used in investing
activities of $6.6 million and a reallocation of funds, totaling approximately
$3.2 million, from continuing to discontinued operations due to changes in
minimum working capital requirements. Net cash provided by discontinued
operations during 2002 totaled $10.8 million, which was primarily due to net
cash provided by investing activities of $7.3 million and a reallocation of
funds, totaling approximately $27.6 million, between continuing and discontinued
operations due to changes in minimum working capital requirements, partially
offset by net cash used in operating activities of $22.6 million and net cash
used in financing activities of $1.6 million. Net cash used in discontinued
operations during 2001 totaled $51.2 million, which was primarily due to net
cash used in operating activities of $15.8 million, net cash used in investing
activities of $.3 million, net cash used in financing activities of $4.2 million
and a reallocation of funds, totaling approximately $33.2 million, between
continuing and discontinued operations due to changes in minimum working capital
requirements.

Net cash used in operating activities of discontinued operations during 2003 of
$.2 million primarily consisted of a net loss of $3.6 million partially offset
by a non-cash charge for a contingent loss of $2.8 million and a provision for
doubtful accounts and other of $.6 million. Net cash used in operating
activities of discontinued operations during 2002 of $22.6 million primarily
consisted of a gain on settlement of vendor payables and other obligations of
$12.0 million and $4.4 million, respectively, a reversal of a restructuring
accrual of $.8 million, and a net decrease in working capital items of $14.9
million. The reduction in working capital items was primarily caused by the
pay-down of accounts payable, accrued expenses and

17

other current liabilities in connection with the discontinuance of the
promotions business. These changes were partially offset by income from
discontinued operations of $6.1 million, depreciation and amortization expense
of $.4 million and a charge for impaired assets of $2.9 million. Net cash used
in operating activities of discontinued operations during 2001 of $15.8 million
primarily consisted of a loss from discontinued operations of $114.4 million,
and a realized gain on the sale of investments of $4.2 million partially offset
by depreciation and amortization expense of $5.2 million, provision for doubtful
accounts of $2.1 million, loss on sale of business of $2.3 million, change in
deferred income taxes of $11.9 million, net charge for impaired assets and
investments of $70.0 million, non-cash restructuring charge of $9.0 million,
issuance of common stock related to acquisition agreement of $.6 million, and a
net change in working capital items of $1.8 million.

Net cash used in investing activities of discontinued operations during 2003 of
$6.6 million primarily consisted of an increase in restricted cash. Net cash
provided by investing activities of discontinued operations during 2002 of $7.3
million primarily consisted of a decrease in restricted cash of $5.9 million,
proceeds from the sale of investments of $.1 million, and a $1.3 million net
change in other investments. Net cash used in investing activities during 2001
of $2.5 million primarily consisted of $7.9 million related to the purchase of a
marketable security, $2.9 million of property and equipment purchases, a $5.9
million increase in restricted cash, and a net change in other investments of
$.3 million, partially offset by $8.4 million of proceeds from the sale of the
CPG business and $11.1 million of proceeds from the sale of investments.

There were no financing activities of discontinued operations during 2003. Net
cash used in financing activities of discontinued operations during 2002 of $1.6
million primarily consisted of repayments of short and long-term borrowings. Net
cash used in financing activities of discontinued operations during 2001 of $4.2
million primarily consisted of $5.1 million related to repayments of short-term
borrowings partially offset by $.2 million of proceeds from long-term
obligations and $.6 million of proceeds from the issuance of common stock.

In February 2001, the Company sold its CPG business for approximately $14.0
million, which included approximately $3.7 million of Company debt that was
assumed by the buyer. Two million three hundred thousand dollars ($2,300,000) of
the purchase price was paid with a 10% per annum five-year subordinated note,
with the balance being paid in cash. Pursuant to a March 2002 settlement
agreement between the Company and Cyrk, this note has been cancelled. See 2001
Sale of Business section within Item 1. Business and Notes to Consolidated
Financial Statements.

During 2002, due to the loss of its two largest customers, and other customers
(see Notes to Consolidated Financial Statements), the Company negotiated early
terminations on many of its facility and non-facility operating leases, and also
negotiated settlements related to liabilities with many of its suppliers. During
2002, approximately $22.0 million of the Company's recorded liabilities were
settled. These settlements were on terms generally more favorable to the Company
than required by the existing terms of these obligations. The Company recorded
nominal settlement gains during 2003.

As a result of the precipitous drop in the value of the Company's common stock
after the announcement of the loss of its two largest customers (see Notes to
Consolidated Financial Statements), the Company recorded a $5.0 million charge
in the third quarter of 2001 to accelerate the recognition of contingent payment
obligations due in June 2002 arising from the acquisition of Simon Marketing in
1997. Pursuant to Separation, Settlement and General Release Agreements entered
into during 2002 with former employees, the Company settled its contingent
payment obligations for an amount less than its recorded liability. See Notes to
Consolidated Financial Statements.

The Company's Credit and Security Agreements, which provided for working capital
and other financing arrangements, expired on May 15, 2002. At December 31, 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 1 of
Notes to Consolidated Financial Statements), the Company no longer has the
ability to borrow under any of its existing credit facilities without it being
fully cash collateralized. As of December 31, 2003, the Company had
approximately $4.7 million in outstanding letters of credit, which includes $3.7
million of letters of credit provided by the Company to support Cyrk's and the
Company's obligations to Winthrop Resources Corporation. These letters of credit
are secured, in part, by $3.2 million of restricted cash of the Company. The
Company's letter of credit is also secured, in part, by a $500,000 letter of
credit provided by Cyrk for the benefit of the Company. Cyrk has agreed to
indemnify the Company if Winthrop makes any draw under the $3.7 million letter
of credit which supports Cyrk's obligations to Winthrop. The remaining letters
of credit, totaling approximately $1.0 million, are fully cash collateralized.

Restricted cash included within discontinued operations at December 31, 2003 and
2002 totaled $6.6 million and $0, respectively. Restricted cash at December 31,
2003, primarily consisted of amounts deposited with lenders to satisfy the

18

Company's obligations pursuant to its outstanding standby letters of credit and
amounts deposited into an irrevocable trust, totaling $2.7 million.

Cyrk assumed the obligations of the Company to Winthrop Resources Corporation
("Winthrop") in connection with its purchase of the CPG business. As a condition
to Cyrk assuming these obligations, however, the Company was required to provide
a $4.2 million letter of credit as collateral for Winthrop in case Cyrk did not
perform the assumed obligations. The available amount under this letter of
credit reduces over time as the underlying obligation to Winthrop reduces. As of
December 31, 2003, the available amount under the letter of credit is $3.7
million. This letter of credit is secured, in part, by $3.2 million of
restricted cash of the Company. Cyrk has agreed to indemnify the Company if
Winthrop makes any draw under this letter of credit. The letter of credit has
annual expirations through August 2007 when the underlying obligation is
satisfied. The Company's letter of credit is also secured, in part, by a
$500,000 letter of credit provided by Cyrk for the benefit of the Company.

In the fourth quarter of 2003, Cyrk informed the Company that it was continuing
to suffer substantial financial difficulties, and that it could not continue to
discharge its obligations to Winthrop which are secured by the Company's letter
of credit. If this occurs, Winthrop has the right to draw upon the Company's
letter of credit, which as of February 29, 2004, was $3.335 million, $2.835
million of which is secured by restricted cash of the Company. The Company's
$3.335 million letter of credit is also secured, in part, by a $500,000 letter
of credit provided by Cyrk for the benefit of the Company. The Company will have
indemnification rights against Cyrk for all losses relating to any default by
Cyrk under the Winthrop lease. No assurances can be made that the Company will
be successful in enforcing those rights or, if successful, collecting damages
from Cyrk. As a result of the foregoing facts, the Company has recorded a charge
of $2.835 million with respect to the liability arising from the Winthrop lease.

The Company's second quarter 2001 restructuring actions (see Notes to
Consolidated Financial Statements) have had an adverse impact on the Company's
cash position. Total cash outlays related to restructuring activities totaled
approximately $10.9 million during 2002 and 2001.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The disclosure required by this Item is not material to the Company because the
Company does not currently have any exposure to market rate sensitive
instruments, as defined in this Item.

Part of the Company's discontinued operations consists of certain consolidated
subsidiaries that are denominated in foreign currencies. As the assets of these
subsidiaries are largely offset by liabilities, the Company is not materially
exposed to foreign currency exchange risk.

19

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Page
---------

Report of Independent Certified Public Accountants F-1

Consolidated Balance Sheets as of December 31, 2003 and 2002 F-2

Consolidated Statements of Operations for the years ended
December 31, 2003, 2002 and 2001 F-3

Consolidated Statements of Stockholders' (Deficit) Equity for the years ended
December 31, 2003, 2002 and 2001 F-4

Consolidated Statements of Cash Flows for the years ended F-5
December 31, 2003, 2002 and 2001

Notes to Consolidated Financial Statements F-6

Schedule II: Valuation and Qualifying Accounts F-27

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

See disclosure in Item 3. Legal Proceedings regarding the resignation during
2002 of PricewaterhouseCoopers, LLP ("PWC") as the Company's independent
certified public accountants.

ITEM 9A. CONTROLS AND PROCEDURES

DISCLOSURE CONTROLS AND PROCEDURES: As of December 31, 2003, 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.

20

PART III

ITEM 10. DIRECTORS OF THE REGISTRANT

The Company's certificate of incorporation provides that the number of directors
shall be determined from time to time by the Board of Directors (but shall be no
less than three and no more than fifteen) and that the Board of Directors shall
be divided into three classes. On September 1, 1999, the Company entered into a
Securities Purchase Agreement with Overseas Toys, L.P., an affiliate of Yucaipa,
the holder of all of the Company's outstanding series A senior cumulative
participating convertible preferred stock, pursuant to which the Company agreed
to fix the size of the Board of Directors at seven members. Yucaipa has the
right to designate three individuals to the Board of Directors.

Pursuant to a Voting Agreement, dated September 1, 1999, among Yucaipa, Patrick
D. Brady, Allan I. Brown, Gregory Shlopak, the Shlopak Foundation, Cyrk
International Foundation and the Eric Stanton Self-Declaration of Revocable
Trust, each of Messrs. Brady, Brown, Shlopak and Stanton agreed to vote all of
the shares beneficially held by them to elect the three directors nominated by
Yucaipa. On November 10, 1999, Ronald W. Burkle, George G. Golleher and Richard
Wolpert were the three Yucaipa nominees elected to the Company's Board of
Directors, of which Mr. Burkle became Chairman. Mr. Wolpert resigned from the
Board of Directors on February 7, 2000. Thereafter, Yucaipa requested that Erika
Paulson be named as its third designee to the Board of Directors and on May 25,
2000, Ms. Paulson was elected to fill the vacancy created by Mr. Wolpert's
resignation. On August 24, 2001, Mr. Burkle and Ms. Paulson resigned from the
Board of Directors and Yucaipa has not subsequently designated replacement
nominees. On June 15, 2001, Patrick D. Brady resigned from the Board of
Directors.

The following table sets forth the names and ages of the directors, the year in
which each individual was first elected a director and the year his term
expires:

Name Age Class Year Term Expires Director Since
- ---------------------------- ------------ ------------ ---------------------- -----------------

Joseph W. Bartlett 70 I 2003 1993
Allan I. Brown 63 I 2003 1999
Joseph Anthony Kouba 56 III 2002 1997
George G. Golleher 55 II 2004 1999

No stockholders meeting to elect directors was held in 2002 or 2003. In
accordance with Delaware law and the Company's by-laws, Mr. Bartlett's, Mr.
Brown's and Mr. Kouba's terms as directors continue until their successors are
elected and qualified.

BUSINESS HISTORY OF DIRECTORS

MR. BARTLETT is engaged in the private practice of law as of counsel to the law
firm of Fish & Richardson. From 1996 through 2002, he was a partner in the law
firm of Morrison & Foerster LLP. He was a partner in the law firm of Mayer,
Brown & Platt from July 1991 until March 1996. From 1969 until November 1990,
Mr. Bartlett was a partner of, and from November 1990 until June 1991 he was of
counsel to, the law firm of Gaston & Snow. Mr. Bartlett served as Under
Secretary of the United States Department of Commerce from 1967 to 1968 and as
law clerk to the Chief Justice of the United States in 1960.

MR. BROWN was the Company's chief executive officer and president from July 2001
until March 2002 when his employment with the Company terminated. From November
1999 to July 2001, Mr. Brown served as the Company's co-chief executive officer
and co-president. From November 1975 until March 2002, Mr. Brown served as the
chief executive officer of Simon Marketing.

MR. GOLLEHER is a consultant and private investor. Mr. Golleher's career
includes numerous positions in senior financial capacities, including chief
financial officer. More recently, Mr. Golleher served as president and chief
operating officer of Fred Meyer, Inc. from March 1998 to June 1999, and also
served as a member of its Board of Directors. Mr. Golleher served as chief
executive officer of Ralphs Grocery Company from January 1996 to March 1998 and
was Vice Chairman from June 1995 to January 1996. Mr. Golleher serves as
chairman of the Board of American Restaurant Group and also serves on the Board
of Directors of Rite-Aid Corporation and General Nutrition Centers, Inc.

21

MR. KOUBA is a private investor and is engaged in the business of real estate,
hospitality and outdoor advertising. He has been an attorney and a member of the
Bar in California since 1972.

The Company's ongoing operations are now being managed by an Executive Committee
of the Board of Directors consisting of Messrs. Golleher and Kouba, who act as
co-chief executive officers, in consultation with financial, legal and other
advisors.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

In May 2003, Messrs. Bartlett, Brown, Golleher and Kouba were each granted
options to purchase 20,000 shares of the Company's common stock and Mr. Mays was
granted options to purchase 10,000 shares of the Company's common stock at a
price of $.10 per share in connection with their service to the Company. The
Form 5 reports of those grants were due to be filed with the Commission by
February 17, 2004, and were filed by March 4, 2004.

CODE OF ETHICS

The Company has adopted a code of ethics applicable to all employees which is
designed to deter wrongdoing and to promote honest and ethical conduct and
compliance with applicable laws and regulations. The Company undertakes to
provide a copy to any person without charge upon written request.

AUDIT COMMITTEE FINANCIAL EXPERT

The members of the Audit Committee of the Board of Directors are Messrs.
Bartlett, Golleher and Kouba. The Board of Directors has determined that Mr.
Golleher is an "audit committee financial expert," as defined in the rules of
the Securities and Exchange Commission, by reason of his experience described
under "Business History of Directors." Although Mr. Golleher provides service to
the Company only in his capacity as a director, he may be deemed not to be an
"independent director" under the rules of the Nasdaq Stock Market.

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth the compensation the Company paid or accrued for
services rendered in 2003, 2002 and 2001, for the individuals who have the
responsibility for the roles of the executive officers of the Company.

Summary Compensation Table
- -----------------------------------------------------------------------------------------------------------------------------
Long-Term
Compensation
Annual Compensation (1) ------------
--------------------------------------------------------- Securities
Name and Other Annual Underlying All Other
Principal Position Year Salary Bonus Compensation Options Compensation
- -----------------------------------------------------------------------------------------------------------------------------

J. Anthony Kouba 2003 $ 425,669 $ - $ - 20,000 $ 161,500(2)
Executive Committee-Director 2002 100,000 - - - 740,926(2)
2001 - - - 5,000 479,671(2)(3)

George Golleher 2003 433,544 - - 20,000 165,405(2)
Executive Committee-Director 2002 100,000 - - - 636,495(2)
2001 - - - 5,000 462,500(2)(3)

Greg Mays 2003 254,009 - - 10,000 101,168(4)
Chief Financial Officer 2002 50,000 - - - 587,139(4)
2001 - - - - 346,288(4)

1. In accordance with the rules of the Securities and Exchange
Commission, other compensation in the form of perquisites and other
personal benefits have been omitted for all of the individuals in the
table because the aggregate

22

amount of such perquisites and other personal benefits constituted
less than the lesser of $50,000 or 10% of the total annual salary and
bonuses for such individuals for 2003, 2002 and 2001.

2. Includes compensation paid by the Company based on the rate of $2,000
per Board of Directors or committee meeting attended and an hourly
rate of $750 for services outside of Board of Directors and committee
meetings paid pursuant to the retention letter agreements described
under "Directors' Compensation." The agreements including the hourly
rate for services were replaced by the Executive Services Agreements
described under Executive Services Agreements commencing May 1, 2003.

3. Includes $150,000 retention fee paid pursuant to the retention letter
agreements.

4. Represents compensation for consulting services at the rate of $400
per hour plus an initial commitment fee of $25,000 paid in 2001. This
agreement including the hourly rate for services was replaced by the
Executive Services Agreements described under Executive Services
Agreements commencing May 1, 2003.

OPTION GRANTS IN THE LAST FISCAL YEAR

The following table sets forth certain information with respect to stock options
granted to each of the Company's executive officers during 2003.

Potential Realized
Value at Assumed
Annual Rates of
Stock Price
Appreciation for
Individual Grants Option Term (3)
---------------------------------------------------------------------------------- ---------------------------
Number of Percent of Total
Securities Options Granted to
Underlying Employees in Fiscal
Options Granted(1) Year Exercise Price(2) Expiration Date 5% 10%
------------------- ---------------------- ---------------- ----------------- ------------ ------------

George Golleher 20,000 36.4% $ 0.10 5/9/2013 $ - $ -
J. Anthony Kouba 20,000 36.4% 0.10 5/9/2013 - -
Greg Mays 10,000 18.2% 0.10 5/9/2013 - -

1. Exercisable for one-half of the underlying shares beginning on each of
May 9, 2004, and May 9, 2005.

2. The exercise price per share of each option was not below the fair
market value of the Company's common stock on the date of grant and,
therefore, no compensation expense was recorded by the Company during
2003.

3. The potential realizable value is calculated based on the term of the
option (10 years) at its date of grant. It is calculated by assuming
that the stock price on the date of grant appreciates at the indicated
annual rate compounded annually for the entire term of the option and
that the option is exercised and sold on the last day of its term for
the appreciated stock price. However, the optionee will not actually
realize any benefit from the option unless the market value of the
Company's stock price in fact increases over the option price.

AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES

There were no exercises of stock options during 2003.

EXECUTIVE SERVICES AGREEMENTS

On February 7, 2003, the Company entered into additional agreements with Messrs.
Golleher and Kouba in order to induce them to continue to serve as members of
the Executive Committee of the Board of Directors and to compensate them for the
additional obligations, responsibilities and potential liabilities of such
service, including responsibilities imposed under the federal securities laws by
virtue of the fact that, as members of the Executive Committee, they served, in
effect, as the chief

23

executive officers of the Company since the Company had no executive officers.
The agreements provided for a fee of $100,000 to each of Messrs. Golleher and
Kouba for each of 2003 and 2002. Also on that date, the Company entered into a
similar agreement with Mr. Mays who provided financial and accounting services
to the Company as a consultant but, in effect, served as the Company's chief
financial officer. The agreement provided for a fee of $50,000 to Mr. Mays for
each of 2003 and 2002.

In May 2003, the Company entered into Executive Services Agreements with Messrs.
Bartlett, Brown, Golleher, Kouba, Mays and Terrence Wallock, acting general
counsel of the Company. The purpose of the Agreements was to substantially lower
the administrative costs of the Company going forward while at the same time
retaining the availability of experienced executives knowledgeable about the
Company for ongoing administration as well as future opportunities. The
Agreements replaced the retention letter agreements with Messrs. Bartlett,
Golleher and Kouba dated August 28, 2001, described under "Directors'
Compensation." The Agreements can be terminated at any time by the Company, by
the lump sum payment of 180 days compensation and by the executive upon 180 days
prior notice, except in certain limited circumstances, and provide for
compensation at the rate of $1,000 per month to Messrs. Bartlett and Brown,
$6,731 per week to Messrs. Golleher and Kouba, $4,040 per week to Mr. Mays and
$3,365 per week to Mr. Wallock. Additional hourly compensation is provided after
termination of the Agreements and, in some circumstances during the term, for
extensive commitments of time related to any legal or administrative proceedings
and merger and acquisition activities in which the Company may be involved. The
Agreements call for the payment of health insurance benefits and provide for
mutual releases upon termination.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Until March 2002, decisions concerning executive compensation were made by the
Compensation Committee of the Board of Directors, which consisted of Messrs.
Bartlett and Kouba. Neither Messrs. Bartlett nor Kouba is or was an officer or
employee of the Company or any of its subsidiaries during such period. After
March 2002, the Company ceased to have any executive officers and decisions
concerning the compensation of Messrs. Kouba and Golleher, the members of the
Executive Committee of the Board of Directors who serve, in effect, as the
principal executive officers of the Company, were made by the non-Executive
Committee members of the Board of Directors. The compensation of Mr. Mays, who
serves, in effect, as the Company's principal financial officer, was determined
by the Board of Directors. In 2003, none of Messrs. Kouba, Golleher and Mays
served as an executive officer, or on the Board of Directors, of any entity of
which any of the other members of the Board of Directors served as an executive
officer or as a member of its Board of Directors.

DIRECTORS' COMPENSATION

During 2002, directors were paid an annual retainer of $25,000. Commencing April
2003, directors are paid an annual retainer of $50,000. In 2003 and 2002,
directors also received a fee of $2,000 for each Board of Directors, Audit or
Compensation Committee meeting attended.

On August 28, 2001, following the resignation of two directors designated by
Yucaipa, including the chairman, the chief financial officer, the controller,
and certain other officers of the Company, the Company entered into retention
letter agreements with each of Messrs. Bartlett, Golleher and Kouba, the
non-management members of the Board of Directors, pursuant to which the Company
paid each of them a retention fee of $150,000 in exchange for their agreement to
serve as a director of the Company for at least six months. If a director
resigned before the end of the six-month period, the director would have been
required to refund to the Company the pro rata portion of the retention fee
equal to the percentage of the six-month period not served. Additionally, the
Company agreed to compensate these directors at an hourly rate of $750 for
services outside of Board of Directors and committee meetings for which they
were paid $2,000 per meeting in accordance with existing Company policy. These
agreements, including the hourly rate for services, were replaced by the
Executive Services Agreements described under Executive Services Agreements.

In 2003, payments totaling approximately $145,000, $77,000, $599,000 and
$587,000 were made to Messrs. Bartlett, Brown, Golleher and Kouba, respectively
which includes, in the case of Messrs. Golleher and Kouba, the amounts shown in
the Summary Compensation Table. The payments made to Mr. Bartlett totaling
approximately $145,000 include approximately $32,000 for services that related
to 2002 but were paid in 2003.

24

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following tables set forth certain information regarding beneficial
ownership of the Company's common stock at January 31, 2004. Except as otherwise
indicated in the footnotes, the Company believes that the beneficial owners of
its common stock listed below, based on information furnished by such owners,
have sole investment and voting power with respect to the shares of the
Company's common stock shown as beneficially owned by them.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

The following table sets forth each person known by the Company (other than
directors and executive officers) to own beneficially more than 5% of the
outstanding common stock.

Number of Shares
Name and Address Of Common Stock Percentage Of
Of Beneficial Owner (1) Beneficially Owned Class
----------------------------------------------- ------------------- ----------------

Yucaipa and affiliates (2):
Overseas Toys, L.P.
OA3, LLC
Multi-Accounts, LLC
Ronald W. Burkle 5,169,482 23.7%

Gotham International Advisors, L.L.C. (3)(4)
Goldman Parters, L.P.
Goldman Parters III, L.P.
110 East 42nd Street
18th Floor
New York, NY 10017 1,742,851 10.5%

H. Ty Warner (3)
P.O. Box 5377
Oak Brook, IL 60522 975,610 5.9%

Eric Stanton (3)(5)
39 Gloucester Road
6th Floor
Wanchai
Hong Kong 1,123,023 6.7%

Gregory P. Shlopak (3)(6)
63 Main Street
Gloucester, MA 01930 1,064,900 6.4%

1. The number of shares beneficially owned by each stockholder is determined in
accordance with the rules of the Securities and Exchange Commission and is not
necessarily indicative of beneficial ownership for any other purpose. Under
these rules, beneficial ownership includes those shares of common stock that the
stockholder has sole or shared voting or investment power and any shares of
common stock that the stockholder has a right to acquire within sixty (60) days
after December 31, 2003, through the exercise of any option, warrant or other
right including the conversion of the series A preferred stock. The percentage
ownership of the outstanding common stock, however, is based on the assumption,
expressly required by the rules of the Securities and Exchange Commission, that
only the person or entity whose ownership is being reported has converted
options, warrants or other rights into shares of common stock including the
conversion of the series A preferred stock.

25

2. Represents approximately 3,502,816 shares of common stock issuable upon
conversion of 28,737 shares of outstanding series A preferred stock and
1,666,667 shares of common stock issuable upon conversion of 15,000 shares of
series A preferred stock issuable pursuant to a warrant, which is currently
exercisable. Percentages are based on common stock outstanding, plus all such
convertible shares. Overseas Toys, L.P. is an affiliate of Yucaipa and is the
holder of record of all the outstanding shares of series A preferred stock and
the warrant to acquire the shares of series A preferred stock. Multi-Accounts,
LLC is the sole general partner of Overseas Toys, L.P., and OA3, LLC is the sole
managing member of Multi-Accounts, LLC. Ronald W. Burkle is the sole managing
member of OA3, LLC. The address of each of Overseas Toys, L.P., Multi-Accounts,
LLC, OA3, LLC, and Ronald W. Burkle is 9130 West Sunset Boulevard, Los Angeles,
California 90069.

Overseas Toys, L.P. is party to a Voting Agreement, dated September 1, 1999,
with Patrick D. Brady, Allan I. Brown, Gregory P. Shlopak, the Shlopak
Foundation, Cyrk International Foundation and the Eric Stanton Self-Declaration
of Revocable Trust, pursuant to which Overseas Toys, L.P., Multi-Accounts, LLC,
OA3, LLC, and Ronald W. Burkle may be deemed to have shared voting power over
9,475,104 shares for the purpose of election of certain nominees of Yucaipa to
the Company's Board of Directors, and may be deemed to be members of a "group"
for the purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended. Overseas Toys, L.P., Multi-Accounts, LLC, OA3, LLC and Ronald W. Burkle
disclaim beneficial ownership of any shares, except for the shares as to which
they possess sole dispositive and voting power.

3. Based on 16,653,193 shares of common stock outstanding as of December 31,
2003.

4. The information concerning these holders is based solely on information
contained in joint filings they have made with the Securities and Exchange
Commission pursuant to Sections 13(d) and 13(g) of the Securities Exchange Act
of 1934, as amended. Gotham International Advisors, L.L.C., or Gotham, serves as
investment manager to Gotham Partners International, Ltd., or International,
with respect to the shares of common stock directly owned by International. In
its role as investment manager, Gotham has indicated that it has the sole power
to vote, or to direct the vote of, and the sole power to dispose, or direct the
disposition of, all of the 1,163,420 shares owned directly by International.
Gotham Partners, L.P. and Gotham Partners III, L.P. each has indicated that it
has the sole power to vote, or to direct the vote of, and the sole power to
dispose, or direct the disposition of, all the 550,459 and 28,972 shares
directly owned by each of them, respectively.

5. Eric Stanton, as trustee of the Eric Stanton Self-Declaration of Revocable
Trust, has the sole power to vote, or to direct the vote of, and the sole power
to dispose, or to direct the disposition of, 1,123,023 shares. Mr. Stanton, as
trustee of the Eric Stanton Self-Declaration of Revocable Trust, is a party to a
Voting Agreement, dated September 1, 1999, with Yucaipa and Patrick D. Brady,
Allan I. Brown, Gregory P. Shlopak, the Shlopak Foundation Trust and the Cyrk
International Foundation Trust pursuant to which Messrs. Brady, Brown, Shlopak
and Stanton and the trusts have agreed to vote in favor of certain nominees of
Yucaipa to the Company's Board of Directors. Mr. Stanton expressly disclaims
beneficial ownership of any shares except for the 1,123,023 shares as to which
he possesses sole voting and dispositive power.

6. The information concerning this holder is based solely on information
contained in filings Mr. Shlopak has made with the Securities and Exchange
Commission pursuant to Sections 13(d) and 13(g) of the Securities Exchange Act
of 1934, as amended. Includes 84,401 shares held by a private charitable
foundation as to which Mr. Shlopak, as trustee, has sole voting and dispositive
power. Mr. Shlopak is a party to a Voting Agreement, dated September 1, 1999,
with Yucaipa, Patrick D. Brady, Allan I. Brown, the Shlopak Foundation, Cyrk
International Foundation and the Eric Stanton Self-Declaration of Revocable
Trust, pursuant to which Messrs. Brady, Brown, Shlopak and Stanton and the
trusts have agreed to vote in favor of certain nominees of Yucaipa to the
Company's Board of Directors. Mr. Shlopak expressly disclaims beneficial
ownership of any shares except for the 1,064,900 shares as to which he possesses
sole voting and dispositive power.

26

SECURITY OWNERSHIP OF MANAGEMENT

The following table sets forth information at December 31, 2003, regarding the
beneficial ownership of the Company's common stock (including common stock
issuable upon the exercise of stock options exercisable within 60 days of
December 31, 2003) by each director and each executive officer named in the
Summary Compensation Table, and by all of the Company's directors and persons
performing the roles of executive officers as a group.

Number of Shares
Name and Address Of Common Stock Percentage Of
Of Beneficial Owner (1) Beneficially Owned Class (2)
-------------------------------------------- --------------------- --------------

Allan I. Brown (3) 1,113,023 6.7%

Joseph W. Bartlett (4) 80,000 *

Joseph Anthony Kouba (5) 40,000 *

George G. Golleher (6) 25,000 *

Greg Mays - -

All directors and executive officers as
a group (5 persons) 1,258,023 7.6%

* Represents less than 1%

(1) The address of each of the directors and executive officers is c/o Simon
Worldwide, Inc., 1888 Century Park East, Suite 222, Los Angeles, California,
90067. The number of shares beneficially owned by each stockholder is determined
in accordance with the rules of the Securities and Exchange Commission and is
not necessarily indicative of beneficial ownership for any other purpose. Under
these rules, beneficial ownership includes those shares of common stock that the
stockholder has sole or shared voting or investment power and any shares of
common stock that the stockholder has a right to acquire within sixty (60) days
after December 31, 2003, through the exercise of any option, warrant or other
right including the conversion of the series A preferred stock. The percentage
ownership of the outstanding common stock, however, is based on the assumption,
expressly required by the rules of the Securities and Exchange Commission, that
only the person or entity whose ownership is being reported has converted
options, warrants or other rights including the conversion of the series A
preferred stock into shares of common stock.

(2) Based on 16,653,193 shares of common stock outstanding as of December 31,
2003.

(3) Mr. Brown has the sole power to vote, or to direct the vote of, and the sole
power to dispose, or to direct the disposition of, 1,113,023 shares. Mr. Brown
is party to a Voting Agreement, dated September 1, 1999, with Yucaipa, Patrick
D. Brady, Gregory P. Shlopak, the Shlopak Foundation, Cyrk International
Foundation and the Eric Stanton Self-Declaration of Revocable Trust, pursuant to
which Messrs. Brady, Brown, Shlopak and Stanton and the trusts have agreed to
vote in favor of certain nominees of Yucaipa to the Company's Board of
Directors. Mr. Brown expressly disclaims beneficial ownership of any shares
except for the 1,113,023 shares as to which he possesses sole voting and
dispositive power.

(4) The 80,000 shares are issuable pursuant to stock options exercisable within
60 days of December 31, 2003.

(5) The 40,000 shares are issuable pursuant to stock options exercisable within
60 days of December 31, 2003.

(6) Includes 10,000 shares issuable pursuant to stock options exercisable within
60 days of December 31, 2003.

27

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

The following table sets forth information as of December 31, 2003, regarding
the Company's 1993 Omnibus Stock Plan (the "1993 Plan") and 1997 Acquisition
Stock Plan (the "1997 Plan"). The Company's stockholders previously approved the
1993 Plan and the 1997 Plan and all amendments that were subject to stockholder
approval. As of December 31, 2003, options to purchase 225,000 shares of common
stock were outstanding under the 1993 Plan and no options were outstanding under
the 1997 Plan. The Company's 1993 Employee Stock Purchase Plan was terminated
effective December 31, 2001, and no shares of the Company's common stock are
issuable under that plan. The 1993 Plan expired in May 2003, except as to
options outstanding under the 1993 Plan.

Number of Shares
of Common Stock
Number of Shares Available for
of Common Stock Weighted- Future Issuance
to be Issued Upon Average (excluding those
Exercise of Exercise Price in column (a))
Outstanding Stock of Outstanding Under the Stock
Options Stock Options Option Plans
--------------------- ----------------- --------------------

Plans Approved by Stockholders 225,000 $5.33 per share 1,000,000

Plans Not Approved by Stockholders Not applicable Not applicable Not applicable

Total 225,000 $5.33 per share 1,000,000

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

NONE.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table presents fees, including reimbursement for expenses, billed
for professional services rendered by the Company's principal accountant for the
fiscal years ended December 31, 2003 and 2002:

Fiscal Year
---------------------
2003 2002
------- -------
(in thousands)

Audit fees (1) $ 77 $ 85

Audit-related fees (2) - 10

Tax fees (3) 2 155

All other fees (4) - -
----- -----
Total $ 79 $ 250
===== =====

(1) Audit fees consist of billings related to the audit of the Company's
consolidated annual financial statements, review of the interim
consolidated financial statements and services normally provided by
the Company's principal accountant in connection with statutory and
regulatory filings and engagements.

(2) Audit-related fees consist of billings for assurance and related
services that are reasonably related to the performance of the audit
or review of the Company's consolidated financial statements and are
not reported under Audit Fees. This category includes fees billed
related to employee benefit plan audits.

(3) Tax fees consist of billings related to tax compliance, planning, and
consulting.

28

(4) All other fees consist of billings for services other than those
reported in the other categories.

POLICY ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND NON-AUDIT SERVICES OF
INDEPENDENT AUDITOR

Pre-approval is provided by the Audit Committee for up to one year of all audit
and permissible non-audit services provided by the Company's independent
auditor. Any pre-approval is detailed as to the particular service or category
of service and is generally subject to a specific fee.

29

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) DOCUMENTS FILED AS PART OF THIS REPORT

1. FINANCIAL STATEMENTS:

Consolidated Balance Sheets as of December 31, 2003 and 2002

Consolidated Statements of Operations for the years ended
December 31, 2003, 2002 and 2001

Consolidated Statements of Stockholders' (Deficit) Equity for the
years ended December 31, 2003, 2002 and 2001

Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001

Notes to Consolidated Financial Statements

2. FINANCIAL STATEMENT SCHEDULES FOR THE FISCAL YEARS ENDED
DECEMBER 31, 2003, 2002 AND 2001:

Schedule II: Valuation and Qualifying Accounts

All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under the related instructions or are
inapplicable, and therefore have been omitted.

3. EXHIBITS

Reference is made to the Exhibit Index, which follows.

Schedule II to the consolidated financial statements in this
Report on Form 10-K

30

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized. The Executive Committee of
the Board of Directors has the responsibility for the role of the principal
executive officer of the registrant.

Date: March 30, 2004 SIMON WORLDWIDE, INC.

/s/ George G. Golleher /s/ J. Anthony Kouba
---------------------- ----------------------------
GEORGE G. GOLLEHER J. ANTHONY KOUBA
Member of Executive Member of Executive
Committee Committee

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

/s/ Joseph W. Bartlett Director March 30, 2004
- --------------------------------
JOSEPH W. BARTLETT

/s/ Allan I. Brown Director March 30, 2004
- --------------------------------
ALLAN I. BROWN

/s/ George G. Golleher Director and Member of March 30, 2004
- -------------------------------- Executive Committee
GEORGE G. GOLLEHER

/s/ J. Anthony Kouba Director and Member of March 30, 2004
- -------------------------------- Executive Committee
J. ANTHONY KOUBA

/s/ Greg Mays Principal Financial Officer March 30, 2004
- --------------------------------
GREG MAYS

31

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors and Stockholders of
Simon Worldwide, Inc.:

We have audited the accompanying consolidated balance sheets of Simon Worldwide,
Inc. and its subsidiaries as of December 31, 2003 and 2002 and the related
consolidated statements of operations, stockholders' (deficit) equity and cash
flows for each of the three years in the period ended December 31, 2003. We have
also audited the schedule listed in the accompanying index. These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statement and schedule. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Simon Worldwide Inc.
and its subsidiaries as of December 31, 2003, 2002 and 2001, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2003 in conformity with accounting principles generally
accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has a stockholders' deficit, has
suffered significant losses from operations, has no operating revenue and faces
numerous legal actions that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regards to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.

/s/ BDO Seidman, LLP

Los Angeles, California
January 30, 2004

F-1

PART I -- FINANCIAL INFORMATION

SIMON WORLDWIDE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

December 31, December 31,
2003 2002
------------ ------------

ASSETS

Current assets:
Cash and cash equivalents $ -- $ 1,181
Restricted cash 334 7,640
Prepaid expenses and other current assets 740 1,394
Assets from discontinued operations to be
disposed of -- current (see Note 4) 16,827 14,255
--------- ---------
Total current assets 17,901 24,470
Property and equipment, net 33 67
Investments 500 500
Other assets 276 293
--------- ---------
18,710 25,330
Assets from discontinued operations to be
disposed of -- non-current (see Note 4) 1,128 1,110
--------- ---------
$ 19,838 $ 26,440
========= =========

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities:
Accounts payable:
Trade $ 75 $ 51
Affiliates 161 155
Accrued expenses and other current liabilities 123 478
Liabilities from discontinued
operations -- current (see Note 4) 17,955 15,365
--------- ---------
18,314 16,049

Commitments and contingencies

Redeemable preferred stock, Series A1 senior
cumulative participating convertible, $.01 par
value, 28,737 shares issued and outstanding
at December 31, 2003 and 27,616 shares issued
and outstanding at December 31, 2002, stated
at redemption value of $1,000 per share 28,737 27,616

Stockholders' deficit:
Common stock, $.01 par value; 50,000,000 shares
authorized; 16,653,193 shares issued and
outstanding at December 31, 2003 and 2002 167 167

Additional paid-in capital 138,500 138,500

Retained deficit (165,880) (155,892)
--------- ---------
Total stockholders' deficit (27,213) (17,225)
--------- ---------
$ 19,838 $ 26,440
========= =========

See the accompanying Notes to Consolidated Financial Statements.

F-2

SIMON WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)

2003 2002 2001
-------- -------- ---------

Revenues $ -- $ -- $ --

General and administrative expenses 5,270 5,156 4,757
Investment losses -- 10,250 3,159
-------- -------- ---------
Loss from continuing operations before income taxes (5,270) (15,406) (7,916)
Income tax provision -- -- --
-------- -------- ---------
Net loss from continuing operations (5,270) (15,406) (7,916)
Income (loss) from discontinued
operations, net of tax (see Note 4) (3,591) 6,120 (114,429)
-------- -------- ---------
Net loss (8,861) (9,286) (122,345)
Preferred stock dividends 1,127 1,091 1,042
-------- -------- ---------
Net loss available to common stockholders $ (9,988) $(10,377) $(123,387)
======== ======== =========

Loss per share from continuing operations available
to common stockholders:
Loss per common share - basic and diluted $ (0.38) $ (0.99) $ (0.54)
======== ======== =========
Weighted average shares outstanding --
basic and diluted 16,653 16,653 16,455
======== ======== =========

Income (loss) per share from discontinued operations:
Income (loss) per common share -- basic and diluted $ (0.22) $ 0.37 $ (6.96)
======== ======== =========
Weighted average shares outstanding -- basic and diluted 16,653 16,653 16,455
======== ======== =========

Net loss available to common stockholders:
Net loss per common share -- basic and diluted $ (0.60) $ (0.62) $ (7.50)
======== ======== =========
Weighted average shares outstanding -- basic and diluted 16,653 16,653 16,455
======== ======== =========

See the accompanying Notes to Consolidated Financial Statements.

F-3

SIMON WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
For the years ended December 31, 2003, 2002 and 2001
(in thousands)

Accumulated Total
Common Additional Retained Other Stockholders'
Stock Paid-in (Deficit) Comprehensive Comprehensive (Deficit)
($.01 Par Value) Capital Earnings Loss Income (Loss) Equity
---------------- ---------- --------- ------------- ------------- -------------

Balance, December 31, 2000 (unaudited) $ 161 $138,978 $ (22,128) $ (835) $ 116,176

Comprehensive loss:
Net loss (122,345) $(122,345) (122,345)
---------
Other comprehensive loss, net of
income taxes:
Net unrealized loss on
available-for-sale
securities (94) (94)
Translation adjustment (1,186) (1,186)
---------
Other comprehensive loss (1,280) (1,280)
---------
Comprehensive loss $(123,625)
=========
Dividends on preferred stock (1,042) (1,042)
Phantom shareholder contingent obligation (5,042) (5,042)
Options compensation 459 459
Issuance of shares under employee
stock option and stock purchase plans 1 164 165
Issuance of shares for businesses acquired 5 1,407 1,412
------ -------- --------- ------ ---------
Balance, December 31, 2001 167 135,966 (145,515) (2,115) (11,497)

Comprehensive loss:
Net loss (9,286) $ (9,286) (9,286)
---------
Other comprehensive loss, net of
income taxes:
Translation adjustment 2,115 2,115
---------
Other comprehensive loss 2,115 2,115
---------
Comprehensive loss $ (7,171)
=========
Dividends on preferred stock
(1,091) (1,091)
Phantom shareholder contingent obligation 2,994 2,994
Options compensation (460) (460)
------ -------- --------- ------ ---------
Balance, December 31, 2002 167 138,500 (155,892) -- (17,225)

Comprehensive loss:
Net loss (8,861) $ (8,861) (8,861)
---------
Other comprehensive loss -- --
---------
Comprehensive loss $ (8,861)
=========
Dividends on preferred stock
(1,127) (1,127)
------ -------- --------- ------ ---------
Balance, December 31, 2003 $ 167 $138,500 $(165,880) $ -- $ (27,213)
====== ======== ========= ====== =========

See the accompanying Notes to Consolidated Financial Statements.

F-4

SIMON WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

2003 2002 2001
------- -------- ---------

Cash flows from operating activities:
Net loss $(8,861) $ (9,286) $(122,345)
Income (loss) from discontinued operations (3,591) 6,120 (114,429)
------- -------- ---------
Loss from continuing operations (5,270) (15,406) (7,916)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 64 58 58
Charge for impaired assets, net -- 432 --
Charge for impaired investments -- 10,250 2,313
Increase (decrease) in cash from changes
in working capital items:
Prepaid expenses and other current assets 654 (316) (816)
Accounts payable 29 45 (28)
Accrued expenses and other current liabilities (355) 345 (40)
------- -------- ---------
Net cash used in operating activities (4,878) (4,592) (6,429)
------- -------- ---------

Cash flows from investing activities:
Purchase of property and equipment (30) -- --
Decrease (increase) in restricted cash 7,306 (4,772) (2,868)
Other, net 17 (208) --
------- -------- ---------
Net cash provided by (used in) investing activities 7,293 (4,980) (2,868)
------- -------- ---------
Net cash provided by financing activities -- -- --
------- -------- ---------
Net cash provided by (used in) continuing operations 2,415 (9,572) (9,297)

Net cash provided by (used in) discontinued operations (3,596) 10,753 (51,176)
------- -------- ---------
Net increase (decrease) in cash and cash equivalents (1,181) 1,181 (60,473)
Cash and cash equivalents, beginning of period 1,181 -- 60,473
------- -------- ---------
Cash and cash equivalents, end of period $ -- $ 1,181 $ --
======= ======== =========

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ -- $ 22 $ 440
======= ======== =========
Income taxes $ 11 $ 72 $ 465
======= ======== =========

Supplemental non-cash investing activities:
Issuance of additional stock related
to acquisitions $ -- $ -- $ 1,413
======= ======== =========
Dividends paid in kind on mandatorily
redeemable preferred stock $ 1,121 $ 1,078 $ 1,038
======= ======== =========

See the accompanying Notes to Consolidated Financial Statements.

SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES -- 2001

The Company sold its CPG business on February 15, 2001, to Cyrk, Inc. ("Cyrk"),
formerly known as Rockridge Partners, Inc., for approximately $14 million, which
included the assumption of approximately $3.7 million of Company debt. Two
million three hundred thousand dollars ($2,300,000) of the purchase price was
paid with a 10% per annum five-year subordinated note from Cyrk, with the
balance being paid in cash. In March 2002, the Company entered into a settlement
agreement with Cyrk whereby the Company cancelled the remaining indebtedness
outstanding under the aforementioned subordinated note from Cyrk, totaling $2.3
million. See Note 3.

F-5

SIMON WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF BUSINESS, LOSS OF CUSTOMERS, RESULTING EVENTS AND GOING CONCERN

In August 2001, Simon Worldwide, Inc. (the "Company") experienced the loss of
its two largest customers: McDonald's Corporation ("McDonald's") and, to a
lesser extent, Philip Morris Incorporated ("Philip Morris"), now known as
Altria, Inc. Since August 2001, the Company has concentrated its efforts on
reducing its costs and settling numerous claims, contractual obligations and
pending litigation. As a result of these efforts, the Company has been able to
resolve a significant number of outstanding liabilities that existed at December
31, 2001, or arose subsequent to that date. As of December 31, 2003, the Company
had reduced its worldwide workforce to 7 employees from 9 employees and 136
employees as of December 31, 2002 and 2001, respectively. The Company is
currently managed by an Executive Committee consisting of two members of the
Company's Board of Directors, together with a principal financial officer and an
acting general counsel.

At December 31, 2003, the Company had a stockholders' deficit of $27.2 million.
For the year ended December 31, 2003, the Company had a net loss of $8.9
million. The Company continued to incur losses in 2003 and continues to incur
losses in 2004 for the general and administrative expenses being incurred to
manage the affairs of the Company and resolve outstanding legal matters. By
utilizing cash which had been generated from discontinued operations and
assuming payments are received pursuant to the settlement with McDonald's in
2004 (see Item 3), management believes it has sufficient capital resources and
liquidity to operate the Company for the foreseeable future. However, as a
result of the stockholders' deficit, loss of customers and the related legal
matters at December 31, 2003, the Company's independent certified 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
promotions business operations and was in the process of disposing of its assets
and settling its liabilities related to the promotions business and defending
and pursuing litigation with respect thereto. The process is ongoing and will
continue throughout 2004 and possibly into 2005. During the second quarter of
2002, the discontinued activities of the Company, consisting of revenues,
operating costs, certain general and administrative costs and certain assets and
liabilities associated with the Company's promotions business, were classified
as discontinued operations for financial reporting purposes. The Board of
Directors of the Company continues to consider various alternative courses of
action for the Company going forward, including possibly acquiring one or more
operating businesses, selling the Company or distributing its net assets, if
any, to shareholders. The decision on which course to take will depend upon a
number of factors including the outcome of the significant litigation matters in
which the Company is involved. See Legal Actions Associated with the McDonald's
Matter below. To date, the Board of Directors has made no decision on which
course of action to take.

Prior to the loss of its two largest customers in August 2001 and the subsequent
loss of its other customers, the Company had been operating as a multi-national
full-service promotional marketing company, specializing in the design and
development of high-impact promotional products and sales programs.

On August 21, 2001, the Company was notified by McDonald's that they were
terminating their approximately 25-year relationship with one of the Company's
subsidiaries, Simon Marketing, Inc. ("Simon Marketing") as a result of the
arrest of Jerome P. Jacobson ("Mr. Jacobson"), a former employee of Simon
Marketing who subsequently plead guilty to embezzling winning game pieces from
McDonald's promotional games administered by Simon Marketing. No other Company
employee was found or even alleged to have any knowledge of or complicity in his
illegal scheme. The Second Superseding Indictment filed December 7, 2001, by the
U.S. Attorney in the United States District Court for the Middle District of
Florida charged that Mr. Jacobson "embezzled more than $20 million worth of high
value winning McDonald's promotional game pieces from his employer, [Simon]".
Simon Marketing was identified in the Indictment, along with McDonald's, as an
innocent victim of Mr. Jacobson's fraudulent scheme. See Legal Actions
Associated with the McDonald's Matter, below. Further, on August 23, 2001, the
Company was notified that its second largest customer, Philip Morris, was also
ending its approximately nine-year relationship with the Company. Net sales to
McDonald's and Philip Morris accounted for 78% and 8%, respectively, of total
net sales during 2001. The Company had no sales during 2003 or 2002. The
Company's financial condition, results of operations and net cash flows have
been and will continue to be materially adversely affected by the loss of the
McDonald's and Philip Morris business, as well as the loss of its other
customers. At December 31, 2003, 2002 and

F-6

2001, the Company had no customer backlog. In addition, the absence of business
from McDonald's and Philip Morris has adversely affected the Company's
relationship with and access to foreign manufacturing sources.

As a result of actions taken in the second half of 2001, the Company recorded
third and fourth quarter pre-tax charges totaling approximately $80.3 million.
These charges related principally to the write-down of goodwill attributable to
Simon Marketing ($46.7 million) and to a substantial reduction of its worldwide
infrastructure, including asset write-downs ($22.4 million), lump-sum severance
costs associated with the termination of approximately 377 employees ($6.3
million), lease cancellations ($1.8 million), legal fees ($1.7 million) and
other costs associated with the McDonald's and Philip Morris matters ($1.4
million). During 2002, the Company also recorded a pre-tax net charge totaling
approximately $4.6 million associated with the loss of customers. Charges
totaling $8.6 million, primarily related to asset write-downs ($3.6 million),
professional fees ($4.3 million), labor and other costs ($.7 million), were
partially offset by recoveries of certain assets, totaling $1.3 million (see
Note 6 for details), that had been written off and included in the 2001 charges
attributable to the loss of significant customers and other gains ($2.7
million).

As an inducement to the Company's directors to continue their services to the
Company, in the wake of the events of August 21, 2001, and to provide assurances
that the Company will be able to fulfill its obligations to indemnify directors,
officers and agents of the Company and its subsidiaries ("Indemnitees") under
Delaware law and pursuant to various contractual arrangements, in March 2002 the
Company entered into an Indemnification Trust Agreement ("Agreement") for the
benefit of the Indemnitees. Pursuant to this Agreement, the Company has
deposited a total of $2.7 million with an independent trustee in order to fund
any indemnification amounts owed to an Indemnitee which the Company is unable to
pay. These arrangements, and the Executive Service Agreements described below,
were negotiated by the Company on an arms-length basis with the advice of the
Company's counsel and other advisors.

The chief executive officer's employment with the Company terminated in March
2002 but he remains on the Company's Board of Directors. The ongoing operations
of the Company and Simon Marketing are being managed by the Executive Committee
of the Board of Directors consisting of Messrs. George Golleher and Anthony
Kouba, who jointly act as chief executive officers, in consultation with
financial, legal and other advisors. Messrs. Golleher and Kouba have entered
into Executive Service Agreements dated May 30, 2003, in connection with such
responsibilities.

CLASS, REPRESENTATIVE AND OTHER THIRD-PARTY ACTIONS AGAINST MCDONALD'S AND THE
COMPANY

As a result of the Jacobson embezzlement described under Loss of Customers,
Resulting Events and Going Concern in Item 1. Business, numerous consumer class
action and representative action lawsuits (hereafter variously referred to as,
"actions", "complaints" or "lawsuits") were 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 sought 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 were 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-

F-7

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.

On April 8, 2003, the Illinois Circuit Court issued a final order approving the
Boland Settlement. The Boland Settlement was conditioned upon a final judgment
being issued in the Boland case and in the case before the California Court,
both of which have now occurred and, therefore, the Boland Settlement has become
effective. While 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. The Company
has been informed that approximately 250 persons in the United States and Canada
purport to have opted out of the Boland Settlement. Claims may also be asserted
in Canada and elsewhere 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 had been ordered to arbitration.

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. The Canadian Court has
dismissed the case filed in September 2002, but has allowed the October 2002
case to move forward. It is anticipated that McDonald's and the Company will
appeal the ruling.

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 who purportedly assigned to it
the right to receive 19 installment payments of $50,000 each under the ticket.
Such installment payments were terminated after the Jacobson theft was
uncovered, and Stone Street seeks to recover amounts paid by it for the
assignment from McDonald's and Simon Marketing. An attempt to remove the case to
federal court has been unsuccessful, and the matter is proceeding in Maryland.

LEGAL ACTIONS BETWEEN THE COMPANY AND MCDONALD'S

McDonald's termination of its contractual relationship with the Company led to
various lawsuits between the Company and Simon Marketing on the one hand and
McDonald's and certain of its agents and suppliers on the other which were
commenced between October 2001 and March 2002. In July 2003, all parties to
these lawsuits entered into a settlement agreement.

Under the settlement, all causes of action between the parties have been
dismissed and mutual releases have been exchanged. In addition, McDonald's will
pay $6.9 million to the Company and will assign to the Company all rights to
insurance proceeds agreed to be paid by the Company's errors and omissions
insurance carriers after payment of expenses relating to the Boland Settlement.
The precise amount of insurance proceeds will not be known until all expenses of
the Boland Settlement have been calculated, but the Company currently estimates
that insurance proceeds will be approximately $9.3 million which would result in
total net proceeds to the Company of approximately $13 million after payment of
attornies' fees relating to the settlement. In addition, both parties will be
mutually released from all obligations to the other party which includes all
related trade payables and accrued expenses which are recorded within
discontinued operations. It is expected that payments made to the Company
pursuant to the settlement with McDonald's will be received by mid-2004.

F-8

As a result of this settlement, in consideration for paying an amount in the
settlement equal to the remaining limits of the Company's policies, the errors
and omissions insurance carriers of the Company have been released from any
further obligations to defend the Company, Simon Marketing or any additional
insureds under the policies from any claims brought with respect to the Jacobson
embezzlement or any other promotional games, including the cases pending in
Canada, Maryland and elsewhere described in Item 3. Legal Proceedings.

OTHER LEGAL ACTIONS ARISING FROM JACOBSON EMBEZZLEMENT

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 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 second amended complaint were sustained in part,
including the dismissal of all claims for punitive damages with no leave to
amend. A third amended complaint was filed, and defendants' demurrer to all
causes of action was sustained without leave to amend. A dismissal of the case
will result. The Company intends to appeal this ruling.

As a result of this lawsuit, PWC resigned as the Company's independent certified
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 consolidated 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 certified public
accountants. In connection with obtaining PWC's agreement to re-release their
audit report dated February 15, 2001, for inclusion in the Company's 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.

2. SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of the
Company. All intercompany accounts and transactions have been eliminated in
consolidation.

REVENUE RECOGNITION

Sales were generally recognized when title to the product passes to the
customer, which occurs when the products were shipped or services were provided
to customers. Sales of certain imported goods were recognized at the time
shipments were received at the customer's designated location.

The Company evaluates the collectibility of its accounts receivable on a
specific identification basis. In circumstances where the Company is aware of a
customer's inability or unwillingness to pay outstanding amounts, the Company
records a specific reserve for bad debts against amounts due to reduce the
receivable to its estimated collectible balance.

F-9

STOCK-BASED COMPENSATION PLANS AND PRO FORMA STOCK-BASED COMPENSATION EXPENSE

At December 31, 2003, the Company had one stock-based compensation plan, which
is described below. The Company adopted the disclosure provisions of Statement
of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," as amended by SFAS No. 148, and has applied APB No. 25 and
related Interpretations in accounting for its plan. Accordingly, no compensation
cost has been recognized related to such plans during the years ended December
31, 2003 and 2002. Had compensation cost for the Company's grants for stock
based compensation plans been determined consistent with SFAS No. 123, the
Company's net loss and loss per common share would have been increased to the
pro forma amounts indicated below.

2003 2002 2001
------- -------- ---------
(in thousands)

Net loss available to common stockholders -- as reported $(9,988) $(10,377) $(123,387)
Add: Stock-based compensation expense
included in reported net income, net of income tax -- (276) 275
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of income taxes -- -- (843)
------- -------- ---------
Net loss available to common stockholders -- pro forma $(9,988) $(10,653) $(123,995)
======= ======== =========

Loss per common share -- basic and diluted -- as reported $ (0.60) $ (0.62) $ (7.50)

Loss per common share -- basic and diluted -- pro forma (0.60) (0.64) (7.45)

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

CONCENTRATION OF CREDIT RISK

The Company places its cash in what it believes to be credit-worthy financial
institutions. However, cash balances exceed FDIC insured levels at various times
during the year.

FINANCIAL INSTRUMENTS

The carrying amounts of cash equivalents, investments, short-term borrowings and
long-term obligations approximate their fair values.

CASH EQUIVALENTS

Cash equivalents consist of short-term, highly liquid investments, which have
original maturities at the date of purchase of three months or less.

INVESTMENTS

Investments are stated at fair value. Current investments are designated as
available-for-sale in accordance with the provisions of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," and as such,
unrealized gains and losses are reported in a separate component of
stockholders' equity. Long-term investments, for which there are no

F-10

readily available market values, are accounted for under the cost method and are
carried at the lower of cost or estimated fair value.

PROPERTY AND EQUIPMENT

Historically, property and equipment are stated at cost and are depreciated
primarily using the straight-line method over the estimated useful lives of the
assets or over the terms of the related leases, if such periods are shorter.
Property and equipment currently have been adjusted to reflect an impairment
charge associated with the Company's loss of its customers. See Note 1. The cost
and accumulated depreciation for property and equipment sold, retired or
otherwise disposed of are relieved from the accounts, and the resulting gains or
losses are reflected in income.

IMPAIRMENT OF LONG-LIVED ASSETS

Periodically, the Company assesses, based on undiscounted cash flows, if there
has been an other-than-temporary impairment in the carrying value of its
long-lived assets and, if so, the amount of any such impairment by comparing
anticipated undiscounted future cash flows with the carrying value of the
related long lived assets. In performing this analysis, management considers
such factors as current results, trends and future prospects, in addition to
other economic factors.

INCOME TAXES

The Company determines deferred taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires that deferred tax assets and
liabilities be computed based on the difference between the financial statement
and income tax bases of assets and liabilities using the enacted marginal tax
rate. Deferred income tax expenses or credits are based on the changes in the
asset or liability from period to period.

FOREIGN CURRENCY TRANSLATION

The Company translates financial statements denominated in foreign currency by
translating balance sheet accounts at the balance sheet date exchange rate and
income statement accounts at the average rates of exchange during the period.
Translation gains and losses are recorded in a separate component of
stockholders' equity and transaction gains and losses are reflected in income.

EARNINGS (LOSS) PER COMMON SHARE

Earnings (loss) per common share have been determined in accordance with the
provisions of SFAS No. 128, "Earnings per Share."

RECENTLY ISSUED ACCOUNTING STANDARDS

In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities."
FIN 46, as amended by FIN 46(R), issued in December 2003, requires an investor
with a majority of the variable interests in a variable interest entity to
consolidate the entity and also requires majority and significant variable
interest investors to provide certain disclosures. A variable interest entity is
an entity in which the equity investors do not have a controlling financial
interest or the equity investment at risk is insufficient to finance the
entity's activities without receiving additional subordinated financial support
from other parties. The provisions of FIN 46(R) are applicable for fiscal years
ending after December 31, 2003, and must be adopted no later than March 15,
2004. The Company does not have any variable interest entities that must be
consolidated.

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 manditorily redeemable through
the transfer of company assets at a specified date or upon an event that is
likely to occur, an instrument (other than an outstanding share) that embodies
an obligation to repurchase the issuer's equity shares and that requires or may
require the issuer settle the obligation through the transfer of assets, an
instrument that embodies an

F-11

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 $28.7 million and
$27.6 million of convertible preferred stock outstanding at December 31, 2003
and 2002, respectively. Because such convertible 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 convertible 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.

3. SALE OF BUSINESS

In February 2001, the Company sold its Corporate Promotions Group ("CPG")
business to Cyrk, Inc. ("Cyrk"), formerly known as Rockridge Partners, Inc., an
investor group led by Gemini Investors LLC, a Wellesley, Massachusetts based
private equity investment firm, pursuant to a Purchase Agreement entered into as
of January 20, 2001 (as amended, the "Purchase Agreement") for approximately $14
million, which included the assumption of approximately $3.7 million of Company
debt, $2.3 million of the purchase price was paid with a 10% per annum five-year
subordinated note from Cyrk, with the balance being paid in cash.

CPG was engaged in the corporate catalog and specialty advertising segment of
the promotions industry. The group was formed as a result of the Company's
acquisitions of Marketing Incentives, Inc. ("Marketing Incentives") and Tonkin,
Inc. ("Tonkin") in 1996 and 1997, respectively.

Pursuant to the Purchase Agreement, Cyrk purchased from the Company (i) all of
the outstanding capital stock of Cyrk Acquisition Corp. ("CAC"), successor to
the business of Marketing Incentives, and Tonkin, each a wholly owned subsidiary
of the Company, (ii) certain other assets of the Company, including those assets
at the Company's Danvers and Wakefield, Massachusetts facilities necessary for
the operation of the CPG business and (iii) all intellectual property of the CPG
business as specified in the Purchase Agreement. Cyrk assumed certain
liabilities of the CPG business as specified in the Purchase Agreement and all
of the assets and liabilities of CAC and Tonkin and, pursuant to the Purchase
Agreement, the Company agreed to transfer its former name, Cyrk, to the buyer.
Cyrk extended employment offers to certain former employees of the Company who
had performed various support activities, including accounting, human resources,
information technology, legal and other various management functions. There is
no material relationship between Cyrk and the Company or any of its affiliates,
directors or officers, or any associate thereof, other than the relationship
created by the Purchase Agreement and related documents.

The sale of CPG effectively completed the restructuring effort announced by the
Company in May 2000 with respect to the CPG business. See Note 15.

Following the closing of the sale of the CPG business, certain disputes arose
between the Company and Cyrk. In March 2002, the Company entered into a
settlement agreement with Cyrk. Under the settlement agreement (1) the Company
contributed $500,000 towards the settlement of a lawsuit against the Company and
Cyrk made by a former employee, (2) the Company cancelled the remaining
indebtedness outstanding under Cyrk's subordinated promissory note in favor of
the Company in the original principal amount of $2.3 million, (3) Cyrk agreed to
vacate the Danvers, Massachusetts facility by June 15, 2002, and that lease
would terminate as of June 30, 2002, thereby terminating the Company's
substantial lease liability thereunder, (4) Cyrk and the Company each released
the other from all known and unknown claims (subject to limited exceptions)
including Cyrk's release of all indemnity claims made against the Company
arising out of Cyrk's purchase of the CPG business, and (5) a letter of credit
in the amount of $500,000 was provided by Cyrk for the benefit of the Company to
support a portion of a $3.7 million letter of credit provided by the Company for
the benefit of Cyrk in connection with Cyrk's purchase of the CPG business. If
Cyrk fails to perform its obligations under this agreement, or fails to perform
and discharge liabilities assumed in connection with its purchase of the CPG
business, then all or a portion of Cyrk's indebtedness to the Company under the
subordinated promissory note may be reinstated. Pursuant to this agreement, the
Company's 2001 financial statements reflect the settlement, and include a
pre-tax charge of $3.2 million associated with the write-off of the subordinated
note and other charges relating to final sale and settlement.

F-12

4. DISCONTINUED OPERATIONS

As discussed in Note 1, the Company had effectively eliminated a majority of its
ongoing promotions business operations by April 2002. Accordingly, the
discontinued activities of the Company, including the operations of CPG sold in
February 2001 (see Note 3), have been classified as discontinued operations in
the accompanying consolidated financial statements. The Company includes
sufficient cash within discontinued operations to ensure assets from
discontinued operations to be disposed of cover liabilities from discontinued
operations. By utilizing cash generated from discontinued operations and
assuming payments are received pursuant to the settlement with McDonald's in
2004 (see Note 1), management believes it has sufficient capital resources and
liquidity to operate the Company for the foreseeable future. Assets and
liabilities relating to discontinued operations as of December 31, 2003 and
2002, as disclosed in the accompanying consolidated financial statements,
consist of the following:

December 31, December 31,
2003 2002
------------ ------------
(in thousands)

Assets:
Cash and cash equivalents $10,065 $13,236
Restricted cash 6,547 --
Accounts receivable:
Trade, less allowance for doubtful accounts of $13,852
at December 31, 2003 and $13,416 at December 31, 2002 41 558
Prepaid expenses and other current assets 174 461
------- -------
Total current assets 16,827 14,255
Property and equipment, net -- --
Other assets 1,128 1,110
------- -------
Assets from discontinued operations to be disposed
of -- non-current $17,955 $15,365
======= =======
Liabilities:
Accounts payable:
Trade $ 5,170 $ 5,736
Accrued expenses and other current liabilities 12,785 9,629
------- -------
Total current liabilities 17,955 15,365
------- -------
Liabilities from discontinued operations $17,955 $15,365
======= =======

F-13

Net income (loss) from discontinued operations for the years ended December 31,
2003, 2002 and 2001, as disclosed in the accompanying consolidated financial
statements, consists of the following:

2003 2002 2001
------- -------- ---------
(in thousands)

Net sales $ -- $ -- $ 324,040
Cost of sales -- -- 252,326
------- -------- ---------
Gross profit -- -- 71,714

Selling, general and administrative expenses 1,359 3,464 74,492
Goodwill amortization expense -- -- 1,574
Management fees -- 1,458 619
Impairment of intangible asset -- -- 46,671
Charges attributable to loss of significant customers -- 4,574 33,644
Gain on settlement of obligations (23) (12,023) --
Restructuring -- (750) 20,212
------- -------- ---------
Operating income (loss) (1,336) 3,277 (105,498)

Interest income (246) (366) (2,075)
Interest expense -- 35 576
Other (income) expense 2,501 974 (4,244)
Loss on sale of business -- -- 2,300
------- -------- ---------
Income (loss) before income taxes (3,591) 2,634 (102,055)
Income tax expense (benefit) -- (3,486) 12,374
------- -------- ---------
Net income (loss) $(3,591) $ 6,120 $(114,429)
======= ======== =========

5. RESTRICTED CASH

Restricted cash at December 31, 2003 and 2002 primarily consisted of amounts
deposited with lenders to satisfy the Company's obligations pursuant to its
outstanding standby letters of credit (see Note 9) and $2.7 million deposited
into an irrevocable trust entered into during 2002. See Note 16.

6. ACCOUNTS RECEIVABLE

On November 13, 2001, the Company had filed suit against Philip Morris in
California Superior Court for the County of Los Angeles, asserting numerous
causes of action arising from Philip Morris' termination of the Company's
relationship with Philip Morris. Subsequently, the Company dismissed the action
without prejudice, so that the Company and Philip Morris could attempt to
resolve this dispute outside of litigation. During 2002, a settlement was
reached resulting in a payment of $1.5 million by Philip Morris to the Company.
As this payment was in excess of the Company's net outstanding receivable due
from Philip Morris, a gain of approximately $463,000 was recorded (see Note 14)
during the second quarter, included in gain on settlement of obligations
disclosed in Note 4. During the second quarter of 2002, the Company also
received payments, totaling approximately $877,000, relating to accounts
receivable from other former customers that had been previously deemed to be
uncollectible and written off during 2001. The Company also received
approximately $464,000 in connection with the termination of a retirement plan
maintained by one of its foreign subsidiaries. These recoveries, totaling
approximately $1.3 million, have been recorded as reductions to charges
attributable to loss of significant customers, disclosed in Note 4. Also see
Note 13.

F-14

7. PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

Discontinued Continuing
Operations Operations Total
-------------- ---------------- ----------------
As of December 31,
--------------------------------------------------------
2003 2002 2003 2002 2003 2002
----- ----- ----- ----- ----- -----
(in thousands)

Machinery and equipment $ -- $ -- $ 292 $ 173 $ 292 $ 173
Less: Accumulated depreciation
and amortization -- -- (259) (106) (259) (106)
----- ----- ----- ----- ----- -----
$ -- $ -- $ 33 $ 67 $ 33 $ 67
===== ===== ===== ===== ===== =====

During 2002, property and equipment reflected impairment charges totaling $2.4
million, which has been included in charges attributable to loss of customer in
Note 4. See Note 13 for details. Depreciation and amortization expense on
property and equipment totaled approximately $64,000, $475,000 and $3.9 million
during 2003, 2002 and 2001, respectively.

8. INVESTMENTS

SHORT-TERM

As of December 31, 2001 the Company owned 190,000 shares of a marketable
security that were stated at fair value of $152,000. During 2002, the Company
sold its investment in the stock and recognized a nominal loss.

LONG-TERM

The Company has made strategic and venture investments in a portfolio of
privately held companies. These investments were in technology and
Internet-related companies that were at varying stages of development, and were
intended to provide the Company with an expanded technology and 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 technology and the
Internet. 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 companies is subject to the
aforementioned risks. Periodically, the Company performs a review of the
carrying value of all its investments in these companies, and considers such
factors as current results, trends and future prospects, capital market
conditions and other economic factors. The book value of the Company's
investment portfolio totaled $500,000 as of December 31, 2003, which is
accounted for under the cost method. While the Company will continue to
periodically evaluate its Internet investments, there can be no assurance that
its investment strategy will be successful, and thus the Company might not ever
realize any benefits from its portfolio of investments.

In June 2002, certain events occurred which indicated an impairment of the
Company's investment in Alliance Entertainment Corp. ("Alliance"), an indirect
investment through a limited liability company that is owned by Yucaipa. Yucaipa
is believed to be indirectly a significant shareholder in Alliance, which is a
home entertainment product distribution, fulfillment, and infrastructure company
providing both brick-and-mortar and e-commerce home entertainment retailers with
complete business-to-business solutions. This investment had a carrying value of
$10.0 million at December 31, 2001. The Company recorded a pre-tax non-cash
charge of $10.0 million in June 2002 to write-down its investment.

9. BORROWINGS AND LONG-TERM OBLIGATIONS

The Company no longer has the ability to borrow under any of its existing credit
facilities without it being fully cash collateralized. The Company's Credit and
Security Agreements, which provided for working capital and other financing
arrangements expired on May 15, 2002.

As a result of the precipitous drop in the value of the Company's common stock
after the announcement of the loss of its two largest customers (see Note 1),
the Company had recorded a $5.0 million adjustment in the third quarter of 2001
to accelerate the recognition of contingent payment obligations (due in June
2002) arising from the acquisition of Simon Marketing in

F-15

1997. This obligation was recorded as a charge to additional paid in capital
during 2001. Pursuant to Separation, Settlement and General Release Agreements
entered into during 2002, the Company paid approximately $2.0 million to settle
this obligation. The remaining liability, totaling approximately $3.0 million,
was reversed through additional paid in capital during 2002.

In connection with the discontinuance of the Company's supermarket operations,
the Company filed a lawsuit in 1993 against its former contractual partner.
During 1998 the Company settled the litigation by entering into a Joint Business
Arrangement with the defendant, at which time the Company made a cash payment
and recorded a $2.9 million accrual for the maximum potential liability under
the agreement, which was included in other long-term obligations within
discontinued operations in the Company's 2001 consolidated financial statements.
During 2002, the Company paid approximately $2.2 million to settle these
obligations, resulting in a settlement gain of $725,000, recorded as a reduction
to selling, general, and administrative expenses in Note 4.

10. LEASE OBLIGATIONS

During 2002, the Company settled all of its outstanding domestic and
international real estate and equipment lease obligations, except for one
expired warehouse lease with approximately $70,000 of unpaid rent, and relocated
its remaining scaled-down operations to smaller office space in Los Angeles,
California. As these settlements were on terms generally more favorable to the
Company than required by the existing terms of the liabilities, the Company
recorded a 2002 gain totaling approximately $2.8 million, recorded as a
reduction to selling, general, and administrative expenses in Note 4.

The approximate minimum rental commitments under all noncancelable leases as of
December 31, 2003 total approximately $103,000, which are due in 2004.

Rental expense for all operating leases was $345,000, $2.7 million, and $8.0
million for the years ended December 31, 2003, 2002 and 2001, respectively. Rent
is charged to operations on a straight-line basis for certain leases.

11. INCOME TAXES

The components of the provision (benefit) for income taxes, all of which are
related to discontinued operations for all periods, are as follows (in
thousands):

2003 2002 2001
------ -------- -------

Current:
Federal $ -- $ (3,486) $ 520
State -- -- --
Foreign -- -- --
------ -------- -------
-- (3,486) 520

Deferred:
Federal -- -- 10,702
State -- -- 1,152
------ -------- -------
-- -- 11,854
------ -------- -------
$ -- $ (3,486) $12,374
====== ======== =======

F-16

As required by SFAS No. 109 "Accounting for Income Taxes," the Company
periodically evaluates the positive and negative evidence bearing upon the
realizability of its deferred tax assets. The Company, however, has considered
recent events (see Note 1) and results of operations and concluded, in
accordance with the applicable accounting methods, that it is more likely than
not that the deferred tax assets will not be realizable. As a result, the
Company has determined that a valuation allowance of approximately $47,028 is
required at December 31, 2003. The tax effects of temporary differences that
gave rise to deferred tax assets as of December 31, 2003 and 2002, were as
follows (in thousands):

2003 2002
-------- --------

Deferred tax assets:
Receivable reserves $ 2,207 $ 2,207
Other asset reserves 11,560 12,173
Deferred compensation 26 19
Capital Losses 6,901 6,894
Foreign tax credits 253 1,881
Net operating losses 26,064 20,582
Depreciation 17 (41)
Valuation Allowance (47,028) (43,715)
-------- --------
$ -- $ --
======== ========

As of December 31, 2003, the Company had federal and state net operating loss
carryforwards of approximately $67,781 and $34,412, respectively. The federal
net operating loss carryforward will begin to expire in 2020 and the state net
operating loss carryforwards began to expire in 2003. As of December 31, 2003,
the Company also had foreign tax credit carryforwards of $253 that began to
expire in 2003. As of December 31, 2003, the Company had capital loss
carryforwards of approximately $16,108 which begin to expire in 2006.

The following is a reconciliation of the statutory federal income tax rate to
the actual effective income tax rate:

2003 2002 2001
---- ---- ----

Federal Tax (benefit) rate (34%) (34%) (35%)

Increase (decrease) in taxes resulting from
State Income Taxes (6) (6) (1)
Effect of foreign income or loss 23 (5) 32
Release of prior year estimated tax liability -- (27) --
Goodwill -- -- 16
Non-deductible loss on sale of business -- 11 --
Change in valuation allowance 51 30 --
Effect of non-utilization of state losses 2 5 --
Life Insurance 3 4 --
Adjustment to State Tax Liability (9) 18 --
Foreign Tax Credits 27 (14) --
Post-tax return filing Net Operating Loss Adjustments (50) (9) --
Other, net (6) -- (1)
--- --- ---
0% (27%) 11%
=== === ===

An audit by the Internal Revenue Service covering the tax years 1996 through
2000 was concluded during 2003. The Company incurred no additional income tax
upon conclusion of the IRS audit.

F-17

12. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

At December 31, 2003 and 2002, accrued expenses and other current liabilities
consisted of the following:

Discontinued Continuing
Operations Operations Total
------------------ ------------------ -------------------
As of December 31,
---------------------------------------------------------------
2003 2002 2003 2002 2003 2002
------- ------ ---- ---- ------- -------
(in thousands)

Accrued payroll and related items and
deferred compensation $ 73 $ 344 $ -- $ -- $ 73 $ 344
Inventory purchases 4,471 4,378 -- -- 4,471 4,378
Royalties 1,552 1,552 -- -- 1,552 1,552
Contingent loss 2,835 -- -- -- 2,835 --
Other 3,854 3,355 123 478 3,977 3,833
------- ------ ---- ---- ------- -------
$12,785 $9,629 $123 $478 $12,908 $10,107
======= ====== ==== ==== ======= =======

During 2002, the Company settled lease obligations that were outstanding as of
December 31, 2001. See Note 10.

13. CHARGES ATTRIBUTABLE TO LOSS OF CUSTOMERS

During 2002, the Company recorded a pre-tax net charge totaling approximately
$4.6 million associated with the loss of customers. Charges totaling $8.6
million, primarily related to asset write-downs ($3.6 million), professional
fees ($4.3 million), labor and other costs ($.7 million), were partially offset
by recoveries of certain assets, totaling $1.3 million (see Note 6), that had
been written off and included in the 2001 charges attributable to the loss of
significant customers and other gains ($2.7 million).

In the second half of 2001, the Company recorded third and fourth quarter
pre-tax charges totaling approximately $33.6 million. These charges related
principally to a substantial reduction of the Company's worldwide
infrastructure, including asset write-downs ($22.4 million), lump-sum severance
costs associated with the termination of approximately 377 employees ($6.3
million), lease cancellations ($1.8 million), legal fees ($1.7 million) and
other costs associated with the McDonald's and Philip Morris matters ($1.4
million).

14. GAIN ON SETTLEMENT OF OBLIGATIONS

During 2002 the Company negotiated settlements related to outstanding
liabilities with many of its vendors. As these settlements were on terms
generally more favorable to the Company than required by the existing terms of
the liabilities, the Company recorded a gain, totaling approximately $12.0
million. This gain is classified as gain on settlement of obligations disclosed
in Note 4. No such gains were recorded by the Company during 2001. Nominal
settlement gains were recorded by the Company during 2003.

F-18

15. RESTRUCTURING AND OTHER CHARGES

A summary of the charges for the years ended December 31, 2003, 2002 and 2001 is
as follows:

2003 2002 2001
---- ----- -------
(in thousands)

Restructuring $ -- $(750)(1) $20,212
==== ===== =======

(1) Consists of an accrual reversal of $304 and $446 related to the Company's
2001 and 2000 restructuring efforts, respectively.

2001 RESTRUCTURING

After the February 2001 sale of its CPG business, and its previously announced
intentions, the Company conducted a second quarter 2001 evaluation of its
remaining businesses with the objective of restoring consistent profitability
through a more rationalized, cost-efficient business model. As a result of this
evaluation, and pursuant to a plan approved by its Board of Directors, the
Company has taken action to shutdown or consolidate certain businesses, sell
certain assets and liabilities related to its legacy corporate catalog business
in the United Kingdom and eliminate approximately two-thirds (40 positions) of
its Wakefield, Massachusetts corporate office workforce. Additionally, the
Company announced the resignation of its co-chief executive officer and two
other executive officers, including the Company's chief financial officer.
Consequently, the Company announced that all responsibilities for the chief
executive officer position had been consolidated under Allan I. Brown, who had
served as co-chief executive officer since November 1999 and as the chief
executive officer of Simon Marketing, the Company's wholly owned subsidiary
based in Los Angeles, California, since 1975.

As a result of these actions, the Company recorded a second quarter 2001 pre-tax
charge of approximately $20.2 million for restructuring expenses. The second
quarter charge relates principally to employee termination costs ($10.5
million), asset write-downs which were primarily attributable to a consolidation
of its Wakefield, Massachusetts workspace ($6.5 million), a loss on the sale of
the United Kingdom business ($2.1 million) and the settlement of certain lease
obligations ($1.1 million). The restructuring plan was complete by the first
quarter of 2002. During 2002, the Company revised its initial estimate of future
restructuring activities and, as a result, recorded an approximately $304,000
reduction to the restructuring accrual outstanding as of December 31, 2001. A
summary of activity in the restructuring accrual related to the 2001
restructuring action is as follows (in thousands):

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 $ --
========

16. INDEMNIFICATION TRUST AGREEMENT

In March 2002, the Company, Simon Marketing and a Trustee entered into an
Indemnification Trust Agreement (the "Agreement" or the "Trust"), which requires
the Company and Simon Marketing to fund an irrevocable trust in the amount of
$2.7 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
(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

F-19

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 $2.7 million) for funds paid out to an Indemnitee.
Upon termination of the Trust, if, after payment of all outstanding claims
against the Trust have been satisfied, there are funds remaining in the Trust,
such funds and all other assets of the Trust shall be distributed to Simon
Marketing. These funds are included in restricted cash in the accompanying
consolidated balance sheets.

17. REDEEMABLE PREFERRED STOCK

In November 1999, Overseas Toys, L.P., an affiliate of Yucaipa, a Los Angeles,
California based investment firm, invested $25 million in the Company in
exchange for preferred stock and a warrant to purchase additional preferred
stock. Under the terms of the investment, which was approved at a Special
Meeting of Stockholders on November 10, 1999, the Company issued 25,000 shares
of a newly authorized senior cumulative participating convertible preferred
stock ("preferred stock") to Yucaipa for $25 million. Yucaipa is entitled, at
their option, to convert each share of preferred stock into common stock equal
to the sum of $1,000 per share plus all accrued and unpaid dividends, divided by
$8.25 (3,502,816 shares as of December 31, 2003, and 3,347,340 shares as of
December 31, 2002).

In connection with the issuance of the preferred stock, the Company also issued
a warrant to purchase 15,000 shares of a newly authorized series of preferred
stock at a purchase price of $15 million. Each share of this series of preferred
stock issued upon exercise of the warrant is convertible, at Yucaipa's option,
into common stock equal to the sum of $1,000 per share plus all accrued and
unpaid dividends, divided by $9.00 (1,666,667 shares as of December 31, 2003 and
2002). The warrant expires on November 10, 2004.

Assuming conversion of all of the convertible preferred stock, Yucaipa would own
approximately 17% of the then outstanding common shares at December 31, 2003 and
2002. Assuming the preceding conversion, and assuming the exercise of the
warrant and the conversion of the preferred stock issuable upon its exercise,
Yucaipa would own a total of approximately 24% and 23% of the then outstanding
common shares at December 31, 2003 and 2002, respectively, making it the
Company's largest shareholder.

Yucaipa has voting rights equivalent to the number of shares of common stock
into which their preferred stock is convertible on the relevant record date.
Also, Yucaipa is entitled to receive a quarterly dividend equal to 4% of the
base liquidation preference of $1,000 per share outstanding, payable in cash or
in-kind at the Company's option.

In the event of liquidation, dissolution or winding up of the affairs of the
Company, Yucaipa, as holder of the preferred stock, will be entitled to receive
the redemption price of $1,000 per share plus all accrued dividends plus (1) (a)
7.5% of the amount that the Company's retained earnings exceeds $75 million less
(b) the aggregate amount of any cash dividends paid on common stock which are
not in excess of the amount of dividends paid on the preferred stock, divided by
(2) the total number of preferred shares outstanding as of such date (the
"adjusted liquidation preference"), before any payment is made to other
stockholders.

The Company may redeem all or a portion of the preferred stock at a price equal
to the adjusted liquidation preference of each share, if the average closing
prices of the Company's common stock have exceeded $12.00 for sixty consecutive
trading days on or after November 10, 2002, or, any time on or after November
10, 2004. The preferred stock is subject to mandatory redemption if a change in
control of the Company occurs.

In connection with this transaction, the managing partner of Yucaipa was
appointed chairman of the Company's Board of Directors and Yucaipa was entitled
to nominate two additional individuals to a seven person board. In August 2001,
the managing partner of Yucaipa, along with another Yucaipa representative,
resigned from the Company's Board of Directors.

Additionally, the Company paid Yucaipa a management fee of $500,000 per year for
a five-year term for which Yucaipa provided general business consultation and
advice and management services. On October 17, 2002, the Management Agreement
was terminated and a payment was made to Yucaipa of $1.5 million and each party
was released from further obligations thereunder.

F-20

18. STOCK PLANS

1993 OMNIBUS STOCK PLAN

Under its 1993 Omnibus Stock Plan, as amended (the "Omnibus Plan"), which
terminated in May 2003 except as to options outstanding at that time, the
Company reserved up to 3,000,000 shares of its common stock for issuance
pursuant to the grant of incentive stock options, nonqualified stock options or
restricted stock. The Omnibus Plan is administered by the Compensation Committee
of the Board of Directors. Subject to the provisions of the Omnibus Plan, the
Compensation Committee had the authority to select the optionees or restricted
stock recipients and determine the terms of the options or restricted stock
granted, including: (i) the number of shares; (ii) the exercise period (which
may not exceed ten years); (iii) the exercise or purchase price (which in the
case of an incentive stock option cannot be less than the market price of the
common stock on the date of grant); (iv) the type and duration of options or
restrictions, limitations on transfer and other restrictions; and (v) the time,
manner and form of payment. Generally, an option is not transferable by the
option holder except by will or by the laws of descent and distribution. Also,
generally, no incentive stock option may be exercised more than 60 days
following termination of employment. However, in the event that termination is
due to death or disability, the option is exercisable for a maximum of 180 days
after such termination. Options granted under this plan generally become
exercisable in three equal installments commencing on the first anniversary of
the date of grant. Options granted during 2003 become exercisable in two equal
installments commencing on the first anniversary of the date of grant. No
further options may be granted under the Omnibus Plan.

1997 ACQUISITION STOCK PLAN

The 1997 Acquisition Stock Plan (the "1997 Plan") is intended to provide
incentives in connection with the acquisitions of other businesses by the
Company. The 1997 Plan is identical in all material respects to the Omnibus
Plan, except that the number of shares available for issuance under the 1997
Plan is 1,000,000 shares.

The fair value of each option grant under the above plans was estimated using
the Black-Scholes option pricing model with the following assumptions for 2003:
expected dividend yield of 0 %; expected life of 9.4 years; expected volatility
of 40%; and, a risk-free interest rate of 2.0%. The following assumptions were
used for 2001 grants: expected dividend yield of 0 %; expected life of 3.0
years; expected volatility of 142%; and, a risk-free interest rate of 4.4%.
There were no stock options granted under any of the plans during 2002.

The following summarizes the status of the Company's stock options as of
December 31, 2003, 2002 and 2001 and changes for the years then ended:

2003 2002 2001
Weighted Weighted Weighted
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- -------- -------------- -------- ---------- --------

Outstanding at the beginning of year 130,000 $9.16 1,176,199 $7.55 1,847,448 $ 9.45
Granted 95,000 0.10 -- -- 182,000 0.35
Exercised -- -- -- -- -- --
Canceled -- -- 1,046,199 7.35 (853,249) 10.32
---------- --------- ----------
Outstanding at end of year 225,000 5.33 130,000 9.16 1,176,199 7.55
========== ========= ==========

Options exercisable at year-end 130,000 9.16 122,500 9.59 844,809 8.96
========== ========= ==========

Options available for future grant 1,000,000 2,456,389 2,586,389
========== ========= ==========

Weighted average fair value of
options granted during the year $ 0.02 Not applicable $ 1.92

F-21

The following table summarizes information about stock options outstanding at
December 31, 2003:

Options Outstanding Options Exercisable
----------------------------------------- ---------------------------
Weighted
Range of Average Weighted Weighted
Exercise Number Remaining Average Number Avera
Prices Outstanding Contractual Life Price Exercisable Price
- --------------- ----------- ---------------- -------- ----------- --------------

$ 0.10 - $ 1.99 95,000 9.35 0.10 -- not applicable
$ 2.00 - $ 5.38 65,000 5.63 4.60 65,000 4.60
$ 7.56 - $ 8.81 25,000 5.85 8.31 25,000 8.31
$12.25 - $15.50 25,000 4.04 14.85 25,000 14.85
$16.50 - $28.75 15,000 1.24 20.83 15,000 20.83
------- --------

$ 0.10 - 28.75 225,000 6.76 $ 5.33 $130,000 $ 9.16
====== ====== ======= ==== ====== ======== ======

EMPLOYEE STOCK PURCHASE PLAN

Pursuant to its 1993 Employee Stock Purchase Plan, as amended (the "Stock
Purchase Plan"), which terminated effective December 31, 2001, the Company was
authorized to issue up to an aggregate of 600,000 shares of its common stock to
substantially all full-time employees electing to participate in the Stock
Purchase Plan. Eligible employees could contribute, through payroll withholdings
or lump-sum cash payment, up to 10% of their base compensation during six-month
participation periods beginning in January and July of each year. At the end of
each participation period, the accumulated deductions were applied toward the
purchase of Company common stock at a price equal to 85% of the market price at
the beginning or end of the participation period, whichever is lower. As of
December 31, 2001, no shares can be purchased under the Stock Purchase Plan.
Employee purchases amounted to 57,808 shares in 2001 at prices ranging from
$2.59 to $2.87 per share. The fair value of the employees' purchase rights was
estimated using the Black-Scholes option pricing model with the following
weighted average assumptions for 2001: expected dividend yield of 0%; expected
life of six months; expected volatility of 142%; and, a risk-free interest rate
of 4.4%. The weighted average fair value of those purchase rights granted in
2001 was $1.69 per share. There were no employee purchases of shares during 2003
or 2002.

COMMON STOCK PURCHASE WARRANTS

In February 1998, the Company issued 975,610 shares of its common stock and a
warrant to purchase up to 100,000 shares of its common stock in a private
placement, resulting in net proceeds of approximately $10 million to be used for
general corporate purposes. The warrant was exercisable at any time from the
grant date of February 12, 1998, to February 12, 2003, at an exercise price of
$10.25 per share, which represented the fair market value on the grant date, and
now has expired.

19. COMPREHENSIVE INCOME

The Company's comprehensive income (loss) consists of net income (loss), foreign
currency translation adjustments and unrealized holding gains (losses) on
available-for-sale securities, and is presented in the Consolidated Statements
of Stockholders' (Deficit) Equity. Components of other comprehensive income
(loss) consist of the following:

2003 2002 2001
------ ------ -------
(in thousands)

Change in unrealized gains and
losses on investments $ -- $ -- $ (94)
Foreign currency translation adjustments -- 2,115 (1,186)
Income tax benefit related to unrealized
gains and losses on investments -- -- --
------ ------ -------
Other comprehensive income (loss) $ -- $2,115 $(1,280)
====== ====== =======

F-22

20. PROFIT-SHARING RETIREMENT PLAN

Until December 2002, the Company had a qualified profit-sharing plan under
Section 401(k) of the Internal Revenue Code that was available to substantially
all employees. Under this plan the Company matched one-half of employee
contributions up to six percent of eligible payroll. Employees were immediately
fully vested for their contributions and vested in the Company contribution
ratably over a three-year period. The Company's contribution expense for the
years ended December 31, 2003, 2002 and 2001 was approximately $0, $50,000 and
$664,000, respectively.

21. COMMITMENTS AND CONTINGENCIES

In addition to the legal matters discussed in Note 1, the Company is also
involved in other litigation and various legal matters, which have arisen in the
ordinary course of business. The Company does not believe that the ultimate
resolution of these other litigation and various legal matters will have a
material adverse effect on its financial condition, results of operations or net
cash flows.

In the fourth quarter of 2003, Cyrk informed the Company that it was continuing
to suffer substantial financial difficulties, and that it could not continue to
discharge its obligations to Winthrop which are secured by the Company's letter
of credit. If this occurs, Winthrop has the right to draw upon the Company's
letter of credit, which as of February 29, 2004, was $3.335 million, $2.835
million of which is secured by restricted cash of the Company. The Company's
$3.335 million letter of credit is also secured, in part, by a $500,000 letter
of credit provided by Cyrk for the benefit of the Company. The Company will have
indemnification rights against Cyrk for all losses relating to any default by
Cyrk under the Winthrop lease. No assurances can be made that the Company will
be successful in enforcing those rights or, if successful, collecting damages
from Cyrk. As a result of the foregoing facts, the Company has recorded a charge
of $2.835 million with respect to the liability arising from the Winthrop lease.

22. RELATED PARTY TRANSACTIONS

As an inducement to the Company's directors to continue their services to the
Company, in the wake of the events of August 21, 2001, and to provide assurances
that the Company will be able to fulfill its obligations to indemnify directors,
officers and agents of the Company and its subsidiaries ("Indemnitees") under
Delaware law and pursuant to various contractual arrangements, in March 2002 the
Company entered into an Indemnification Trust Agreement ("Agreement") for the
benefit of the Indemnitees. Pursuant to this Agreement, the Company has
deposited a total of $2.7 million with an independent trustee in order to fund
any indemnification amounts owed to an Indemnitee, which the Company is unable
to pay. These arrangements, and all other arrangements disclosed in Item 11.
Executive Compensation, were negotiated by the Company on an arms-length basis
with the advice of the Company's counsel and other advisors.

In connection with the wind-down of its business operations and pursuant to
negotiations that began in the fourth quarter of 2001, the Company entered into
a Termination, Severance and General Release Agreement ("Agreement") with its
chief executive officer in March 2002. In accordance with the terms of this
Agreement, the chief executive officer's employment with the Company terminated
in March 2002 (the chief executive officer remains on the Company's Board of
Directors) and substantially all other agreements, obligations and rights
existing between the chief executive officer and the Company were terminated,
including the chief executive officer's Employment Agreement dated September 1,
1999, as amended, and his retention agreement dated August 29, 2001. For
additional information related to the chief executive officer's retention
agreement, see the Company's Report on Form 10-Q for the quarter ended September
30, 2001. The ongoing operations of the Company and Simon Marketing are being
managed by the Executive Committee of the Board of Directors consisting of
George G. Golleher and J. Anthony Kouba, in consultation with outside financial,
legal and other advisors. As a result of the foregoing, the Company recorded a
2001 fourth quarter pre-tax charge of $4.6 million, relating principally to the
forgiveness of indebtedness of the chief executive officer to the Company, a
lump-sum severance payment and the write-off of an asset associated with an
insurance policy on the life of the chief executive officer. The Company
received a full release from the chief executive officer in connection with this
Agreement, and the Company provided the chief executive officer with a full
release. Additionally, the Agreement calls for the chief executive officer to
provide consulting services to the Company for a period of six months after the
chief executive officer's employment with the Company terminated in exchange for
a fee of approximately $46,666 per month, plus specified expenses.

F-23

In addition, retention agreements were entered into in September and October
2001 with certain key employees which provided for retention payments ranging
from 8% to 100% of their respective salaries conditioned upon continued
employment through specified dates and/or severance payments up to 100% of these
employee's respective annual salaries should such employees be terminated within
the parameters of their agreements such as termination without cause. In the
first quarter of 2002, additional similar agreements were entered into with
certain employees of one of the Company's subsidiaries. Payments under these
agreements have been made at various dates from September 2001 through March
2002. The Company's obligations under these agreements were approximately $3.1
million. Approximately $2.5 million of these commitments had been segregated in
separate cash accounts in October 2001, in which security interests had been
granted to certain employees, and released back to the Company in 2002 when all
such retention and severance payments were made to these applicable employees.

On October 17, 2002, the Management Agreement between the Company and Yucaipa
was terminated by the payment to Yucaipa of $1.5 million and each party was
released from further obligations thereunder. The Company recorded this payment
to management fees during 2002. See Notes 4 and 17.

On February 7, 2003, the Company entered into additional agreements with Messrs.
Golleher and Kouba in order to induce them to continue to serve as members of
the Executive Committee of the Board of Directors and to compensate them for the
additional obligations, responsibilities and potential liabilities of such
service, including responsibilities imposed under the federal securities laws by
virtue of the fact that, as members of the Executive Committee, they served, in
effect, as the chief executive officers of the Company since the Company had no
executive officers. The agreements provided for a fee of $100,000 to each of
Messrs. Golleher and Kouba for each of 2003 and 2002. Also on that date, the
Company entered into a similar agreement with Greg Mays who provided financial
and accounting services to the Company as a consultant but, in effect, served as
the Company's chief financial officer. The agreement provided for a fee of
$50,000 to Mr. Mays for each of 2003 and 2002.

In May 2003 the Company entered into Executive Services Agreements with Messrs.
Bartlett, Brown, Golleher, Kouba, Mays and Terrence Wallock, acting general
counsel of the Company. The purpose of the Agreements was to substantially lower
the administrative costs of the Company going forward while at the same time
retaining the availability of experienced executives knowledgeable about the
Company for ongoing administration as well as future opportunities. The
Agreements replace the letter agreements with Messrs. Bartlett, Golleher and
Kouba dated August 28, 2001. See Directors' Compensation. The Agreements can be
terminated at any time by the Company, by the lump sum payment of 180 days
compensation and by the Executive upon 180 days prior notice, except in certain
limited circumstances, and provide for compensation at the rate of $1,000 per
month to Messrs. Bartlett and Brown, $6,731 per week to Messrs. Golleher and
Kouba, $4,040 per week to Mr. Mays and $3,365 per week to Mr. Wallock.
Additional hourly compensation is provided for time spent in litigation after
termination of the Agreements and, in some circumstances during the term, for
extensive commitments of time for litigation and merger and acquisition
activities. The Agreements call for the payment of health insurance benefits and
provide for a mutual release upon termination.

23. SEGMENTS AND RELATED INFORMATION

Until the events of August 2001 occurred (see Note 1), the Company operated in
one industry--the promotional marketing industry. The Company's business in this
industry encompassed the design, development and marketing of high-impact
promotional products and programs.

A significant percentage of the Company's sales and trade receivables had been
attributable to a small number of customers. The following schedule summarizes
the concentration of sales and trade receivables for customers with sales in
excess of 10% of total sales for the year ended December 31, 2001. There were no
sales during 2003 or 2002. A majority of the accounts receivable as of December
31, 2003 and 2002 pertained to one customer for which a 100% reserve has been
established.

% of Trade
% of Sales Receivables
---------- -----------
2001 2001
---------- -----------

Company A 78 55
Company B 8 15

F-24

The Company historically conducted its promotional marketing business on a
global basis. The following summarizes the Company's net sales for the year
ended December 31, 2001, by geographic area. There were no sales during 2003 or
2002.

2001
--------------
(in thousands)

United States $ 199,583
Germany 45,709
Asia 45,301
United Kingdom 13,676
Other foreign 19,771
-----------
Consolidated $ 324,040
===========

The following summarizes the Company's long-lived assets as of December 31,
2003, 2002 and 2001, by geographic area:

2003 2002 2001
------ ------- -------
(in thousands)

United States $1,935 $ 1,949 $16,267
Foreign 2 21 987
------ ------- -------
$1,937 $ 1,970 $17,254
====== ======= =======

Geographic areas for net sales are based on customer locations. Long-lived
assets include property and equipment, excess of cost over net assets acquired
(in 2001) and other non-current assets.

24. EARNINGS PER SHARE DISCLOSURE

The following is a reconciliation of the numerators and denominators of the
basic and diluted Earnings Per Share ("EPS") computation for income (loss)
available to common stockholders and other related disclosures required by SFAS
No.128 "Earnings Per Share":

For the Twelve Months Ended December 31,
-----------------------------------------------------------------------------------------------------------
2003 2002 2001
----------------------------------- ----------------------------------- -----------------------------------
Income Shares Per Share Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- --------- ----------- ------------- ---------
(in thousands, except share data)

Basic and diluted EPS:
Loss from continuing
operations $(5,270) $(15,406) $ (7,916)
Preferred stock
dividends 1,127 1,091 1,042
------- -------- ---------
Loss from continuing
operations available
to common
stockholders $(6,397) 16,653,193 $(0.38) $(16,497) 16,653,193 $(0.99) $ (8,958) 16,454,779 $(0.54)
======= ========== ====== ======== ========== ====== ========= ========== ======
Income (loss) from
discontinued
operations $(3,591) 16,653,193 $(0.22) $ 6,120 16,653,193 $ 0.37 $(114,429) 16,454,779 $(6.96)
======= ========== ====== ======== ========== ====== ========= ========== ======

Net loss $(8,861) $ (9,286) $(122,345)
Preferred stock dividends 1,127 1,091 1,042
------- -------- ---------
Net loss available to
common stockholders $(9,988) 16,653,193 $(0.60) $(10,377) 16,653,193 $(0.62) $(123,387) 16,454,779 $(7.50)
======= ========== ====== ======== ========== ====== ========= ========== ======

For the years ended December 31, 2003 and 2002, 3,547,296 and 3,422,725,
respectively, shares of convertible preferred stock and common stock equivalents
and for the year ended December 31, 2001, 3,376,032 shares of convertible
preferred stock, common stock equivalents and contingently and non-contingently
issuable shares related to acquired companies were not included in the
computation of diluted EPS because to do so would have been antidilutive.

F-25

25. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following is a tabulation of the quarterly results of operations for the
years ended December 31, 2003 and 2002, respectively:

First Second Third Fourth
2003 Quarter Quarter Quarter Quarter
- ------------------------------------------ ------- ------- ------- -------
(in thousands, except per share data)

Continuing operations:
Net sales $ -- $ -- $ -- $ --
Gross profit -- -- -- --
Net loss (1,472) (1,389) (1,228) (1,181)
Loss per common share available
to common -- basic & diluted (0.10) (0.10) (0.09) (0.09)

Discontinued operations:
Net sales $ -- $ -- $ -- $ --
Gross profit -- -- -- --
Net income (loss) (117) 85 (311) (3,248)
Income (loss) per common share available
to common -- basic & diluted (0.01) -- (0.02) (0.19)

First Second Third Fourth
2002 Quarter Quarter Quarter Quarter
- ------------------------------------------ ------- -------- ------- -------
(in thousands, except per share data)

Continuing Operations:
Net Sales $ -- $ -- $ -- $ --
Gross Profit -- -- -- --
Net loss (1,328) (11,218) (1,318) (1,542)
Loss per common share available
to common -- basic & diluted (0.10) (0.69) (0.10) (0.10)

Discontinued Operations:
Net Sales $ -- $ -- $ -- $ --
Gross Profit -- -- -- --
Net income (loss) (3,839) 9,766 (405) 598
Income (loss) per common share available
to common -- basic & diluted (0.23) 0.59 (0.02) 0.03

F-26

Schedule II
Simon Worldwide, Inc.
Valuation and Qualifying Accounts
For the Years Ended December 31, 2003, 2002 and 2001
(in thousands)

Additions
Charged To Deductions
Accounts Receivable, Balance At Costs And (Charged Against Balance At
Allowance For Beginning Expenses Accounts End
Doubtful Accounts Of Period (Bad Debt Expenses) Recoveries Receivable) Of Period
- -------------------- ---------- ------------------- ---------- ---------------- ----------

2003 $13,416 $ 523 $ -- $ 87 $13,852
2002 15,616 -- 1,733 467 13,416
2001 2,074 15,492(1) -- 1,950 15,616