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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to ________________________
Commission File Number 0-21878
SIMON WORLDWIDE, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 04-3081657
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1888 CENTURY PARK EAST, LOS ANGELES, CALIFORNIA 90067
(Address of principal executive offices)
(Zip code)
(310) 552-6800
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by a check mark whether registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act). [ ]
At April 30, 2004, 16,653,193 shares of the Registrant's common stock were
outstanding.
SIMON WORLDWIDE, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE NUMBER
-----------
PART I FINANCIAL INFORMATION
Item 1. Condensed Financial Statements (Unaudited)
Consolidated Balance Sheets -
March 31, 2004 and December 31, 2003 3
Consolidated Statements of Operations -
For the three months ended March 31, 2004, and 2003 4
Consolidated Statements of Comprehensive Loss -
For the three months ended March 31, 2004, and 2003 5
Consolidated Statements of Cash Flows -
For the three months ended March 31, 2004, and 2003 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 17
Item 4. Controls and Procedures 17
PART II OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURE 19
2
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
SIMON WORLDWIDE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
March 31, December 31,
2004 2003
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ - $ -
Restricted cash - 334
Prepaid expenses and other current assets 527 740
Assets from discontinued operations to be disposed of - current (see Note 4) 16,038 16,827
------------ ------------
Total current assets 16,565 17,901
Property and equipment, net 18 33
Investments 500 500
Other assets 276 276
------------ ------------
17,359 18,710
Assets from discontinued operations to be disposed of - non-current (see Note 4) 1,100 1,128
------------ ------------
$ 18,459 $ 19,838
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable:
Trade $ 32 $ 75
Affiliates 163 161
Accrued expenses and other current liabilities 70 123
Liabilities from discontinued operations - current (see Note 4) 17,910 17,955
------------ ------------
Total current liabilities 18,175 18,314
Commitments and contingencies
Redeemable preferred stock, Series A1 senior cumulative participating
convertible, $.01 par value, 29,024 shares issued and outstanding at March
31, 2004, and 28,737 shares issued and outstanding
at December 31, 2003, stated at redemption value of $1,000 per share 29,024 28,737
Stockholders' deficit:
Common stock, $.01 par value; 50,000,000 shares authorized;
16,653,193 shares issued and outstanding at March 31, 2004, and
December 31, 2003 167 167
Additional paid-in capital 138,500 138,500
Retained deficit (167,407) (165,880)
------------ ------------
Total stockholders' deficit (28,740) (27,213)
------------ ------------
$ 18,459 $ 19,838
============ ============
See the accompanying Notes to Consolidated Financial Statements.
3
SIMON WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
For the three months
ended March 31,
------------------------
2004 2003
---------- ----------
Revenue $ - $ -
General and administrative expenses 1,028 1,472
---------- ----------
Loss from continuing operations before income taxes (1,028) (1,472)
Income tax benefit - -
---------- ----------
Net loss from continuing operations (1,028) (1,472)
Loss from discontinued operations, net of tax (see Note 4) (210) (117)
---------- ----------
Net loss (1,238) (1,589)
Preferred stock dividends 289 278
---------- ----------
Net loss available to common stockholders $ (1,527) $ (1,867)
========== ==========
Loss per share from continuing operations available
to common stockholders:
Loss per common share - basic and diluted $ (0.08) $ (0.10)
========== ==========
Weighted average shares outstanding - basic and diluted 16,653 16,653
========== ==========
Loss per share from discontinued operations:
Loss per common share - basic and diluted $ (0.01) $ (0.01)
========== ==========
Weighted average shares outstanding - basic and diluted 16,653 16,653
========== ==========
Net loss available to common stockholders:
Loss per common share - basic and diluted $ (0.09) $ (0.11)
========== ==========
Weighted average shares outstanding - basic and diluted 16,653 16,653
========== ==========
See the accompanying Notes to Consolidated Financial Statements.
4
SIMON WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(in thousands)
For the three months
ended March 31,
------------------------
2004 2003
---------- ----------
Net loss $ (1,238) $ (1,589)
---------- ----------
Other comprehensive income, before tax:
Foreign currency translation adjustments - -
Income tax expense related to items of
other comprehensive income - -
---------- ----------
Other comprehensive income, net of tax - -
---------- ----------
Comprehensive loss $ (1,238) $ (1,589)
========== ==========
See the accompanying Notes to Consolidated Financial Statements.
5
SIMON WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the three months
ended March 31,
------------------------
2004 2003
---------- ----------
Cash flows from operating activities:
Net loss $ (1,238) $ (1,589)
Loss from discontinued operations (210) (117)
---------- ----------
Loss from continuing operations (1,028) (1,472)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 15 15
Increase (decrease) in cash from changes
in working capital items:
Prepaid expenses and other current assets 213 177
Accounts payable (41) (47)
Accrued expenses and other current liabilities (53) (158)
---------- ----------
Net cash used in operating activities (894) (1,485)
---------- ----------
Cash flows from investing activities:
Purchase of property and equipment - (12)
Increase in restricted cash 334 435
---------- ----------
Net cash used in investing activities 334 423
---------- ----------
Net cash provided by financing activities - -
---------- ----------
Net cash used in continuing operations (560) (1,062)
Net cash provided by (used in) discontinued operations 560 (119)
---------- ----------
Net increase (decrease) in cash and cash equivalents - (1,181)
Cash and cash equivalents, beginning of period - 1,181
---------- ----------
Cash and cash equivalents, end of period $ - $ -
========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes $ 7 $ 2
========== ==========
Supplemental non-cash investing activities:
Dividends paid in kind on redeemable preferred stock $ 287 $ 276
========== ==========
See the accompanying Notes to Consolidated Financial Statements.
6
SIMON WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
by Simon Worldwide, Inc. (the "Company") pursuant to the rules and regulations
of the Securities and Exchange Commission regarding interim financial reporting.
Accordingly, they do not include all of the information and footnotes in
accordance with generally accepted accounting principles for complete financial
statements and should be read in conjunction with the consolidated financial
statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2003.
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments, consisting only of those considered
necessary for fair presentation of the Company's financial position, results of
operations and cash flows at the dates and for the periods presented.
By April 2002, the Company had effectively eliminated a majority of its ongoing
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 certain
revenues, operating costs, general and administrative costs and certain assets
and liabilities associated with the Company's promotions business, have been
classified as discontinued operations for financial reporting purposes.
The embezzlement by a former employee caused McDonald's Corporation
("McDonald's") and Philip Morris Incorporated ("Philip Morris", now known as
Altria, Inc.), substantial customers, to terminate their relationships with the
Company. See Note 2. The loss of these customers resulted in the Company no
longer having a business. Prior to the loss of its customers, the Company had
operated as a multi-national full service promotional marketing company.
Substantially all of the Company's assets and liabilities are in the same
business segment.
At March 31, 2004, and December 31, 2003, the Company had a passive investment
in a limited liability company controlled by an affiliate. See Note 5.
The operating results for the three months ended March 31, 2004, are not
necessarily indicative of the results to be expected for the full year.
2. LOSS OF CUSTOMERS, RESULTING EVENTS AND GOING CONCERN
In August 2001, Simon Worldwide, Inc. experienced the loss of its two largest
customers: McDonald's and, to a lesser extent, Philip Morris. Since August 2001,
the Company has concentrated its efforts on reducing its costs and settling
numerous claims, contractual obligations and pending litigation. As a result of
these efforts, the Company has been able to resolve a significant number of
outstanding liabilities that existed at December 31, 2001, or arose subsequent
to that date. 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 March 31, 2004, and December 31, 2003, the Company had a stockholders'
deficit of $28.7 million and $27.2 million, respectively. For the three months
ended March 31, 2004 and 2003, the Company had a net loss of $1.2 million and
$1.6 million, respectively. 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 Legal Actions Between the Company and McDonald's below),
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 March
31, 2004, 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
7
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. 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. 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 the three months
ended March 31, 2004, and 2003. 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 March 31, 2004, and 2003, 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.
LEGAL ACTIONS ASSOCIATED WITH THE MCDONALD'S MATTER
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 above, 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-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.
8
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. McDonald's and the Company have appealed 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.
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.
9
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.
3. RECENTLY ISSUED ACCOUNTING STANDARDS
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 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 $29.0 million and $28.7
million of preferred stock outstanding at March 31, 2004, and December 31, 2003,
respectively. Because such preferred stock is not mandatorily redeemable at a
specified date or upon an event that is likely to occur, the Company does not
consider its preferred stock to be mandatorily redeemable within the scope of
SFAS No. 150. Accordingly, the Company does not expect SFAS No. 150 to have a
material impact on its financial position, results of operations or cash flows.
4. DISCONTINUED OPERATIONS
As discussed in Note 2, 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 its promotions
business and defending and pursuing litigation with respect thereto.
Accordingly, the discontinued activities of the Company 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 2), management believes it has sufficient capital
resources and liquidity to operate the Company for the foreseeable future.
10
Assets and liabilities from discontinued operations as of March 31, 2004, and
December 31, 2003, as disclosed in the accompanying consolidated financial
statements, consist of the following:
March 31, December 31,
2004 2003
------------ ------------
Assets:
Cash and cash equivalents $ 9,409 $ 10,065
Restricted cash 6,431 6,547
Accounts receivable:
Trade, less allowance for doubtful accounts of $13,917
at March 31, 2004, and $13,852 at December 31, 2003 40 41
Prepaid expenses and other current assets 158 174
------------ ------------
Total current assets 16,038 16,827
Other assets 1,100 1,128
------------ ------------
Assets from discontinued operations to be disposed of $ 17,138 $ 17,955
============ ============
Liabilities:
Accounts payable - trade $ 5,148 $ 5,170
Accrued expenses and other current liabilities 12,762 12,785
------------ ------------
Total current liabilities 17,910 17,955
------------ ------------
Liabilities from discontinued operations $ 17,910 $ 17,955
============ ============
Net loss from discontinued operations for the three months ended March 31, 2004
and 2003, as disclosed in the accompanying consolidated financial statements,
consists of the following:
For the three months
ended March 31,
--------------------
2004 2003
-------- --------
Net sales $ - $ -
Cost of sales - -
-------- --------
Gross profit - -
Selling, general and administrative expenses 174 245
Gain on settlement of obligations - (2)
-------- --------
Operating loss (174) (243)
Interest income (32) (74)
Interest expense - -
Other income (expense) 68 (52)
-------- --------
Loss before income taxes (210) (117)
Income tax benefit - -
-------- --------
Net loss from discontinued operations $ (210) $ (117)
======== ========
11
5. 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 March 31, 2004, and 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.
6. SHORT-TERM BORROWINGS
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.
Restricted cash at March 31, 2004, and December 31, 2003, primarily consisted of
amounts deposited with lenders to satisfy the Company's obligations pursuant to
its outstanding standby letters of credit and $2.7 million deposited into an
irrevocable trust during 2002. See Note 7.
7. 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 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 within continuing operations in the accompanying
consolidated balance sheets as of March 31, 2004, and December 31, 2003.
12
8. EARNINGS PER SHARE DISCLOSURE
The following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computation for "loss available to common stockholders"
and other related disclosures required by SFAS No. 128, "Earnings per Share,"
(in thousands, except share data):
For the Three Months Ended March 31,
2004 2003
--------------------------------------- ---------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
Basic and diluted EPS:
Loss from continuing operations $ (1,028) $ (1,472)
Preferred stock dividends 289 278
----------- -----------
Loss from continuing operations available
to common stockholders $ (1,317) 16,653,193 $ (0.08) $ (1,750) 16,653,193 $ (0.10)
=========== ============= ========= =========== ============= =========
Income (loss) from discontinued operations $ (210) 16,653,193 $ (0.01) $ (117) 16,653,193 $ (0.01)
=========== ============= ========= =========== ============= =========
Net loss (1,238) (1,589)
Preferred stock dividends 289 278
----------- -----------
Net loss available to common stockholders $ (1,527) 16,653,193 $ (0.09) $ (1,867) 16,653,193 $ (0.11)
=========== ============= ========= =========== ============= =========
For the three months ended March 31, 2004, and 2003, 3,502,606 and 3,365,936
shares of convertible preferred stock and common stock equivalents, were not
included in the computation of diluted EPS because to do so would have been
antidilutive.
9. STOCK-BASED COMPENSATION PLAN AND PRO FORMA STOCK-BASED COMPENSATION EXPENSE
At March 31, 2004, the Company had one stock-based compensation plan. The
Company adopted the disclosure provisions of SFAS No. 123, 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 three months ended March 31, 2004, and 2003. Since there
were no employee stock option grants during the three months ended March 31,
2004, and 2003, there is no impact on net income as reported in the accompanying
consolidated financial statements.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion of the financial condition and results of
operations of Simon Worldwide, Inc. (the "Company") for the three months ended
March 31, 2004, as compared to the same period in the previous year. This
discussion should be read in conjunction with the consolidated financial
statements of the Company and related Notes included elsewhere in this Form
10-Q.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
From time to time, the Company may provide forward-looking information such as
forecasts of expected future performance or statements about the Company's plans
and objectives, including certain information provided below. These
forward-looking statements are based largely on the Company's expectations and
are subject to a number of risks and uncertainties, certain of which are beyond
the Company's control. The Company wishes to caution readers that actual results
may differ materially from those expressed in any forward-looking statements
made by, or on behalf of, the Company including, without limitation, as a result
of factors described in the Company's Amended Cautionary Statement for Purposes
of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act
of 1995, filed as Exhibit 99.1 to the Company's 2003 Annual Report on Form 10-K
which is incorporated herein by reference.
GENERAL
In August 2001, the Company experienced the loss of its two largest customers:
McDonald's Corporation ("McDonald's") and, to a lesser extent, Philip Morris
Incorporated ("Philip Morris"), now known as Altria, Inc. 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 March 31, 2004, and December 31, 2003, the Company had a stockholders'
deficit of $28.7 million and $27.2 million, respectively. For the three months
ended March 31, 2004 and 2003, the Company had a net loss of $1.2 million and
$1.6 million, respectively. 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 Loss of Customers, Resulting Events and Going Concern discussed in
Item 1), 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 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 Loss of Customers, Resulting Events and Going
Concern discussed in Item 1. 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% of total net sales in
2001. The Company had no sales during 2003 or 2002.
14
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 during the fourth quarter of 2003 with respect to the
liability arising from the Winthrop lease.
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 Loss of Customer, Resulting Events and Going Concern
Discussed in Item 1. 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 Loss of Customer, Resulting Events and
Going Concern Discussed in Item 1), management believes it has sufficient
capital resources and liquidity to operate the Company for the foreseeable
future.
RESULTS OF CONTINUING AND DISCONTINUED OPERATIONS
By April 2002, the Company had effectively eliminated a majority of its ongoing
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.
RESULTS OF CONTINUING OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004, COMPARED TO THREE MONTHS ENDED MARCH 31, 2003
General and administrative expenses totaled $1.0 million in the first quarter of
2004 as compared to $1.5 million in the first quarter of 2003, primarily due to
decreases in labor expense, insurance expense, and Board of Director Fees.
RESULTS OF DISCONTINUED OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004, COMPARED TO THREE MONTHS ENDED MARCH 31, 2003
The Company had no sales or gross profit during the three months ended March 31,
2004 and 2003, due to the loss of its McDonald's and Philip Morris business in
2001 as well as the loss of its other customers. See notes to consolidated
financial statements.
Selling, general and administrative expenses totaled $.17 million in the first
quarter of 2004 as compared to $.25 million in the first quarter of 2003
primarily due to decreases in professional fees and space and facilities
expenses. See notes to consolidated financial statements.
During the three months ended March 31, 2003, the Company dissolved two foreign
subsidiaries pertaining to the promotions business resulting in a net gain of
approximately $.4 million recorded as other income within discontinued
operations. This gain resulted from the resolution of obligations and general
accruals for amounts less than the amounts carried on the Company's books. No
such gain was recorded during the three months ended March 31, 2004.
15
LIQUIDITY AND CAPITAL RESOURCES
The matters discussed in the Loss of Customers, Resulting Events and Going
Concern section in Note 2 to the Notes to Condensed Consolidated Financial
Statements 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, 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 Note 2 of the Notes to Condensed Consolidated
Financial Statements. To date, the Board of Directors has made no decision on
which course of action to take.
CONTINUING OPERATIONS
Working capital from continuing operations at March 31, 2004, was $.3 million
compared to $.7 million at December 31, 2003. Net cash used in operating
activities from continuing operations during the three months ended March 31,
2004, totaled $.9 million, primarily due to a net loss from continuing
operations of $1.0 million partially offset by a net increase in working capital
of $.1 million. Net cash used in operating activities from continuing operations
during the three months ending March 31, 2003, totaled $1.5 million, primarily
due to a loss from continuing operations of $1.5 million and a decrease in
accrued expenses of $.2 million partially offset by a decrease in prepaid
expenses and other current assets of $.2 million.
Net cash provided by investing activities from continuing operations during the
three months ended March 31, 2004, totaled $.3 million, primarily due to a
decrease in restricted cash. Net cash provided by investing activities during
the three months ended March 31, 2003, totaling $.4 million, primarily
represented decreases in restricted cash balances during the period. There were
also no financing activities from continuing operations during the three months
ended March 31, 2004 and 2003.
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 March 31, 2004, and
December 31, 2003, totaled $0 and $.3 million, respectively, and primarily
consisted of amounts deposited with lenders to satisfy the Company's obligations
pursuant to its outstanding standby letters of credit.
DISCONTINUED OPERATIONS
Working capital from discontinued operations at March 31, 2004, was a deficit of
$(1.9) million compared to a deficit of $(1.1) million at December 31, 2003. Net
cash provided by discontinued operations during the three months ended March 31,
2004, totaled $.6 million, primarily due to a reallocation of funds, totaling
$.7 million, from discontinued to continuing operations and net cash provided by
investing activities of $.1 million, partially offset by net cash used by
operating activities of $.2 million. Net cash used in discontinued operations
during the three months ended March 31, 2003, totaled $.1 million, which was
primarily due to net cash used in operating activities of $.8 million and net
cash used in investing activities of $.3 million, partially offset by and a
reallocation of funds, totaling approximately $1.0 million, between continuing
and discontinued operations due to changes in minimum working capital
requirements.
Net cash used in operating activities from discontinued operations during the
three months ended March 31, 2004, of $.2 million, primarily consisted of a net
loss from discontinued operations. Net cash used in operating activities of
discontinued operations during the three months ended March 31, 2003, of $.8
million primarily consisted of a net loss from discontinued operations of $.1
16
million and a decrease in accounts payable and accrued liabilities totaling $1.0
million, partially offset by a decrease in accounts receivable totaling $.3
million.
Net cash provided by investing activities from discontinued operations during
the three months ended March 31, 2004, totaled $.1 million million, primarily
due to a decrease in restricted cash. Net cash used in investing activities
within discontinued operations during the three months ended March 31, 2003, of
$.3 million primarily consisted of an increase in restricted cash.
There were no financing activities within discontinued operations during the
three months ended March 31, 2004 and 2003.
Restricted cash included within discontinued operations at March 31, 2004, and
December 31, 2003, totaled $6.4 million and $6.5 million, respectively, and
primarily consisted of amounts deposited with lenders to satisfy the Company's
obligations pursuant to its outstanding standby letters of credit and amounts
deposited into an irrevocable trust totaling $2.7 million.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The disclosure required by this Item is not material to the Company because the
Company does not currently have any exposure to market rate sensitive
instruments, as defined in this Item. Part of the Company's discontinued
operations consists of certain consolidated subsidiaries that are denominated in
foreign currencies. As the assets of these subsidiaries are largely offset by
liabilities, the Company is not materially exposed to foreign currency exchange
risk.
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES: As of March 31, 2004, 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, the chief financial
officer of the Company, reviewed and participated in this evaluation. Based on
this evaluation, the principal executive and financial officers of the Company
concluded that the Company's disclosure controls and procedures 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.
17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See "Legal Actions Associated with the McDonald's Matter" in Note 2 of the Notes
to Consolidated Financial Statements in Part I of this Report on Form 10-Q for
disclosure related to legal proceedings involving the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed herewith:
10.30 May 3, 2004, Amendment No. 1 to Executive Services Agreements
with Joseph Bartlett, Allan Brown, George Golleher, Anthony
Kouba, Gregory Mays, and Terrence Wallock
31.1 Certification of George G. Golleher pursuant to Rule 13a-14(a)
of the Securities Exchange Act of 1934.
31.2 Certification of J. Anthony Kouba pursuant to Rule 13a-14(a)
of the Securities Exchange Act of 1934.
31.3 Certification of Greg Mays pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934.
32 Certification of George G. Golleher, J. Anthony Kouba and Greg
Mays pursuant to Section 13a-14(b) of the Securities Exchange
Act of 1934 and 18 U.S.C. Section 1350.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarterly period ended
March 31, 2004.
18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: May 6, 2004 SIMON WORLDWIDE, INC.
/s/ J. ANTHONY KOUBA
---------------------------
J. Anthony Kouba
Executive Committee Member
(duly authorized signatory)
19