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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 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.)
5200 WEST CENTURY BOULEVARD, LOS ANGELES, CALIFORNIA 90045
(Address of principal executive offices)
(Zip code)
(310) 417-4660
(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 October 31, 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 -
September 30, 2004, and December 31, 2003 3
Consolidated Statements of Operations -
For the three and nine months ended September 30, 2004
and 2003 4
Consolidated Statements of Cash Flows -
For the nine months ended September 30, 2004 and 2003 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 14
Item 4. Controls and Procedures 14
PART II OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURE 16
2
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
SIMON WORLDWIDE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 30, December 31,
2004 2003
------------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 16,337 $ -
Restricted cash 5,873 334
Prepaid expenses and other current assets 110 740
Assets from discontinued operations to be disposed of - current (see Note 4) 5,562 16,827
--------- ---------
Total current assets 27,882 17,901
Property and equipment, net 13 33
Investments 500 500
Other assets 197 276
--------- ---------
28,592 18,710
Assets from discontinued operations to be disposed of - non-current (see Note 4) 246 1,128
--------- ---------
$ 28,838 $ 19,838
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable:
Trade $ 84 $ 75
Affiliates 164 161
Accrued expenses and other current liabilities 48 123
Liabilities from discontinued operations - current (see Note 4) 5,808 17,955
--------- ---------
Total current liabilities 6,104 18,314
Commitments and contingencies
Redeemable preferred stock, Series A1 senior cumulative participating
convertible, $.01 par value, 29,608 shares issued and outstanding at
September 30, 2004, and 28,737 shares issued and outstanding
at December 31, 2003, stated at redemption value of $1,000 per share 29,608 28,737
Stockholders' deficit:
Common stock, $.01 par value, 50,000,000 shares authorized, 16,653,193 shares
issued and outstanding at September 30, 2004, and December 31, 2003 167 167
Additional paid-in capital 138,500 138,500
Retained deficit (145,541) (165,880)
--------- ---------
Total stockholders' deficit (6,874) (27,213)
--------- ---------
$ 28,838 $ 19,838
========= =========
See the accompanying Notes to Condensed Consolidated Financial Statements.
3
SIMON WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
For the three months For the nine months
ended September 30, ended September 30,
---------------------- ----------------------
2004 2003 2004 2003
-------- -------- -------- --------
Revenue $ - $ - $ - $ -
General and administrative expenses 618 1,228 2,278 4,102
-------- -------- -------- --------
Loss from continuing operations before income taxes (618) (1,228) (2,278) (4,102)
Income tax benefit - - - -
-------- -------- -------- --------
Net loss from continuing operations (618) (1,228) (2,278) (4,102)
Income (loss) from discontinued operations, net of tax (see Note 4) 24,520 (311) 23,491 (330)
-------- -------- -------- --------
Net income (loss) 23,902 (1,539) 21,213 (4,432)
Preferred stock dividends 292 282 874 840
-------- -------- -------- --------
Net income (loss) available to common stockholders $ 23,610 $ (1,821) $ 20,339 $ (5,272)
======== ======== ======== ========
Loss per share from continuing operations available to common stockholders:
Loss per common share - basic and diluted $ (0.05) $ (0.09) $ (0.19) $ (0.30)
======== ======== ======== ========
Weighted average shares outstanding - basic and diluted 16,653 16,653 16,653 16,653
======== ======== ======== ========
Income (loss) per share from discontinued operations:
Income (loss) per common share - basic and diluted $ 1.47 $ (0.02) $ 1.41 $ (0.02)
======== ======== ======== ========
Weighted average shares outstanding - basic and diluted 16,653 16,653 16,653 16,653
======== ======== ======== ========
Net income (loss) available to common stockholders:
Net income (loss) per common share - basic and diluted $ 1.42 $ (0.11) $ 1.22 $ (0.32)
======== ======== ======== ========
Weighted average shares outstanding - basic and diluted 16,653 16,653 16,653 16,653
======== ======== ======== ========
See the accompanying Notes to Condensed Consolidated Financial Statements.
4
SIMON WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the nine months
ended September 30,
2004 2003
-------- --------
Cash flows from operating activities:
Net income (loss) $ 21,213 $ (4,432)
Income (loss) from discontinued operations 23,491 (330)
-------- --------
Loss from continuing operations (2,278) (4,102)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation 20 46
Increase (decrease) in cash from changes
in working capital items:
Prepaid expenses and other current assets 630 1,046
Accounts payable 12 27
Accrued expenses and other current liabilities (75) (446)
-------- --------
Net cash used in operating activities (1,691) (3,429)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment - (27)
Decrease (increase) in restricted cash (5,539) 2,608
Other, net 79 -
-------- --------
Net cash provided by (used in) investing activities (5,460) 2,581
-------- --------
Net cash provided by financing activities - -
-------- --------
Net cash used in continuing operations (7,151) (848)
Net cash provided by (used in) discontinued operations 23,488 (333)
-------- --------
Net increase (decrease) in cash and cash equivalents 16,337 (1,181)
Cash and cash equivalents, beginning of period - 1,181
-------- --------
Cash and cash equivalents, end of period $ 16,337 $ -
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes $ 14 $ 9
======== ========
Supplemental non-cash investing activities:
Dividends paid in kind on redeemable preferred stock $ 871 $ 837
======== ========
See the accompanying Notes to Condensed Consolidated Financial Statements.
5
SIMON WORLDWIDE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed 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 condensed 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.
Prior to August 2001, the Company was a multi-national, full service promotional
marketing company. In August 2001, McDonald's Corporation ("McDonald's"), the
Company's principal customer, terminated its 25-year relationship with the
Company as a result of the embezzlement by a former Company employee of winning
game pieces from McDonald's promotional games administered by the Company. Other
customers also terminated their relationships with the Company, resulting in the
Company no longer having a business. 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 related litigation. Although
the settlement of litigation between the Company and McDonald's was completed in
August 2004 (see Item 1. Legal Proceedings in Part II - Other Information), this
process is ongoing and will continue throughout 2004 and into 2005. During the
second quarter of 2002, the discontinued activities of the Company, consisting
of revenues, operating costs, 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.
At September 30, 2004, the Company had one stock-based compensation plan. The
Company adopted the disclosure provisions of FASB Statement No. 123, "Accounting
for Stock -- Based Compensation," as amended by FASB Statement No. 148,
"Accounting for Stock-Based Compensation -- Transition and Disclosure -- An
Amendment of FASB Statement No. 123," and has applied APB No. 25 and related
Interpretations in accounting for its plan. Accordingly, no compensation cost
has been recognized related to such plan during the three and nine months ended
September 30, 2004 and 2003. Since there were no employee stock option grants
during the three and nine months ended September 30, 2004 and 2003, there is no
impact on net income as reported in the accompanying condensed consolidated
financial statements.
At September 30, 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 and nine months ended September 30, 2004,
are not necessarily indicative of the results to be expected for the full year.
2. ABSENCE OF OPERATING BUSINESS; GOING CONCERN
As a result of the loss of its customers, the Company no longer has any
operating business. 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. At September 30, 2004, the Company
had reduced its workforce to 5 employees from 136 employees at December 31,
2001. 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 September 30, 2004, and December 31, 2003, the Company had a stockholders'
deficit of $6.9 million and $27.2 million, respectively. For the nine months
ended September 30, 2004 and 2003, the Company had net income (losses) of $21.2
million and $(4.4) million, respectively. The Company continues to incur losses
in 2004 within its continuing operations for the general and administrative
expenses being incurred to manage the affairs of the Company and resolve
outstanding legal matters. By utilizing cash received pursuant to the settlement
with McDonald's in 2004 (see Item 1. Legal Proceedings in Part II - Other
Information), 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 pending legal matters
at December 31, 2003, the Company's
6
registered public accounting firm has expressed substantial doubt about the
Company's ability to continue as a going concern. The accompanying condensed
consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
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. To date, the Board of Directors has made no
decision on which course of action to take.
3. RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2003, the FASB issued a revision to FASB Interpretation No. 46 ("FIN
46"), "Consolidation of Variable Interest Entities." FIN 46, as amended by FIN
46(R), requires an investor with a majority of the variable interest 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 with
adoption no later than March 15, 2004. The Company does not have any variable
interest entities that must be consolidated.
4. 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 its promotions business and defending
and pursuing related litigation. Accordingly, the discontinued activities of the
Company have been classified as discontinued operations in the accompanying
condensed consolidated financial statements. The Company typically includes
sufficient cash within discontinued operations to ensure assets from
discontinued operations to be disposed of cover liabilities from discontinued
operations.
Assets and liabilities from discontinued operations as of September 30, 2004,
and December 31, 2003, as disclosed in the accompanying condensed consolidated
financial statements, consist of the following (in thousands):
September 30, December 31,
2004 2003
------------- ------------
Assets:
Cash and cash equivalents $ 5,561 $10,065
Restricted cash - 6,547
Accounts receivable:
Trade, less allowance for doubtful accounts of $13,852
at December 31, 2003 - 41
Prepaid expenses and other current assets 1 174
------- -------
Total current assets 5,562 16,827
Other assets 246 1,128
------- -------
Assets from discontinued operations to be disposed of $ 5,808 $17,955
======= =======
Liabilities:
Accounts payable - trade $ 243 $ 5,170
Accrued expenses and other current liabilities 5,565 12,785
------- -------
Total current liabilities 5,808 17,955
------- -------
Liabilities from discontinued operations $ 5,808 $17,955
======= =======
7
Net income (loss) from discontinued operations for the three and nine months
ended September 30, 2004 and 2003, as disclosed in the accompanying condensed
consolidated financial statements, consists of the following (in thousands):
For the three months For the nine months
ended September 30, ended September 30,
---------------------- ----------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net sales $ - - - $ -
Cost of sales - - - -
-------- -------- -------- --------
Gross profit - - - -
General and administrative expenses 488 227 1,070 502
Gain on settlement of obligations (see Note 9) (24,480) (17) (24,500) (23)
Impairment of asset (see Note 10) - - 1,029 -
-------- -------- -------- --------
Operating income (loss) 23,992 (210) 22,401 (479)
Interest income (64) (37) (173) (211)
Other (income) expense (see Note 11) (464) 138 (917) 62
-------- -------- -------- --------
Net income (loss) from discontinued operations $ 24,520 $ (311) $ 23,491 $ (330)
======== ======== ======== ========
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. The 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 September 30, 2004, and December 31,
2003, and was 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. Restricted cash at
September 30, 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 and a Trustee entered into an Indemnification Trust
Agreement (the "Agreement" or the "Trust"), which requires the Company 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 the Company. At September 30, 2004, these funds are included in
restricted cash within continuing operations.
8
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 FASB Statement No. 128, "Earnings per
Share," (in thousands, except share data):
For the Three Months Ended September 30,
2004 2003
--------------------------------------- --------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ----------
Basic and diluted EPS:
Loss from continuing operations $ (618) $ (1,228)
Preferred stock dividends 292 282
------------ ---------
Loss from continuing operations available
to common stockholders $ (910) 16,653,193 $(0.05) $ (1,510) 16,653,193 $(0.09)
============ ========== ====== ========= ========== ======
Income (loss) from discontinued operations $ 24,520 16,653,193 $ 1.47 $ (311) 16,653,193 $(0.02)
============ ========== ====== ========= ========== ======
Net income (loss) $ 23,902 $ (1,539)
Preferred stock dividends 292 282
------------ ---------
Net income (loss) available to common
stockholders $ 23,610 16,653,193 $ 1.42 $ (1,821) 16,653,193 $(0.11)
============ ========== ====== ========= ========== ======
For the three months ended September 30, 2004 and 2003, 3,573,352 and
3,433,921 shares, respectively, of convertible preferred stock, 1,666,667 shares
related to an outstanding warrant, and 225,000 shares related to outstanding
options, were not included in the computation of diluted EPS because to do so
would have been antidilutive.
For the Nine Months Ended September 30,
2004 2003
--------------------------------------- --------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ----------
Basic and diluted EPS:
Loss from continuing operations $ (2,278) $ (4,102)
Preferred stock dividends 874 840
------------ ---------
Loss from continuing operations available
to common stockholders $ (3,152) 16,653,193 $(0.19) $ (4,942) 16,653,193 $(0.30)
============ ========== ====== ========= ========== ======
Income (loss) from discontinued operations $ 23,491 16,653,193 $ 1.41 $ (330) 16,653,193 $(0.02)
============ ========== ====== ========= ========== ======
Net income (loss) $ 21,213 $ (4,432)
Preferred stock dividends 874 840
------------ ---------
Net income (loss) available to common
stockholders $ 20,339 16,653,193 $ 1.22 $ (5,272) 16,653,193 $(0.32)
============ ========== ====== ========= ========== ======
For the nine months ended September 30, 2004 and 2003, 3,538,180 and 3,400,121
shares, respectively, of convertible preferred stock, 1,666,667 shares related
to an outstanding warrant, and 225,000 shares related to outstanding options,
were not included in the computation of diluted EPS because to do so would have
been antidilutive.
9
9. GAIN ON SETTLEMENT OF OBLIGATIONS
During the three months ended September 30, 2004, and in connection with the
Company's settlement of its litigation with McDonald's and related entities, the
Company received net cash proceeds, after attorney's fees, of approximately $13
million and due to the elimination of liabilities associated with the settlement
of $12 million, the Company recorded a gain of $25 million. This gain was
partially offset by a contingent settlement loss of $.5 million. During the
three and nine months ended September 30, 2003, the Company recorded nominal
gains related to the settlement of outstanding liabilities with some of its
vendors on terms more favorable to the Company than required by the existing
terms of the liabilities.
10. IMPAIRMENT OF ASSET
During the nine months ended September 30, 2004, certain events occurred that
indicated the Company would not realize amounts related to an insurance policy
on which the Company is the beneficiary of the cash surrender value. As such,
the Company recorded an asset impairment charge of $1.0 million which is
included in Impairment of Asset within discontinued operations disclosed in Note
4 of the Notes to Condensed Consolidated Financial Statements.
11. OTHER (INCOME) EXPENSE
During the three months ended September 30, 2004, the Company reduced its
contingent loss liability related to its guarantee of an equipment lease by $.4
million to reflect the reduced potential loss. In addition, during the nine
months ended September 30, 2004, the Company recorded a gain of $.3 million
related to the wind-down of one of the Company's foreign subsidiaries and
resulting from the settlement of general accruals for less than amounts carried
on the Company's books. Also during the nine months ended September 30, 2004,
the Company received various refunds totaling $.1 million related to the
wind-down of the Company's promotions business.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion of the financial condition and results of
operations of Simon Worldwide, Inc. (the "Company") for the three and nine
months ended September 30, 2004, as compared to the same periods in the previous
year. This discussion should be read in conjunction with the condensed
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 this Form 10-Q.
GENERAL
Prior to August 2001, the Company was a multi-national, full service promotional
marketing company. In August 2001, McDonald's Corporation ("McDonald's"), the
Company's principal customer, terminated its 25-year relationship with the
Company as a result of the embezzlement by a former Company employee of winning
game pieces from McDonald's promotional games administered by the Company. Other
customers also terminated their relationships with the Company, resulting in the
Company no longer having a business. 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 related litigation. Although
the settlement of litigation between the Company and McDonald's was completed in
August 2004 (see Item 1. Legal Proceedings in Part II - Other Information), this
process is ongoing and will continue throughout 2004 and into 2005. During the
second quarter of 2002, the discontinued activities of the Company, consisting
of revenues, operating costs, 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.
As a result of the loss if its customers, the Company no longer has any
operating business. 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. At September 30, 2004, the Company
had reduced its workforce to 5 employees from 136 employees at December 31,
2001. 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.
OUTLOOK
As a result of the stockholders' deficit, loss of customers and the pending
legal matters at December 31, 2003, the Company's registered public accounting
firm has expressed substantial doubt about the Company's ability to continue as
a going concern. The accompanying condensed consolidated financial statements do
not include any adjustments that might result from the outcome of these
uncertainties. The Company has taken significant actions and will continue to
take further action to reduce its cost structure. The Board of Directors of the
Company continues to consider various alternative courses of action for the
Company going forward, including possibly acquiring one or more operating
businesses, selling the Company or distributing its net assets, if any, to
shareholders. The decision on which course to take will depend upon a number of
factors. To date, the Board of Directors has made no decision on which course of
action to take. By utilizing cash 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.
11
RESULTS OF CONTINUING AND DISCONTINUED OPERATIONS
The discontinued activities of the Company have been classified as discontinued
operations in the accompanying condensed 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 condensed consolidated financial
statements and related notes.
RESULTS OF CONTINUING OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004, COMPARED TO THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 2003
General and administrative expenses decreased to $.6 million and $2.3 million
for the three and nine months, respectively, ended September 30, 2004, from $1.2
million and $4.1 million for the three and nine months, respectively, ended
September 30, 2003, primarily due to reduced labor, insurance, and professional
services costs.
RESULTS OF DISCONTINUED OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004, COMPARED TO THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 2003
The Company generated no sales or gross profits during the three and nine months
ended September 30, 2004 and 2003, due to the loss of its McDonald's business
and subsequent loss of its other customers.
General and administrative expenses totaled $.5 million and $1.1 million for the
three and nine months, respectively, ended September 30, 2004, as compared to
$.2 million and $.5 million for the three and nine months, respectively, ended
September 30, 2003, primarily due to exchange losses and an increase in the
valuation allowance of the deferred tax accounts of the Company's foreign
subsidiaries.
During the three and nine months ended September 30, 2004, and in connection
with the Company's settlement of its litigation with McDonald's and related
entities, the Company received net cash proceeds, after attorney's fees, of
approximately $13 million and due to the elimination of liabilities associated
with the settlement of $12 million, the Company recorded a gain of $25 million
included in Gain on Settlement of Obligations disclosed in Note 4 of the Notes
to Condensed Consolidated Financial Statements. During the three and nine months
ended September 30, 2003, the Company recorded nominal gains related to the
settlement of outstanding liabilities with some of its vendors on terms more
favorable to the Company than required by the existing terms of the liabilities
which are included in Gain on Settlement of Obligations disclosed in Note 4 of
the Notes to Condensed Consolidated Financial Statements.
During the three months ended September 30, 2004, the Company reduced its
contingent loss liability related to its guarantee of an equipment lease by $.4
million to reflect the reduced potential loss.
During the nine months ended September 30, 2003, the Company dissolved two
foreign subsidiaries which had been part of its promotions business resulting in
a net gain of approximately $.4 million included as Other Income within
discontinued operations. This gain resulted from the settlement of obligations
and general accruals for amounts less than the amounts carried on the Company's
books. During the nine months ended September 30, 2004, the Company recorded a
similar gain of $.3 million related to the wind-down of another of the Company's
foreign subsidiaries and resulting from the settlement of general accruals for
less than amounts carried on the Company's books. In addition, during the nine
months ended September 30, 2004, the Company received various refunds totaling
$.1 million related to the wind-down of the Company's promotions business. These
amounts are included in Other Income within discontinued operations disclosed in
Note 4 of the Notes to Condensed Consolidated Financial Statements.
12
During the nine months ended September 30, 2004, certain events occurred that
indicated the Company would not realize amounts related to an insurance policy
on which the Company is the beneficiary of the cash surrender value. As such,
the Company recorded an asset impairment charge of $1.0 million which is
included in Impairment of Asset within discontinued operations disclosed in Note
4 of the Notes to Condensed Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The matters discussed in the Absence of Operating Business; Going Concern in
Note 2 of 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
pending legal matters at December 31, 2003, the Company's registered public
accounting firm has expressed substantial doubt about the Company's ability to
continue as a going concern. The accompanying condensed consolidated financial
statements do not include any adjustments that might result from the outcome of
these uncertainties. The Company continues to incur operating losses in 2004
within its continuing operations for the general and administrative expenses
incurred to manage the affairs of the Company and resolve outstanding legal
matters. Inasmuch as the Company no longer generates operating income and is
unable to borrow funds, the source of current and future working capital is
expected to be cash on hand, the recovery of certain long-term investments and
any future proceeds from litigation. By utilizing cash 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. 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 September 30, 2004, was $22.0
million compared to $.7 million at December 31, 2003. The increase is primarily
due to the cash received and elimination of liabilities in connection with the
Company's settlement of its litigation with McDonald's and related entities. Net
cash used in operating activities from continuing operations during the nine
months ended September 30, 2004, totaled $1.7 million primarily due to a net
loss of $2.3 million partially offset by net change in working capital items of
$.6 million. Net cash used in operating activities from continuing operations
during the nine months ended September 30, 2003, totaled $3.4 million, primarily
due to a net loss from continuing operations of $4.1 million partially offset by
a net change in working capital items of $.6 million.
Net cash used in investing activities from continuing operations during the nine
months ended September 30, 2004, totaled $5.5 million primarily due to an
increase in restricted cash. Net cash provided by investing activities during
the nine months ended September 30, 2003, totaled $2.6 million, primarily due to
a decrease in restricted cash.
There were no cash flows from financing activities during the nine months ended
September 30, 2004 and 2003.
Restricted cash included within continuing operations at September 30, 2004, and
December 31, 2003, totaled $5.9 million 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 and, at
September 30, 2004, included $2.7 million deposited into an irrevocable trust.
DISCONTINUED OPERATIONS
Working capital from discontinued operations at September 30, 2004, was a
deficit of $.2 million compared to a deficit of $1.1 million at December 31,
2003. Net cash provided by discontinued operations during the nine months ended
September 30, 2004, totaled $23.5 million and primarily related to cash received
and the elimination of liabilities in connection with the settlement with
McDonald's totaling $25.0 million partially offset by non-cash impairment and
other charges of $1.2 million and other items of $.3 million. Net cash used in
discontinued operations during the nine months ended September 30, 2003, totaled
$.3 million and primarily related to net cash used in operating activities of
$.6 million and net cash used in investing activities of $1.8 million partially
offset by a reallocation of funds, totaling $2.1 million, between continuing and
discontinued operations due to changes in minimum working capital requirements.
Net cash provided by investing activities within discontinued operations during
the nine months ended September 30, 2004, totaled $6.4 million and primarily
consisted of a decrease in restricted cash. Net cash used by investing
activities within discontinued operations during the nine months ended September
30, 2003, of $1.8 million, primarily consisted of an increase in restricted
cash.
There were no financing activities within discontinued operations during the
nine months ended September 30, 2004 and 2003.
13
Restricted cash included within discontinued operations at September 30, 2004,
and December 31, 2003, totaled $0 and $6.5 million, respectively, and at
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 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 September 30, 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.
14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
McDonald's Litigation. McDonald's termination of its contractual relationship
with the Company led to various lawsuits between the Company and its subsidiary
Simon Marketing on 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
and, in August 2004, the settlement was completed. Under the settlement, all
causes of action between the parties have been dismissed and mutual releases
have been exchanged. In addition, McDonald's has paid $6.9 million to the
Company and assigned 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 amount of insurance proceeds
paid to the Company was $8.7 million which resulted in total net proceeds to the
Company of approximately $13 million after payment of attornies' fees relating
to the settlement. The mutual releases cover all obligations between the
parties, including all related trade payables and accrued expenses which were
recorded within discontinued operations. 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
related claims, including the previously reported cases pending in Canada.
Stone Street Litigation. The previously-reported Stone Street case pending in
Maryland was settled in September 2004.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
(a) Exhibits filed herewith:
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
99.1 Amended Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act of 1995
15
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: November 12, 2004 SIMON WORLDWIDE, INC.
/s/ J. ANTHONY KOUBA
---------------------------
J. Anthony Kouba
Executive Committee Member
(duly authorized signatory)
16