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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 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 W. CENTURY BOULEVARD, LOS ANGELES, CALIFORNIA 90045
(Address of principal executive office)
(310) 417-4660
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
COMMON STOCK, $0.01 PAR VALUE NONE
PER SHARE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). [ ]
At June 30, 2004, the aggregate market value of voting stock held by
non-affiliates of the registrant was $2,949,782.
At February 28, 2005, 16,653,193 shares of the registrant's common stock were
outstanding.
SIMON WORLDWIDE, INC.
FORK 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
INDEX
PAGE
PART I
Item 1. Business 3
Item 2. Properties 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 5
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 6
Item 6. Selected Financial Data 6
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 7
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 15
Item 8. Financial Statements and Supplementary Data 15
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 16
Item 9A. Controls and Procedures 16
Item 9B. Other Information 16
PART III
Item 10. Directors of the Registrant 17
Item 11. Executive Compensation 18
Item 12. Security Ownership of Certain Beneficial Owners and Management 20
Item 13. Certain Relationships and Related Transactions 23
Item 14. Principal Accountant Fees and Services 23
PART IV
Item 15. Exhibits and Financial Statement Schedules 25
2
PART I
ITEM 1. BUSINESS
GENERAL
Prior to August 2001, the Company, incorporated in Delaware and founded in 1976,
had been operating as a multi-national full-service promotional marketing
company, specializing in the design and development of high-impact promotional
products and sales promotions. The major client of the Company in recent years
had been McDonald's Corporation ("McDonald's"), for whom the Company's Simon
Marketing subsidiary designed and implemented marketing promotions, which
included premiums, games, sweepstakes, events, contests, coupon offers, sports
marketing, licensing and promotional retail items. Net sales to McDonald's and
Philip Morris, another significant client, accounted for 78% and 8%,
respectively, of total net sales in 2001.
On August 21, 2001, the Company was notified by McDonald's that they were
terminating their approximately 25-year relationship with Simon Marketing as a
result of the arrest of Jerome P. Jacobson ("Mr. Jacobson"), a former employee
of Simon Marketing who subsequently pled guilty to embezzling winning game
pieces from McDonald's promotional games administered by Simon Marketing. No
other Company employee was found to have any knowledge of or complicity in his
illegal scheme. Simon Marketing was identified in the criminal indictment of Mr.
Jacobson, 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. As a result of the above events, the
Company no longer has an on-going promotions business.
Since August 2001, the Company has concentrated its efforts on reducing its
costs and settling numerous claims, contractual obligations and pending
litigation. By April 2002, the Company had effectively eliminated a majority of
its on-going 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 for some indefinite period primarily dependent upon
on-going litigation. See Item 3. Legal Proceedings. As a result of these
efforts, the Company has been able to resolve a significant number of
outstanding liabilities that existed in August 2001 or arose subsequent to that
date. As of December 31, 2004, the Company had reduced its workforce to 5
employees from 136 employees as of December 31, 2001.
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. At December 31, 2004, the Company had a stockholders'
deficit of $7.7 million. For the year ended December 31, 2004, the Company had
net income of $20.6 million primarily due to a settlement of litigation with
McDonald's and the elimination thereby of previously outstanding liabilities
recorded by the Company. The Company incurred losses within its continuing
operations in 2004 and continues to incur losses in 2005 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 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. However, as a result of the stockholders' deficit at
December 31, 2004, and loss of customers, the Company's independent registered
public accounting firm has 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.
The Company is currently managed by the Executive Committee of the Board of
Directors, consisting of Messrs. George Golleher and J. Anthony Kouba, who
jointly act as Chief Executive Officers, in consultation with a principal
financial officer and acting general counsel. In connection with such
responsibilities, Messrs. Golleher and Kouba entered into Executive Services
Agreements dated May 30, 2003, which were subsequently amended in May 2004. See
Item 11. Executive Compensation.
The Board of Directors continues to consider various alternative courses of
action for the Company going forward, including possibly acquiring or combining
with one or more operating businesses. The Board of Directors has reviewed and
analyzed a number of proposed transactions and will continue to do so until it
can determine a course of action going forward to best benefit all shareholders,
including the holder of the Company's outstanding preferred stock described
below. The Company
3
cannot predict when the Directors will have developed a proposed course of
action or whether any such course of action will be successful. Management
believes it has sufficient capital resources and liquidity to operate the
Company for the foreseeable future.
1999 EQUITY INVESTMENT
In November 1999, Overseas Toys L.P., an affiliate of the Yucaipa Companies
("Yucaipa"), a Los Angeles, California based investment firm, invested $25
million into the Company in exchange for 25,000 shares of a new series A
convertible preferred stock (initially convertible into 3,030,303 shares of
Company common stock) and a warrant, which expired in November 2004, to purchase
an additional 15,000 shares of series A convertible preferred stock (initially
convertible into 1,666,667 shares of Company common stock). The net proceeds of
$20.6 million from this transaction, which was approved by the Company's
stockholders, were used for general corporate purposes. Under its terms, the
preferred stock has a preference upon liquidation and must be redeemed under
certain circumstances, including a sale of the Company or change of control as
defined therein. As of December 31, 2004, the amount of the liquidation
preference was $30.1 million and redemption value (101% of the liquidation
preference) was $30.4 million. As of December 31, 2004, assuming conversion of
all of the convertible preferred stock and accrued dividends, Overseas Toys L.P.
would own approximately 18.0% of the then outstanding common stock.
In connection with the investment, the Company's Board of Directors was
increased to seven members and three designees of Yucaipa, including Yucaipa's
managing partner, Ronald W. Burkle, were elected to the Board of Directors and
Mr. Burkle was elected Chairman. Pursuant to a Voting Agreement, dated September
1, 1999, among Yucaipa, Patrick Brady, Allan Brown, Gregory Shlopak, the Shlopak
Foundation, Cyrk International Foundation and the Eric Stanton Self-Declaration
of Revocable Trust, each of Messrs. Brady, Brown, Shlopak and Stanton agreed to
vote all of the shares beneficially held by them to elect the three members
nominated by Yucaipa. Mr. Burkle and Erika Paulson, a Yucaipa representative on
the Board of Directors, subsequently resigned from the Board of Directors in
August 2001.
2001 SALE OF BUSINESS
In February 2001, the Company sold its Corporate Promotions Group ("CPG")
business to Cyrk, Inc. ("Cyrk"), formerly known as Rockridge Partners, Inc., for
approximately $14 million, which included the assumption of approximately $3.7
million of Company debt. Two million three hundred thousand dollars ($2,300,000)
of the purchase price was paid with a 10% per annum five-year subordinated note
from Cyrk, with the balance being paid in cash. CPG had been engaged in the
corporate catalog and specialty advertising segment of the promotions industry.
Cyrk assumed certain liabilities of the CPG business as specified in the
Purchase Agreement, and the Company agreed to transfer its former name, Cyrk, to
the buyer. There is no material relationship between Cyrk and the Company or any
of its affiliates, directors or officers, or any associate thereof, other than
the relationship created by the Purchase Agreement and related documents.
Subsequently, in connection with the settlement of a controversy between the
parties, Cyrk supplied a $500,000 letter of credit to secure partial performance
of assumed liabilities and the balance due on the note was forgiven, subject to
a reinstatement thereof in the event of default by Cyrk under such assumed
liabilities.
One of the obligations assumed by Cyrk was to Winthrop Resources Corporation
("Winthrop"). As a condition to Cyrk assuming this obligation, however, the
Company was required to provide a $4.2 million letter of credit as collateral
for Winthrop in case Cyrk did not perform the assumed obligation. The available
amount under this letter of credit reduces over time as the underlying
obligation to Winthrop reduces. As of February 28, 2005, the available amount
under the letter of credit was $2.6 million which is secured, in part, by $2.1
million of restricted cash of the Company. The Company's letter of credit is
also secured, in part, by the aforesaid $500,000 letter of credit provided by
Cyrk for the benefit of the Company. Cyrk has agreed to indemnify the Company if
Winthrop makes any draw under this letter of credit. No assurances can be made
that the Company will be successful in enforcing those rights or, if successful,
collecting damages from Cyrk. The letter of credit has semi-annual expirations
through August 2007 when the underlying obligation is satisfied.
In the fourth quarter of 2003, Cyrk informed the Company that it was continuing
to suffer substantial financial difficulties and that it might not be able to
continue to discharge its obligations to Winthrop which are secured by the
Company's letter of credit. As a result of the foregoing, the Company recorded a
charge in 2003 of $2.8 million with respect to the liability arising from the
Winthrop lease. Such charge was revised downward to $2.5 million during 2004
based on the reduction in the Winthrop liability. As of the date hereof, the
Company has received no notification that Winthrop has drawn upon the letter of
credit due to a default by Cyrk.
4
ITEM 2. PROPERTIES
As a result of the loss of its two major customers in 2001, the Company took
actions to significantly reduce its infrastructure and its global property
commitments. During 2002, the Company negotiated early terminations of all its
domestic, Asian and European office, warehouse and distribution facility leases
and settled its outstanding remaining real estate lease obligations. During
2002, the Company made aggregate payments totaling approximately $2.9 million
related to the early termination of these leases.
In September 2004, the Company entered into a 12-month lease agreement for 2,600
square feet of office space in Los Angeles, California, with a monthly rent of
approximately $3,600, into which it relocated its remaining scaled-down
operations. For a summary of the Company's minimum rental commitments under all
non-cancelable operating leases as of December 31, 2004, see Notes to
Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
As a result of the Jacobson embezzlement described above in Item 1, numerous
consumer class action and representative action lawsuits were filed in Illinois
and multiple jurisdictions nationwide and in Canada. All actions brought in the
United States were eventually consolidated and settled (the "Boland
Settlement"), except for any plaintiff who opted out of such settlement. One
such opt-out plaintiff, seeking to redeem a purported $1 million winning game
ticket, had brought a lawsuit in Kentucky, which was transferred to Illinois and
ordered to arbitration. The plaintiff has appealed the arbitration order.
On or about September 13, 2002, an action was filed against Simon Marketing and
McDonald's in Canada in Ontario Provincial Court alleging substantially the same
facts as in the United States class action lawsuits and adding an allegation
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 were Canadian citizens seeking restitution and damages on
a class-wide basis. On October 28, 2002, a second action was filed against Simon
Marketing and McDonald's 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. An appeal of that
decision by McDonald's and the Company has been denied by the Court of Appeal.
The Company is unable to predict the outcome of the aforesaid lawsuit and its
ultimate effect, if any, on the Company's financial condition, results of
operations or net cash flows. In accordance with FASB Statement No. 5,
"Accounting for Contingencies", and because the amount of any loss cannot be
reasonably estimated, the company has not recorded an accrual for this
contingency.
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 alleged 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, sought 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.
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. The Company has
appealed this ruling with respect to PWC only.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
5
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Until May 3, 2002, the Company's stock traded on The Nasdaq Stock Market under
the symbol SWWI. On May 3, 2002, the Company's stock was delisted by Nasdaq due
to the fact that the Company's stock was trading at a price below the minimum
Nasdaq requirement. The following table presents, for the periods indicated, the
high and low sales prices of the Company's common stock as reported on the
over-the-counter market as reported in the Pink Sheets. Such over-the-counter
market quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not necessarily represent actual transactions.
2004 2003
------------------- -------------------
High Low High Low
----- ----- ----- -----
First Quarter $0.41 $0.05 $0.10 $0.04
Second Quarter 0.31 0.16 0.09 0.01
Third Quarter 0.22 0.10 0.15 0.05
Fourth Quarter 0.18 0.12 0.11 0.05
As of February 28, 2005, the Company had approximately 417 holders of record of
its common stock. The last reported sale price of the Company's common stock on
March 23, 2005, was $0.15.
The Company has never paid cash dividends, other than series A preferred stock
distributions in 2000 and stockholder distributions of Subchapter S earnings
during 1993 and 1992.
ITEM 6. SELECTED FINANCIAL DATA
By April 2002, the Company had effectively eliminated a majority of its on-going
promotions business operations. Accordingly, the discontinued activities of the
Company have been classified as discontinued operations. The selected financial
data for prior periods has been reclassified to conform to current period
presentation. The following selected financial data had been derived from our
audited financial statements and should be read in conjunction with Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Item 8. Financial Statements and Supplementary Data:
For the Years Ended December 31,
---------------------------------------------------------------------
(unaudited)
2004 2003 2002 2001 2000
------- ------- -------- --------- -----------
Selected income statement data: (in thousands, except per share data)
Continuing operations:
Net sales $ - $ - $ - $ - $ -
Net loss (3,625) (5,270) (15,406) (7,916) (8,179)
Loss per common share available
to common shareholders - basic and diluted (0.29) (0.38) (0.99) (0.54) (0.57)
Discontinued operations:
Net sales - - - 324,040 768,450
Net income (loss) 24,261(1) (3,591) 6,120 (114,429)(3) (61,536)(4)
Earnings (loss) per common share available
to common shareholders - basic anddiluted 1.46 (0.22) 0.37(2) (6.95)(3) (3.85)(4)
6
December 31,
---------------------------------------------------------------
(unaudited)
2004 2003 2002 2001 2000
-------- --------- -------------- -------- -----------
Selected balance sheet data: (in thousands)
Cash and cash equivalents (5) $ 18,892 $ 10,065 $ 14,417 $ 40,851 $ 68,162
Total assets 26,123 19,838 26,440 77,936 252,436
Long-term obligations - - - 6,785 6,587
Redeemable preferred stock 29,904 28,737 27,616 26,538 25,500
Stockholders' (deficit) equity (7,749) (27,213) (17,225) (11,497) 116,176
(1) 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 $13,000 and due to the elimination of
liabilities associated with the settlement of approximately $12,000, the Company
recorded a gain of approximately $25,000.
(2) Includes $4,574 of pre-tax charges attributable to loss of significant
customers, $12,023 of pre-tax net gain on settlement of vendor payables and
$4,432 on settlement of lease and other obligations.
(3) Includes $46,671 of pre-tax impairment of intangible asset, $33,644 of
pre-tax charges attributable to loss of significant customers and $20,212 of
pre-tax restructuring and nonrecurring charges.
(4) Includes $50,103 of pre-tax loss on sale of business and $6,395 of pre-tax
restructuring and nonrecurring charges.
(5) Includes only non-restricted cash.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
From time to time, the Company may provide forward-looking information such as
forecasts of expected future performance or statements about the Company's plans
and objectives, including certain information provided below. These
forward-looking statements are based largely on the Company's expectations and
are subject to a number of risks and uncertainties, certain of which are beyond
the Company's control. The Company wishes to caution readers that actual results
may differ materially from those expressed in any forward-looking statements
made by, or on behalf of, the Company including, without limitation, as a result
of factors described in the Company's Amended Cautionary Statement for Purposes
of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act
of 1995, filed as Exhibit 99.1 to this Report on Form 10-K for the year ended
December 31, 2004.
BUSINESS CONDITIONS
Prior to August 2001, the Company, incorporated in Delaware and founded in 1976,
had been operating as a multi-national full-service promotional marketing
company, specializing in the design and development of high-impact promotional
products and sales promotions. The majority of the Company's revenue was derived
from the sale of products to consumer products and services companies seeking to
promote their brand names and corporate identities and build brand loyalty. The
major client of the Company was McDonald's Corporation ("McDonald's"), for whom
the Company's Simon Marketing subsidiary designed and implemented marketing
promotions, which included premiums, games, sweepstakes, events, contests,
coupon offers, sports marketing, licensing and promotional retail items. Net
sales to McDonald's and Philip Morris, another significant client, accounted for
78% and 8%, respectively, of total net sales in 2001.
On August 21, 2001, the Company was notified by McDonald's that they were
terminating their approximately 25-year relationship with Simon Marketing as a
result of the arrest of Jerome P. Jacobson ("Mr. Jacobson"), a former employee
of Simon Marketing who subsequently pled guilty to embezzling winning game
pieces from McDonald's promotional games administered by Simon Marketing. No
other Company employee was found to have any knowledge of or complicity in his
illegal scheme. Simon Marketing was identified in the criminal indictment of Mr.
Jacobson, 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. As a result of the above events, the
Company no longer has an on-going promotions business.
7
Since August 2001, the Company has concentrated its efforts on reducing its
costs and settling numerous claims, contractual obligations and pending
litigation. By April 2002, the Company had effectively eliminated a majority of
its on-going 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 for some indefinite period primarily dependent upon
on-going litigation. See Item 3. Legal Proceedings. As a result of these
efforts, the Company has been able to resolve a significant number of
outstanding liabilities that existed in August 2001 or arose subsequent to that
date. As of December 31, 2004, the Company had reduced its workforce to 5
employees from 136 employees as of December 31, 2001.
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. At December 31, 2004, the Company had a stockholders'
deficit of $7.7 million. For the year ended December 31, 2004, the Company had
net income of $20.6 million primarily due to a settlement of litigation with
McDonald's and the elimination thereby of previously outstanding liabilities
recorded by the Company. The Company incurred losses within its continuing
operations in 2004 and continues to incur losses in 2005 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 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. However, as a result of the stockholders' deficit at
December 31, 2004, and loss of customers, the Company's registered public
accounting firm has 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.
The Company is currently managed by the Executive Committee of the Board of
Directors, consisting of Messrs. George Golleher and J. Anthony Kouba, who
jointly act as Chief Executive Officers, in consultation with a principal
financial officer and acting general counsel. In connection with such
responsibilities, Messrs. Golleher and Kouba entered into Executive Services
Agreements dated May 30, 2003, which were subsequently amended in May 2004. See
Item 11. Executive Compensation.
The Board of Directors continues to consider various alternative courses of
action for the Company going forward, including possibly acquiring or combining
with one or more operating businesses. The Board has reviewed and analyzed a
number of proposed transactions and will continue to do so until it can
determine a course of action going forward to best benefit all shareholders,
including the holder of the Company's outstanding preferred stock. The Company
cannot predict when the Directors will have developed a proposed course of
action or whether any such course of action will be successful. Management
believes it has sufficient capital resources and liquidity to operate the
Company for the foreseeable future.
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of financial condition and results of
operations is based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues, expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, management evaluates
its estimates and bases its estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates.
Management applies the following critical accounting policies in the preparation
of the Company's consolidated financial statements:
LONG-TERM INVESTMENTS
In the past, with its excess cash, the Company had 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
8
subject to the valuation volatility associated with the investment community and
capital markets. The carrying value of the Company's investments in these
companies is subject to the aforementioned risks. Periodically, the Company
performs a review of the carrying value of all its investments in these
companies, and considers such factors as current results, trends and future
prospects, capital market conditions and other economic factors. The carrying
value of the Company's investment portfolio totaled $500,000 as of December 31,
2004, 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 may not
ever realize any benefits from its portfolio of investments.
At December 31, 2004, the Company held an investment in Yucaipa AEC Associates,
LLC ("Yucaipa AEC Associates"), a limited liability company that is controlled
by Yucaipa, which also controls the holder of the Company's outstanding
preferred stock. Yucaipa AEC Associates in turn held an investment in Alliance
Entertainment Corp. ("Alliance") which is a home entertainment product
distribution, fulfillment, and infrastructure company providing both
brick-and-mortar and e-commerce home entertainment retailers with complete
business-to-business solutions. At December 31, 2001, the Company's investment
in Yucaipa AEC Associates had a carrying value of $10.0 million. In June 2002,
certain events occurred which indicated an impairment and the Company recorded a
pre-tax non-cash charge of $10.0 million to write down this investment in June
2002. On February 28, 2005, Alliance merged with Source Interlink Companies,
Inc. ("Source"), a direct-to-retail magazine distribution and fulfillment
company in North America and a provider of magazine information and front-end
management services for retailers. See Note 19.
The Emerging Issues Task Force ("EITF") of the FASB, issued EITF 03-16,
"Accounting for Investments in Limited Liability Companies," which required the
Company to change its method of accounting for its investment in Yucaipa AEC
Associates from the cost method to the equity method for periods ending after
July 1, 2004. The adjustment related to the cumulative effect of this change in
accounting principle which is equal to the Company's pro rata share of Yucaipa
AEC Associates' gains and losses since making the original investment is
immaterial.
During the third quarter of 2002, the Company also received a final return of
capital, totaling approximately $275,000, on another investment with a carrying
value totaling approximately $525,000 as of December 31, 2001. A loss of
approximately $250,000 was recorded in connection with this final distribution.
CONTINGENCIES
The Company records an accrued liability and related charge for an estimated
loss from a loss contingency if two conditions are met: (i) information is
available prior to the issuance of the financial statements that indicates it is
probable that an asset had been impaired or a liability had been incurred at the
date of the financial statements and (ii) the amount of loss can be reasonably
estimated. Accruals for general or unspecified business risks are not recorded.
Gain contingencies are recognized when realized.
In the fourth quarter of 2003, Cyrk informed the Company that it was continuing
to suffer substantial financial difficulties and that it might not be able to
continue to discharge its obligations to Winthrop which are secured by the
Company's letter of credit. As a result of the foregoing, the Company recorded a
charge in 2003 of $2.8 million with respect to the liability arising from the
Winthrop lease. Such charge was revised downward to $2.5 million during 2004
based on the reduction in the Winthrop liability.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2004, the Financial Accounting Standards Board ("FASB") issued a
revision entitled, "Share Based Payment," to Statement of Financial Accounting
Standard ("SFAS") No. 123, "Accounting for Stock Based Compensation." This
revision supersedes Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and its related implementation
guidance. As such, this revision eliminates the alternative to use the intrinsic
value method of accounting under APB Opinion No. 25 that was available under
SFAS No. 123 as originally issued. Under APB Opinion No. 25, issuing stock
options to employees generally resulted in recognition of no compensation cost.
This revision requires entities to recognize the cost of employee services
received in exchange for awards of equity instruments based on the fair value at
grant-date of those awards (with limited exceptions). The Company currently
applies APB Opinion No. 25 and
9
related interpretations in accounting for its stock-based compensation plan.
This revision is effective for the first interim or annual reporting period that
begins after June 15, 2005.
SIGNIFICANT CONTRACTUAL OBLIGATIONS
The following table includes certain significant contractual obligations of the
Company at December 31, 2004. See Notes to Consolidated Financial Statements for
additional information related to these and other obligations.
Payments Due by Period
--------------------------------------------------------------------
Less Than 1-3 4-5 After 5
Total 1 Year Years Years Years
-------- --------- ------- -------- -------
(in thousands)
Operating leases (1) $ 33 $ 33 $ - $ - $ -
Contingent payment obligations 53 53 - - -
Other long-term obligations(2) 400 80 160 160 -
-------- --------- ------- -------- -------
Total contractual cash obligations $ 486 $ 166 $ 160 $ 160 $ -
======== ========= ======= ======== =======
(1) Payments for operating leases are recognized as an expense in the
Consolidated Statement of Operations on a straight-line basis over the term of
the lease.
(2) Relates to life insurence premiums for the benifit of a former company
executive and for which the company is obligated.
OTHER COMMERCIAL COMMITMENTS
Changes in general and administrative expenses going forward is dependent on the
outcome of the various alternative courses of action for the Company going
forward being considered by the Board of Directors which include possibly
acquiring or combining with one or more operating businesses. The Board has
reviewed and analyzed a number of proposed transactions and will continue to do
so until it can determine a course of action going forward to best benefit all
shareholders, including the holder of the Company's outstanding preferred stock.
The Company cannot predict when the Directors will have developed a proposed
course of action or whether any such course of action will be successful.
Accordingly, the Company cannot predict changes in general and administrative
expenses going forward.
The following table includes certain commercial commitments of the Company at
December 31, 2004. See Notes to Consolidated Financial Statements for additional
information related to these and other commitments.
Total
Committed at Total Committed at end of
December 31, --------------------------------------------------------
2004 1 Year 2 Years 3 Years 4 Years 5 Years Thereafter
------------- ------- ------- ------- ------- ------- ----------
(in thousands)
Standby letters of credit $3,034 $ 2,043 $ 961 $ 33 $ 33 $ 33 $ 33
============= ======= ======= ======= ======= ======= ==========
The $3,034 of standby letters of credit committed at December 31, 2004,
primarily related to letters of credit provided by the Company to support Cyrk's
and the Company's obligations to Winthrop Resources Corporation.
RESULTS OF CONTINUING AND DISCONTINUED OPERATIONS
By April 2002, the Company had effectively eliminated a majority of its on-going
promotions business operations and was in the process of disposing of its assets
and settling its liabilities related to the promotions business. Accordingly,
the discontinued activities of the Company have been classified as discontinued
operations in the accompanying consolidated financial statements. Continuing
operations represent the direct costs required to maintain the Company's current
corporate infrastructure that will enable the Board of Directors to pursue
various alternative courses of action going forward. These costs primarily
consist of the salaries and benefits of executive management and corporate
finance staff, professional fees, Board of Director fees, and space and facility
costs. The Company's continuing operations and discontinued operations will be
discussed separately, based on the respective financial results contained in the
accompanying consolidated financial statements and related notes.
CONTINUING OPERATIONS
2004 COMPARED TO 2003
General and administrative expenses totaled $3.6 million in 2004 compared to
$5.3 million in 2003. The decrease is primarily due to reductions in
professional fees ($.7 million), insurance expense ($.5 million), labor costs
($.4 million) and facilities costs ($.1 million).
Changes in general and administrative expenses going forward is dependent on the
outcome of the various alternative courses of action for the Company going
forward being considered by the Board of Directors which include possibly
acquiring or combining with one or more operating businesses. The Board has
reviewed and analyzed a number of proposed transactions and will continue to do
so until it can determine a course of action going forward to best benefit all
shareholders, including the holder of the Company's outstanding preferred stock.
The Company cannot predict when the Directors will have developed a proposed
course of action or whether any such course of action will be successful.
Accordingly, the Company cannot predict changes in general and administrative
expenses going forward.
10
2003 COMPARED TO 2002
General and administrative expenses totaled $5.3 million in 2003 compared to
$5.2 million in 2002, primarily due to an increase in insurance expense ($.44
million) partially offset by a decrease in Board of Director fees ($.35
million). Investment losses in 2002 represented charges related to an
other-than-temporary investment impairment associated with the Company's
investment portfolio, totaling $10.3 million. As of December 31, 2003, a
majority of the Company's investments had been written down.
DISCONTINUED OPERATIONS
2004 COMPARED TO 2003
There were no net sales or gross profit during 2004 or 2003, which was primarily
attributable to the effects associated with the loss of the Company's McDonald's
and Philip Morris business.
General and administrative expenses totaled $2.0 million in 2004 compared to
$1.4 million in 2003. The increase is primarily due to a charge of $1.0 against
an asset related to an insurance policy for the benefit of a former Company
executive and on which the company was the beneficiary of the cash surrender
value partially offset by reductions in professional fees, labor costs,
facilities costs, and other items related to the wind-down of the Company's
Europe, Hong Kong and United States entities.
Gain on settlement of obligations totaled $24.5 million in 2004 compared to $.02
million during 2003. During 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 settlement loss of $.5 million. During 2003, the Company's 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.
2003 COMPARED TO 2002
There were no net sales or gross profit during 2003 or 2002, which was primarily
attributable to the effects associated with the loss of the Company's McDonald's
and Philip Morris business.
Selling, general and administrative expenses totaled $1.4 million in 2003 as
compared to $3.5 million in 2002. The Company's spending decreased primarily due
to a decrease in labor costs ($3.3 million) and space and facility costs ($1.8
million), depreciation and amortization ($.4 million), and changes in subsidiary
deferred tax accounts and other items ($1.0 million) partially offset by gains
during 2002 related to the favorable settlement of lease and other obligations
($4.4 million) that were recorded as reductions to selling, general, and
administrative expenses. There were no such gains during 2003 reducing selling,
general and administrative expenses. In 2002, selling, general and
administrative expenses consisted primarily of promotion related activities,
many of which were eliminated by April 2002.
In connection with a contingent liability arising from its obligations under the
Winthrop lease, the Company recorded a charge of $2.8 million during 2003 which
is recorded to other expense within discontinued operations.
During 2002, the Company recorded a pre-tax net charge totaling approximately
$4.6 million related to the loss of customers. Charges totaling $8.6 million,
primarily related to asset write-downs ($3.6 million), professional fees ($4.3
million), labor and other costs ($.7 million), were partially offset by
recoveries of accounts receivable balances, totaling $1.3 million, that had been
written off in previous periods and other gains ($2.7 million).
During 2003 and 2002, the Company negotiated settlements related to outstanding
liabilities with many of its vendors and suppliers. During 2002, the Company
also settled all of its outstanding domestic and international real estate and
equipment lease obligations and relocated its remaining scaled-down operations
to smaller office space in Los Angeles, California. These settlements were on
terms generally more favorable to the Company than required by the existing
terms of the
11
liabilities. During 2002, the difference between the final settlement payment
and the outstanding obligations was recorded as a gain, totaling approximately
$12.0 million related to vendor settlements, included in gain on settlement of
obligations and $4.4 million related to lease obligations and other settlements
recorded as a reduction to selling, general, and administrative expenses. The
Company recorded nominal settlement gains during 2003.
During 2002, the Company revised its initial estimate of future restructuring
activities related to its 2001 restructuring plan as such plan was completed by
the first quarter of 2002 and, as a result, recorded a $.75 million reduction to
the restructuring accrual outstanding as of December 31, 2001.
On October 17, 2002, the Management Agreement between the Company and Yucaipa
was terminated by the payment to Yucaipa of $1.5 million and each party was
released from further obligations thereunder. The Company recorded this payment
to management fees during 2002.
LIQUIDITY AND CAPITAL RESOURCES
The loss of the McDonald's and Philip Morris business has had and will continue
to have a substantial adverse impact on the Company's cash position. As a result
of the stockholders' deficit at December 31, 2004, and loss of customers, the
Company's independent registered public accounting firm has 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 within its continuing operations in 2004 and continues
to incur losses in 2005 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 within its continuing operations,
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. Management believes it has sufficient capital resources and
liquidity to operate the Company for the foreseeable future.
The Board of Directors continues to consider various alternative courses of
action for the Company going forward, including possibly acquiring or combining
with one or more operating businesses. The Board of Directors has reviewed and
analyzed a number of proposed transactions and will continue to do so until it
can determine a course of action going forward to best benefit all shareholders,
including the holder of the Company's outstanding preferred stock.
CONTINUING OPERATIONS
Working capital attributable to continuing operations at December 31, 2004, was
$21.4 million compared to $.7 million at December 31, 2003. The increase in
working capital is primarily due to cash received and the elimination of
liabilities related to the McDonald's settlement within the Company's
discontinued operations and subsequent transfer of cash to continuing operations
as the Company's discontinued operations already had sufficient assets from
discontinued operations to be disposed of to cover liabilities from discontinued
operations.
Net cash used in operating activities from continuing operations during 2004
totaled $2.8 million, primarily due to a loss from continuing operations of $3.6
million, resulting from the general and administrative expenses incurred to
manage the affairs of the Company and resolve outstanding legal matters,
partially offset by changes in working capital items of $.8 million. By
utilizing cash which had been received pursuant to the settlement with
McDonald's in 2004 of $13 million, after attorney's fees, management believes it
has sufficient capital resources and liquidity to operate the Company for the
foreseeable future. In addition, the Company does not expect any significant
capital expenditures in the foreseeable future.
Net cash used in operating activities from continuing operations during 2003
totaled $4.9 million, primarily due to a loss from continuing operations of $5.3
million, resulting from the general and administrative expenses incurred to
manage the affairs of the Company and resolve outstanding legal matters,
partially offset by a net increase in working capital items of $.4 million.
12
Net cash used in operating activities from continuing operations during 2002
totaled $4.6 million, primarily due to a loss from continuing operations of
$15.4 million partially offset by charges for impaired assets and investments of
$.4 million and $10.3 million, respectively.
Net cash used in investing activities during 2004 totaled $2.6 million primarily
due to an increase in restricted cash as such restricted cash was transferred
from discontinued operations on the basis that discontinued operations already
had sufficient assets from discontinued operations to be disposed of to cover
liabilities from discontinued operations.
Net cash provided by investing activities during 2003 totaled $7.3 million,
primarily due to a decrease in restricted cash as such restricted cash was
transferred to discontinued operations on the basis that discontinued operations
required additional assets from discontinued operations to be disposed of to
cover liabilities from discontinued operations.
Net cash used in investing activities from continuing operations during 2002
totaled $5.0 million, primarily due to an increase in restricted cash balances,
totaling $4.8 million. Such restricted cash was transferred from discontinued
operations on the basis that discontinued operations already had sufficient
assets from discontinued operations to be disposed of to cover liabilities from
discontinued operations.
There were no financing cash flows from continuing operations during 2004, 2003
or 2002.
Restricted cash included within continuing operations at December 31, 2004 and
2003, totaled $3.0 million and $.3 million, respectively, and primarily
consisted of amounts deposited with lenders to satisfy the Company's obligations
pursuant to its standby letters of credit.
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. As of December 31, 2004, there
have not been any claims made against the trust.
DISCONTINUED OPERATIONS
Working capital (deficit) attributable to discontinued operations at December
31, 2004, was $(.2) million compared to $(1.1) million at December 31, 2003. The
increase in working capital can be attributed to additional cash required within
the Company's discontinued operations to ensure assets from discontinued
operations to be disposed of cover liabilities from discontinued operations
resulting from a charge against an asset related to an insurance policy for the
benefit of a former Company executive and on which the Company was the
beneficiary of the cash surrender value.
Net cash provided by discontinued operations during 2004 totaled $24.3 million,
primarily due to cash received and the elimination of liabilities related to the
McDonald's settlement totaling $25.0 million and cash provided by investing
activities of $3.6 million primarily related to a reduction in restricted cash,
partially offset by a settlement loss of $.5 million, a net change in working
capital items of $2.8 million and other charges of $1.0 million.
Net cash used in discontinued operations during 2003 totaled $3.6 million,
primarily due to net cash used in operating activities of $.2 million, net cash
used in investing activities of $6.6 million and a reallocation of funds,
totaling approximately $3.2 million, from continuing to discontinued operations
due to changes in minimum working capital requirements.
Net cash used in operating activities of discontinued operations during 2003 of
$.2 million primarily consisted of a net loss of $3.6 million partially offset
by a non-cash charge for a contingent loss of $2.8 million and a provision for
doubtful accounts and other items of $.6 million.
Net cash used in investing activities of discontinued operations during 2003 of
$6.6 million primarily consisted of an increase in restricted cash.
13
Net cash provided by discontinued operations during 2002 totaled $10.8 million,
which was primarily due to net cash provided by investing activities of $7.3
million and a reallocation of funds, totaling approximately $27.6 million,
between continuing and discontinued operations due to changes in minimum working
capital requirements, partially offset by net cash used in operating activities
of $22.6 million and net cash used in financing activities of $1.6 million.
Net cash used in operating activities of discontinued operations during 2002 of
$22.6 million primarily consisted of a gain on settlement of vendor payables and
other obligations of $12.0 million and $4.4 million, respectively, a reversal of
a restructuring accrual of $.8 million, and a net decrease in working capital
items of $14.9 million. The reduction in working capital items was primarily
caused by the pay-down of accounts payable, accrued expenses and other current
liabilities in connection with the discontinuance of the promotions business.
These changes were partially offset by income from discontinued operations of
$6.1 million, depreciation and amortization expense of $.4 million and a charge
for impaired assets of $2.9 million.
Net cash provided by investing activities of discontinued operations during 2002
of $7.3 million primarily consisted of a decrease in restricted cash of $5.9
million, proceeds from the sale of investments of $.1 million, and a $1.3
million net change in other investments.
There were no financing activities of discontinued operations during 2004 and
2003. Net cash used in financing activities of discontinued operations during
2002 of $1.6 million primarily consisted of repayments of short and long-term
borrowings.
In 2004, the Company recorded a net settlement gain of $24.5 million primarily
due to cash received and the elimination of liabilities related to the
McDonald's settlement totaling $25.0 million partially offset by a settlement
loss of $.5 million related to a life insurance policy for a former Company
executive and on which the Company was obligated to make premium payments.
The Company recorded nominal settlement gains during 2003.
During 2002, due to the loss of its two largest customers, as well as its other
customers, the Company negotiated early terminations on many of its facility and
non-facility operating leases, and also negotiated settlements related to
liabilities with many of its suppliers. During 2002, approximately $22.0 million
of the Company's recorded liabilities were settled. These settlements were on
terms generally more favorable to the Company than required by the existing
terms of these obligations.
As a result of the precipitous drop in the value of the Company's common stock
after the announcement of the loss of its two largest customers, the Company
recorded a $5.0 million charge in the third quarter of 2001 to accelerate the
recognition of contingent payment obligations due in June 2002 arising from the
acquisition of Simon Marketing in 1997. Pursuant to Separation, Settlement and
General Release Agreements entered into during 2002 with former employees, the
Company settled its contingent payment obligations for an amount less than its
recorded liability.
At December 31, 2004, the Company had various pre-existing letters of credit
outstanding, which are cash collateralized and have various expiration dates
through August 2007. As of December 31, 2004, the Company had approximately $3.0
million in outstanding letters of credit, which primarily consisted of letters
of credit provided by the Company to support Cyrk's and the Company's
obligations to Winthrop Resources Corporation. These letters of credit are
secured, in part, by $2.5 million of restricted cash of the Company. The
Company's letter of credit which supports Cyrk's obligations to Winthrop is also
secured, in part, by a $500,000 letter of credit provided by Cyrk for the
benefit of the Company. Cyrk has agreed to indemnify the Company if Winthrop
makes any draw under the letter of credit which supports Cyrk's obligations to
Winthrop.
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 28, 2005, was $2.6 million, $2.1 million
of which is secured by restricted cash 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
in 2003 of $2.8 million with respect to the liability arising from the Winthrop
lease. Such charge was revised downward in 2004 to $2.5 million based on the
reduction in the Winthrop liability.
14
Restricted cash included within discontinued operations at December 31, 2004 and
2003 totaled $2.8 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. These amounts are in addition to
the restricted cash amounts included within continuing operations at December
31, 2004 and 2003, totaling $3.0 million and $.3 million, respectively, which
primarily consisted of amounts deposited with lenders to satisfy the Company's
obligations pursuant to its standby letters of credit.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The disclosure required by this Item is not material to the Company because the
Company does not currently have any exposure to market rate sensitive
instruments, as defined in this Item.
Part of the Company's discontinued operations consists of certain consolidated
subsidiaries that are denominated in foreign currencies. As the assets of these
subsidiaries are largely offset by liabilities, the Company is not materially
exposed to foreign currency exchange risk.
All of the Company's cash equivalents consist of short-term, highly liquid
investments, with original maturities at the date of purchase of three-months or
less.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets as of December 31, 2004 and 2003 F-2
Consolidated Statements of Operations for the years ended
December 31, 2004, 2003 and 2002 F-3
Consolidated Statements of Stockholders' Deficit for the years ended
December 31, 2004, 2003 and 2002 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003 and 2002 F-5
Notes to Consolidated Financial Statements F-6
Schedule II: Valuation and Qualifying Accounts F-21
15
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES: As of December 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 Principal Financial
Officer, reviewed and participated in this evaluation. Based on this evaluation,
the Company's disclosure controls were effective.
INTERNAL CONTROLS: Since the date of the evaluation described above, there have
not been any significant changes in the Company's internal controls or in other
factors that could significantly affect those controls.
ITEM 9B. OTHER INFORMATION
None.
16
PART III
ITEM 10. DIRECTORS OF THE REGISTRANT
The Company's certificate of incorporation provides that the number of directors
shall be determined from time to time by the Board of Directors (but shall be no
less than three and no more than fifteen) and that the Board of Directors shall
be divided into three classes. On September 1, 1999, the Company entered into a
Securities Purchase Agreement with Overseas Toys, L.P., an affiliate of Yucaipa,
the holder of all of the Company's outstanding series A senior cumulative
participating convertible preferred stock, pursuant to which the Company agreed
to fix the size of the Board of Directors at seven members. Yucaipa has the
right to designate three individuals to the Board of Directors.
Pursuant to a Voting Agreement, dated September 1, 1999, among Yucaipa, Patrick
D. Brady, Allan I. Brown, Gregory Shlopak, the Shlopak Foundation, Cyrk
International Foundation and the Eric Stanton Self-Declaration of Revocable
Trust, each of Messrs. Brady, Brown, Shlopak and Stanton agreed to vote all of
the shares beneficially held by them to elect the three Directors nominated by
Yucaipa. On November 10, 1999, Ronald W. Burkle, George G. Golleher and Richard
Wolpert were the three Yucaipa nominees elected to the Company's Board of
Directors, of which Mr. Burkle became Chairman. Mr. Wolpert resigned from the
Board of Directors on February 7, 2000. Thereafter, Yucaipa requested that Erika
Paulson be named as its third designee to the Board of Directors and on May 25,
2000, Ms. Paulson was elected to fill the vacancy created by Mr. Wolpert's
resignation. On August 24, 2001, Mr. Burkle and Ms. Paulson resigned from the
Board of Directors and Yucaipa has not subsequently designated replacement
nominees. On June 15, 2001, Patrick D. Brady resigned from the Board of
Directors. On May 25, 2004, Gregory Mays was elected to the Board of Directors
to fill the vacancy which had been created by Mr. Brady's resignation.
The following table sets forth the names and ages of the Directors, the year in
which each individual was first elected a director and the year his term
expires:
Name Age Class Year Term Expires Director Since
- ------------------ --- ----- ----------------- --------------
Joseph W. Bartlett 71 I 2003 1993
Allan I. Brown 64 I 2003 1999
J. Anthony Kouba 57 III 2002 1997
George G. Golleher 56 II 2004 1999
Gregory Mays 58 III 2005 2004
No stockholders meeting to elect directors was held in 2004 or 2003. In
accordance with Delaware law and the Company's by-laws, Mr. Bartlett's, Mr.
Brown's, Mr. Kouba's, and Mr. Golleher's terms as directors continue until their
successors are elected and qualified.
BUSINESS HISTORY OF DIRECTORS
MR. BARTLETT is engaged in the private practice of law as of counsel to the law
firm of Fish & Richardson. From 1996 through 2002, he was a partner in the law
firm of Morrison & Foerster LLP. He was a partner in the law firm of Mayer,
Brown & Platt from July 1991 until March 1996. From 1969 until November 1990,
Mr. Bartlett was a partner of, and from November 1990 until June 1991 he was of
counsel to, the law firm of Gaston & Snow. Mr. Bartlett served as Under
Secretary of the United States Department of Commerce from 1967 to 1968 and as
law clerk to the Chief Justice of the United States in 1960.
MR. BROWN was the Company's Chief Executive Officer and president from July 2001
until March 2002 when his employment with the Company terminated. From November
1999 to July 2001, Mr. Brown served as the Company's Co-Chief Executive Officer
and Co-President. From November 1975 until March 2002, Mr. Brown served as the
Chief Executive Officer of Simon Marketing.
MR. GOLLEHER is a consultant and private investor. Mr. Golleher's career
includes numerous positions in senior financial capacities, including Chief
Financial Officer. More recently, Mr. Golleher served as President and Chief
Operating Officer of Fred Meyer, Inc. from March 1998 to June 1999, and also
served as a member of its Board of Directors. Mr. Golleher served as Chief
Executive Officer of Ralphs Grocery Company from January 1996 to March 1998 and
was Vice Chairman
17
from June 1995 to January 1996. Mr. Golleher serves as chairman of the Board of
American Restaurant Group and also serves on the Board of Directors of Rite-Aid
Corporation and General Nutrition Centers, Inc.
MR. KOUBA is a private investor and is engaged in the business of real estate,
hospitality and outdoor advertising. He has been an attorney and a member of the
Bar in California since 1972.
MR. MAYS is a consultant and private investor. He also serves as the Company's
acting Chief Financial Officer. Through his career, Mr. Mays has held numerous
executive and financial positions, most recently as Executive Vice President -
Finance and Administration of Ralphs Grocery Company from 1995 to 1999. Mr. Mays
also serves on the Board of Directors of Source Interlink Companies, Inc.
The Company's on-going operations are now being managed by an Executive
Committee of the Board of Directors consisting of Messrs. Golleher and Kouba,
who act as Co-Chief Executive Officers, in consultation with Mr. Mays as
Principal Financial Officer and an acting general counsel.
CODE OF ETHICS
The Company has adopted a code of ethics applicable to all directors, officers
and employees which is designed to deter wrongdoing and to promote honest and
ethical conduct and compliance with applicable laws and regulations. The Company
undertakes to provide a copy to any person without charge upon written request.
AUDIT COMMITTEE FINANCIAL EXPERT
The members of the Audit Committee of the Board of Directors are Messrs.
Bartlett, Golleher, and Kouba. The Board of Directors has determined that Mr.
Golleher is an "audit committee financial expert," as defined in the rules of
the Securities and Exchange Commission, by reason of his experience described
under "Business History of Directors." Mr. Golleher may be deemed not to be an
"independent director" under the rules applicable to national stock exchanges in
the event the Company should ever qualify and seek relisting.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation the Company paid or accrued for
services rendered in 2004, 2003 and 2002, for the individuals who have the
responsibility for the roles of the executive officers of the Company:
Summary Compensation Table
Long-Term
Annual Compensation (1) Compensation
----------------------------------------------- Securities
Name and Other Annual Underlying All Other
Principal Position Year Salary Bonus Compensation Options Compensation
- --------------------------------------- ---- -------- ----- ------------ ------------ ------------
J. Anthony Kouba 2004 $350,000 $ - $ - - $ 112,192(2)(3)
Executive Committee Member and Director 2003 425,669 - - 20,000 161,500(2)
2002 100,000 - - - 740,926(2)
George Golleher 2004 $350,000 $ - $ - - $ 110,192(2)(3)
Executive Committee Member and Director 2003 433,544 - - 20,000 165,405(2)
2002 100,000 - - - 636,495(2)
Greg Mays 2004 $210,000 $ - $ - - $ 41,551(2)
Chief Financial Officer and Director 2003 254,009 - - 10,000 101,168
2002 50,000 - - - 587,139
18
1. In accordance with the rules of the Securities and Exchange Commission,
other compensation in the form of perquisites and other personal benefits
have been omitted for all of the individuals in the table because the
aggregate amount of such perquisites and other personal benefits
constituted less than the lesser of $50,000 or 10% of the total annual
salary and bonuses for such individuals for 2004, 2003 and 2002.
2. Includes Board of Directors retainer and meeting fees. See Directors'
Compensation below.
3. Includes $22,192 for services that related to 2003 but were paid in 2004.
OPTION GRANTS IN THE LAST FISCAL YEAR
There were no option grants during the last fiscal year.
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
There were no exercises of stock options during the last fiscal year.
EXECUTIVE SERVICES AGREEMENTS
In May 2003, the Company entered into Executive Services Agreements with Messrs.
Bartlett, Brown, Golleher, Kouba, Mays and Terrence Wallock, acting general
counsel of the Company. The purpose of the Agreements was to substantially lower
the administrative costs of the Company going forward while at the same time
retaining the availability of experienced executives knowledgeable about the
Company for on-going administration as well as future opportunities. The
Agreements provide for compensation at the rate of $1,000 per month to Messrs.
Bartlett and Brown, $6,731 per week to Messrs. Golleher and Kouba, $4,040 per
week to Mr. Mays and $3,365 per week to Mr. Wallock. Additional hourly
compensation is provided after termination of the Agreements and, in some
circumstances during the term, for extensive commitments of time related to any
legal or administrative proceedings and merger and acquisition activities in
which the Company may be involved. As of December 31, 2004, no such additional
payments have been made. The Agreements call for the payment of health insurance
benefits and provide for mutual releases upon termination. By amendments dated
May 3, 2004, the Agreements were amended to allow termination at any time by the
Company by the lump sum payment of one year's compensation and by the executive
upon one year's notice, except in certain circumstances wherein the executive
can resign immediately and receive a lump sum payment of one year's salary.
Under the amendment health benefits are to be provided during any notice period
or for the time with respect to which an equivalent payment is made.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Until March 2002, decisions concerning executive compensation were made by the
Compensation Committee of the Board of Directors, which consisted of Messrs.
Bartlett and Kouba. Neither Messrs. Bartlett nor Kouba is or was an officer or
employee of the Company or any of its subsidiaries during such period. After
March 2002, the Company ceased to have any executive officers and decisions
concerning the compensation of Messrs. Kouba and Golleher, the members of the
Executive Committee of the Board of Directors who serve, in effect, as the
Principal Executive Officers of the Company, were made by the non-Executive
Committee members of the Board of Directors. The compensation of Mr. Mays, who
serves, in effect, as the Company's Principal Financial Officer, was determined
by the Board of Directors. In 2004, none of Messrs. Kouba, Golleher or Mays
served as an executive officer, or on the Board of Directors, of any entity of
which any of the other members of the Board of Directors served as an executive
officer or as a member of its Board of Directors.
DIRECTORS' COMPENSATION
Since April 2003, Directors are paid an annual retainer of $50,000. Directors
also receive a fee of $2,000 for each Board of Directors, Compensation,
Governance and Nominating Committee meeting attended. Beginning in May 2004
chairmen of the Compensation, Governance and Nominating Committee also receive
annual retainers of $7,500 and $5,000, respectively, plus an additional $500 for
each committee meeting they chair.
19
As an inducement to the Company's Directors to continue their services to the
Company in the wake of the events of August 21, 2001, and to provide assurances
that the Company will be able to fulfill its obligations to indemnify directors,
officers and agents of the Company and its subsidiaries (individually
"Indemnitee" and collectively "Indemnitees") under Delaware law and pursuant to
various contractual arrangements, in March 2002 the Company entered into an
Indemnification Trust Agreement ("Agreement") for the benefit of the
Indemnitees. See Notes to Consolidated Financial Statements. Pursuant to this
Agreement, the Company deposited a total of $2.7 million with an independent
trustee to fund any indemnification amounts owed to an Indemnitee which the
Company is unable to pay. These arrangements, and the Executive Services
Agreements, were negotiated by the Company on an arms-length basis with the
advice of the Company's counsel and other advisors. As of December 31, 2004,
there have not been any claims made against the trust.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth certain information regarding beneficial
ownership of the Company's common stock at January 31, 2005. Except as otherwise
indicated in the footnotes, the Company believes that the beneficial owners of
its common stock listed below, based on information furnished by such owners,
have sole investment and voting power with respect to the shares of the
Company's common stock shown as beneficially owned by them.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth each person known by the Company (other than
Directors and Executive Officers) to own beneficially more than 5% of the
outstanding common stock:
Number of Shares
Name and Address Of Common Stock Percentage Of
Of Beneficial Owner (1) Beneficially Owned Class
- -------------------------------------------- ------------------ -------------
Yucaipa and affiliates (2)(3)
Overseas Toys, L.P.
OA3, LLC
Multi-Accounts, LLC
Ronald W. Burkle 3,644,848 18.0%
Gotham International Advisors, L.L.C. (3)(4)
Gotham Partners, L.P.
Gotham Partners III, L.P.
110 East 42nd Street
18th Floor
New York, NY 10017 1,631,351 9.8%
Hazelton Capital Limited (4)(5)
28 Hazelton Avenue
Toronto, Ontario Canada M5R 2E2 1,130,537 6.8%
Eric Stanton (4)(6)
39 Gloucester Road
6th Floor
Wanchai
Hong Kong 1,123,023 6.7%
Gregory P. Shlopak (4)(7)
63 Main Street
Gloucester, MA 01930 1,064,900 6.4%
H. Ty Warner (4)
P.O. Box 5377
Oak Brook, IL 60522 975,610 5.9%
20
1. The number of shares beneficially owned by each stockholder is determined in
accordance with the rules of the Securities and Exchange Commission and is not
necessarily indicative of beneficial ownership for any other purpose. Under
these rules, beneficial ownership includes those shares of common stock that the
stockholder has sole or shared voting or investment power and any shares of
common stock that the stockholder has a right to acquire within sixty (60) days
after December 31, 2004, through the exercise of any option, warrant or other
right including the conversion of the series A preferred stock. The percentage
ownership of the outstanding common stock, however, is based on the assumption,
expressly required by the rules of the Securities and Exchange Commission, that
only the person or entity whose ownership is being reported has converted
options, warrants or other rights into shares of common stock including the
conversion of the series A preferred stock.
2. Represents shares of common stock issuable upon conversion of 29,904 shares
of outstanding series A preferred stock and accrued dividends. Percentage based
on common stock outstanding, plus all such convertible shares. Overseas Toys,
L.P. is an affiliate of Yucaipa and is the holder of record of all the
outstanding shares of series A preferred stock. Multi-Accounts, LLC is the sole
general partner of Overseas Toys, L.P., and OA3, LLC is the sole managing member
of Multi-Accounts, LLC. Ronald W. Burkle is the sole managing member of OA3,
LLC. The address of each of Overseas Toys, L.P., Multi-Accounts, LLC, OA3, LLC,
and Ronald W. Burkle is 9130 West Sunset Boulevard, Los Angeles, California
90069.
Overseas Toys, L.P. is party to a Voting Agreement, dated September 1, 1999,
with Patrick D. Brady, Allan I. Brown, Gregory P. Shlopak, the Shlopak
Foundation, Cyrk International Foundation and the Eric Stanton Self-Declaration
of Revocable Trust, pursuant to which Overseas Toys, L.P., Multi-Accounts, LLC,
OA3, LLC, and Ronald W. Burkle may be deemed to have shared voting power over
8,233,616 shares for the purpose of election of certain nominees of Yucaipa to
the Company's Board of Directors, and may be deemed to be members of a "group"
for the purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended. Overseas Toys, L.P., Multi-Accounts, LLC, OA3, LLC and Ronald W. Burkle
disclaim beneficial ownership of any shares, except for the shares as to which
they possess sole dispositive and voting power.
3. Based on 16,653,193 shares of common stock outstanding and shares of common
stock issuable upon conversion of 29,904 shares of outstanding series A
preferred stock and accrued dividends as of December 31, 2004.
4. Based on 16,653,193 shares of common stock outstanding as of December 31,
2004.
5. The information concerning these holders is based solely on information
contained in filings pursuant to the Securities Exchange Act of 1934.
6. Eric Stanton, as trustee of the Eric Stanton Self-Declaration of Revocable
Trust, has the sole power to vote, or to direct the vote of, and the sole power
to dispose, or to direct the disposition of, 1,123,023 shares. Mr. Stanton, as
trustee of the Eric Stanton Self-Declaration of Revocable Trust, is a party to a
Voting Agreement, dated September 1, 1999, with Yucaipa and Patrick D. Brady,
Allan I. Brown, Gregory P. Shlopak, the Shlopak Foundation Trust and the Cyrk
International Foundation Trust pursuant to which Messrs. Brady, Brown, Shlopak
and Stanton and the trusts have agreed to vote in favor of certain nominees of
Yucaipa to the Company's Board of Directors. Mr. Stanton expressly disclaims
beneficial ownership of any shares except for the 1,123,023 shares as to which
he possesses sole voting and dispositive power.
7. The information concerning this holder is based solely on information
contained in filings Mr. Shlopak has made with the Securities and Exchange
Commission pursuant to Sections 13(d) and 13(g) of the Securities Exchange Act
of 1934, as amended. Includes 84,401 shares held by a private charitable
foundation as to which Mr. Shlopak, as trustee, has sole voting and dispositive
power. Mr. Shlopak is a party to a Voting Agreement, dated September 1, 1999,
with Yucaipa, Patrick D. Brady, Allan I. Brown, the Shlopak Foundation, Cyrk
International Foundation and the Eric Stanton Self-Declaration of Revocable
Trust, pursuant to which Messrs. Brady, Brown, Shlopak and Stanton and the
trusts have agreed to vote in favor of certain nominees of Yucaipa to the
Company's Board of Directors. Mr. Shlopak expressly disclaims beneficial
ownership of any shares except for the 1,064,900 shares as to which he possesses
sole voting and dispositive power.
21
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information at December 31, 2004, regarding the
beneficial ownership of the Company's common stock (including common stock
issuable upon the exercise of stock options exercisable within 60 days of
December 31, 2004) by each director and each executive officer named in the
Summary Compensation Table, and by all of the Company's Directors and persons
performing the roles of executive officers as a group:
Number of Shares
Name and Address Of Common Stock Percentage Of
Of Beneficial Owner (1) Beneficially Owned Class (2)
- --------------------------------------- ------------------ -------------
Allan I. Brown (3) 1,123,023 6.7%
Joseph W. Bartlett (4) 90,000 *
Joseph Anthony Kouba (5) 50,000 *
George G. Golleher (6) 35,000 *
Greg Mays (7) 5,000 *
All directors and executive officers as
a group (5 persons) 1,303,023 7.8%
* Represents less than 1%
(1) The address of each of the Directors and Executive Officers is c/o Simon
Worldwide, Inc., 5200 W. Century Boulevard, Suite 420, Los Angeles, California,
90045. The number of shares beneficially owned by each stockholder is determined
in accordance with the rules of the Securities and Exchange Commission and is
not necessarily indicative of beneficial ownership for any other purpose. Under
these rules, beneficial ownership includes those shares of common stock that the
stockholder has sole or shared voting or investment power and any shares of
common stock that the stockholder has a right to acquire within sixty (60) days
after December 31, 2004, through the exercise of any option, warrant or other
right including the conversion of the series A preferred stock. The percentage
ownership of the outstanding common stock, however, is based on the assumption,
expressly required by the rules of the Securities and Exchange Commission, that
only the person or entity whose ownership is being reported has converted
options, warrants or other rights including the conversion of the series A
preferred stock into shares of common stock.
(2) Based on 16,653,193 shares of common stock outstanding as of December 31,
2004.
(3) Includes 10,000 shares issuable pursuant to stock options exercisable within
60 days of December 31, 2004. Mr. Brown has the sole power to vote, or to direct
the vote of, and the sole power to dispose, or to direct the disposition of,
1,113,023 shares of common stock. Mr. Brown is party to a Voting Agreement,
dated September 1, 1999, with Yucaipa, Patrick D. Brady, Gregory P. Shlopak, the
Shlopak Foundation, Cyrk International Foundation and the Eric Stanton
Self-Declaration of Revocable Trust, pursuant to which Messrs. Brady, Brown,
Shlopak and Stanton and the trusts have agreed to vote in favor of certain
nominees of Yucaipa to the Company's Board of Directors. Mr. Brown expressly
disclaims beneficial ownership of any shares except for the 1,113,023 shares as
to which he possesses sole voting and dispositive power.
(4) The 90,000 shares are issuable pursuant to stock options exercisable within
60 days of December 31, 2004.
(5) The 50,000 shares are issuable pursuant to stock options exercisable within
60 days of December 31, 2004.
(6) Includes 20,000 shares issuable pursuant to stock options exercisable within
60 days of December 31, 2004.
(7) The 5,000 shares are issuable pursuant to stock options exercisable within
60 days of December 31, 2004.
22
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets forth information as of December 31, 2004, regarding
the Company's 1993 Omnibus Stock Plan (the "1993 Plan") and 1997 Acquisition
Stock Plan (the "1997 Plan"). The Company's stockholders previously approved the
1993 Plan and the 1997 Plan and all amendments that were subject to stockholder
approval. As of December 31, 2004, options to purchase 220,000 shares of common
stock were outstanding under the 1993 Plan and no options were outstanding under
the 1997 Plan. The Company's 1993 Employee Stock Purchase Plan was terminated
effective December 31, 2001, and no shares of the Company's common stock are
issuable under that plan. The 1993 Plan expired in May 2003, except as to
options outstanding under the 1993 Plan.
Number of Shares
of Common Stock
Number of Shares Available for
of Common Stock Weighted- Future Issuance
to be Issued Upon Average (excluding those
Exercise of Exercise Price in column (a))
Outstanding Stock of Outstanding Under the Stock
Options Stock Options Option Plans
----------------- ---------------- ----------------
Plans Approved by Stockholders 220,000 $ 4.80 per share 1,000,000
Plans Not Approved by Stockholders Not applicable Not applicable Not applicable
Total 220,000 $ 4.80 per share 1,000,000
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table presents fees, including reimbursement for expenses, for
professional services rendered by the Company's independent registered public
accounting firm for the fiscal years ended December 31, 2004 and 2003:
Fiscal Year
----------------
2004 2003
------ ------
(in thousands)
Audit fees (1) $ 89 $ 87
Audit-related fees (2) 12 16
Tax fees (3) 45 58
All other fees (4) - -
------ ------
Total $ 146 $ 160
====== ======
(1) Audit fees consist of billings related to the audit of the Company's
consolidated annual financial statements, review of the interim
consolidated financial statements and services normally provided by the
Company's independent registered public accounting firm in connection with
statutory and regulatory filings and engagements.
(2) Audit-related fees consist of billings for assurance and related services
that are reasonably related to the performance of the audit or review of
the Company's consolidated financial statements and are not reported under
Audit Fees. This category includes fees billed related to employee benefit
plan audits.
(3) Tax fees consist of billings related to tax compliance, planning, and
consulting.
(4) All other fees consist of billings for services other than those reported
in the other categories.
23
POLICY ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND NON-AUDIT SERVICES OF
INDEPENDENT AUDITOR
Pre-approval is provided by the Audit Committee for up to one year of all audit
and permissible non-audit services provided by the Company's independent
auditor. Any pre-approval is detailed as to the particular service or category
of service and is generally subject to a specific fee.
24
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) DOCUMENTS FILED AS PART OF THIS REPORT
1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 2004 and 2003
Consolidated Statements of Operations for the years ended
December 31, 2004, 2003 and 2002
Consolidated Statements of Stockholders' Deficit for the years
ended December 31, 2004, 2003 and 2002
Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003 and 2002
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES FOR THE FISCAL YEARS ENDED
DECEMBER 31, 2004, 2003 AND 2002:
Schedule II: Valuation and Qualifying Accounts
All other schedules for which provision is made
in the applicable accounting regulations of the
Securities and Exchange Commission are not
required under the related instructions or are
inapplicable, and therefore have been omitted.
(b) EXHIBITS
Reference is made to the Exhibit Index, which follows.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized. The Executive Committee of
the Board of Directors has the responsibility for the role of the Principal
Executive Officer of the registrant.
Date: April 1, 2005 SIMON WORLDWIDE, INC.
/s/ George G. Golleher /s/ J. Anthony Kouba
------------------------ ---------------------
GEORGE G. GOLLEHER J. ANTHONY KOUBA
Member of Executive Member of Executive
Committee Committee
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ Joseph W. Bartlett Director April 1, 2005
- --------------------------
JOSEPH W. BARTLETT
/s/ Allan I. Brown Director April 1, 2005
- --------------------------
ALLAN I. BROWN
/s/ George G. Golleher Director and Member of April 1, 2005
- -------------------------- Executive Committee
GEORGE G. GOLLEHER
/s/ J. Anthony Kouba Director and Member of April 1, 2005
- -------------------------- Executive Committee
J. ANTHONY KOUBA
/s/ Greg Mays Director and Principal Financial April 1, 2005
- -------------------------- Officer
GREG MAYS
26
EXHIBITS
EXHIBIT NO. DESCRIPTION
2.1 (6) Securities Purchase Agreement dated September 1, 1999, between the Registrant and Overseas Toys, L.P.
2.2 (8) Purchase Agreement between the Company and Rockridge Partners, Inc., dated January 20, 2001, as
amended by Amendment No. 1 to the Purchase Agreement, dated February 15, 2001
2.3 (9) March 12, 2002, Letter Agreement between Cyrk and Simon, as amended by Letter Agreement dated as of
March 22, 2002
2.4 (9) Mutual Release Agreement between Cyrk and Simon
2.5 (10) Letter Agreement Between Cyrk and Simon, dated December 20, 2002
3.1 (3) Restated Certificate of Incorporation of the Registrant
3.2 (1) Amended and Restated By-laws of the Registrant
3.3 (7) Certificate of Designation for Series A Senior Cumulative Participating Convertible Preferred Stock
4.1 (1) Specimen certificate representing Common Stock
10.1 (2)(3) 1993 Omnibus Stock Plan, as amended
10.2 (2)(4) Life Insurance Agreement dated as of November 15, 1994, by and between the Registrant and Patrick D.
Brady as Trustee under a declaration of trust dated November 7, 1994, between Gregory P. Shlopak and
Patrick D. Brady, Trustee, entitled "The Shlopak Family 1994 Irrevocable Insurance Trust"
10.2.1 (2)(4) Assignments of Life Insurance policies as Collateral, each dated November 15, 1994
10.3 (2)(4) Life Insurance Agreement dated as of November 15, 1994, by and between the Registrant and Patrick
D. Brady as Trustee under a declaration of trust dated November 7, 1994, between Gregory P. Shlopak and
Patrick D. Brady, Trustee, entitled "The Gregory P. Shlopak 1994 Irrevocable Insurance Trust"
10.3.1 (2)(4) Assignments of Life Insurance policies as Collateral, each dated November 15, 1994
10.5 (2)(5) 1997 Acquisition Stock Plan
10.6 (5) Securities Purchase Agreement dated February 12, 1998, by and between the Company and Ty Warner
10.10 (7) Registration Rights Agreement between the Company and Overseas Toys, L.P.
10.18 (8) Subordinated Promissory Note by Rockridge Partners, Inc. in favor of the Company dated February 15,
2001
10.25 (9) Indemnification Trust Agreement between the Company and Development Specialists, Inc. as Trustee,
dated March 1, 2002
10.28 (11) February 7, 2003, letter agreements with George Golleher, J. Anthony Kouba and Greg Mays regarding
2002 and 2003 compensation
10.29 (11) May 30, 2003, Executive Services Agreements with Joseph Bartlett, Allan Brown, George Golleher, J.
Anthony Kouba, Gregory Mays, and Terrence Wallock
27
10.30 (12) May 3, 2004, Amendment No. 1 to Executive Services Agreement
21.1 (10) List of Subsidiaries
31 Certifications pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 (the "Exchange Act"),
filed herewith
32 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-
Oxley Act of 2002, filed herewith
99.1 Amended Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities
Litigation Reform Act of 1995, filed herewith
- ---------------------
(1) Filed as an exhibit to the Registrant's Registration Statement on Form S-1 (Registration No. 33-63118) or
an amendment thereto and incorporated herein by reference.
(2) Management contract or compensatory plan or arrangement.
(3) Filed as an exhibit to the Annual Report on Form 10-K for the year ended December 31, 1994, and
incorporated herein by reference.
(4) Filed as an exhibit to the Registrant's Registration Statement on Form 10-Q dated March 31, 1995, and
incorporated herein by reference.
(5) Filed as an exhibit to the Annual Report on Form 10-K for the year ended December 31, 1997, and
incorporated herein by reference.
(6) Filed as an exhibit to the Registrant's Report on Form 8-K dated September 1, 1999, and incorporated
herein by reference.
(7) Filed as an exhibit to the Annual Report on Form 10-K for the year ended December 31, 1999, and
incorporated herein by reference.
(8) Filed as an exhibit to the Registrant's Report on Form 8-K dated February 15, 2001, and incorporated
herein by reference.
(9) Filed as an exhibit to the Registrant's original Report on Form 10-K for the year ended December 31, 2001,
filed on March 29, 2002, and incorporated herein by reference.
(10) Filed as an exhibit to the Registrant's Report on Form 10-K/A for the year ended December 31, 2001, filed
on April 18, 2003, and incorporated herein by reference.
(11) Filed as an exhibit to the Registrant's Report on Form 10-K for the year ended December 31, 2002, filed on
July 29, 2003, and incorporated herein by reference.
(12) Filed as an exhibit to the Registrant's Report on Form 10-Q for the quarter ended March 31, 2004, filed on
May 10, 2004, and incorporated herein by reference.
28
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of
Simon Worldwide, Inc.:
We have audited the accompanying consolidated balance sheets of Simon Worldwide,
Inc. and its subsidiaries as of December 31, 2004 and 2003 and the related
consolidated statements of operations, stockholders' (deficit) equity and cash
flows for each of the three years in the period ended December 31, 2004. We have
also audited the financial statement schedule listed in the accompanying index.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and schedule are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statement and financial statement schedule. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Simon Worldwide Inc.
and its subsidiaries as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2004 in conformity with accounting principles generally accepted in
the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has a stockholders' deficit, has
suffered significant losses from operations, has no operating revenue and faces
numerous legal actions that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regards to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Also, in our opinion, the financial statement schedule presents fairly, in all
material respects, the information set forth therein.
BDO Seidman, LLP /s/
Los Angeles, California
March 21, 2005
F-1
PART I - FINANCIAL INFORMATION
SIMON WORLDWIDE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31, December 31,
2004 2003
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 18,892 $ -
Restricted cash 2,973 334
Prepaid expenses and other current assets 483 740
Assets from discontinued operations to be disposed of - current (Note 4) 2,815 16,827
------------ ------------
Total current assets 25,163 17,901
Non-current assets:
Property and equipment, net 13 33
Investments 500 500
Other assets 198 276
Assets from discontinued operations to be disposed of - non-current (Note 4) 249 1,128
------------ ------------
Total non-current assets 960 1,937
------------ ------------
$ 26,123 $ 19,838
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable:
Trade $ 226 $ 75
Affiliates 166 161
Accrued expenses and other current liabilities 512 123
Liabilities from discontinued operations - current (Note 4) 3,064 17,955
------------ ------------
Total current liabilities 3,968 18,314
Commitments and contingencies
Redeemable preferred stock, Series A1 senior cumulative
participating convertible, $.01 par value, 29,904 shares issued and
outstanding at December 31, 2004, and 28,737 shares issued and outstanding
at December 31, 2003, stated at redemption value of $1,000 per share 29,904 28,737
Stockholders' deficit:
Common stock, $.01 par value; 50,000,000 shares authorized;
16,653,193 shares issued and outstanding at December 31, 2004 and 2003 167 167
Additional paid-in capital 138,500 138,500
Retained deficit (146,416) (165,880)
------------ ------------
Total stockholders' deficit (7,749) (27,213)
------------ ------------
$ 26,123 $ 19,838
============ ============
See the accompanying Notes to Consolidated Financial Statements.
F-2
SIMON WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
2004 2003 2002
---------- ---------- ----------
Revenues $ - $ - $ -
General and administrative expenses 3,625 5,270 5,156
Investment losses - - 10,250
---------- ---------- ----------
Loss from continuing operations before income taxes (3,625) (5,270) (15,406)
Income tax provision - - -
---------- ---------- ----------
Net loss from continuing operations (3,625) (5,270) (15,406)
Income (loss) from discontinued
operations, net of tax (Note 4) 24,261 (3,591) 6,120
---------- ---------- ----------
Net income (loss) 20,636 (8,861) (9,286)
Preferred stock dividends 1,172 1,127 1,091
---------- ---------- ----------
Net income (loss) available to common stockholders $ 19,464 $ (9,988) $ (10,377)
========== ========== ==========
Loss per share from continuing operations available
to common stockholders:
Loss per common share - basic and diluted $ (0.29) $ (0.38) $ (0.99)
========== ========== ==========
Weighted average shares outstanding - basic and diluted 16,653 16,653 16,653
========== ========== ==========
Income (loss) per share from discontinued operations:
Income (loss) per common share - basic and diluted $ 1.46 $ (0.22) $ 0.37
========== ========== ==========
Weighted average shares outstanding - basic and diluted 16,653 16,653 16,653
========== ========== ==========
Net income (loss) available to common stockholders:
Net income (loss) per common share - basic and diluted $ 1.17 $ (0.60) $ (0.62)
========== ========== ==========
Weighted average shares outstanding - basic and diluted 16,653 16,653 16,653
========== ========== ==========
See the accompanying Notes to Consolidated Financial Statements.
F-3
SIMON WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
For the years ended December 31, 2004, 2003 and 2002
(in thousands)
Accumulated
Common Additional Other Total
Stock Paid-in Retained Comprehensive Comprehensive Stockholders'
($.01 Par Value) Capital Deficit Income (Loss) Income (Loss) Deficit
---------------- ---------- ----------- -------------- -------------- -------------
Balance, December 31, 2001 $ 167 $ 135,966 $ (145,515) $ (2,115) $ (11,497)
Comprehensive loss:
Net loss (9,286) $ (9,286) (9,286)
Other comprehensive income, net of
income taxes:
Translation adjustment 2,115 2,115
--------------
Other comprehensive income 2,115 2,115
--------------
Comprehensive loss $ (7,171)
==============
Dividends on preferred stock (1,091) (1,091)
Phantom shareholder contingent obligation 2,994 2,994
Options compensation (460) (460)
---------------- ---------- ----------- -------------- -------------
Balance, December 31, 2002 167 138,500 (155,892) - (17,225)
Comprehensive loss:
Net loss (8,861) $ (8,861) (8,861)
Other comprehensive income - -
--------------
Comprehensive loss $ (8,861)
==============
Dividends on preferred stock (1,127) (1,127)
---------------- ---------- ----------- -------------- -------------
Balance, December 31, 2003 167 138,500 (165,880) - (27,213)
Comprehensive loss:
Net income 20,636 $ 20,636 20,636
Other comprehensive income - -
--------------
Comprehensive income $ 20,636
==============
Dividends on preferred stock (1,172) (1,172)
---------------- ---------- ----------- -------------- -------------
Balance, December 31, 2004 $ 167 $ 138,500 $ (146,416) $ - $ (7,749)
================ ========== =========== ============== =============
See the accompanying Notes to Consolidated Financial Statements.
F-4
SIMON WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
2004 2003 2002
---------- ---------- ----------
Cash flows from operating activities:
Net income (loss) $ 20,636 $ (8,861) $ (9,286)
Income (loss) from discontinued operations 24,261 (3,591) 6,120
---------- ---------- ----------
Loss from continuing operations (3,625) (5,270) (15,406)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 20 64 58
Charge for impaired assets, net - - 432
Charge for impaired investments - - 10,250
Gain on settlement of obligations (11,500) (23) (16,455)
Cash received from settlement 13,000 - -
Cash provided by (used in) discontinued operations 9,108 (127) (6,024)
Cash transferred to continuing operations 10,066 3,119 27,615
Increase (decrease) in cash from changes
in working capital items:
Prepaid expenses and other current assets 257 654 (316)
Accounts payable 156 29 45
Accrued expenses and other current liabilities 389 (355) 345
---------- ---------- ----------
Net cash provided by (used in) operating activities 17,871 (1,909) (544)
---------- ---------- ----------
Cash flows from investing activities:
Purchase of property and equipment - (30) -
Decrease (increase) in restricted cash (2,639) 7,306 (4,772)
Cash provided by (used in) discontinued operations 3,582 (6,565) 7,256
Other, net 78 17 (208)
---------- ---------- ----------
Net cash provided by investing activities 1,021 728 2,276
---------- ---------- ----------
Cash flows from financing activities:
Cash used in discontinued operations - - (1,639)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 18,892 (1,181) 1,181
Cash and cash equivalents, beginning of year - 1,181 -
---------- ---------- ----------
Cash and cash equivalents, end of year $ 18,892 $ - $ 1,181
========== ========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ - $ - $ 22
========== ========== ==========
Income taxes $ 23 $ 11 $ 72
========== ========== ==========
Supplemental non-cash investing activities:
Dividends paid in kind on redeemable preferred stock $ 1,167 $ 1,121 $ 1,078
========== ========== ==========
See the accompanying Notes to Consolidated Financial Statements.
F-5
SIMON WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS, LOSS OF CUSTOMERS, RESULTING EVENTS AND GOING CONCERN
Prior to August 2001, the Company, incorporated in Delaware and founded in 1976,
had been operating as a multi-national full-service promotional marketing
company, specializing in the design and development of high-impact promotional
products and sales promotions. The majority of the Company's revenue was derived
from the sale of products to consumer products and services companies seeking to
promote their brand names and corporate identities and build brand loyalty. The
major client of the Company was McDonald's Corporation ("McDonald's"), for whom
the Company's Simon Marketing subsidiary designed and implemented marketing
promotions, which included premiums, games, sweepstakes, events, contests,
coupon offers, sports marketing, licensing and promotional retail items. Net
sales to McDonald's and Philip Morris, another significant client, accounted for
78% and 8%, respectively, of total net sales in 2001.
On August 21, 2001, the Company was notified by McDonald's that they were
terminating their approximately 25-year relationship with Simon Marketing as a
result of the arrest of Jerome P. Jacobson ("Mr. Jacobson"), a former employee
of Simon Marketing who subsequently pled guilty to embezzling winning game
pieces from McDonald's promotional games administered by Simon Marketing. No
other Company employee was found to have any knowledge of or complicity in his
illegal scheme. Simon Marketing was identified in the criminal indictment of Mr.
Jacobson, 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. As a result of the above events, the
Company no longer has an on-going promotions business.
Since August 2001, the Company has concentrated its efforts on reducing its
costs and settling numerous claims, contractual obligations and pending
litigation. 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 for some indefinite period primarily dependent upon
ongoing litigation. As a result of these efforts, the Company has been able to
resolve a significant number of outstanding liabilities that existed in August
2001 or arose subsequent to that date. As of December 31, 2004, the Company had
reduced its workforce to 5 employees from 136 employees as of December 31, 2001.
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. At December 31, 2004, the Company had a stockholders'
deficit of $7.7 million. For the year ended December 31, 2004, the Company had
net income of $20.6 million primarily due to a settlement of litigation with
McDonald's (see Note 4) and the elimination thereby of previously outstanding
liabilities recorded by the Company. The Company incurred losses within its
continuing operations in 2004 and continues to incur losses in 2005 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
received pursuant to the settlement with McDonald's in 2004 (see Note 4),
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 at December 31, 2004, and loss of customers, the Company's
independent registered public accounting firm has 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.
The Company is currently managed by the Executive Committee of the Board of
Directors, consisting of Messrs. George Golleher and J. Anthony Kouba, who
jointly act as Chief Executive Officers, in consultation with a principal
financial officer and acting general counsel. In connection with such
responsibilities, Messrs. Golleher and Kouba entered into Executive Services
Agreements dated May 30, 2003, which were subsequently amended in May 2004.
The Board of Directors continues to consider various alternative courses of
action for the Company going forward, including possibly acquiring or combining
with one or more operating businesses. The Board of Directors has reviewed and
analyzed a number of proposed transactions and will continue to do so until it
can determine a course of action going forward to best benefit all shareholders,
including the holder of the Company's outstanding preferred stock. (See Note
12.) The Company cannot predict when the Directors will have developed a
proposed course of action or whether any such course of action will be
successful. Management believes it has sufficient capital resources and
liquidity to operate the Company for the foreseeable future.
F-6
As a result of the Jacobson embezzlement, numerous consumer class action and
representative action lawsuits were filed in Illinois and multiple jurisdictions
nationwide and in Canada. All actions brought in the United States were
eventually consolidated and settled (the "Boland Settlement"), except for any
plaintiff who opted out of such settlement. One such opt-out plaintiff, seeking
to redeem a purported $1 million winning game ticket, had brought a lawsuit in
Kentucky, which was transferred to Illinois and ordered to arbitration. The
plaintiff has appealed the arbitration order.
On or about September 13, 2002, an action was filed against Simon Marketing and
McDonald's in Canada in Ontario Provincial Court alleging substantially the same
facts as in the United States class action lawsuits and adding an allegation
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 were Canadian citizens seeking restitution and damages on
a class-wide basis. On October 28, 2002, a second action was filed against Simon
Marketing and McDonald's 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. An appeal of that
decision by McDonald's and the Company has been denied by the Court of Appeal.
The Company is unable to predict the outcome of the aforesaid lawsuit and its
ultimate effect, if any, on the Company's financial condition, results of
operations or net cash flows.
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 alleged 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, sought 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.
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 has resulted. The Company has appealed this ruling with respect to PWC
only.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company. All intercompany accounts and transactions have been eliminated in
consolidation.
STOCK-BASED COMPENSATION PLANS AND PRO FORMA STOCK-BASED COMPENSATION EXPENSE
At December 31, 2004, the Company had one stock-based compensation plan, which
is described below. The Company adopted the disclosure provisions of Statement
of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - An Amendment of FASB Statement No.
123," and has applied Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations in
accounting for its plan. Accordingly, no compensation cost has been recognized
related to such plans during the years ended December 31, 2004, 2003 and 2002.
In December 2004, the Financial Accounting Standards Board ("FASB") issued a
revision entitled, "Share Based Payment," to SFAS No. 123. This revision
supersedes APB Opinion No. 25 and its related implementation guidance. As such,
this revision eliminates the alternative to use the intrinsic value method of
accounting under APB Opinion No. 25 that was provided in SFAS No. 123 as
originally issued. Under APB Opinion No. 25, issuing stock options to employees
generally resulted in recognition of no compensation cost. This revision
requires entities to recognize the cost of employee services received in
exchange for awards of equity instruments based on the fair value at grant-date
of those awards (with limited exceptions). The Company currently applies APB
Opinion No. 25 and related interpretations in accounting for its stock-based
compensation plan. This revision is effective for the first interim or annual
reporting period that begins after June 15, 2005. The Company does not expect
adoption of SFAS No. 123 to have a material effect on its consolidated
statements of financial position or results of operations.
Had compensation cost for the Company's grants for stock-based compensation
plans been determined consistent with SFAS No. 123, the Company's net income
(loss) and income (loss) per common share would have been adjusted to the pro
forma amounts indicated below:
F-7
2004 2003 2002
--------- --------- ----------
(in thousands)
Net income (loss) available to common stockholders - as reported $ 19,464 $ (9,988) $ (10,377)
Add: Stock-based compensation expense
included in reported net income, net of income tax - - (276)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of income taxes - - -
--------- --------- ----------
Net income (loss) available to common stockholders - pro forma $ 19,464 $ (9,988) $ (10,653)
========= ========= ==========
Income (loss) per common share - basic and diluted - as reported $ 1.17 $ (0.60) $ (0.62)
Income (loss) per common share - basic and diluted - pro forma $ 1.17 $ (0.60) $ (0.64)
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
The Company places its cash in what it believes to be credit-worthy financial
institutions. However, cash balances exceed FDIC insured levels at various times
during the year.
FINANCIAL INSTRUMENTS
The carrying amounts of cash equivalents, investments, short-term borrowings and
long-term obligations, if any, approximate their fair values.
CASH EQUIVALENTS
Cash equivalents consist of short-term, highly liquid investments, which have
original maturities at the date of purchase of three-months or less.
INVESTMENTS
Investments are stated at fair value. Current investments are designated as
available-for-sale in accordance with the provisions of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," and as such,
unrealized gains and losses are reported in a separate component of
stockholders' deficit. Long-term investments, for which there are no readily
available market values, were originally accounted for under the cost method and
were carried at the lower of cost or estimated fair value.
The Emerging Issues Task Force ("EITF") of the FASB, issued EITF 03-16,
"Accounting for Investments in Limited Liability Companies," which requires the
Company to change its method of accounting for its investment in Yucaipa AEC
Associates from the cost method to the equity method for periods ending after
July 1, 2004. The adjustment related to the cumulative effect of this change in
accounting principle which is equal to the Company's pro rata share of Yucaipa
AEC Associates' gains and losses since making the original investment is
immaterial.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets or over the
terms of the related leases, if such periods are shorter. Property and equipment
has been adjusted to reflect an impairment charge associated with the Company's
loss of its customers. See Note 1. The cost and accumulated depreciation for
property and equipment sold, retired or otherwise disposed of are relieved from
the accounts, and the resulting gains or losses are reflected in income.
F-8
IMPAIRMENT OF LONG-LIVED ASSETS
Periodically, the Company assesses, based on undiscounted cash flows, if there
has been an other-than-temporary impairment in the carrying value of its
long-lived assets and, if so, the amount of any such impairment by comparing
anticipated undiscounted future cash flows with the carrying value of the
related long-lived assets. In performing this analysis, management considers
such factors as current results, trends and future prospects, in addition to
other economic factors.
INCOME TAXES
The Company determines deferred taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires that deferred tax assets and
liabilities be computed based on the difference between the financial statement
and income tax bases of assets and liabilities using the enacted marginal tax
rate. Deferred income tax expenses or credits are based on the changes in the
asset or liability from period to period.
FOREIGN CURRENCY TRANSLATION
The Company translates financial statements denominated in foreign currency by
translating balance sheet accounts at the balance sheet date exchange rate and
income statement accounts at the average rates of exchange during the period.
Translation gains and losses are recorded in a separate component of
stockholders' deficit and transaction gains and losses are reflected in income.
EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share have been determined in accordance with the
provisions of SFAS No. 128, "Earnings per Share," which requires dual
presentation of basic and diluted earnings per share on the face of the income
statement and a reconciliation of the numerator and denominator of the basic
earnings per share computation to the numerator and denominator of the diluted
earnings per share computation (see Note 17).
3. COMMITMENTS AND CONTINGENCIES
In addition to the legal matters discussed in Note 1, the Company is also
involved in other litigation and legal matters which have arisen in the ordinary
course of business. The Company does not believe that the ultimate resolution of
these other litigation and legal matters will have a material adverse effect on
its financial condition, results of operations or net cash flows.
In February 2001, the Company sold its Corporate Promotions Group ("CPG")
business to Cyrk, Inc. ("Cyrk"), formerly known as Rockridge Partners, Inc., for
$8 million cash and a note in the amount of $2.3 million. Cyrk also assumed
certain liabilities of the CPG business. Subsequently, in connection with the
settlement of a controversy between the parties, Cyrk supplied a $500,000 letter
of credit to secure partial performance of certain assumed liabilities and the
balance due on the note was forgiven, subject to a reinstatement thereof in the
event of default by Cyrk under such assumed liabilities.
One of the obligations assumed by Cyrk was to Winthrop Resources Corporation
("Winthrop"). As a condition to Cyrk assuming this obligation, however, the
Company was required to provide a $4.2 million letter of credit as collateral
for Winthrop in case Cyrk did not perform the assumed obligation. The available
amount under this letter of credit reduces over time as the underlying
obligation to Winthrop reduces. As of December 31, 2004, the available amount
under the letter of credit was $3.0 million which is secured, in part, by $2.5
million of restricted cash of the Company. The Company's letter of credit is
also secured, in part, by the aforesaid $500,000 letter of credit provided by
Cyrk for the benefit of the Company. Cyrk has agreed to indemnify the Company if
Winthrop makes any draw under this letter of credit. No assurances can be made
that the Company will be successful in enforcing those rights or, if successful,
collecting damages from Cyrk. The letter of credit has semi-annual expirations
through August 2007 when the underlying obligation is satisfied.
Because the Company remained secondarily liable under the Winthrop lease
restructuring, recognizing a liability at inception for the fair value of the
obligation is not required under the provisions of FASB Interpretation 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others--an interpretation of FASB
Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34,"
However, in the fourth quarter of 2003,
F-9
Cyrk informed the Company that it was continuing to suffer substantial financial
difficulties and that it might not be able to continue to discharge its
obligations to Winthrop which are secured by the Company's letter of credit. As
a result of the foregoing, and in accordance with the provisions of FASB
Statement No. 5, "Accounting for Contingencies," the Company recorded a charge
in 2003 of $2.8 million with respect to the liability arising from the Winthrop
lease. Such liability was revised downward to $2.5 million during 2004 based on
the reduction in the Winthrop liability.
4. DISCONTINUED OPERATIONS
As discussed in Note 1, the Company had effectively eliminated a majority of its
on going promotions business operations by April 2002. 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 its discontinued operations to ensure assets
from discontinued operations to be disposed of cover liabilities from
discontinued operations. Management believes it has sufficient capital resources
and liquidity to operate the Company for the foreseeable future.
Assets and liabilities related to discontinued operations at December 31, 2004
and 2003, as disclosed in the accompanying consolidated financial statements,
consist of the following:
December 31, December 31,
2004 2003
------------- ------------
(in thousands)
Assets:
Cash and cash equivalents $ - $ 10,065
Restricted cash 2,815 6,547
Accounts receivable:
Trade, less allowance for doubtful accounts of $13,852
at December 31, 2003 - 41
Prepaid expenses and other current assets - 174
------------- ------------
Total current assets 2,815 16,827
Other assets 249 1,128
------------- ------------
Assets from discontinued operations to be disposed of $ 3,064 $ 17,955
============= ============
Liabilities:
Accounts payable:
Trade $ 58 $ 5,170
Accrued expenses and other current liabilities 3,006 12,785
------------- ------------
Total current liabilities 3,064 17,955
------------- ------------
Liabilities from discontinued operations $ 3,064 $ 17,955
============= ============
F-10
Net income (loss) from discontinued operations for the years ended December 31,
2004, 2003 and 2002, as disclosed in the accompanying consolidated financial
statements, consists of the following:
2004 2003 2002
-------- ------- --------
(in thousands)
Net sales $ - $ - $ -
Cost of sales - - -
-------- ------- --------
Gross profit - - -
General and administrative expenses 1,990 1,359 3,464
Management fees - - 1,458
Charges attributable to loss of significant customers - - 4,574
Gain on settlement of obligations (24,500) (23) (12,023)
Restructuring - - (750)
-------- ------- --------
Operating income (loss) 22,510 (1,336) 3,277
Interest income (283) (246) (366)
Interest expense - - 35
Other (income) expense (1,468) 2,501 974
-------- ------- --------
Income (loss) before income taxes 24,261 (3,591) 2,634
Income tax expense (benefit) - - (3,486)
-------- ------- --------
Net income (loss) $ 24,261 $(3,591) $ 6,120
======== ======= ========
GENERAL AND ADMINISTRATIVE EXPENSES
During 2004, certain events occurred that indicated the Company would not
realize amounts related to an insurance policy for the benefit of a former
Company executive and on which the Company is the beneficiary of the cash
surrender value. As such, the Company recorded a charge against such asset of
$1.0 million.
In connection with the discontinuance of part of the Company's operations in
1993, the Company filed a lawsuit against a former contractual partner. During
1998, the Company settled the litigation by entering into a Joint Business
Arrangement with the defendant, at which time the Company made a cash payment
and recorded a $2.9 million accrual for the maximum potential liability under
the agreement, which was included in other long-term obligations within
discontinued operations in the Company's 2001 consolidated financial statements.
During 2002, the Company paid approximately $2.2 million to settle these
obligations, resulting in a settlement gain of $725,000, recorded as a reduction
to general and administrative expenses.
Also during 2002, the Company settled its outstanding domestic and international
real estate and equipment lease obligations and relocated its remaining
scaled-down operations to smaller office space in Los Angeles, California. As
these settlements were on terms generally more favorable to the Company than
required by the existing terms of the liabilities, the Company recorded a 2002
gain totaling approximately $2.8 million, recorded as a reduction to general and
administrative expenses.
MANAGEMENT FEES
The Company paid Yucaipa a management fee of $500,000 per year for a five-year
term, beginning in 1999, for which Yucaipa provided general business
consultation and advice and management services. On October 17, 2002, the
Management Agreement was terminated, a payment of $1.5 million was made to
Yucaipa and each party was released from further obligations thereunder.
CHARGES ATTRIBUTABLE TO LOSS OF SIGNIFICANT CUSTOMERS
During 2002, the Company recorded a pre-tax net charge totaling approximately
$4.6 million associated with the loss of customers. Charges totaling $8.6
million, primarily related to asset write-downs ($3.6 million), professional
fees ($4.3 million), labor and other costs ($.7 million), were partially offset
by recoveries of certain assets, totaling $1.3 million, that had been written
off and included in the 2001 charges attributable to the loss of significant
customers and other gains ($2.7 million).
F-11
GAIN ON SETTLEMENT OF OBLIGATIONS
During 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 settlement
loss of $.5 million, resulting in a 2004 net gain on settlement of obligations
of $24.5 million.
During 2002 the Company negotiated settlements related to outstanding
liabilities with many of its vendors. As these settlements were on terms
generally more favorable to the Company than required by the existing terms of
the liabilities, the Company recorded a gain totaling approximately $12.0
million.
RESTRUCTURING
The 2002 restructuring amount above of $(750) consists of an accrual reversal of
$304 and $446 related to the Company's 2001 and 2000 restructuring efforts,
respectively.
OTHER (INCOME) EXPENSE
In the fourth quarter of 2003, Cyrk informed the Company that it was continuing
to suffer substantial financial difficulties and that it might not be able to
continue to discharge its obligations to Winthrop which are secured by the
Company's letter of credit. As a result of the foregoing, and in accordance with
FASB Statement No. 5, "Accounting for Contingencies," the Company recorded a
charge in 2003 of $2.8 million with respect to the liability arising from the
Winthrop lease. Such liability was revised downward to $2.5 million during 2004
based on the reduction in the Winthrop liability.
5. RESTRICTED CASH
Restricted cash included within discontinued operations at December 31, 2004 and
2003 totaled $2.8 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.
Restricted cash included within continuing operations at December 31, 2004 and
2003, totaled $3.0 million and $.3 million, respectively, which primarily
consisted of amounts deposited with lenders to satisfy the Company's obligations
pursuant to its standby letters of credit.
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
Continuing
Operations
Discontinued --------------------
Operations As of December 31, Total
---------------------------------------------------------------------
2004 2003 2004 2003 2004 2003
----- ----- ---- ---- ---- ----
(in thousands)
Machinery and equipment $ - $ - $ 27 $ 292 $ 27 $ 292
Less: Accumulated depreciation and amortization - - (14) (259) (14) (259)
----- ----- ---- ----- ---- -----
$ - $ - $ 13 $ 33 $ 13 $ 33
===== ===== ==== ===== ==== =====
Depreciation and amortization expense on property and equipment totaled
approximately $20,000, $64,000, and $475,000 during 2004, 2003 and 2002,
respectively.
7. INVESTMENTS
LONG-TERM
In the past, with its excess cash the Company had 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
F-12
the Company's investments in these companies is subject to the aforementioned
risks. The book value of the Company's investment portfolio totaled $500,000 as
of December 31, 2004, which is accounted for under the cost method.
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. Based on such periodic review, the Company considers $500,000 to
properly reflect the value of its investment portfolio. While the Company will
continue to periodically evaluate its internet investments, there can be no
assurance that its investment strategy will be successful and, thus, the Company
might not ever realize any benefits from its portfolio of investments.
At December 31, 2004, the Company held an investment in Yucaipa AEC Associates,
LLC ("Yucaipa AEC Associates"), a limited liability company that is controlled
by Yucaipa, which also controls the holder of the Company's outstanding
preferred stock. Yucaipa AEC Associates in turn held an investment in Alliance
Entertainment Corp. ("Alliance") which is a home entertainment product
distribution, fulfillment, and infrastructure company providing both
brick-and-mortar and e-commerce home entertainment retailers with complete
business-to-business solutions. At December 31, 2001, the Company's investment
in Yucaipa AEC Associates had a carrying value of $10.0 million. In June 2002,
certain events occurred which indicated an impairment and the Company recorded a
pre-tax non-cash charge of $10.0 million to write down this investment in June
2002. On February 28, 2005, Alliance merged with Source Interlink Companies,
Inc. ("Source"), a direct-to-retail magazine distribution and fulfillment
company in North America and a provider of magazine information and front-end
management services for retailers. See Note 19.
The Emerging Issues Task Force ("EITF") of the FASB, issued EITF 03-16,
"Accounting for Investments in Limited Liability Companies," which required the
Company to change its method of accounting for its investment in Yucaipa AEC
Associates from the cost method to the equity method for periods ending after
July 1, 2004. The adjustment related to the cumulative effect of this change in
accounting principle which is equal to the Company's pro rata share of Yucaipa
AEC Associates' gains and losses since making the original investment is
immaterial.
8. LEASE OBLIGATIONS
The approximate minimum rental commitments under all noncancelable leases at
December 31, 2004, totaled approximately $33,000, which are due in 2005.
For the years ended December 31, 2004, 2003 and 2002, rental expense for all
operating leases included within continuing operations was approximately
$117,000, $165,000, and $95,000, respectively, rental expense for all operating
leases included within discontinued operations was $0, $180,000, and $2.6
million, respectively. Rent is charged to operations on a straight-line basis.
9. INCOME TAXES
The Company had no provision or benefit for income taxes for 2004 and 2003. The
provision (benefit) for income taxes for 2002 was $(3,486), all of which related
to discontinued operations and was classified as current.
As required by SFAS No. 109 "Accounting for Income Taxes," the Company
periodically evaluates the positive and negative evidence bearing upon the
realizability of its deferred tax assets. The Company, however, has considered
recent events (see Note 1) and results of operations and concluded, in
accordance with the applicable accounting methods, that it is more likely than
not that the deferred tax assets will not be realizable. As a result, the
Company has determined that a valuation allowance of approximately $38,456 is
required at December 31, 2004. The tax effects of temporary differences that
gave rise to deferred tax assets as of December 31, 2004 and 2003, were as
follows (in thousands):
2004 2003
-------- --------
Deferred tax assets:
Receivable reserves $ 83 $ 2,207
Other asset reserves 4,007 11,560
Deferred compensation 40 26
Capital Losses 7,137 6,901
Foreign tax credits 82 253
AMT credit 649
Net operating losses 26,440 26,064
Depreciation 18 17
Valuation Allowance (38,456) (47,028)
-------- --------
$ - $ -
======== ========
As of December 31, 2004, the Company had federal and state net operating loss
carryforwards of approximately $66,818 and $42,104, respectively. The federal
net operating loss carryforward will begin to expire in 2020 and the state net
operating loss carryforwards began to expire in 2005. As of December 31, 2004,
the Company also had foreign tax credit carryforwards of $82 that began to
expire in 2004. As of December 31, 2004, the Company had federal and state
capital loss carryforwards of approximately $16,659 which begin to expire in
2006.
F-13
The following is a reconciliation of the statutory federal income tax rate to
the actual effective income tax rate:
2004 2003 2002
---- ---- ----
Federal Tax (benefit) rate -34% -34% -34%
Increase (decrease) in taxes resulting from
State Income Taxes (6) (6) (6)
Effect of foreign income or loss (8) 23 (5)
Release of prior year estimated tax liability - - (27)
Non-deductible loss on sale of business - - 11
Change in valuation allowance 48 51 30
Effect of non-utilization of state losses - 2 5
Life Insurance - 3 4
Adjustment to State Tax Liability - (9) 18
Foreign Tax Credits - 27 (14)
Post-tax return filing Net Operating Loss
Adjustments - (50) (9)
Other, net - (7) -
---- ---- ---
0% 0% -27%
==== ==== ===
An audit by the Internal Revenue Service covering the tax years 1996 through
2000 was concluded during 2003. The Company incurred no additional income tax
upon conclusion of the IRS audit.
10. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
At December 31, 2004 and 2003, accrued expenses and other current liabilities
consisted of the following:
Continuing
Operations
Discontinued ------------------
Operations As of December 31, Total
-----------------------------------------------------------------
2004 2003 2004 2003 2004 2003
------- -------- ----- ----- ------- --------
(in thousands)
Accrued payroll and related items and
deferred compensation $ - $ 73 $ 42 $ - $ 42 $ 73
Inventory purchases - 4,471 - - - 4,471
Royalties - 1,552 - - - 1,552
Contingent loss 2,455 2,835 - - 2,455 2,835
Other 551 3,854 470 123 1,021 3,977
------- -------- ----- ----- ------- --------
$ 3,006 $ 12,785 $ 512 $ 123 $ 3,518 $ 12,908
======= ======== ===== ===== ======= ========
11. 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 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 in the accompanying Consolidated Balance Sheets. As of December
31, 2004, there have not been any claims made against the trust.
12. REDEEMABLE PREFERRED STOCK
F-14
In November 1999, Overseas Toys, L.P., an affiliate of Yucaipa, a Los Angeles,
California based investment firm, invested $25 million in the Company in
exchange for preferred stock and a warrant to purchase additional preferred
stock. Under the terms of the investment, which was approved at a Special
Meeting of Stockholders on November 10, 1999, the Company issued 25,000 shares
of a newly authorized senior cumulative participating convertible preferred
stock ("preferred stock") to Yucaipa for $25 million. Yucaipa is entitled, at
their option, to convert each share of preferred stock into common stock equal
to the sum of $1,000 per share plus all accrued and unpaid dividends, divided by
$8.25 (3,644,848 shares as of December 31, 2004, and 3,502,816 shares as of
December 31, 2003).
In connection with the issuance of the preferred stock, the Company also issued
a warrant to purchase 15,000 shares of a newly authorized series of preferred
stock at a purchase price of $15 million. Each share of this series of preferred
stock issued upon exercise of the warrant is convertible, at Yucaipa's option,
into common stock equal to the sum of $1,000 per share plus all accrued and
unpaid dividends, divided by $9.00 (1,666,667 shares as of December 31, 2003).
The warrant expired on November 10, 2004.
Assuming conversion of all of the convertible preferred stock, Yucaipa would own
approximately 18% and 17% of the then outstanding common shares at December 31,
2004 and 2003.
Yucaipa has voting rights equivalent to the number of shares of common stock
into which their preferred stock is convertible on the relevant record date.
Also, Yucaipa is entitled to receive a quarterly dividend equal to 4% of the
base liquidation preference of $1,000 per share outstanding, payable in cash or
in-kind at the Company's option.
In the event of liquidation, dissolution or winding up of the affairs of the
Company, Yucaipa, as holder of the preferred stock, will be entitled to receive
the redemption price of $1,000 per share plus all accrued dividends plus: (1)
(a) 7.5% of the amount that the Company's retained earnings exceeds $75 million
less (b) the aggregate amount of any cash dividends paid on common stock which
are not in excess of the amount of dividends paid on the preferred stock,
divided by (2) the total number of preferred shares outstanding as of such date
(the "adjusted liquidation preference"), before any payment is made to other
stockholders.
The Company may redeem all or a portion of the preferred stock at a price equal
to the adjusted liquidation preference of each share, if the average closing
prices of the Company's common stock have exceeded $12.00 for sixty consecutive
trading days on or after November 10, 2002, or, any time on or after November
10, 2004. The preferred stock is subject to mandatory redemption if a change in
control of the Company occurs.
In connection with this transaction, the managing partner of Yucaipa was
appointed chairman of the Company's Board of Directors and Yucaipa was entitled
to nominate two additional individuals to a seven person board. In August 2001,
the managing partner of Yucaipa, along with another Yucaipa representative,
resigned from the Company's Board of Directors.
Additionally, the Company paid Yucaipa a management fee of $500,000 per year for
a five-year term, beginning in 1999, for which Yucaipa provided general business
consultation and advice and management services. On October 17, 2002, the
Management Agreement was terminated and a payment was made to Yucaipa of $1.5
million and each party was released from further obligations thereunder.
13. STOCK PLAN
1993 OMNIBUS STOCK PLAN
Under its 1993 Omnibus Stock Plan, as amended (the "Omnibus Plan"), which
terminated in May 2003 except as to options outstanding at that time, the
Company reserved up to 3,000,000 shares of its common stock for issuance
pursuant to the grant of incentive stock options, nonqualified stock options or
restricted stock. The Omnibus Plan is administered by the Compensation Committee
of the Board of Directors. Subject to the provisions of the Omnibus Plan, the
Compensation Committee had the authority to select the optionees or restricted
stock recipients and determine the terms of the options or restricted stock
granted, including: (i) the number of shares; (ii) the exercise period (which
may not exceed ten years); (iii) the exercise or purchase price (which in the
case of an incentive stock option cannot be less than the market price of the
common stock on the date of grant); (iv) the type and duration of options or
restrictions, limitations on transfer and other restrictions; and (v) the time,
manner and form of payment.
Generally, an option is not transferable by the option holder except by will or
by the laws of descent and distribution. Also, generally, no incentive stock
option may be exercised more than 60 days following termination of employment.
However, in
F-15
the event that termination is due to death or disability, the option is
exercisable for a maximum of 180 days after such termination.
Options granted under this plan generally become exercisable in three equal
installments commencing on the first anniversary of the date of grant. Options
granted during 2003 become exercisable in two equal installments commencing on
the first anniversary of the date of grant. No further options may be granted
under the Omnibus Plan.
1997 ACQUISITION STOCK PLAN
The 1997 Acquisition Stock Plan (the "1997 Plan") is intended to provide
incentives in connection with the acquisitions of other businesses by the
Company. The 1997 Plan is identical in all material respects to the Omnibus
Plan, except that the number of shares available for issuance under the 1997
Plan is 1,000,000 shares.
The fair value of each option grant under the above plans was estimated using
the Black-Scholes option pricing model with the following assumptions for 2003
grants: expected dividend yield of 0%; expected life of 9.4 years; expected
volatility of 40%; and, a risk-free interest rate of 2.0%. There were no stock
options granted under the plans during 2004 and 2002.
The following summarizes the status of the Company's stock options as of
December 31, 2004, 2003 and 2002, and changes for the years then ended:
2004 2003 2002
Weighted Weighted Weighted
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------- -------- ---------- -------- -------------- ----------
Outstanding at the beginning of year 225,000 $ 5.33 130,000 $ 9.16 1,176,199 $ 7.55
Granted - - 95,000 0.10 - -
Exercised - - - - - -
Expired/Forfeited 5,000 28.75 - - 1,046,199 7.35
--------- ---------- ---------
Outstanding at end of year 220,000 4.80 225,000 5.33 130,000 9.16
========= ========== =========
Options exercisable at year-end 172,500 6.09 130,000 9.16 122,500 9.59
========= ========== =========
Options available for future grant 1,000,000 1,000,000 2,456,389
========= ========== =========
Weighted average fair value of
options granted during the year Not applicable $ 0.02 Not applicable
F-16
The following table summarizes information about stock options outstanding at
December 31, 2004:
Options Outstanding Options Exercisable
----------------------------------------- ------------------------------
Weighted
Range of Average Weighted Weighted
Exercise Number Remaining Average Number Average
Prices Outstanding Contractual Life Price Exercisable Price
- ----------------- ----------- ---------------- ---------- ----------- --------------
$ 0.10 - $ 1.99 95,000 8.35 0.10 47,500 not applicable
$ 2.00 - $ 5.38 65,000 4.63 4.60 65,000 4.60
$ 7.56 - $ 8.81 25,000 4.84 8.31 25,000 8.31
$ 12.25 - $ 15.50 25,000 3.04 14.85 25,000 14.85
$ 16.50 - $ 17.25 10,000 0.74 16.88 10,000 16.88
------- -------
$ 0.10 - $ 17.25 220,000 5.90 $ 4.80 172,500 $ 6.09
======= ==== ======= ======= =========
14. COMPREHENSIVE INCOME
The Company's comprehensive income consists of net income and foreign currency
translation adjustments and is presented in the Consolidated Statements of
Stockholders' Deficit. Components of other comprehensive income consist of the
following:
2004 2003 2002
------ ------ ------
(in thousands)
Foreign currency translation adjustments $ - $ - $2,115
------ ------ ------
Other comprehensive income $ - $ - $2,115
====== ====== ======
15. RELATED PARTY TRANSACTIONS
As an inducement to the Company's Directors to continue their services to the
Company, in the wake of the events of August 21, 2001, and to provide assurances
that the Company will be able to fulfill its obligations to indemnify directors,
officers and agents of the Company and its subsidiaries (individually,
"Indemnitee" and collectively, "Indemnitees") under Delaware law and pursuant to
various contractual arrangements, in March 2002 the Company entered into an
Indemnification Trust Agreement ("Agreement") for the benefit of the
Indemnitees. Pursuant to this Agreement, the Company has deposited a total of
$2.7 million with an independent trustee in order to fund any indemnification
amounts owed to an Indemnitee, which the Company is unable to pay. These
arrangements, and all other arrangements, were negotiated by the Company on an
arms-length basis with the advice of the Company's counsel and other advisors.
As of December 31, 2004, there have not been any claims made against the trust.
On October 17, 2002, the Management Agreement between the Company and Yucaipa
was terminated by the payment to Yucaipa of $1.5 million and each party was
released from further obligations thereunder. The Company recorded this payment
to management fees during 2002. See Notes 4 and 17.
F-17
On February 7, 2003, the Company entered into agreements with Messrs. Golleher
and Kouba in order to induce them to continue to serve as members of the
Executive Committee of the Board of Directors and to compensate them for the
additional obligations, responsibilities and potential liabilities of such
service, including responsibilities imposed under the federal securities laws by
virtue of the fact that, as members of the Executive Committee, they served, in
effect, as the Chief Executive Officers of the Company since the Company had no
Executive Officers. The agreements provided for a fee of $100,000 to each of
Messrs. Golleher and Kouba for each of 2003 and 2002. Also on that date, the
Company entered into a similar agreement with Greg Mays who provided financial
and accounting services to the Company as a consultant but, in effect, served as
the Company's Chief Financial Officer. The agreement provided for a fee of
$50,000 to Mr. Mays for each of 2003 and 2002.
In May 2003 the Company entered into Executive Services Agreements with Messrs.
Bartlett, Brown, Golleher, Kouba, Mays and Terrence Wallock, acting general
counsel of the Company. The purpose of the Agreements was to substantially lower
the administrative costs of the Company going forward while at the same time
retaining the availability of experienced executives knowledgeable about the
Company for ongoing administration as well as future opportunities. The
Agreements replace the letter agreements with Messrs. Bartlett, Golleher and
Kouba dated August 28, 2001. The Agreements provide for compensation at the rate
of $1,000 per month to Messrs. Bartlett and Brown, $6,731 per week to Messrs.
Golleher and Kouba, $4,040 per week to Mr. Mays and $3,365 per week to Mr.
Wallock. Additional hourly compensation is provided for time spent in litigation
after termination of the Agreements and, in some circumstances during the term,
for extensive commitments of time for litigation and merger and acquisition
activities. As of December 31, 2004, no such additional payments have been made.
The Agreements call for the payment of health insurance benefits and provide for
a mutual release upon termination. By amendments dated May 3, 2004, the
Agreements were amended to allow termination at any time by the Company by the
lump sum payment of one year's compensation and by the Executive upon one year's
notice, except in certain circumstances wherein the Executive can resign
immediately and receive a lump sum payment of one year's salary. Under the
amendment, health benefits are to be provided during any notice period or for
the time with respect to which an equivalent payment is made.
16. SEGMENTS AND RELATED INFORMATION
Until the events of August 2001 occurred (see Note 1), the Company operated in
one industry--the promotional marketing industry. The Company's business in
this industry encompassed the design, development and marketing of high-impact
promotional products and programs.
There were no sales during 2004, 2003 and 2002. The Company had no accounts
receivable at December 31, 2004, and a majority of the accounts receivable as of
December 31, 2003, pertained to one customer for which a 100% reserve had been
established.
The following summarizes the Company's long-lived assets as of December 31,
2004, 2003 and 2002, by geographic area:
2004 2003 2002
---- ------- ------
(in thousands)
United States $458 $1,435 $1,449
Foreign 2 2 21
---- ------ ------
$960 $1,937 $1,970
==== ====== ======
Long-lived assets include property and equipment, and other non-current assets.
F-18
17. EARNINGS PER SHARE DISCLOSURE
The following is a reconciliation of the numerators and denominators of the
basic and diluted Earnings Per Share ("EPS") computation for income (loss)
available to common stockholders and other related disclosures required by SFAS
No.128 "Earnings Per Share":
For the Twelve Months Ended December 31,
-------------------------------------------------------------------------------------
2004 2003
---------------------------------------- -----------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ------------ ------------- ---------
(in thousands, except share data)
Basic and diluted EPS:
Loss from continuing
operations $ (3,625) $ (5,270)
Preferred stock dividends 1,172 1,127
----------- ------------
Loss from continuing
operations available
to common stockholders $ (4,797) 16,653,193 $ (0.29) $ (6,397) 16,653,193 $ (0.38)
=========== ========== ========= ============ ========== =========
Income (loss) from
discontinued operations $ 24,261 16,653,193 $ 1.46 $ (3,591) 16,653,193 $ (0.22)
=========== ========== ========= ============ ========== =========
Net income (loss) $ 20,636 $ (8,861)
Preferred stock dividends 1,172 1,127
----------- ------------
Net income (loss)
available to common
stockholders $ 19,464 16,653,193 $ 1.17 $ (9,988) 16,653,193 $ (0.60)
=========== ========== ========= ============ ========== =========
For the Twelve Months Ended December 31,
----------------------------------------
2002
----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- --------
(in thousends, except share date)
Basic and diluted EPS:
Loss from continuing
operations $ (15,406)
Preferred stock dividends 1,091
-----------
Loss from continuing
operations available
to common stockholders $ (16,497) 16,653,193 $ (0.99)
=========== ========== =========
Income (loss) from
discontinued operations $ 6,120 16,653,193 $ 0.37
=========== ========== =========
Net income (loss) $ (9,286)
Preferred stock dividends 1,091
-----------
Net income (loss)
available to common
stockholders $ (10,377) 16,653,193 $ (0.62)
=========== ========== =========
For the years ended December 31, 2004, 2003 and 2002, 3,556,052, 3,547,296 and
3,422,725, respectively, shares of convertible preferred stock were not included
in the computation of diluted EPS because to do so would have been antidilutive.
In addition, for the years ended December 31, 2004, 2003 and 2002, 172,500,
130,000, and 122,500 shares related to stock options exercisable, were not
included in the computation of diluted EPS as the average market price of the
Company's common stock during such periods of $.17, $.07, and $.10,
respectively, did not exceed the weighted average exercise price of such options
of $6.09, $9.16, and $9.59, respectively.
F-19
18. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a tabulation of the quarterly results of operations for the
years ended December 31, 2004 and 2003, respectively:
First Second Third Fourth
2004 Quarter Quarter Quarter(a) Quarter
- ------------------------------------------------------------------------- ----------- --------- ---------- ---------
(in thousands, except per share data)
Continuing operations:
Net sales $ - $ - $ - $ -
Gross profit - - - -
Net loss (1,028) (633) (618) (1,346)
Loss per common share available to common - basic & diluted (0.08) (0.05) (0.05) (0.11)
Discontinued operations:
Net sales $ - $ - $ - $ -
Gross profit - - - -
Net income (loss) (210) (818) 24,520 769
Income (loss) per common share available to common - basic & diluted (0.01) (0.05) 1.47 0.05
First Second Third Fourth
2003 Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------- ----------- --------- --------- ---------
(in thousands, except per share data)
Continuing operations:
Net sales $ - $ - $ - $ -
Gross profit - - - -
Net loss (1,472) (1,389) (1,228) (1,181)
Loss per common share available to common - basic & diluted (0.10) (0.10) (0.09) (0.09)
Discontinued operations:
Net sales $ - $ - $ - $ -
Gross profit - - - -
Net income (loss) (117) 85 (311) (3,248)
Income (loss) per common share available to common - basic & diluted (0.01) - (0.02) (0.19)
(a) See Note 4.
19. SUBSEQUENT EVENT
At December 31, 2004, the Company held an investment in Yucaipa AEC Associates,
LLC ("Yucaipa AEC Associates"), a limited liability company that is controlled
by Yucaipa, which also controls the holder of the Company's outstanding
preferred stock. Yucaipa AEC Associates in turn held an investment in Alliance
Entertainment Corp. ("Alliance") which is a home entertainment product
distribution, fulfillment, and infrastructure company providing both
brick-and-mortar and e-commerce home entertainment retailers with complete
business-to-business solutions. At December 31, 2001, the Company's investment
in Yucaipa AEC Associates had a carrying value of $10.0 million. In June 2002,
certain events occurred which indicated an impairment and the Company recorded a
pre-tax non-cash charge of $10.0 million to write down this investment in June
2002.
The Emerging Issues Task Force ("EITF") of the FASB, issued EITF 03-16,
"Accounting for Investments in Limited Liability Companies," which required the
Company to change its method of accounting for its investment in Yucaipa AEC
Associates from the cost method to the equity method for periods ending after
July 1, 2004. The adjustment related to the cumulative effect of this change in
accounting principle which is equal to the Company's pro rata share of Yucaipa
AEC Associates' gains and losses since making the original investment is
immaterial.
On February 28, 2005, Alliance, whose stock was privately held, merged with
Source Interlink Companies, Inc. ("Source"), a direct-to-retail magazine
distribution and fulfillment company in North America and a provider of magazine
information and front-end management services for retailers whose stock is
publicly traded on the NASDAQ National Market, As a result of this merger, the
former equity holders of Alliance hold 50% of the fully diluted capitalization
of Source.
Inasmuch as Source is a publicly traded company, the Company's pro rata
investment in Yucaipa AEC Associates which holds the shares in Source was valued
at $11.8 million as of March 21, 2005, which does not reflect any discount for
illiquidity. The Company has no power to dispose of or liquidate its shares in
Yucaipa AEC Associates or its indirect interest in Source which power is held by
Yucaipa AEC Associates. Furthermore, in the event of a sale or liquidation of
the Source shares by Yucaipa AEC Associates, the amount and timing of any
distribution of the proceeds of such sale or liquidation to the Company is
discretionary with Yucaipa AEC Associates.
F-20
Schedule II
Simon Worldwide, Inc.
Valuation and Qualifying Accounts
For the Years Ended December 31, 2004, 2003 and 2002
(in thousands)
Additions
Accounts Receivable, Balance At Charged To Balance At
Allowance For Beginning Costs And End
Doubtful Accounts Of Period Expenses Recoveries Deductions Of Period
- ------------------- --------- ---------- ---------- ---------- ---------
2004 $ 13,852 $ - $ - $ 13,852(a) $ -
2003 13,416 523 - 87 13,852
2002 15,616 - 1,733 467 13,416
(a) As a result of the loss of business from McDonald's in 2001, the company
recorded a 100% allowance against its accounts receivable to reduce them
to their net realizable value. In 2004, the company completed its settlement
with McDonald's and, as such, removed any accounts receivable and related
allowance for doubtful accounts from its books.
F-21