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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to __________________________
Commission File Number: 0-21878
SIMON WORLDWIDE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3081657
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5200 WEST CENTURY BOULEVARD, LOS ANGELES, CALIFORNIA 90045
(Address of principal executive offices)
(Zip code)
(310) 417-4660
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by a check mark whether registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act). [ ]
At April 30, 2005, 16,653,193 shares of the registrant's common stock were
outstanding.
SIMON WORLDWIDE, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE NUMBER
PART I FINANCIAL INFORMATION
Item 1. Condensed Financial Statements (Unaudited)
Consolidated Balance Sheets -
March 31, 2005, and December 31, 2004 3
Consolidated Statements of Operations -
For the three months ended March 31, 2005 and 2004 4
Consolidated Statements of Comprehensive Income
(Loss) - For the three months ended March 31,
2005 and 2004 5
Consolidated Statements of Cash Flows -
For the three months ended March 31, 2005 and 2004 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Item 4. Controls and Procedures 16
PART II OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits 17
SIGNATURE 18
2
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
SIMON WORLDWIDE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(Unaudited)
March 31, December 31,
2005 2004
---------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 18,308 $ 18,892
Restricted cash 3,304 2,973
Prepaid expenses and other current assets 345 483
Assets from discontinued operations to be disposed of - current (Note 4) 2,100 2,815
--------- ---------
Total current assets 24,057 25,163
Property and equipment, net 11 13
Other assets 387 198
Investments 11,795 500
Assets from discontinued operations to be disposed of - non-current (Note 4) 247 249
--------- ---------
Total non-current assets 12,440 960
--------- ---------
$ 36,497 $ 26,123
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable:
Trade $ 139 $ 226
Affiliates 170 166
Accrued expenses and other current liabilities 550 512
Liabilities from discontinued operations - current (Note 4) 2,347 3,064
--------- ---------
Total current liabilities 3,206 3,968
Deferred income taxes - non-current 600 -
--------- ---------
Total liabilities 3,806 3,968
Commitments and contingencies
Redeemable preferred stock, Series A1 senior cumulative participating
convertible, $.01 par value, 30,203 shares issued and outstanding at March
31, 2005, and 29,904 shares issued and outstanding at December 31, 2004,
stated at redemption value of $1,000 per share (Note 10) 30,203 29,904
Stockholders' equity (deficit):
Common stock, $.01 par value; 50,000,000 shares authorized;
16,653,193 shares issued and outstanding at March 31, 2005 and
December 31, 2004 167 167
Additional paid-in capital 138,500 138,500
Retained deficit (147,079) (146,416)
Unrealized gain on investments 10,900 -
--------- ---------
Total stockholders' equity (deficit) 2,488 (7,749)
--------- ---------
$ 36,497 $ 26,123
========= =========
See the accompanying Notes to Condensed Consolidated Financial Statements.
3
SIMON WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
For the three months
ended March 31,
--------------------
2005 2004
--------- ---------
Revenue $ - $ -
General and administrative expenses (780) (1,028)
-------- --------
Operating loss from continuing operations (780) (1,028)
Interest income 120 -
-------- --------
Loss from continuing operations before income taxes (660) (1,028)
-------- --------
Net loss from continuing operations (660) (1,028)
Income (loss) from discontinued operations, net of tax (Note 4) 300 (210)
-------- --------
Net loss (360) (1,238)
Preferred stock dividends (303) (289)
-------- --------
Net loss available to common stockholders $ (663) $ (1,527)
======== ========
Loss per share from continuing operations available
to common stockholders:
Loss per common share - basic and diluted $ (0.06) $ (0.08)
======== ========
Weighted average shares outstanding - basic and diluted 16,653 16,653
======== ========
Income (loss) per share from discontinued operations:
Income (loss) per common share - basic and diluted $ 0.02 $ (0.01)
======== ========
Weighted average shares outstanding - basic and diluted 16,653 16,653
======== ========
Net loss available to common stockholders:
Loss per common share - basic and diluted $ (0.04) $ (0.09)
======== ========
Weighted average shares outstanding - basic and diluted 16,653 16,653
======== ========
See the accompanying Notes to Condensed Consolidated Financial Statements.
4
SIMON WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(in thousands)
For the three months
ended March 31,
--------------------
2005 2004
--------- ---------
Net loss $ (360) $ (1,238)
Other comprehensive income:
Unrealized gain on investments, net of tax of $600 10,900 -
-------- --------
Comprehensive income (loss) $ 10,540 $ (1,238)
======== ========
See the accompanying Notes to Condensed Consolidated Financial Statements.
5
SIMON WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the three months
ended March 31,
--------------------
2005 2004
--------- ---------
Cash flows from operating activities:
Net loss $ (360) $ (1,238)
Income (loss) from discontinued operations 300 (210)
-------- --------
Loss from continuing operations (660) (1,028)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 2 15
Deferred income taxes 600 -
Cash used in discontinued operations (417) (241)
Cash transferred to (from) continuing operations (604) 657
Increase (decrease) in cash from changes
in working capital items:
Prepaid expenses and other current assets 138 213
Accounts payable (83) (41)
Accrued expenses and other current liabilities 38 (53)
-------- --------
Net cash used in operating activities (986) (478)
-------- --------
Cash flows from investing activities:
Decrease (increase) in restricted cash (331) 334
Cash provided by discontinued operations 717 144
Other, net 16 -
-------- --------
Net cash provided by investing activities 402 478
-------- --------
Net decrease in cash and cash equivalents (584) -
Cash and cash equivalents, beginning of period 18,892 -
-------- --------
Cash and cash equivalents, end of period $ 18,308 $ -
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes $ 6 $ 7
======== ========
Supplemental non-cash investing activities:
Dividends paid in kind on redeemable preferred stock $ 299 $ 287
======== ========
See the accompanying Notes to Condensed Consolidated Financial Statements.
6
SIMON WORLDWIDE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared by Simon Worldwide, Inc. (the "Company") pursuant to the rules and
regulations of the Securities and Exchange Commission regarding interim
financial reporting. Accordingly, they do not include all of the information and
footnotes in accordance with accounting principles generally accepted in the
United States for complete financial statements and should be read in
conjunction with the consolidated financial statements included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2004.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments, consisting only of those
considered necessary for fair presentation of the Company's financial position,
results of operations and cash flows at the dates and for the periods presented.
Prior to August 2001, the Company was a multi-national, full service
promotional marketing company. In August 2001, McDonald's Corporation
("McDonald's"), the Company's principal customer, terminated its 25-year
relationship with the Company as a result of the embezzlement by a former
Company employee of winning game pieces from McDonald's promotional games
administered by the Company. Other customers also terminated their
relationships with the Company, resulting in the Company no longer having a
business. By April 2002, the Company had effectively eliminated a majority of
its ongoing promotions business operations and was in the process of disposing
of its assets and settling its liabilities related to the promotions business
and defending and pursuing related litigation. Although the settlement of
litigation between the Company and McDonald's was completed in August 2004,
this process is ongoing and will continue for some indefinite period primarily
dependent upon on-going litigation. During the second quarter of 2002, the
discontinued activities of the Company, consisting of revenues, operating
costs, general and administrative costs and certain assets and liabilities
associated with the Company's promotions business, were classified as
discontinued operations for financial reporting purposes.
At March 31, 2005, the Company had one stock-based compensation plan. The
Company adopted the disclosure provisions of Financial Accounting Standards
Board ("FASB") Statement No. 123, "Accounting for Stock-Based Compensation," as
amended by FASB Statement No. 148, "Accounting for Stock-Based Compensation --
Transition and Disclosure -- An Amendment of FASB Statement No. 123," and has
applied Accounting Principles Board ("APB") Opinion No. 25 and related
Interpretations in accounting for its plan. Accordingly, no compensation cost
has been recognized related to such plan during the three months ended March
31, 2005 and 2004. Since there were no employee stock option grants or vesting
of options during the three months ended March 31, 2005 and 2004, there is no
impact on net income as reported in the accompanying condensed consolidated
financial statements. In December 2004, the FASB issued a revision to Statement
No. 123. See Note 3.
At March 31, 2005, and December 31, 2004, the Company had a passive investment
in a limited liability company controlled by an affiliate. See Note 5.
The operating results for the three months ended March 31, 2005 are not
necessarily indicative of the results to be expected for the full year.
2. ABSENCE OF OPERATING BUSINESS; GOING CONCERN
As a result of the loss of its customers, the Company no longer has any
operating business. Since August 2001, the Company has concentrated its efforts
on reducing its costs and settling numerous claims, contractual obligations and
pending litigation. As a result of these efforts, the Company has been able to
resolve a significant number of outstanding liabilities that existed at December
31, 2001, or arose subsequent to that date. At March 31, 2005, the Company had
reduced its workforce to 5 employees from 136 employees at December 31, 2001.
The Company is currently managed by an Executive Committee consisting of two
members of the Company's Board of Directors, together with a principal financial
officer and an acting general counsel.
At March 31, 2005, and December 31, 2004, the Company had a stockholders'
equity (deficit) of $2.5 million and $(7.7) million, respectively. For the
three months ended March 31, 2005 and 2004, the Company had net losses of $.4
million and $1.2 million, respectively. The Company continues to incur losses
in 2005 within its continuing operations for the general and administrative
expenses being incurred to manage the affairs of the Company and resolve
outstanding legal matters. By utilizing cash received pursuant to the
settlement with McDonald's in 2004, management believes it has sufficient
capital resources and liquidity to operate the Company for the foreseeable
future. However, as a result of
7
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 condensed consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
The Board of Directors of the Company continues to consider various alternative
courses of action for the Company going forward, including possibly acquiring 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 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.
3. RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2004, the FASB issued a revision entitled, "Share-Based Payment," to
Statement 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
available under Statement 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 annual reporting period that begins after June 15, 2005.
4. DISCONTINUED OPERATIONS
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 in the accompanying
condensed 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 March 31, 2005, and
December 31, 2004, as disclosed in the accompanying condensed consolidated
financial statements, consist of the following (in thousands):
March 31, December 31,
2005 2004
--------- ------------
Assets:
Restricted cash $2,100 $2,815
------ ------
Total current assets 2,100 2,815
Other assets 247 249
------ ------
Assets from discontinued operations to be disposed of $2,347 $3,064
====== ======
Liabilities:
Accounts payable - trade $ 11 $ 58
Accrued expenses and other current liabilities 2,336 3,006
------ ------
Total current liabilities 2,347 3,064
------ ------
Liabilities from discontinued operations $2,347 $3,064
====== ======
8
Net income (loss) from discontinued operations for the three months ended March
31, 2005 and 2004, as disclosed in the accompanying condensed consolidated
financial statements, consists of the following (in thousands):
For the three months
ended March 31,
-----------------------
2005 2004
-------- --------
Net sales $ - $ -
Cost of sales - -
-------- --------
Gross profit - -
General and administrative expenses 33 174
-------- --------
Operating loss (33) (174)
Interest income - (32)
Other (income) expense (Note 9) (333) 68
-------- --------
Income (loss) before income taxes 300 (210)
-------- --------
Net income (loss) from discontinued operations $ 300 $ (210)
======== ========
5. LONG-TERM INVESTMENTS
The Company has made strategic and venture investments in a portfolio of
privately held companies. These investments were in technology and
internet-related companies that were at varying stages of development, and were
intended to provide the Company with an expanded technology and internet
presence, to enhance the Company's position at the leading edge of e-business
and to provide venture investment returns. The companies in which the Company
has invested are subject to all the risks inherent in technology and the
internet. In addition, these companies are subject to the valuation volatility
associated with the investment community and the capital markets. The carrying
value of the Company's investments in these companies is subject to the
aforementioned risks. Periodically, the Company performs a review of the
carrying value of all its investments in these companies, and considers such
factors as current results, trends and future prospects, capital market
conditions and other economic factors. The carrying value of the Company's
investment portfolio totaled $500,000 at December 31, 2004 and $11.8 million at
March 31, 2005.
Also, 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.
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, is equal
to the number of Source shares indirectly held by the Company multiplied by the
stock price of Source on the date of closing of the merger. Accordingly, on
February 28, 2005, the date of closing of the merger, and to reflect the change
in the value of its investment in Yucaipa AEC Associates, the Company recorded
an unrealized gain to Other Comprehensive Income of $11.3 million ($10.8 million
net of tax), which does not reflect any discount for illiquidity. The Company's
investment in Yucaipa AEC Associates is accounted for under the equity method
and, as such, the Company will adjust its investment based in its pro rata share
of the earnings and losses of Yucaipa AEC Associates. There were no such
9
adjustments between the date of closing of the merger, February 28, 2005, and
March 31,2005. 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.
While the Company will continue to periodically evaluate its investments, there
can be no assurance that its investment strategy will be successful, and thus
the Company might not ever realize any benefits from its portfolio of
investments.
6. SHORT-TERM BORROWINGS
The Company no longer has the ability to borrow under any of its existing credit
facilities without it being fully cash collateralized. Restricted cash included
within discontinued operations at March 31, 2005 and December 31, 2004 totaled
$2.1 million and $2.8 million, respectively, and primarily consisted of amounts
deposited with lenders to satisfy the Company's obligations pursuant to its
outstanding standby letters of credit. These amounts are in addition to the
restricted cash amounts included within continuing operations at March 31, 2005
and December 31, 2004 totaling $3.3 million and $3.0 million, respectively,
which primarily consisted of amounts deposited with lenders to satisfy the
Company's obligations pursuant to its standby letters of credit and amounts
deposited into an irrevocable trust, totaling $2.7 million.
7. INDEMNIFICATION TRUST AGREEMENT
In March 2002, the Company, Simon Marketing (a subsidiary of the Company) 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 March 31,
2005, there have not been any claims made against the trust.
8. EARNINGS PER SHARE DISCLOSURE
The following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computation for "loss available to common stockholders"
and other related disclosures required by FASB Statement No. 128, "Earnings per
Share," (in thousands, except share and per share data):
For the Three Months Ended March 31,
2005 2004
--------------------------------------- ---------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
Basic and diluted EPS:
Loss from continuing operations $ (660) $ (1,028)
Preferred stock dividends (303) (289)
------- --------
Loss from continuing operations available
to common stockholders $ (963) 16,653,193 $ (0.06) $ (1,317) 16,653,193 $ (0.08)
======= ========== ======= ======== ========== =======
Income (loss) from discontinued operations $ 300 16,653,193 $ 0.02 $ (210) 16,653,193 $ (0.01)
======= ========== ======= ======== ========== =======
Net loss (360) (1,238)
Preferred stock dividends (303) (289)
------- --------
Net loss available to common stockholders $ (663) 16,653,193 $ (0.04) $ (1,527) 16,653,193 $ (0.09)
======= ========== ======= ======== ========== =======
For the three months ended March 31, 2005 and 2004, 3,644,826 and 3,502,606
shares on a converted basis, respectively, of convertible preferred stock (see
Note 10) and 167,500 and 125,000 shares related to stock options exercisable,
were not included in the computation of diluted EPS because to do so would have
been antidilutive as the average market price of the Company's
10
common stock during such periods of $.14 and $.16, respectively, did not exceed
the weighted average exercise price of such options of $5.76 and $8.37,
respectively.
9. OTHER (INCOME) EXPENSE
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. 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. 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, 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.
During the three months ended March 31, 2005, the Company reduced its contingent
loss liability related to the Winthrop lease by an additional $.4 million to
reflect the reduction in the Winthrop liability.
10. REDEEMABLE PREFERRED STOCK
In November 1999, Overseas Toys, L.P., an affiliate of Yucaipa, a Los Angeles,
California based investment firm, invested $25 million in the Company in
exchange for preferred stock and a warrant to purchase additional preferred
stock. Under the terms of the investment, 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
(3,644,826 and 3,502,606 shares as of March 31, 2005 and 2004, respectively).
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 was 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.
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 an annual dividend equal to 4%, paid
quarterly, 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.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion of the financial condition and results of
operations of Simon Worldwide, Inc. (the "Company") for the three months ended
March 31, 2005, as compared to the same periods in the previous year. This
discussion should be read in conjunction with the condensed consolidated
financial statements of the Company and related Notes included elsewhere in this
Form 10-Q.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
From time to time, the Company may provide forward-looking information such as
forecasts of expected future performance or statements about the Company's plans
and objectives, including certain information provided below. These
forward-looking statements are based largely on the Company's expectations and
are subject to a number of risks and uncertainties, certain of which are beyond
the Company's control. The Company wishes to caution readers that actual results
may differ materially from those expressed in any forward-looking statements
made by, or on behalf of, the Company including, without limitation, as a result
of factors described in the Company's Amended Cautionary Statement for Purposes
of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act
of 1995, filed as Exhibit 99.1 to the Company's December 31, 2004, Form 10-K.
GENERAL
Prior to August 2001, the Company was a multi-national, full service
promotional marketing company. In August 2001, McDonald's Corporation
("McDonald's"), the Company's principal customer, terminated its 25-year
relationship with the Company as a result of the embezzlement by a former
Company employee of winning game pieces from McDonald's promotional games
administered by the Company. Other customers also terminated their
relationships with the Company, resulting in the Company no longer having a
business. By April 2002, the Company had effectively eliminated a majority of
its ongoing promotions business operations and was in the process of disposing
of its assets and settling its liabilities related to the promotions business
and defending and pursuing related litigation. Although the settlement of
litigation between the Company and McDonald's was completed in August 2004,
this process is ongoing and will continue for some indefinite period primarily
dependent upon on-going litigation. During the second quarter of 2002, the
discontinued activities of the Company, consisting of revenues, operating
costs, general and administrative costs and certain assets and liabilities
associated with the Company's promotions business, were classified as
discontinued operations for financial reporting purposes.
As a result of the loss if its customers, the Company no longer has any
operating business. Since August 2001, the Company has concentrated its efforts
on reducing its costs and settling numerous claims, contractual obligations and
pending litigation. As a result of these efforts, the Company has been able to
resolve a significant number of outstanding liabilities that existed at December
31, 2001, or arose subsequent to that date. At March 31, 2005, the Company had
reduced its workforce to 5 employees from 136 employees at December 31, 2001.
The Company is currently managed by an Executive Committee consisting of two
members of the Company's Board of Directors, together with a principal financial
officer and an acting general counsel.
OUTLOOK
As a result of the stockholders' deficit 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 condensed consolidated financial statements do not
include any adjustments that might result from the outcome of these
uncertainties. The Company has taken significant actions and will continue to
take further action to reduce its cost structure. The Board of Directors of the
Company continues to consider various alternative courses of action for the
Company going forward, including possibly acquiring 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. 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.
12
RESULTS OF CONTINUING AND DISCONTINUED OPERATIONS
The discontinued activities of the Company have been classified as discontinued
operations in the accompanying condensed consolidated financial statements.
Continuing operations represent the direct costs required to maintain the
Company's current corporate infrastructure that will enable the Board of
Directors to pursue various alternative courses of action going forward. These
costs primarily consist of the salaries and benefits of executive management and
corporate finance staff, professional fees, Board of Director fees, and space
and facility costs. The Company's continuing operations and discontinued
operations will be discussed separately, based on the respective financial
results contained in the accompanying condensed consolidated financial
statements and related notes.
RESULTS OF CONTINUING OPERATIONS
THREE MONTHS ENDED MARCH 31, 2005, COMPARED TO THREE MONTHS ENDED MARCH 31, 2004
During the three months ended March 31, 2005 and 2004, general and
administrative expenses totaled $.8 million and $1.0 million, respectively. The
decrease of $.2 million was primarily due to decreases in labor expense,
insurance expense, and rent expense.
RESULTS OF DISCONTINUED OPERATIONS
THREE MONTHS ENDED MARCH 31, 2005, COMPARED TO THREE MONTHS ENDED MARCH 31, 2004
During the three months ended March 31, 2005 and 2004, the Company had no sales
or gross profit due to the loss of its McDonald's and Philip Morris business in
2001 as well as the loss of its other customers.
General and administrative expenses totaled approximately $33,000 during the
first quarter of 2005 as compared to approximately $174,000 during the first
quarter of 2004. The decrease of $141,000 was primarily due to decreases in
professional fees and space and facilities expenses related to the continued
wind-down of the Europe operations.
During the three months ended March 31, 2005, the Company reduced its contingent
loss liability related to the Winthrop lease by an additional $.4 million,
recorded to Other Income, to reflect the reduction in the Winthrop liability.
LIQUIDITY AND CAPITAL RESOURCES
The matters discussed in the Absence of Operating Business; Going Concern in
Note 2 of the Notes to Condensed Consolidated Financial Statements have had and
will continue to have a substantial adverse impact on the Company's cash
position. As a result of the stockholders' deficit 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 condensed consolidated financial statements do
not include any adjustments that might result from the outcome of these
uncertainties. The Company continues to incur operating losses in 2005 within
its continuing operations for the general and administrative expenses incurred
to manage the affairs of the Company and resolve outstanding legal matters.
Inasmuch as the Company no longer generates operating income and is unable to
borrow funds, the source of current and future working capital is expected to
be cash on hand, the recovery of certain long-term investments and any future
proceeds from litigation. By utilizing cash received pursuant to the settlement
with McDonald's in 2004, management believes it has sufficient capital
resources and liquidity to operate the Company for the foreseeable future. The
Board of Directors of the Company continues to consider various alternative
courses of action for the Company going forward, including possibly acquiring
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. 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.
CONTINUING OPERATIONS
Working capital from continuing operations at March 31, 2005, was $21.1 million
compared to $21.4 million at December 31, 2004. Net cash used in operating
activities from continuing operations during the three months ended March 31,
2005, totaled $35,000 primarily related to a net change in non-cash working
capital items of $.1 million and a change in deferred taxes of $.6 million
partially offset by a net loss from continuing operations of $.7 million. Net
cash used in operating activities from
13
continuing operations during the three months ended March 31, 2004, totaled $.9
million, primarily due to a net loss from continuing operations of $1.0 million
partially offset by a net increase in non-cash working capital items of $.1
million.
Net cash used in investing activities from continuing operations during the
three months ended March 31, 2005, totaled $.3 million primarily due to an
increase in restricted cash which was transferred from discontinued operations
as 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 from continuing operations during the
three months ended March 31, 2004, totaled $.3 million, primarily due to a
decrease in restricted cash.
There were no financing activities from continuing operations during the three
months ended March 31, 2005 and 2004.
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.
Restricted cash included within continuing operations at March 31, 2005 and
December 31, 2004 totaling $3.3 million and $3.0 million, respectively,
primarily consisted of amounts deposited with lenders to satisfy the Company's
obligations pursuant to its standby letters of credit and amounts deposited into
an irrevocable trust, totaling $2.7 million.
DISCONTINUED OPERATIONS
Working capital from discontinued operations was a deficit of $(.2) at March 31,
2005 and December 31, 2004. Net cash used in discontinued operations during the
three months ended March 31, 2005 totaled $.4 million, primarily due to a change
in the contingent lease liability accrual of $.4 million and a change in working
capital of $.3 million partially offset by net income from discontinued
operations of $.3 million. Net cash used in discontinued operations during the
three months ended March 31, 2004, totaled $.2 million primarily due to a net
loss from discontinued operations of $.2 million.
Net cash provided by investing activities from discontinued operations during
the three months ended March 31, 2005, totaled $.7 million primarily due to a
decrease in restricted cash. Net cash provided by investing activities from
discontinued operations during the three months ended March 31, 2004, totaled
$.1 million primarily due to a decrease in restricted cash.
There were no financing activities within discontinued operations during the
three months ended March 31, 2005 and 2004.
Restricted cash included within discontinued operations at March 31, 2005 and
December 31, 2004, totaled $2.1 million and $2.8 million, respectively, and
primarily consisted of amounts deposited with lenders to satisfy the Company's
obligations pursuant to its outstanding standby letters of credit. These amounts
are in addition to the restricted cash amounts included within continuing
operations noted above.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The disclosure required by this Item is not material to the Company because the
Company does not currently have any exposure to market rate sensitive
instruments, as defined in this Item. Part of the Company's discontinued
operations consists of certain consolidated subsidiaries that are denominated in
foreign currencies. As the assets of these subsidiaries are largely offset by
liabilities, the Company is not materially exposed to foreign currency exchange
risk.
14
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES: At March 31, 2005, the Company evaluated the
effectiveness and design and operation of its disclosure controls and
procedures. The Company's disclosure controls and procedures are the controls
and other procedures that the Company designed to ensure that it records,
processes, summarizes and reports in a timely manner the information that it
must disclose in reports that the Company files with or submits to the
Securities and Exchange Commission. Anthony Kouba and George Golleher, the
members of the Executive Committee, which has the responsibility for the role of
Chief Executive Officer of the Company, and Greg Mays, the Chief Financial
Officer of the Company, reviewed and participated in this evaluation. Based on
this evaluation, the Principal Executive and Financial Officers of the Company
concluded that the Company's disclosure controls and procedures were effective.
INTERNAL CONTROLS: Since the date of the evaluation described above, there have
not been any significant changes in the Company's internal controls or in other
factors that could significantly affect those controls.
15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
(a) Exhibits filed herewith:
31.1 Certification of George G. Golleher pursuant to Rule 13a-14(a) of
the Securities Exchange Act of 1934
31.2 Certification of J. Anthony Kouba pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934
31.3 Certification of Greg Mays pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934
32 Certification of George G. Golleher, J. Anthony Kouba and Greg Mays
pursuant to Section 13a-14(b) of the Securities Exchange Act of 1934
and 18 U.S.C. Section 1350
16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: May 13, 2005 SIMON WORLDWIDE, INC.
/s/ J. ANTHONY KOUBA
----------------------------
J. Anthony Kouba
Executive Committee Member
(duly authorized signatory)
17