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, 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 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:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
COMMON STOCK, $0.01 PAR VALUE PER SHARE NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No [X]
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 large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes [ ] No [X]
At June 30, 2005, the aggregate market value of voting stock held by
non-affiliates of the registrant was $4,657,551.
At February 28, 2006, 16,653,193 shares of the registrant's common stock were
outstanding.
2
SIMON WORLDWIDE, INC.
FORK 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
INDEX
PAGE
----
PART I
Item 1. Business 4
Item 1A. Risk Factors 7
Item 1B. Unresolved Staff Comments 8
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters 10
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 19
Item 8. Financial Statements and Supplementary Data 20
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 20
Item 9A. Controls and Procedures 20
Item 9B. Other Information 20
PART III
Item 10. Directors and Executive Officers of the Registrant 21
Item 11. Executive Compensation 23
Item 12. Security Ownership of Certain Beneficial Owners and Management 27
Item 13. Certain Relationships and Related Transactions 30
Item 14. Principal Accountant Fees and Services 31
PART IV
Item 15. Exhibits and Financial Statement Schedules 32
3
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
on-going 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, 2005, the Company had reduced its workforce to 4
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, 2005, the Company had a stockholders'
deficit of $.8 million. For the year ended December 31, 2005, the Company had a
net loss of $3.2 million. The Company incurred losses within its continuing
operations in 2005 and continues to incur losses in 2006 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 of the Company's litigation 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, 2005, the Company's significant loss from
operations and the pending legal matters, 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 this
uncertainty.
At December 31, 2005, the Company held an investment in Yucaipa AEC Associates,
LLC ("Yucaipa AEC Associates"), a limited liability company that is controlled
by the Yucaipa Companies, a Los Angeles, California based investment firm, which
also controls the holder of the Company's outstanding preferred stock. Yucaipa
AEC Associates in turn principally holds an investment in the common stock of
Source Interlink Companies. Prior to 2005, this investment was 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 which was
accounted for under the cost method. 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.
4
In March 2004, 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.
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. 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 its share of the gain upon receipt of the Source equity by
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. As the Company's investment in Yucaipa AEC
Associates is accounted for under the equity method, the Company will adjust its
investment based on its pro rata share of the earnings and losses of Yucaipa AEC
Associates. There were no such adjustments during 2005. The Company has no power
to dispose of or liquidate its holding 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.
The Company is currently managed by Messrs. George Golleher and J. Anthony
Kouba, members of the Board of Directors 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, 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.
1999 EQUITY INVESTMENT
In November 1999, Overseas Toys L.P., an affiliate of Yucaipa, 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, 2005, the amount of the liquidation
preference, which is equal to the sum of the preferred stock outstanding plus
accrued dividends, was $31.3 million, and the redemption value, which is equal
to the sum of the preferred stock outstanding plus accrued dividends multiplied
by 101%, was $31.6 million. As of December 31, 2005, assuming conversion of all
of the convertible preferred stock and accrued dividends, Overseas Toys L.P.
would own approximately 18.6% 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. On March 20, 2006, Yucaipa notified the Company that it was
designating Ira Tochner and Erika Paulson to fill the vacancies which had been
created by the August 2001 resignations and that it was further designating that
Mr. Tochner be appointed Chairman of the Board, as it was entitled to do under
the terms of its investment. As of March 31, 2006, the Company's Board had not
yet effectuated the designated appointments but expects to do so in the very
near future.
5
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 reduced over time as the underlying
obligation to Winthrop reduces. As of September 30, 2005, the available amount
under the letter of credit was $2.1 million which was secured, in part, by $1.6
million of restricted cash of the Company. The Company's letter of credit was
also secured, in part, by the aforesaid $500,000 letter of credit provided by
Cyrk for the benefit of the Company. Cyrk agreed to indemnify the Company if
Winthrop made any draw under the letter of credit.
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 were 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 and
to $1.6 million during 2005 based on the reduction in the Winthrop liability.
During the fourth quarter of 2005, Winthrop drew down the $1.6 million balance
of the Company's letter of credit due to Cyrk's default on its obligations to
Winthrop. An equal amount of the Company's restricted cash was drawn down by the
Company's bank which had issued the letter of credit. Due to this default,
Cyrk's $2.3 million subordinated note payable to the Company, which forgiven by
the Company in 2003, was reinstated.
On January 31, 2006, the Company and Cyrk entered into a Settlement Agreement
and Mutual General Release pursuant to which: (1) Cyrk agreed to pay $1.6
million to the Company, of which $435,000 was paid on or before March 1, 2006
and the balance is payable, pursuant to a subordinated note (the "New
Subordinated Note"), in forty-one (41) approximately equal consecutive monthly
installments beginning April 1, 2006; (ii) Cyrk entered into a Confession of
Judgment in Washington State Court for all amounts owing to the Company under
the New Subordinated Note and the $2.3 million note (the "Old Subordinated
Note"); (iii) Cyrk's parent company agreed to subordinate approximately $4.3
million of Cyrk debt to the debt owed to the Company by Cyrk; and (iv) Cyrk and
the Company entered into mutual releases of all claims except those arising
under the Settlement Agreement, the New Subordinated Note or the Confession
Judgment. So long as Cyrk does not default on the New Subordinated Note, the
Company has agreed not to enter the Confession of Judgment in court. Cyrk's
obligations under the New Subordinated Note and the Old Subordinated Note are
subordinated to Cyrk's obligations to the financial institution which is Cyrk's
senior lender, which obligations are secured by, among other things,
substantially all of Cyrk's assets. In the event of a default by Cyrk of its
obligations under the New Subordinated Note, there is no assurance that the
Company will be successful in enforcing the Confession of Judgment.
6
ITEM 1A. RISK FACTORS
The following important factors, among others, in some cases have affected, and
in the future could affect, the Company's actual results and could cause the
Company's actual consolidated results for the Company's current year and beyond
to differ materially from those expressed in any forward-looking statements made
by or on behalf of the Company.
UNCERTAIN OUTLOOK
The Company no longer has any operating business. As a result of this fact,
together with the stockholders' deficit, the Company's significant loss from
operations and the pending legal matters, the Company's independent registered
public accounting firm has expressed substantial doubt about the Company's
ability to continue as a going concern. The Board of Directors continues to
consider various alternative courses of action for the Company, 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.
No assurances can be made that the holders of our capital stock will receive any
distributions if the Company is wound up and liquidated or sold. The outstanding
preferred stock has a liquidation preference over the common stock of
approximately $31.3 million, which includes accrued dividends. Also, upon a
change of control of the Company, the holder of the outstanding preferred stock
can cause the Company to redeem the preferred stock for 101% of the liquidation
preference.
PENDING LITIGATION
Although significant litigation, including the litigation with McDonald's and
related entities, was settled during the third quarter of 2004, other material
litigation against the Company is still pending, specifically, a case in Canada
which arose out of the same events which resulted in the McDonald's litigation.
In addition to the on-going legal costs associated with the defense of this case
and any future cases which may be brought against the Company by persons who
opted out of the McDonald's settlement or others, any significant adverse
judgment would have a material adverse effect on the Company.
DEPENDENCE ON KEY PERSONNEL
We are dependent on several key personnel, including our Directors. In light of
our uncertain outlook, there is no assurance that our key personnel can be
retained. The loss of the services of our key personnel would harm the Company.
In addition, the Company has a limited number personnel. As such, this presents
a challenge in implementing Section 404 of the Sarbanes-Oxley Act of 2002 with
which the Company must comply in fiscal 2007. If Section 404 is not properly
implemented, the Company's internal control over financial reporting may be
adversely affected.
INVESTMENTS
The Company has made strategic and venture investments in a portfolio of
privately held companies. These investments were in technology and internet
related companies that were at varying stages of development, and were intended
to provide the Company with an expanded technology and internet presence, to
enhance the Company's position at the leading edge of e-business and to provide
venture investment returns. These companies in which the Company has invested
are subject to all the risks inherent in technology and the internet. In
addition, these companies are subject to the valuation volatility associated
with the investment community and 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 $11.5
million as of December 31, 2005.
7
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. This information may be contained in filings with the Securities
and Exchange Commission, press releases or oral statements by the officers of
the Company. The Company desires to take advantage of the "Safe Harbor"
provisions of the Private Securities Litigation Reform Act of 1995 and these
risk factors are intended to do so.
1B. UNRESOLVED STAFF COMMENTS
Inapplicable.
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 2005, the Company renewed 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 has located 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, 2005, 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 other 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.
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.
During the third quarter of 2005, the Company entered into a settlement
agreement with plaintiff in the case on behalf of the class pursuant to which
the Company agreed to pay $650,000 Canadian ($554,512 US) to be used for costs,
fees and expenses relating to the settlement with excess proceeds to be
distributed to two charities. The settlement is subject to certification of the
class with respect to the Company and approval of the terms of settlement by the
Canadian court.
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 appealed
this ruling with respect to PWC only, and the California Court of Appeal
subsequently reversed the lower court and reinstated the case against PWC. The
case is now proceeding in the discovery stage.
8
On October 19, 2005, the Company received notice of a lawsuit against it in the
Bankruptcy Court for the Northern District of Illinois by the Committee
representing the unsecured creditors of H A 2003 Inc., formerly known as HA-LO
Industries, Inc. ("HA-LO"), seeking to recover as a voidable preference a
certain payment made in May 2001 by HA-LO to the Company in the amount of
$459,852 plus interest. The Company has retained bankruptcy counsel to represent
it in the matter and is investigating facts surrounding the alleged payment. It
has recorded a contingent loss liability of $.5 million related to this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
9
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.
2005 2004
------------- -------------
High Low High Low
----- ----- ----- -----
First Quarter $0.17 $0.12 $0.41 $0.05
Second Quarter 0.32 0.17 0.31 0.16
Third Quarter 0.30 0.20 0.22 0.10
Fourth Quarter 0.40 0.22 0.18 0.12
As of February 28, 2006, the Company had approximately 416 holders of record of
its common stock. The last reported sale price of the Company's common stock on
February 28, 2006, was $.25.
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.
During 2005, the Company did not repurchase any of its common stock.
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,
------------------------------------------------------
Selected income statement data: 2005 2004 2003 2002 2001
- ------------------------------- ------- ------- ------- -------- ---------
(in thousands, except per share data)
Continuing operations:
Net sales $ -- $ -- $ -- $ -- $ --
Net loss (2,684) (3,625) (5,270) (15,406) (7,916)
Loss per common share available
to common shareholders - basic and diluted (0.23) (0.29) (0.38) (0.99) (0.54)
Discontinued operations:
Net sales -- -- -- -- 324,040
Net income (loss) (478) 24,261(1) (3,591) 6,120(2) (114,429)(3)
Earnings (loss) per common share - basic and diluted (0.03) 1.46(1) (0.22) 0.37(2) (6.95)(3)
10
December 31,
--------------------------------------------------
Selected balance sheet data: 2005 2004 2003 2002 2001
- ---------------------------- ------- ------- -------- -------- --------
(in thousands)
Cash and cash equivalents (4) $16,473 $18,892 $ 10,065 $ 14,417 $ 40,851
Total assets 31,822 26,123 19,838 26,440 77,936
Long-term obligations -- -- -- -- 6,785
Redeemable preferred stock 31,118 29,904 28,737 27,616 26,538
Stockholders' deficit (841) (7,749) (27,213) (17,225) (11,497)
(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 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 Item 1A. Risk Factors.
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 it was
terminating its 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.
11
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
on-going 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, 2005, the Company had reduced its workforce to 4
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, 2005, the Company had a stockholders'
deficit of $.8 million. For the year ended December 31, 2005, the Company had a
net loss of $3.2 million. The Company incurred losses within its continuing
operations in 2005 and continues to incur losses in 2006 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 of the Company's litigation 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, 2005, the Company's significant loss from
operations and the pending legal matters, 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 this
uncertainty.
The Company is currently managed by Messrs. George Golleher and J. Anthony
Kouba, members of the Board of Directors 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, 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.
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
subject to the valuation volatility associated with the investment community and
capital markets. The carrying value of the
12
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 $11.5
million as of December 31, 2005.
At December 31, 2005, 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 principally holds an investment
in the common stock of Source Interlink Companies. Prior to 2005, this
investment was 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 which
was accounted for under the cost method. 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.
In March 2004, 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.
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. As such, the primary asset of Yucaipa AEC is its
investment in 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 its underlying investment within 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. As the Company's investment in Yucaipa AEC Associates
is accounted for under the equity method, the Company will adjust its investment
based in its pro rata share of the earnings and losses of Yucaipa AEC
Associates. Other than the merger of Alliance with Source, there were no such
adjustments during 2005. The Company has no power to dispose of or liquidate its
holding 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. During 2005, the Company recorded an investment impairment of $.2
million, net of related amounts recorded in unrealized gain on the balance
sheet, to adjust the recorded value of its other investments that are accounted
for under the cost method to the estimated future undiscounted cash flows the
Company expects from such investments.
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.
On October 19, 2005, the Company received notice of a lawsuit against it in the
Bankruptcy Court for the Northern District of Illinois by the Committee
representing the unsecured creditors of H A 2003 Inc., formerly known as HA-LO
Industries, Inc. ("HA-LO"), seeking to recover as a voidable preference a
certain payment made in May 2001 by HA-LO to the Company in the amount of
$459,852 plus interest. Based on an assessment by management, during the three
months ended September 30, 2005, the Company recorded a contingent loss
liability of $.5 million related to this matter.
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 was secured by a letter
of credit of the Company. As a result of the foregoing, the Company recorded a
charge in 2003 of $2.8 million with respect to the liability
13
arising from the Winthrop lease. Such charge was revised downward to $2.5
million during 2004 and to $1.6 million during 2005 based on the reduction in
the Winthrop liability.
During the fourth quarter of 2005, Winthrop drew down the $1.6 million balance
of the Company's letter of credit due to Cyrk's default on its obligations to
Winthrop. An equal amount of the Company's restricted cash was drawn down by the
Company's bank which had issued the letter of credit. Due to this default,
Cyrk's $2.3 million subordinated note payable to the Company, which forgiven by
the Company in 2003, was reinstated.
On January 31, 2006, the Company and Cyrk entered into a Settlement Agreement
and Mutual General Release pursuant to which: (1) Cyrk agreed to pay $1.6
million to the Company, of which $435,000 was paid on or before March 1, 2006
and the balance is payable, pursuant to a subordinated note (the "New
Subordinated Note"), in forty-one (41) approximately equal consecutive monthly
installments beginning April 1, 2006; (ii) Cyrk entered into a Confession of
Judgment in Washington State Court for all amounts owing to the Company under
the New Subordinated Note and the $2.3 million note (the "Old Subordinated
Note"); (iii) Cyrk's parent company agreed to subordinate approximately $4.3
million of Cyrk debt to the debt owed to the Company by Cyrk; and (iv) Cyrk and
the Company entered into mutual releases of all claims except those arising
under the Settlement Agreement, the New Subordinated Note or the Confession
Judgment. So long as Cyrk does not default on the New Subordinated Note, the
Company has agreed not to enter the Confession of Judgment in court. Cyrk's
obligations under the New Subordinated Note and the Old Subordinated Note are
subordinated to Cyrk's obligations to the financial institution which is Cyrk's
senior lender, which obligations are secured by, among other things,
substantially all of Cyrk's assets. In the event of a default by Cyrk of its
obligations under the New Subordinated Note, there is no assurance that the
Company will be successful in enforcing the Confession of Judgment.
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 related interpretations in accounting for its
stock-based compensation plan. In March 2005, the Securities and Exchange
Commission (the "SEC") issued Staff Accounting Bulletin No. 107, "Share-Based
Payment", which summarizes the views of the SEC staff regarding the interaction
between Statement No. 123(R) and certain SEC rules and regulations, and is
intended to assist in the initial implementation. Statement No. 123(R) is
effective for the annual reporting period beginning January 1, 2006. The Company
does not expect the adoption of Statement No. 123(R) to have a material effect
on its consolidated statements of financial position or results of operations,
due to the small number of outstanding options.
In May 2005, the FASB issued Statement No. 154, "Accounting Changes and Error
Corrections--a replacement of APB Opinion No. 20 and FASB Statement No. 3." APB
Opinion No. 20 relates to accounting changes and FASB Statement No. 3 relates to
reporting accounting changes in interim financial statements and establishes
retrospective application as the required method for reporting a change in
accounting principle. Statement No. 154 provides guidance for determining
whether retrospective application of a change in accounting principle is
impracticable and for reporting a change when retrospective application is
impracticable. The reporting of a correction of an error by restating previously
issued financial statements is also addressed. Statement No. 154 is effective
for accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. The Company does not expect the adoption of Statement
No. 154 to have a material effect on its consolidated statements of financial
position or results of operations.
14
SIGNIFICANT CONTRACTUAL OBLIGATIONS
The following table includes certain significant contractual obligations of the
Company at December 31, 2005. 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 insurance premiums for the benefit of a former Company
executive and for which the Company is obligated.
OTHER COMMERCIAL COMMITMENTS
The following table includes certain commercial commitments of the Company at
December 31, 2005. 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, -----------------------------------------------------------
2005 1 Year 2 Years 3 Years 4 Years 5 Years Thereafter
------------ ------ ------- ------- ------- ------- ----------
(in thousands)
Standby letters of credit $372 $168 $-- $-- $-- $-- $--
==== ==== === === === === ===
The amount committed at December 31, 2005, relates to a letter of credit
provided by the Company to support the Company's obligation 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.
15
CONTINUING OPERATIONS
2005 COMPARED TO 2004
There were no net sales during 2005 or 2004.
General and administrative expenses totaled $3.1 million in 2005 compared to
$3.6 million in 2004. The decrease was primarily due to reductions in insurance
expense ($.3 million), labor costs ($.1 million) and facilities costs ($.1
million) with no material offsetting increases. Changes in general and
administrative expenses going forward are dependent on the outcome of the
various alternative courses of action for the Company 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 Company recorded an investment impairment during 2005 of $.2 million, net of
related amounts recorded in unrealized gain on the balance sheet, to adjust the
recorded value of its investments accounted for under the cost method to the
estimated future undiscounted cash flows the Company expects from such
investments.
2004 COMPARED TO 2003
There were no net sales during 2004 or 2003.
General and administrative expenses totaled $3.6 million in 2004 compared to
$5.3 million in 2003. The decrease was primarily due to reductions in
professional fees ($.7 million), insurance expense ($.5 million), labor costs
($.4 million) and facilities costs ($.1 million).
DISCONTINUED OPERATIONS
2005 COMPARED TO 2004
There were no net sales or gross profit during 2005 or 2004.
General and administrative expenses totaled $.2 million in 2005 compared to $2.0
million in 2004. The decrease was primarily due to a charge in 2004 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 ($1.0 million) and a reduction in expenses and other items related to the
wind-down of the Company's Europe and Hong Kong entities ($.8 million).
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 net gain on settlement of obligations of
$24.5 million
2004 COMPARED TO 2003
There were no net sales or gross profit during 2004 or 2003.
General and administrative expenses totaled $2.0 million in 2004 compared to
$1.4 million in 2003. The increase was primarily due to a charge of $1.0 million
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
16
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.
LIQUIDITY AND CAPITAL RESOURCES
The lack of any operating revenue 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, 2005, the Company's significant loss from
operations and the pending legal matters, 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 this
uncertainty.
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 2005 and continues
to incur losses in 2006 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 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, 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, 2005, was
$18.7 million compared to $21.4 million at December 31, 2004.
Net cash used in operating activities from continuing operations during 2005
totaled $2.5 million, primarily due to a loss from continuing operations of $2.7
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 investment impairment charge of $.2 million. By utilizing
cash which had been received pursuant to the settlement of the Company's
litigation 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 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.
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.
Net cash provided by investing activities during 2005 totaled $.2 million,
primarily due to a decrease in restricted cash.
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.
17
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.
There were no financing cash flows from continuing operations during 2005, 2004
or 2003.
In March 2002, the Company, Simon Marketing and a Trustee entered into an
Indemnification Trust Agreement (the "Trust"), which requires the Company and
Simon Marketing to fund an irrevocable trust in the amount of $2.7 million. The
Trust was set up and will be used to augment the Company's existing insurance
coverage for indemnifying directors, officers and certain described consultants,
who are entitled to indemnification against liabilities arising out of their
status as directors, officers and/or consultants. As of December 31, 2005, there
have not been any claims made against the trust. On March 1, 2006, the trust
expired by its own terms without any claims having been made and all funds held
by the trust plus accrued interest, less trustee fees, totaling approximately
$2.8 million were returned to the Company.
In addition to the legal matters discussed in Item 3. Legal Proceedings, 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.
Restricted cash included within continuing operations at December 31, 2005 and
2004, totaled $2.8 million and $3.0 million, respectively, and primarily
consisted of amounts deposited into an irrevocable trust, totaling $2.7 million
and, at December 31, 2004, amounts deposited with lenders to satisfy the
Company's obligations pursuant to its standby letter of credit.
DISCONTINUED OPERATIONS
Working capital (deficit) attributable to discontinued operations at December
31, 2005, was $(.3) million compared to $(.2) million at December 31, 2004.
Net cash used in discontinued operations during 2005 totaled $.4 million
primarily due to cash used in operating activities of discontinued operations of
$2.7 million, cash transferred from continuing operations of $.1 million,
partially offset by cash provided by investing activities of discontinued
operations of $2.4 million. The $2.7 million cash used in operating activities
of discontinued operations is primarily due to a net loss of $.5 million, a
reduction in working capital items of $1.9 million, and other items of $.3
million. The $2.4 million cash provided by investing activities of discontinued
operations was primarily due to a decrease in restricted cash with $1.6 million
of such reduction due to the default by Cyrk on the Winthrop lease. See "2001
Sale of Business" in Item 1. Business.
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
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 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.
There were no financing activities of discontinued operations during 2005, 2004
and 2003.
18
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.
At December 31, 2004, the Company had various pre-existing letters of credit
outstanding, which were cash collateralized and had 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 were
secured, in part, by $2.5 million of restricted cash of the Company. The
Company's letter of credit which supported Cyrk's obligations to Winthrop was
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 supported 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 were secured by the
Company's letter of credit. In the event of default, Winthrop had the right to
draw upon the Company's letter of credit. As a result of the foregoing facts,
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 and to $1.6 million during 2005 based on the reduction
in the Winthrop liability. During the fourth quarter of 2005, Winthrop drew down
the $1.6 million balance of the Company's letter of credit due to Cyrk's default
on its obligations to Winthrop. See "2001 Sale of Business" in Item 1. Business.
On October 19, 2005, the Company received notice of a lawsuit against it in the
Bankruptcy Court for the Northern District of Illinois by the Committee
representing the unsecured creditors of H A 2003 Inc., formerly known as HA-LO
Industries, Inc. ("HA-LO"), seeking to recover as a voidable preference a
certain payment made in May 2001 by HA-LO to the Company in the amount of
$459,852 plus interest. The Company has retained bankruptcy counsel to represent
it in the matter and is investigating facts surrounding the alleged payment. It
has recorded a contingent loss liability of $.5 million related to this matter.
Restricted cash included within discontinued operations at December 31, 2005 and
2004 totaled $.4 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 December
31, 2005 and 2004, totaling $2.8 million and $3.0 million, respectively, which
primarily consisted of amounts deposited into an irrevocable trust, totaling
$2.7 million and, at December 31, 2004, amounts deposited with lenders to
satisfy the Company's obligations pursuant to its standby letter 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. However, because the
close down of these subsidiaries is substantially complete, there are no
material assets or liabilities remaining at these subsidiaries. As such, 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.
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets as of December 31, 2005 and 2004 F-2
Consolidated Statements of Operations for the years ended
December 31, 2005, 2004 and 2003 F-3
Consolidated Statements of Stockholders' Deficit for the years ended
December 31, 2005, 2004 and 2003 F-4
Consolidated Statements of Cash Flows for the years ended F-5
December 31, 2005, 2004 and 2003
Notes to Consolidated Financial Statements F-6
Schedule II: Valuation and Qualifying Accounts F-21
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, 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 Board of Directors, who have 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.
20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS 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 and to designate
the Chairman of the Board.
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 June 15, 2001, Patrick D. Brady resigned from the Board of
Directors. On August 24, 2001, Mr. Burkle and Ms. Paulson resigned from the
Board of Directors. On May 25,2004 Greg Mays was elected to the Board to fill
the vacancy which had been created by Mr. Brady's resignation. In a letter dated
March 20, 2006, Yucaipa notified the Company that it was designating Ira Tochner
and Erika Paulson to fill the vacancies which had been created by the August
2001 resignations and that it was further designating that Mr. Tochner be
appointed Chairman of the Board, as it was entitled to do under the terms of its
investment. As of March 31, 2006, the Company's Board had not yet effectuated
the designated appointments but expects to do so in the very near future.
As a result of the notification from Yucaipa, the Board re-examined its
membership composition to ensure that Directors unaffiliated with Yucaipa
constituted a majority of its members going forward, as was provided in the
Securities Purchase Agreement. As a result of that analysis, the Board and Mr.
Mays concluded that his continued participation on the Board might give the
appearance that Yucaipa had designated more than the three (of seven) seats to
which it was entitled since in the past year Mr. Mays had been designated by
Yucaipa to join the boards of directors of two companies in which it had
significant investments. Consequently, on March 27, 2006, Mr. Mays agreed to
resign from the Board and the Company terminated his Executive Services
Agreement (see Item 11. Executive Compensation below) and pursuant thereto the
parties exchanged mutual releases and Mr. Mays was paid severance under the
Agreement of $210,000. The Company and Mr. Mays subsequently entered into a new
agreement which is terminable by either party upon 90 days written notice which
requires Mr. Mays to continue to provide accounting services and act as Chief
Financial Officer of the Company under his existing salary and employment
conditions until either party terminates the arrangement.
On March 27,2006, Terrence Wallock, the Company's acting general counsel, was
elected to the Board of Directors to fill the vacancy created by Mr. Mays'
resignation. For further information, see "Business History of Directors and
Executive Officers" below.
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 (a) Director Since
---- --- ----- --------------------- --------------
Joseph W. Bartlett 72 I 2003 1993
Allan I. Brown 65 I 2003 1999
Joseph Anthony Kouba 58 III 2002 1997
George G. Golleher 57 II 2004 1999
Terrence J. Wallock 61 III 2006 2006
21
(a) No stockholders meeting to elect directors was held in 2005 or 2004. In
accordance with Delaware law and the Company's by-laws, Mr. Bartlett's, Mr.
Brown's, Mr. Kouba's, Mr. Golleher's, and Mr. Wallock's terms as directors
continue until their successors are elected and qualified.
BUSINESS HISTORY OF DIRECTORS AND EXECUTIVE OFFICERS
MR. BARTLETT is engaged in the private practice of law as of counsel to the law
firm of Fish & Richardson. From 1996 through 2002, he was a partner in the law
firm of Morrison & Foerster LLP. He was a partner in the law firm of Mayer,
Brown & Platt from July 1991 until March 1996. From 1969 until November 1990,
Mr. Bartlett was a partner of, and from November 1990 until June 1991 he was of
counsel to, the law firm of Gaston & Snow. Mr. Bartlett served as Under
Secretary of the United States Department of Commerce from 1967 to 1968 and as
law clerk to the Chief Justice of the United States in 1960.
MR. BROWN was the Company's Chief Executive Officer and president from July 2001
until March 2002 when his employment with the Company terminated. From November
1999 to July 2001, Mr. Brown served as the Company's Co-Chief Executive Officer
and Co-President. From November 1975 until March 2002, Mr. Brown served as the
Chief Executive Officer of Simon Marketing.
MR. GOLLEHER is a consultant and private investor. Mr. Golleher's career
includes numerous positions in senior financial capacities, including Chief
Financial Officer. More recently, Mr. Golleher served as President and Chief
Operating Officer of Fred Meyer, Inc. from March 1998 to June 1999, and also
served as a member of its Board of Directors. Mr. Golleher served as Chief
Executive Officer of Ralphs Grocery Company from January 1996 to March 1998 and
was Vice Chairman from June 1995 to January 1996. Mr. Golleher serves 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. WALLOCK is an attorney, consultant and private investor. He also serves as
the Company's Assistant Secretary and Legal Counsel. Prior to engaging in a
consulting and private legal practice in 2000, he served a number of public
companies as senior executive and general counsel, including Denny's Inc., The
Vons Companies, Inc. and Ralphs Grocery Company.
MR. MAYS, age 59, is a consultant and private investor. He has served as the
Company's Chief Financial Officer since May 2003. 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. and Pathmark Stores, Inc.
The Company's on-going operations are managed by Messrs. Golleher and Kouba, who
have served as Co-Chief Executive Officers since May 2003, in consultation with
Mr. Mays as Principal Financial Officer and Mr. Wallock, the Company's 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 (Chairman), 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 and Executive Officers." 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.
22
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation the Company paid or accrued for
services rendered in 2005, 2004 and 2003, 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 2005 $350,000 $-- $-- -- $ 84,720(2)
Co-Chief Executive Officer 2004 350,000 -- -- -- 112,192(2)(3)
and Director 2003 425,669 -- -- 20,000 161,500(2)
George Golleher 2005 $350,000 $-- $-- -- $ 87,939(2)
Co-Chief Executive Officer 2004 350,000 -- -- -- 110,192(2)(3)
and Director 2003 433,544 -- -- 20,000 165,405(2)
Greg Mays 2005 $210,000 $-- $-- -- $ 80,002(2)
Chief Financial Officer and Director 2004 210,000 -- -- -- 41,551(2)
2003 254,009 -- -- 10,000 101,168
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 2005, 2004 and 2003.
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.
The following table sets forth for each of our executive officers certain
information regarding exercises of stock options during 2005 and stock options
held at the end of 2005:
(in thousands)
Number of Securities Value of Unexercised
Shares Underlying In-the-Money
Acquired Unexercised Options Options at
On Value at Fiscal Year-End Fiscal Year End (1)
Name Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
---- -------- -------- ------------------------- -------------------------
J. Anthony Kouba -- $-- 60,000 / -- $2 / $--
George Golleher -- -- 30,000 / -- 2 / --
Greg Mays -- -- 10,000 / -- 1 / --
23
(1) This value is the difference between the market price of our common stock
subject to the options on December 31, 2005 ($0.22 per share) and the
option exercise (purchase) price, assuming the options were exercised and
the shares sold on that date.
EXECUTIVE SERVICES AGREEMENTS
In May 2003, the Company entered into Executive Services Agreements with Messrs.
Bartlett, Brown, Golleher, Kouba, Mays and Wallock. 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,
2005, 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, and, in the case of Mr. Wallock,
May 27, 2006, 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 amendments health benefits are to be provided during any
notice period or for the time with respect to which an equivalent payment is
made. As described under "Directors and Executive Officers of the Registrant,"
the Company entered into a new Executive Services Agreement with Mr. Mays on
March 27, 2006, upon termination of his prior agreement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Decisions concerning the 2005 compensation of Messrs. Kouba and Golleher, who
serve as the Principal Executive Officers of the Company, were made by the
Compensation, Governance, and Nominating Committee of the Board of Directors.
The 2005 compensation of Mr. Mays, who serves, as the Company's Principal
Financial Officer, was also determined by the Compensation, Governance, and
Nominating Committee of the Board of Directors. In 2005, 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
Directors are paid an annual retainer of $50,000. Directors also receive a fee
of $2,000 for each Board of Directors, Audit and Compensation, Governance and
Nominating Committees meeting attended. The Chairmen of the Audit and the
Compensation, Governance and Nominating Committees also receive annual retainers
of $7,500 and $5,000, respectively, plus an additional $500 for each committee
meeting they chair.
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 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, 2005, there have not been any claims made against the trust. On
March 1, 2006, the trust expired by its own terms without any claims having been
made and all funds held by the trust plus accrued interest, less trustee fees,
totaling approximately $2.8 million were returned to the Company.
24
STOCK PERFORMANCE GRAPH
The following graph assumes an investment of $100 on December 31, 2000 and
compares changes thereafter through December 31, 2005 in the market price of the
Company's common stock with (1) the Nasdaq Composite Index (a broad market
index) and (2) the Russell 2000 Index. The Russell 2000 Index was used in place
of a published industry or line-of-business index because although the Company
formerly had marketing services operations, the Company currently has no
operating business. As such, a published industry or line-of-business index
would not provide a meaningful comparison and the Company cannot reasonably
identify a peer group. As an alternative, the Company used the Russell 2000
Index which represents a capitalization-weighted index designed to measure the
performance of the 2,000 smallest publicly traded U.S. companies, in terms of
market capitalization, that are included in the Russell 3000 Index. The Nasdaq
Composite Index measures all Nasdaq domestic and international based common type
stocks listed on The Nasdaq Stock Market and includes over 3,000 companies.
The performance of the indices is shown on a total return (dividend
reinvestment) basis; however, the Company paid no dividends on its common stock
during the period shown. The graph lines merely connect the beginning and ending
of the measuring periods and do not reflect fluctuations between those dates.
COMPARISON OF COMULATIVE TOTAL RETURN
(PERFORMANCE GRAPH)
FISCAL YEAR ENDED
---------------------------------------
2000 2001 2002 2003 2004 2005
---- ---- ---- ---- ---- ----
SWWI $100 $ 5 $ 3 $ 2 $ 4 $ 7
NASDAQ 100 79 54 81 88 89
Russell 2000 100 86 67 85 93 97
25
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
This report has been prepared by the Company's Compensation, Governance and
Nominating Committee of the Board of Directors (the "Compensation Committee")
and addresses the Company's compensation policies with respect to its Co-Chief
Executive Officers and its Chief Financial Officer.
The current compensation of the Company's Co-Chief Executive Officers and its
Chief Financial Officer was set originally in May 2003 (i) in the case of Mr.
Golleher, by the Compensation Committee (which then consisted of Messrs. Kouba
and Bartlett) and (ii) in the case of Messrs. Kouba and Mays, by the Board of
Directors, with Mr. Kouba abstaining as to his compensation (Mr. Mays was not on
the Board at that time) pursuant to Executive Services Agreements entered into
with those executives and others at that time. See Executive Services Agreements
above. Inasmuch as the Company had not yet resolved significant liability
exposure which it was facing at that time and had no operating business, the
Committee and the Board determined that it would not then be feasible or
economical to conduct an executive search or offer a customary compensation
package to executive officer candidates. Rather, the Board appointed the two
members of the Executive Committee of the Board to the role of Co-Chief
Executive Officers, and appointed a Chief Financial Officer, at compensation
lower than their customary consulting fees. In so doing, the Board was able to
reduce overhead to the Company while retaining the services and availability of
these experienced executives who were intimately familiar with the affairs of
the Company.
After reviewing the salaries of the Co-Chief Executive Officers and Chief
Financial Officer in 2005, the Compensation Committee chose to make no
adjustments to the arrangements then in place. The Compensation Committee's
policies for executive office compensation in 2005 were unchanged from 2003, as
described above, and were not based on corporate performance since the Company
had no operating business.
The Compensation Committee:
Allan I. Brown
Joseph W. Bartlett
26
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 February 28, 2006. 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 Beneficially Owned (1) Class
- ---------------------------------------- ---------------------- -------------
Yucaipa and affiliates (2)(3)
Overseas Toys, L.P.
OA3, LLC
Multi-Accounts, LLC
Ronald W. Burkle 3,793,185 18.6%
Everest Special Situations Fund L.P. (4)
Maoz Everest Fund Management Ltd.
Elchanan Maoz
Platinum House
21 H' arba' a Street
Tel Aviv 64739 Israel 1,507,000 9.0%
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%
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, 2005, 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
27
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 31,118 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 20,446,378 shares of common stock outstanding and issuable upon
conversion of 31,118 shares of outstanding series A preferred stock and accrued
dividends as of December 31, 2005.
4. Based on 16,653,193 shares of common stock outstanding as of December 31,
2005.
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.
28
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information at December 31, 2005, 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, 2005) 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) 1,133,023 6.8%
Joseph W. Bartlett (4) 90,000 *
Joseph Anthony Kouba (5) 60,000 *
George G. Golleher (6) 45,000 *
Terrence Wallock (7) 5,000 *
Greg Mays (8) 10,000 *
All directors and executive officers as
a group (6 persons) 1,343,023 8.1%
* 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, 2005, 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,
2005.
(3) Includes 20,000 shares issuable pursuant to stock options exercisable
within 60 days of December 31, 2005. 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 1,133,023 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, 2005.
(5) The 60,000 shares are issuable pursuant to stock options exercisable within
60 days of December 31, 2005.
(6) Includes 30,000 shares issuable pursuant to stock options exercisable
within 60 days of December 31, 2005.
(7) The 5,000 shares are issuable pursuant to stock options exercisable within
60 days of December 31, 2005.
(8) The 10,000 shares are issuable pursuant to stock options exercisable within
60 days of December 31, 2005.
29
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets forth information as of December 31, 2005, 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, 2005, options to purchase 215,000 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 215,000 $4.51 per share 1,000,000 (1)
Plans Not Approved by Stockholders Not applicable Not applicable Not applicable
Total 215,000 $4.51 per share 1,000,000 (1)
(1) Available for issuance under the 1997 Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
30
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, 2005 and 2004:
Fiscal Year
-----------
2005 2004
---- ----
(in
thousands)
Audit fees (1) $100 $ 89
Audit-related fees (2) 12 12
Tax fees (3) 42 45
All other fees (4) -- --
---- ----
Total $154 $146
==== ====
(1) Audit fees are 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 are 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 are related to tax compliance, planning, and consulting.
(4) All other fees are for services other than those reported in the other
categories.
POLICY ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND NON-AUDIT SERVICES OF
INDEPENDENT AUDITOR
Pre-approval is provided by the Audit Committee for up to one year of all audit
and permissible non-audit services provided by the Company's independent
auditor. Any pre-approval is detailed as to the particular service or category
of service and is generally subject to a specific fee.
31
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, 2005 and 2004
Consolidated Statements of Operations for the years ended
December 31, 2005, 2004 and 2003
Consolidated Statements of Stockholders' Deficit for the
years ended December 31, 2005, 2004 and 2003
Consolidated Statements of Cash Flows for the years ended
December 31, 2005, 2004 and 2003
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES FOR THE FISCAL YEARS ENDED DECEMBER
31, 2005, 2004 AND 2003:
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.
32
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. Messrs. Golleher and Kouba
of the Board of Directors have the responsibility for the role of the Principal
Executive Officer of the registrant.
Date: March 31, 2006 SIMON WORLDWIDE, INC.
/s/ George G. Golleher /s/ J. Anthony Kouba
-------------------------- --------------------------
GEORGE G. GOLLEHER J. ANTHONY KOUBA
Co-Chief Executive Officer Co-Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ Joseph W. Bartlett Director March 31, 2006
- -------------------------------------
JOSEPH W. BARTLETT
/s/ Allan I. Brown Director March 31, 2006
- -------------------------------------
ALLAN I. BROWN
/s/ Terrence Wallock Director March 31, 2006
- -------------------------------------
TERRENCE WALLOCK
/s/ George G. Golleher Director and March 31, 2006
- ------------------------------------- Co-Chief Executive Officer
GEORGE G. GOLLEHER
/s/ J. Anthony Kouba Director and March 31, 2006
- ------------------------------------- Co-Chief Executive Officer
J. ANTHONY KOUBA
/s/ Greg Mays Principal Financial Officer March 31, 2006
- -------------------------------------
GREG MAYS
33
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
2.6 Settlement Agreement and Mutual General Release between Cyrk and
Simon dated January 31, 2006, filed herewith
2.7 Subordinated Promissory Note in the principal amount of $1,410,000
from Cyrk to Simon dated January 31, 2006, filed herewith
3.1 (3) Restated Certificate of Incorporation of the Registrant
3.2 Amended and Restated By-laws of the Registrant, effective
March 27, 2006, filed herewith
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
10.5 (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
10.30 May 3, 2004, Amendment No. 1 to Executive Services Agreements with
Messrs. Bartlett, Brown, Golleher and Kouba, filed herewith
(replaces previously filed copies of these amendments)
10.31 March 27, 2006, Amendment No. 2 to Wallock Executive Services
Agreement, filed herewith
10.32 March 27, 2006, New Executive Services Agreement with Mr. Mays,
filed herewith
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
34
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
- ----------
(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.
35
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, 2005 and 2004 and the related
consolidated statements of operations, stockholders' deficit and cash flows for
each of the three years in the period ended December 31, 2005. 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 statements 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, 2005 and 2004, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2005 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
significant 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.
/s/ BDO Seidman, LLP
Los Angeles, California
March 3, 2006
F-1
PART I - FINANCIAL INFORMATION
SIMON WORLDWIDE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31, December 31,
2005 2004
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 16,310 $ 18,892
Restricted cash 2,818 2,973
Prepaid expenses and other current assets 316 483
Assets from discontinued operations to be disposed of - current (Note 4) 541 2,815
--------- ---------
Total current assets 19,985 25,163
Non-current assets:
Property and equipment, net 4 13
Other assets 109 198
Investments 11,456 500
Assets from discontinued operations to be disposed of - non-current (Note 4) 268 249
--------- ---------
Total non-current assets 11,837 960
--------- ---------
$ 31,822 $ 26,123
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable:
Trade $ 187 $ 226
Affiliates 176 166
Accrued expenses and other current liabilities 373 512
Liabilities from discontinued operations - current (Note 4) 809 3,064
--------- ---------
Total current liabilities 1,545 3,968
Commitments and contingencies
Redeemable preferred stock, Series A1 senior cumulative
participating convertible, $.01 par value, 31,118 shares issued and
outstanding at December 31, 2005, and 29,904 shares issued and outstanding
at December 31, 2004, stated at redemption value of $1,000 per share 31,118 29,904
Stockholders' deficit:
Common stock, $.01 par value; 50,000,000 shares authorized;
16,653,193 shares issued and outstanding at December 31, 2005 and 2004 167 167
Additional paid-in capital 138,500 138,500
Retained deficit (150,802) (146,416)
Unrealized gain on investments 11,294 --
--------- ---------
Total stockholders' deficit (841) (7,749)
--------- ---------
$ 31,822 $ 26,123
========= =========
See the accompanying Notes to Consolidated Financial Statements.
F-2
SIMON WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
2005 2004 2003
------- ------- -------
Revenues $ -- $ -- $ --
General and administrative expenses 3,086 3,625 5,270
------- ------- -------
Operating loss from continuing operations (3,086) (3,625) (5,270)
Interest income 623 -- --
Investment impairments (221) -- --
------- ------- -------
Loss from continuing operations before income taxes (2,684) (3,625) (5,270)
Income tax -- -- --
------- ------- -------
Net loss from continuing operations (2,684) (3,625) (5,270)
Income (loss) from discontinued operations, net of tax (Note 4) (478) 24,261 (3,591)
------- ------- -------
Net income (loss) (3,162) 20,636 (8,861)
Preferred stock dividends (1,224) (1,172) (1,127)
------- ------- -------
Net income (loss) available to common stockholders $(4,386) $19,464 $(9,988)
======= ======= =======
Loss per share from continuing operations available
to common stockholders:
Loss per common share - basic and diluted $ (0.23) $ (0.29) $ (0.38)
======= ======= =======
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 $ (0.03) $ 1.46 $ (0.22)
======= ======= =======
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 $ (0.26) $ 1.17 $ (0.60)
======= ======= =======
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, 2005, 2004 and 2003
(in thousands)
Accumulated
Common Additional Retained Other Total
Stock Paid-in (Deficit) Comprehensive Comprehensive Stockholders'
($.01 Par Value) Capital Earnings Income (Loss) Income Deficit
---------------- ---------- --------- ------------- ------------- -------------
Balance, December 31, 2002 $167 $138,500 $(155,892) $ -- $(17,225)
Comprehensive loss:
Net loss (8,861) $(8,861) (8,861)
Other comprehensive loss -- --
-------
Comprehensive loss $(8,861)
=======
Dividends on preferred stock (1,127) (1,127)
---- -------- --------- ------- --------
Balance, December 31, 2003 167 138,500 (165,880) (27,213)
--
Comprehensive income:
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)
Comprehensive income:
Net loss (3,162) $(3,162) (3,162)
Other comprehensive income:
Unrealized gain on investments 11,294 11,294
-------
Other comprehensive income 11,294 11,294
-------
Comprehensive income $ 8,132
=======
Dividends on preferred stock (1,224) (1,224)
---- -------- --------- ------- --------
Balance, December 31, 2005 $167 $138,500 $(150,802) $11,294 $ (841)
==== ======== ========= ======= ========
See the accompanying Notes to Consolidated Financial Statements.
F-4
SIMON WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
2005 2004 2003
------- -------- -------
Cash flows from operating activities:
Net income (loss) $(3,162) $ 20,636 $(8,861)
Income (loss) from discontinued operations (478) 24,261 (3,591)
------- -------- -------
Loss from continuing operations (2,684) (3,625) (5,270)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation 9 20 64
Charge for impaired investments 221 -- --
Gain on settlement of obligations -- (11,500) (23)
Cash received from settlement -- 13,000 --
Cash provided by (used in) discontinued operations (2,731) 9,108 (127)
Cash transferred to (from) continuing operations (58) 10,066 3,119
Increase (decrease) in cash from changes
in working capital items:
Prepaid expenses and other current assets 167 257 654
Accounts payable (29) 156 29
Accrued expenses and other current liabilities (139) 389 (355)
------- -------- -------
Net cash provided by (used in) operating activities (5,244) 17,871 (1,909)
------- -------- -------
Cash flows from investing activities:
Purchase of property and equipment -- -- (30)
Decrease (increase) in restricted cash 155 (2,639) 7,306
Cash provided by (used in) discontinued operations 2,418 3,582 (6,565)
Other, net 89 78 17
------- -------- -------
Net cash provided by investing activities 2,662 1,021 728
------- -------- -------
Cash flows from financing activities -- -- --
------- -------- -------
Net increase (decrease) in cash and cash equivalents (2,582) 18,892 (1,181)
Cash and cash equivalents, beginning of period 18,892 -- 1,181
------- -------- -------
Cash and cash equivalents, end of period $16,310 $ 18,892 $ --
======= ======== =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes $ 6 $ 23 $ 11
======= ======== =======
Supplemental non-cash investing activities:
Dividends paid in kind on redeemable preferred stock $ 1,214 $ 1,167 $ 1,121
======= ======== =======
See the accompanying Notes to Condensed 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, 2005, the Company had
reduced its workforce to 4 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, 2005, the Company had a stockholders'
deficit of $.8 million. For the year ended December 31, 2005, the Company had a
net loss of $3.2 million. The Company incurred losses within its continuing
operations in 2005 and continues to incur losses in 2006 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 of the Company's litigation 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, 2005, the Company's
significant loss from operations and the pending legal matters, 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 this uncertainty.
The Company is currently managed by members 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, 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.
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-
F-6
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.
During the third quarter of 2005, the Company entered into a settlement
agreement with plaintiff in the case on behalf of the class pursuant to which
the Company agreed to pay $650,000 Canadian ($554,512 US) to be used for costs,
fees and expenses relating to the settlement with excess proceeds to be
distributed to two charities. The settlement is subject to certification of the
class with respect to the Company and approval of the terms of settlement by the
Canadian court.
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.
On October 19, 2005 the Company received notice of a lawsuit against it in the
Bankruptcy Court for the Northern District of Illinois by the Committee
representing the unsecured creditors of H A 2003 Inc., formerly known as HA-LO
Industries, Inc. ("HA-LO"), seeking to recover as a voidable preference a
certain payment made in May 2001 by HA-LO to the Company for the sale of
inventory in the amount of $459,852 plus interest. Based on an assessment by
management and during the three months ended September 30, 2005, the Company
recorded a contingent loss liability of $.5 million related to this matter.
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, 2005, the Company had one stock-based compensation plan, which
is described below. In December 2004, the FASB issued a revision entitled,
"Share-Based Payment," to Statement No. 123, "Accounting for Stock-Based
Compensation." This revision ("Statement No. 123(R)") supersedes APB Opinion No.
25 and its related implementation guidance. As such, Statement No. 123(R)
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. Statement No. 123(R) requires
entities to recognize in the financial statements 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. In March 2005, the Securities and Exchange
Commission (the "SEC") issued Staff Accounting Bulletin No. 107, "Share-Based
Payment", which summarizes the views of the SEC staff regarding the interaction
between Statement No. 123(R) and certain SEC rules and regulations, and is
intended to assist in the initial implementation. Statement No. 123(R) is
effective for the annual reporting period beginning January 1, 2006. The Company
does not expect the adoption of Statement No. 123(R) to have a material effect
on its consolidated statements of financial position or results of operations,
due to the small number of outstanding options.
F-7
Had compensation cost for the Company's grants for stock-based compensation
plans been determined consistent with Statement No. 123, the Company's net
income (loss) available to common stockholders and income (loss) per common
share would have been adjusted to the pro forma amounts indicated below:
2005 2004 2003
------- ------- -------
(in thousands)
Net income (loss) available to common stockholders - as reported $(4,386) $19,464 $(9,988)
Add: Stock-based compensation expense
included in reported net income (loss), net of income tax -- -- --
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of income taxes (11) -- --
------- ------- -------
Net income (loss) available to common stockholders - pro forma $(4,397) $19,464 $(9,988)
======= ======= =======
Income (loss) per common share - basic and diluted - as reported $ (0.26) $ 1.17 $ (0.60)
Income (loss) per common share - basic and diluted - pro forma $ (0.26) $ 1.17 $ (0.60)
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.
In March 2004, the Emerging Issues Task Force ("EITF") of the FASB, issued EITF
03-16, "Accounting 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 Company recorded an investment impairment during 2005 of $.2 million, net of
related amounts recorded in unrealized gain on the balance sheet, to adjust the
recorded value of its investments accounted for under the cost method to the
estimated future undiscounted cash flows the Company expects from such
investments.
F-8
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. The cost and
accumulated depreciation for property and equipment sold, retired or otherwise
disposed of are relieved from the accounts, and the resulting gains or losses
are reflected in income.
IMPAIRMENT OF LONG-LIVED ASSETS
Periodically, the Company assesses, based on undiscounted cash flows, if there
has been an other-than-temporary impairment in the carrying value of its
long-lived assets and, if so, the amount of any such impairment by comparing
anticipated undiscounted future cash flows with the carrying value of the
related long-lived assets. In performing this analysis, management considers
such factors as current results, trends and future prospects, in addition to
other economic factors.
INCOME TAXES
The Company determines deferred taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires that deferred tax assets and
liabilities be computed based on the difference between the financial statement
and income tax bases of assets and liabilities using the enacted marginal tax
rate. Deferred income tax expenses or credits are based on the changes in the
asset or liability from period to period.
FOREIGN CURRENCY TRANSLATION
At December 31, 2005, the Company had subsidiaries in Europe and Hong Kong, with
the wind-down of such subsidiaries being substantially complete. The Company
translates these subsidiaries' financial statements, which are 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 16).
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.
On October 19, 2005 the Company received notice of a lawsuit against it in the
Bankruptcy Court for the Northern District of Illinois by the Committee
representing the unsecured creditors of H A 2003 Inc., formerly known as HA-LO
Industries, Inc. ("HA-LO"), seeking to recover as a voidable preference a
certain payment made in May 2001 by HA-LO to the Company in the amount of
$459,852 plus interest. Based on an assessment by management during the three
months ended September 30, 2005, the Company recorded a contingent loss
liability of $.5 million related to this matter.
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 September 30, 2005, the available amount
under the letter of
F-9
credit was $2.1 million which was secured, in part, by $1.6 million of
restricted cash of the Company. The Company's letter of credit was also secured,
in part, by the aforesaid $500,000 letter of credit provided by Cyrk for the
benefit of the Company.
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 were 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 to Other Expense with respect
to the liability arising from the Winthrop lease. Such liability was revised
downward to $2.5 million during 2004 and to $1.6 million during 2005 based on
the reduction in the Winthrop liability.
During the fourth quarter of 2005, the Company received notification that
Winthrop has drawn upon the letter of credit due to a default by Cyrk. Cyrk has
agreed to indemnify the Company if Winthrop made 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. See Note
18. Subsequent Events.
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. At December 31,
2005, the Company's elimination of its on-going promotions business operations
is substantially complete.
Assets and liabilities related to discontinued operations at December 31, 2005
and 2004, as disclosed in the accompanying consolidated financial statements,
consist of the following:
December 31, December 31,
2005 2004
------------ ------------
(in thousands)
Assets:
Cash and cash equivalents $163 $ --
Restricted cash 378 2,815
---- ------
Total current assets
541 2,815
Other assets 268 249
---- ------
Assets from discontinued operations to be disposed of $809 $3,064
==== ======
Liabilities:
Accounts payable - trade $ 19 $ 58
Accrued expenses and other current liabilities 790 3,006
---- ------
Total current liabilities
809 3,064
---- ------
Liabilities from discontinued operations $809 $3,064
==== ======
F-10
Net income (loss) from discontinued operations for the years ended December 31,
2005, 2004 and 2003, as disclosed in the accompanying consolidated financial
statements, consists of the following:
2005 2004 2003
----- -------- -------
(in thousands)
Net sales $ -- $ -- $ --
Cost of sales -- -- --
----- -------- -------
Gross profit -- -- --
General and administrative expenses 175 1,990 1,359
Loss (gain) on settlement of obligations and litigation 555 (24,500) (23)
----- -------- -------
Operating income (loss) (730) 22,510 (1,336)
Interest income -- 283 246
Other income (expense) 252 1,468 (2,501)
----- -------- -------
Income (loss) before income taxes (478) 24,261 (3,591)
Income tax expense (benefit) -- -- --
----- -------- -------
Net income (loss) $(478) $ 24,261 $(3,591)
===== ======== =======
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.
LOSS (GAIN) ON SETTLEMENT OF OBLIGATIONS
As previously reported, an action has been pending against the Company in
Ontario Provincial Court in Canada seeking restitution and damages on a
class-wide basis for the diversion from seeding in Canada of high-level winning
prizes in certain McDonald's promotional games administered by Simon Marketing.
During 2005, the Company entered into a settlement agreement with plaintiff in
the case on behalf of the class pursuant to which the Company agreed to pay
$650,000 Canadian ($554,512 US) to be used for costs, fees and expenses relating
to the settlement with excess proceeds to be distributed to two charities. The
settlement is subject to certification of the class with respect to the Company
and approval of the terms of settlement by the Canadian court.
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.
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 was 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. The liability component of such charge was recorded to Accrued
Expenses and Other Current Liabilities. Such liability was revised downward to
$2.5 million during 2004 and to $1.6 million during 2005 based on the reduction
in the Winthrop liability. The other income for 2005 was partially offset by a
contingent loss accrual of $.5 million related to the HA-LO matter. See Note 3.
F-11
5. RESTRICTED CASH
Restricted cash included within discontinued operations at December 31, 2005 and
2004, totaled $.4 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.
Restricted cash included within continuing operations at December 31, 2005 and
2004, totaled $2.8 million and $3.0 million, respectively, and primarily
consisted of amounts deposited into an irrevocable trust, totaling $2.7 million
and, at December 31, 2004, amounts deposited with lenders to satisfy the
Company's obligations pursuant to its standby letter of credit. On March 1,
2006, the trust expired by its own terms without any claims having been made and
all funds held by the trust plus accrued interest, less trustee fees, totaling
approximately $2.8 million were returned to the Company.
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
Discontinued Continuing
Operations Operations Total
------------ ----------- -----------
As of December 31,
----------------------------------------
2005 2004 2005 2004 2005 2004
---- ---- ---- ---- ---- ----
(in thousands)
Machinery and equipment $-- $-- $ 27 $ 27 $ 27 $ 27
Less: Accumulated depreciation and amortization -- -- (23) (14) (23) (14)
---- --- ---- ---- ---- ----
$-- $-- $ 4 $ 13 $ 4 $ 13
==== === ==== ==== ==== ====
Depreciation and amortization expense on property and equipment totaled
approximately $9,000, $20,000, and $64,000 during 2005, 2004 and 2003,
respectively.
7. 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
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 $11.5 million as of December
31, 2005.
At December 31, 2005, 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, primarily held an equity
investment in the Source Interlink Companies ("Source"), received upon the
merger of Alliance Entertainment Companies ("Alliance") with Source. Alliance
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 which was accounted for under the cost method. 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.
In March 2004, 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.
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 principally for retailers. 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
F-12
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 value of the new marketable securities constituting the
primary asset of 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. As the Company's investment in
Yucaipa AEC Associates is accounted for under the equity method, the Company
will adjust its investment based in its pro rata share of the earnings and
losses of Yucaipa AEC Associates. Other than the merger of Alliance with Source,
there were no such adjustments during 2005. The Company has no power to dispose
of or liquidate its holding 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. During 2005, the Company recorded an investment impairment of $.2
million, net of related amounts recorded in unrealized gain on the balance
sheet, to adjust the recorded value of its other investments that are accounted
for under the cost method to the estimated future undiscounted cash flows the
Company expects from such investments.
8. LEASE OBLIGATIONS
The approximate minimum rental commitments under all noncancelable leases at
December 31, 2005, totaled approximately $33,000, which are due in 2006.
For the years ended December 31, 2005, 2004, and 2003, rental expense for all
operating leases included within continuing operations was approximately
$44,000, $117,000, and $165,000, respectively, and rental expense for all
operating leases included within discontinued operations was $0, $0, and
$180,000, 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 2005, 2004 and
2003.
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 $39.7 million
is required at December 31, 2005. The tax effects of temporary differences that
gave rise to deferred tax assets as of December 31, 2005 and 2004, were as
follows (in thousands):
2005 2004
-------- --------
Deferred tax assets:
Receivable reserves $ -- $ 83
Other asset reserves 2,959 4,007
Deferred compensation 38 40
Capital Losses 7,137 7,137
Foreign tax credits 82 82
AMT credit 649 649
Net operating losses 28,792 26,440
Depreciation -- 18
Valuation Allowance (39,657) (38,456)
-------- --------
$ -- $ --
======== ========
As of December 31, 2005, the Company had federal and state net operating loss
carryforwards of approximately $72.4 million and $47.4 million, 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, 2005, the Company also had foreign tax credit carryforwards of $.1 million
that expire in 2009. As of December 31, 2005, the Company had federal and state
capital loss carryforwards of $16.7 million which begin to expire in 2006
through 2008.
F-13
The following is a reconciliation of the statutory federal income tax rate to
the actual effective income tax rate:
2005 2004 2003
---- ---- ----
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 2 (8) 23
Change in valuation allowance 37 48 51
Effect of non-utilization of state losses -- -- 2
Life insurance 1 -- 3
Adjustment to state tax liability -- -- (9)
Foreign tax credits -- -- 27
Post-tax return filing Net Operating Loss adjustments -- -- (50)
Other, net -- -- (7)
--- --- ---
0% 0% 0%
=== === ===
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, 2005 and 2004, accrued expenses and other current liabilities
consisted of the following:
Discontinued Continuing
Operations Operations Total
------------- ----------- ---------------
As of December 31,
---------------------------------------------
2005 2004 2005 2004 2005 2004
---- ------ ---- ---- ------ ------
(in thousands)
Accrued payroll and related items and
deferred compensation $ -- $ -- $ 35 $ 42 $ 35 $ 42
Contingent loss 460 2,455 -- -- 460 2,455
Professional fees -- -- 282 295 282 295
Insurance premiums 280 200 -- -- 280 200
Other 50 351 56 175 106 526
---- ------ ---- ---- ------ ------
$790 $3,006 $373 $512 $1,163 $3,518
==== ====== ==== ==== ====== ======
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, 2005, there have not been any claims made against the trust. See Note 18.
Subsequent Events.
F-14
12. REDEEMABLE PREFERRED STOCK
In November 1999, Overseas Toys, L.P., an affiliate of Yucaipa, a Los Angeles,
California based investment firm, invested $25 million in the Company in
exchange for preferred stock and a warrant to purchase additional preferred
stock. Under the terms of the investment, which was approved at a Special
Meeting of Stockholders on November 10, 1999, the Company issued 25,000 shares
of a newly authorized senior cumulative participating convertible preferred
stock ("preferred stock") to Yucaipa for $25 million. Yucaipa is entitled, at
their option, to convert each share of preferred stock into common stock equal
to the sum of $1,000 per share plus all accrued and unpaid dividends, divided by
$8.25 (3,793,185 shares as of December 31, 2005, and 3,644,848 shares as of
December 31, 2004).
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 18.6% and 18.0% of the then outstanding common shares at December
31, 2005 and 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 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.
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 the event that termination is due to death or disability, the option
is exercisable for a maximum of 180 days after such termination.
F-15
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 2005 and 2004.
The following summarizes the status of the Company's stock options as of
December 31, 2005, 2004 and 2003, and changes for the years then ended:
2005 2004 2003
Weighted Weighted Weighted
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------------- -------- -------------- -------- ---------- --------
Outstanding at the beginning of year 220,000 $ 4.80 225,000 $ 5.33 130,000 $9.16
Granted -- -- -- -- 95,000 0.10
Exercised -- -- -- -- -- --
Expired/Forfeited 5,000 17.25 5,000 28.75 -- --
--------- --------- ----------
Outstanding at end of year 215,000 4.51 220,000 4.80 225,000 5.33
========= ========= ==========
Options exercisable at year-end 215,000 4.51 172,500 6.09 130,000 9.16
========= ========= ==========
Options available for future grant 1,000,000(1) 1,000,000(1) 1,000,000(1)
========= ========= ==========
Weighted average fair value of
options granted during the year Not applicable Not applicable $ 0.02
(1) Available for issuance under the 1997 Plan.
The following table summarizes information about stock options outstanding at
December 31, 2005:
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 7.35 $ 0.10 95,000 $ 0.10
$ 2.00 - $ 5.38 65,000 3.63 4.60 65,000 4.60
$ 7.56 - $ 8.81 25,000 3.84 8.31 25,000 8.31
$12.25 - $15.50 25,000 2.04 14.85 25,000 14.85
$16.50 - $17.25 5,000 0.24 16.50 5,000 16.50
------- -------
$ 0.10 - $17.25 215,000 5.03 $ 4.51 215,000 $ 4.51
======= ==== ====== ======= ======
F-16
14. 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, 2005, there have not been any claims made against the trust.
See Note 18. Subsequent Events.
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, 2005, 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.
15. 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 2005, 2004, and 2003. The Company had no accounts
receivable at December 31, 2005.
Substantially all the Company's long-lived assets as of December 31, 2005, 2004
and 2003, were in the United States.
Long-lived assets include property and equipment, and other non-current assets.
F-17
16. 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,
----------------------------------------------------------------------------------------------------------
2005 2004 2003
---------------------------------- ---------------------------------- ----------------------------------
Per Per Per
Income Shares Share Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------ ----------- ------------- ------
(in thousands, except share data)
Basic and diluted EPS:
Loss from continuing
operations $(2,684) $ (3,625) $(5,270)
Preferred stock
dividends (1,224) (1,172) (1,127)
------- -------- -------
Loss from continuing
operations
available to
common
stockholders $(3,908) 16,653,193 $(0.23) $ (4,797) 16,653,193 $(0.29) $(6,397) 16,653,193 $(0.38)
======= ========== ====== ======== ========== ====== ======= ========== ======
Income (loss) from
discontinued
operations $ (478) 16,653,193 $(0.03) $ 24,261 16,653,193 $ 1.46 $(3,591) 16,653,193 $(0.22)
======= ========== ====== ======== ========== ====== ======= ========== ======
Net income (loss) $(3,162) $ 20,636 $(8,861)
Preferred stock
dividends (1,224) (1,172) (1,127)
------- -------- -------
Net income (loss)
available to
common
stockholders $(4,386) 16,653,193 $(0.26) $ 19,464 16,653,193 $ 1.17 $(9,988) 16,653,193 $(0.60)
======= ========== ====== ======== ========== ====== ======= ========== ======
For the years ended December 31, 2005, 2004, and 2003, 3,793,185, 3,644,848, and
3,547,296, 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, 2005, 2004, and 2003, 215,000,
172,500, and 130,000 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 $.23, $.17, and $.07,
respectively, did not exceed the weighted average exercise price of such options
of $4.51, $6.09, and $9.16, respectively.
F-18
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a tabulation of the quarterly results of operations for the
years ended December 31, 2005 and 2004, respectively:
First Second Third Fourth
2005 Quarter Quarter Quarter Quarter
---- ------- ------- ------- -------
(in thousands, except per share data)
Continuing operations:
Net sales $ -- $ -- $ -- $ --
Gross profit -- -- -- --
Net loss (660) (580) (587) (857)
Loss per common share available to common - basic and diluted (0.06) (0.05) (0.05) (0.07)
Discontinued operations:
Net sales $ -- $ -- $ -- $ --
Gross profit -- -- -- --
Net income (loss) 300 (122) (661) 5
Income (loss) per common share - basic and diluted 0.02 (0.01) (0.04) --
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 and 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 - basic and diluted (0.01) (0.05) 1.47 0.05
(a) See Note 4.
F-19
18. SUBSEQUENT EVENTS
During the fourth quarter of 2005, Winthrop drew down the $1.6 million balance
of the Company's letter of credit due to Cyrk's default on its obligations to
Winthrop. An equal amount of the Company's restricted cash was drawn down by the
Company's bank which had issued the letter of credit. Due to this default,
Cyrk's $2.3 million subordinated note payable to the Company, which forgiven by
the Company in 2003, was reinstated in the first quarter of 2006.
On January 31, 2006, the Company and Cyrk entered into a Settlement Agreement
and Mutual General Release pursuant to which: (1) Cyrk agreed to pay $1.6
million to the Company, of which $435,000 was paid on or before March 1, 2006
and the balance is payable, pursuant to a subordinated note (the "New
Subordinated Note"), in forty-one (41) approximately equal consecutive monthly
installments beginning April 1, 2006; (ii) Cyrk entered into a Confession of
Judgment in Washington State Court for all amounts owing to the Company under
the New Subordinated Note and the $2.3 million note (the "Old Subordinated
Note"); (iii) Cyrk's parent company agreed to subordinate approximately $4.3
million of Cyrk debt to the debt owed to the Company by Cyrk; and (iv) Cyrk and
the Company entered into mutual releases of all claims except those arising
under the Settlement Agreement, the New Subordinated Note or the Confession
Judgment. So long as Cyrk does not default on the New Subordinated Note, the
Company has agreed not to enter the Confession of Judgment in court. Cyrk's
obligations under the New Subordinated Note and the Old Subordinated Note are
subordinated to Cyrk's obligations to the financial institution which is Cyrk's
senior lender, which obligations are secured by, among other things,
substantially all of Cyrk's assets. In the event of a default by Cyrk of its
obligations under the New Subordinated Note, there is no assurance that the
Company will be successful in enforcing the Confession of Judgment.
On March 1, 2006, the Company's Indemnification Trust Agreement (see Note 11)
expired by its own terms without any claims having been made and all funds held
by the trust plus accrued interest, less trustee fees, totaling approximately
$2.8 million were returned to the Company.
F-20
Schedule II
Simon Worldwide, Inc.
Valuation and Qualifying Accounts
For the Years Ended December 31, 2005, 2004 and 2003
(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
- -------------------- ---------- ---------- ---------- ---------- ----------
2005 $ -- $ -- $-- $ -- $ --
2004 13,852 -- -- 13,852(a) --
2003 13,416 523 -- 87 13,852
(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