e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2009
OR
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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)
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DELAWARE
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04-3081657 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
5200 WEST CENTURY BOULEVARD, LOS ANGELES, CALIFORNIA 90045
(Address of principal executive offices)
(310) 417-4660
(Registrant’s telephone number, including area code)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act: Yes o No þ
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 o No þ
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site,
if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post
such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer o |
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Accelerated filer o |
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Non-accelerated filer o
(Do not check if a smaller reporting company) |
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Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act): Yes o No þ
At May 4, 2009, 54,201,080 shares of the registrant’s common stock were outstanding.
SIMON WORLDWIDE, INC.
FORM 10-Q
TABLE OF CONTENTS
2
PART I — FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
SIMON WORLDWIDE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
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March 31, |
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December 31, |
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2009 |
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2008 |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
16,444 |
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$ |
16,576 |
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Prepaid expenses and other current assets |
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119 |
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180 |
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Other receivable |
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— |
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350 |
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Assets from discontinued operations to be disposed of — current (Note 4) |
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177 |
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84 |
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Total current assets |
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16,740 |
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17,190 |
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Investments |
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171 |
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295 |
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Other assets |
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29 |
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25 |
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Assets from discontinued operations to be disposed of — non-current (Note 4) |
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363 |
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436 |
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Total non-current assets |
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563 |
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756 |
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$ |
17,303 |
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$ |
17,946 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
61 |
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$ |
125 |
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Accrued expenses and other current liabilities |
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388 |
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379 |
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Liabilities from discontinued operations — current (Note 4) |
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540 |
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520 |
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Total current liabilities |
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989 |
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1,024 |
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Stockholders’ deficit: |
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Common stock, $.01 par value; 100,000,000 shares authorized;
54,201,080 shares issued and outstanding net of 412,869 treasury shares
at par value at March 31, 2009, and December 31, 2008 |
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542 |
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542 |
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Additional paid-in capital |
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153,303 |
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153,303 |
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Deficit |
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(137,536 |
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(137,055 |
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Accumulated other comprehensive income |
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5 |
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132 |
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Total stockholders’ equity |
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16,314 |
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16,922 |
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$ |
17,303 |
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$ |
17,946 |
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See the accompanying Notes to Condensed Consolidated Financial Statements.
3
SIMON WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
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For the three months |
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ended March 31, |
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2009 |
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2008 |
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Revenue |
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$ |
— |
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$ |
— |
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General and administrative expenses |
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451 |
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903 |
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Operating loss from continuing operations |
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(451 |
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(903 |
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Interest income |
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57 |
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108 |
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Investment impairment (Note 5) |
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(1 |
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(16 |
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Equity in Yucaipa AEC earnings |
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8 |
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— |
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Loss from continuing operations before income taxes |
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(387 |
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(811 |
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Income tax provision |
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— |
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— |
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Net loss from continuing operations |
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(387 |
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(811 |
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Loss from discontinued operations, net of tax (Note 4) |
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(94 |
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(36 |
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Net loss |
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(481 |
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(847 |
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Preferred stock dividends (Note 8) |
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— |
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(340 |
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Net loss available to common stockholders |
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$ |
(481 |
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$ |
(1,187 |
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Loss per share from continuing operations available
to common stockholders: |
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Loss per common share — basic and diluted |
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$ |
(0.01 |
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$ |
(0.07 |
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Weighted average shares outstanding — basic and diluted |
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54,201 |
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16,260 |
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Loss per share from discontinued operations: |
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Loss per common share — basic and diluted |
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$ |
(0.00 |
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$ |
(0.00 |
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Weighted average shares outstanding — basic and diluted |
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54,201 |
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16,260 |
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Net loss available to common stockholders: |
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Loss per common share — basic and diluted |
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$ |
(0.01 |
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$ |
(0.07 |
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Weighted average shares outstanding — basic and diluted |
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54,201 |
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16,260 |
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See the accompanying Notes to Condensed Consolidated Financial Statements.
4
SIMON WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(in thousands)
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For the three months |
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ended March 31, |
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2009 |
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2008 |
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Net loss |
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$ |
(481 |
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$ |
(847 |
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Other comprehensive income (loss): |
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Unrealized income (loss) on investments |
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127 |
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(976 |
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Comprehensive loss |
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$ |
(608 |
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$ |
(1,823 |
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See the accompanying Notes to Condensed Consolidated Financial Statements.
5
SIMON WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
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For the three months |
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ended March 31, |
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2009 |
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2008 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(481 |
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$ |
(847 |
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Loss from discontinued operations |
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(94 |
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(36 |
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Loss from continuing operations |
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(387 |
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(811 |
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Adjustments to reconcile net loss to net
cash used in operating activities: |
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Gain on investment |
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(8 |
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— |
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Charge for impaired investment |
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1 |
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16 |
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Cash provided by discontinued operations |
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— |
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95 |
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Cash transferred to discontinued operations |
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(93 |
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(107 |
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Increase (decrease) in cash from changes
in working capital items: |
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Prepaid
expenses and other current assets and other receivable |
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411 |
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157 |
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Accounts payable |
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(64 |
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97 |
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Accrued expenses and other current liabilities |
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8 |
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(13 |
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Net cash used in operating activities |
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(132 |
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(566 |
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Cash flows from investing activities: |
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Other, net |
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— |
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5 |
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Net cash provided by investing activities |
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— |
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5 |
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Net decrease in cash and cash equivalents |
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(132 |
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(561 |
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Cash and cash equivalents, beginning of period |
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16,576 |
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16,134 |
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Cash and cash equivalents, end of period |
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$ |
16,444 |
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$ |
15,573 |
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Supplemental disclosure of cash flow information: |
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Cash paid during the period for: |
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Income taxes |
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$ |
1 |
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$ |
3 |
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See the accompanying Notes to Condensed Consolidated Financial Statements.
6
SIMON WORLDWIDE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared by Simon
Worldwide, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and
Exchange Commission regarding interim financial reporting. Accordingly, they do not include all of
the information and footnotes in accordance with accounting principles generally accepted in the
United States of America for complete financial statements and should be read in conjunction with
the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2008.
In the opinion of management, the accompanying unaudited condensed consolidated financial
statements contain all adjustments, consisting only of those considered necessary for fair
presentation of the Company’s financial position, results of operations, and cash flows at the
dates and for the periods presented.
Prior to August 2001, the Company was a multi-national, full service promotional marketing company.
In August 2001, McDonald’s Corporation (“McDonald’s”), the Company’s principal customer,
terminated its 25-year relationship with the Company as a result of the embezzlement by a former
Company employee of winning game pieces from McDonald’s promotional games administered by the
Company. Other customers also terminated their relationships with the Company, resulting in the
Company no longer having a business. By April 2002, the Company had effectively eliminated a
majority of its ongoing promotions business operations and was in the process of disposing of its
assets and settling its liabilities related to the promotions business and defending and pursuing
litigation with respect thereto. 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. During the second quarter of 2002, the discontinued activities of the
Company, consisting of revenues, operating costs, certain general and administrative costs and
certain assets and liabilities associated with the Company’s promotions business, were classified
as discontinued operations for financial reporting purposes.
The Company had one stock-based compensation plan at March 31, 2009, and December 31, 2008. See
Note 3.
At March 31, 2009, and December 31, 2008, the Company had a passive investment in a limited
liability company controlled by an affiliate. See Note 5.
The operating results for the three months ended March 31, 2009, are not necessarily indicative of
the results to be expected for the full year.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 2008, the FASB issued Staff Position (FSP) FAS 157-2, “Effective Date of FASB Statement
No. 157,” which defers the implementation for the non-recurring nonfinancial assets and liabilities
from fiscal years beginning after November 15, 2007, to fiscal years beginning after November 15,
2008. The remaining provisions of SFAS 157 did not have a material effect on the Company’s
consolidated statements of financial position or results of operations when they became effective
for the Company on January 1, 2009.
In December 2007, the FASB issued Statement of Financial Accounting Standard No. 141R, “Business
Combinations,” (“SFAS 141R”) which replaces SFAS No. 141, “Business Combinations.” SFAS 141R
requires the acquiring entity in a business combination to record all assets acquired and
liabilities assumed at their acquisition-date fair values, (ii) changes the recognition of assets
acquired and liabilities assumed arising from contingencies, (iii) requires contingent
consideration to be recognized at its fair value on the acquisition date and, for certain
arrangements, requires changes in fair value to be recognized in earnings until settled, (iv)
requires companies to revise any previously issued post-acquisition financial information to
reflect any adjustments as if they had been recorded on the acquisition date, (v) requires the
reversals of valuation allowances related to acquired deferred tax assets and changes to acquired
income tax uncertainties to be recognized in earnings, and (vi) requires the expensing of
acquisition-related costs as incurred. SFAS 141R also requires additional disclosure of information
surrounding a business combination to enhance financial statement users’ understanding of the
nature and financial impact of the business combination. SFAS No. 141R applies to business
combinations for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008, with the exception of accounting for
changes in a valuation allowance for acquired deferred tax assets and the resolution of
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uncertain tax positions accounted for under FIN 48, “Accounting for Uncertainty in Income Taxes—an
interpretation of FASB Statement No. 109,” which was effective on January 1, 2009, for all
acquisitions. The adoption of SFAS 141R did not have a material effect on the Company’s
consolidated statements of financial position or results of operations.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial
Statements — An Amendment of ARB No. 51,” (“SFAS 160”). SFAS 160 establishes accounting and
reporting standards for the non-controlling interest in a subsidiary. SFAS 160 also requires that
a retained noncontrolling interest upon the deconsolidation of a subsidiary be initially measured
at its fair value. Upon adoption of SFAS 160, the Company will be required to report its
noncontrolling interests as a separate component of stockholders’ equity. The Company will also be
required to present net income allocable to the noncontrolling interests and net income
attributable to the stockholders of the Company separately in its consolidated statements of
operations. SFAS 160 requires retroactive adoption of the presentation and disclosure requirements
for existing minority interests. All other requirements of SFAS 160 shall be applied
prospectively. SFAS 160 will be effective for the Company’s 2009 fiscal year. The adoption of SFAS
160 did not have a material impact on the Company’s consolidated statements of financial position
or results of operations.
2. Absence of Operating Business; Going Concern
As a result of the loss of its customers, the Company no longer has any operating business. Since
August 2001, the Company has concentrated its efforts on reducing its costs and settling numerous
claims, contractual obligations, and pending litigation. As a result of these efforts, the Company
has been able to resolve a significant number of outstanding liabilities that existed at December
31, 2001, or arose subsequent to that date. At March 31, 2009, the Company had reduced its
workforce to 4 employees from 136 employees at December 31, 2001. The Company is currently managed
by the Chief Executive Officer and principal financial officer, Greg Mays, together with an acting
general counsel.
At March 31, 2009, and December 31, 2008, the Company had stockholders’ equity of $16.5 million and
$16.9 million, respectively. For the three months ended March 31, 2009 and 2008, the Company had a
net loss from continuing operations of $(0.4) million and $(0.8) million, respectively. The
Company continues to incur losses in 2009 within its continuing operations for the general and
administrative expenses being incurred to manage the affairs of the Company and resolve outstanding
legal matters. By utilizing cash received pursuant to the settlement with McDonald’s in 2004, $2.1
million received from Yucaipa AEC in July 2008 and March 2009 (see Note 5), and $1.75 million
received in settlement of the Company’s lawsuit against PricewaterhouseCoopers LLC, management
believes it has sufficient capital resources and liquidity to operate the Company for the
foreseeable future. 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 approximately $12 million, the Company recorded a gain of approximately $25 million in 2004.
However, as a result of significant losses from operations, a lack of any operating revenue and a
potential liquidation in connection with the Recapitalization Agreement described below, the
Company’s independent registered public accounting firm has expressed substantial doubt about the
Company’s ability to continue as a going concern. The accompanying condensed consolidated
financial statements do not include any adjustments that might result from the outcome of these
uncertainties.
The Board of Directors 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. 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.
In connection with the Recapitalization Agreement described below, and in the event that the
Company does not consummate a business combination by the later of (i) December 31, 2010 or (ii)
December 31, 2011 in the event that a letter of intent, an agreement in principle or a definitive
agreement to complete a business combination was executed on or prior to December 31, 2010 but the
business combination was not consummated prior to such time, and no qualified offer have been
previously consummated, the officers of the Company will take all such action necessary to dissolve
and liquidate the Company as soon as reasonably practicable.
Notwithstanding the foregoing, the Company will not be required to be dissolved and liquidated if
Overseas Toys, L. P. (“Overseas Toys”), the Company’s largest shareholder, and/or any affiliate
thereof shall have made a qualified offer no earlier than one hundred and twenty (120) days and at
least sixty (60) days prior to the termination date and shall have
8
consummated such qualified offer by having purchased all shares of stock properly and timely
tendered and not withdrawn pursuant to the terms of the qualified offer.
On June 11, 2008, the Company entered into an Exchange and Recapitalization Agreement (the
“Recapitalization Agreement”) with Overseas Toys, the holder of all the outstanding shares of
preferred stock of the Company, pursuant to which all the outstanding preferred stock would be
converted into shares of common stock representing 70% of the shares of common stock outstanding
immediately following the conversion. The Recapitalization Agreement was negotiated on the
Company’s behalf by the Special Committee of disinterested directors which, based in part upon the
opinion of the Special Committee’s financial advisor, determined that the transaction was fair to
the holders of common stock from a financial point of view. At a special meeting held on September
18, 2008, the stockholders of the Company approved amendments to the Company’s certificate of
incorporation proposed in order to effect a recapitalization of the Company pursuant to the terms
of the Recapitalization Agreement.
In the exchange, the Company issued 37,940,756 shares of common stock with a fair value of $15.2
million in exchange for 34,717 shares of preferred stock (representing all outstanding preferred
shares) with a carrying value of $34.7 million and related accrued dividends of approximately
$147,000. The Company recorded $19.7 million to retained earnings in September 2008 representing
the excess of carrying value of the preferred stock received over the fair market value of the
common shares issued as such difference essentially represents a return to the Company.
The Company has federal net operating loss carryforwards (“NOLs”) of approximately $65.3 million
and state NOLs of approximately $35.1 million that may, subject to applicable tax rules, be used to
reduce certain income tax obligations in the future. In 2008, California suspended the ability of
businesses to use California NOLs to reduce California income tax obligations for tax years 2008
and 2009. Based on a review of the Company’s NOLs by its outside tax advisors and with the
exception of the two-year NOL suspension implemented by California in 2008, the Company does not
anticipate that the recapitalization will materially or adversely impact the Company’s ability to
use its NOLs.
3. Stock Plan
1993 Omnibus Stock Plan
Under its 1993 Omnibus Stock Plan, as amended (the “Omnibus Plan”), which terminated in May 2003
except for 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, and in general, 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.
Options granted under this plan generally became exercisable in three equal installments commencing
on the first anniversary of the date of grant. Options granted during 2003 became 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.
There were no stock options granted during the three months ended March 31, 2009 or 2008.
9
The following summarizes the status of the Company’s stock options as of March 31, 2009, and
changes for the three months then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Exercise |
|
|
Shares |
|
Price |
Outstanding at the beginning of period |
|
|
100,000 |
|
|
$ |
2.59 |
|
Granted |
|
|
— |
|
|
|
— |
|
Exercised |
|
|
— |
|
|
|
— |
|
Expired or forfeited |
|
|
(35,000 |
) |
|
|
5.69 |
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period |
|
|
65,000 |
|
|
|
0.92 |
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at end of period |
|
|
65,000 |
|
|
$ |
0.92 |
|
|
|
|
|
|
|
|
|
|
|
Options available for future grant |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of
options granted during period |
|
Not applicable |
|
|
|
|
The following table summarizes information about stock options outstanding at March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of |
|
|
|
|
|
|
Average |
|
|
Weighted |
|
|
Aggregate |
|
|
|
|
|
|
Weighted |
|
|
Aggregate |
|
Exercise |
|
|
Number |
|
|
Remaining |
|
|
Average |
|
|
Intrinsic |
|
|
Number |
|
|
Average |
|
|
Intrinsic |
|
Prices |
|
|
Outstanding |
|
|
Contractual Life |
|
|
Price |
|
|
Value |
|
|
Exercisable |
|
|
Price |
|
|
Value |
|
|
$ 0.10 |
|
|
- |
|
|
$ |
1.99 |
|
|
|
55,000 |
|
|
|
4.10 |
|
|
$ |
0.10 |
|
|
$ |
13,750 |
|
|
|
55,000 |
|
|
$ |
0.10 |
|
|
$ |
13,750 |
|
$ 2.00 |
|
|
- |
|
|
$ |
5.38 |
|
|
|
5,000 |
|
|
|
1.99 |
|
|
|
2.00 |
|
|
|
— |
|
|
|
5,000 |
|
|
|
2.00 |
|
|
|
— |
|
$ 7.56 |
|
|
- |
|
|
$ |
8.81 |
|
|
|
5,000 |
|
|
|
0.99 |
|
|
|
8.81 |
|
|
|
— |
|
|
|
5,000 |
|
|
|
8.81 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 0.10 |
|
|
- |
|
|
$ |
8.81 |
|
|
|
65,000 |
|
|
|
3.70 |
|
|
$ |
0.92 |
|
|
|
|
|
|
|
65,000 |
|
|
$ |
0.92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value,
based on the Company’s closing stock price of $.35 on March 26, 2009, as this was the most recently
available closing stock price.
4. Discontinued Operations
By April 2002, the Company had effectively eliminated a majority of its on-going promotions
business operations. Accordingly, the discontinued activities of the Company have been classified
as discontinued operations in the accompanying condensed consolidated financial statements. If
necessary, 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.
10
Assets and liabilities related to discontinued operations at March 31, 2009, and December 31, 2008,
as disclosed in the accompanying condensed consolidated financial statements, consist of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
177 |
|
|
$ |
84 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
177 |
|
|
|
84 |
|
Other assets |
|
|
363 |
|
|
|
436 |
|
|
|
|
|
|
|
|
Assets from discontinued operations to be disposed of |
|
$ |
540 |
|
|
$ |
520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Accrued expenses and other current liabilities |
|
$ |
540 |
|
|
$ |
520 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
540 |
|
|
|
520 |
|
|
|
|
|
|
|
|
Liabilities from discontinued operations |
|
$ |
540 |
|
|
$ |
520 |
|
|
|
|
|
|
|
|
Net income from discontinued operations for the three months ended March 31, 2009 and 2008, as
disclosed in the accompanying condensed consolidated financial statements, consists of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
|
|
ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
Net sales |
|
$ |
— |
|
|
$ |
— |
|
Cost of sales |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
Gross profit |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
General and administrative expenses |
|
|
94 |
|
|
|
131 |
|
Gain on settlements (Note 7) |
|
|
— |
|
|
|
(82 |
) |
|
|
|
|
|
|
|
Operating income |
|
|
(94 |
) |
|
|
(49 |
) |
|
Interest income |
|
|
— |
|
|
|
13 |
|
|
|
|
|
|
|
|
Net income from discontinued operations |
|
|
(94 |
) |
|
|
(36 |
) |
Income tax provision |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
Net income |
|
$ |
(94 |
) |
|
$ |
(36 |
) |
|
|
|
|
|
|
|
5. Long-term Investments
YUCAIPA AEC ASSOCIATES
At March 31, 2009, the Company held an investment in Yucaipa AEC Associates, LLC (“Yucaipa AEC”), a
limited liability company that is controlled by Yucaipa, which also controls the largest holder of
the Company’s common stock. Yucaipa AEC, in turn, primarily held an equity investment in the
Source Interlink Companies (“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, which was 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 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 from the cost method to the equity method for periods
ending after July 1, 2004.
11
On February 28, 2005, Alliance merged with Source. Inasmuch as Source is a publicly traded
company, the Company’s pro rata investment in Yucaipa AEC, 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, which does not reflect any discount for illiquidity. Accordingly, on February 28, 2005,
the date of closing of the merger to reflect its share of the gain upon receipt of the Source
shares by Yucaipa AEC, the Company recorded an unrealized gain to accumulated other comprehensive
income of $11.3 million, which does not reflect any discount for illiquidity. As the Company’s
investment in Yucaipa AEC is accounted for under the equity method, the Company adjusts its
investment based in its pro rata share of the earnings and losses of Yucaipa AEC. In addition, the
Company recognizes its share in the other comprehensive income (loss) of Yucaipa AEC on the basis
of changes in the fair value of Source through an adjustment in the unrealized gains and losses in
the accumulated other comprehensive income component of stockholders’ equity. There were
adjustments totaling $.1 million during the three months ended March 31, 2009, which increased the
recorded value of the Company’s investment in Yucaipa AEC to $.2 million. Subsequently, on April
28, 2009, Source filed a pre-packaged Plan of Reorganization under Chapter 11 of the U.S.
Bankruptcy Code and the Company expects to lose its equity in Source in connection with the
bankruptcy. Accordingly, the Company reduced the value of its Source investment to $0 as of March
31, 2009. The Company has no power to dispose of or liquidate its holding in Yucaipa AEC which
power is held by Yucaipa AEC.
During 2008, the Company received $1.75 million from Yucaipa AEC in connection with a December 2007
sale of one of its holdings. The Company received an additional $350,000 in March 2009 as payment
for a receivable on its December 31, 2008, balance sheet for additional amounts due related to this
transaction. Accordingly, the Company’s total gain related to the sale of this holding was $2.1
million which was included in the Company’s consolidated statement of operations for the year ended
December 31, 2008.
The Yucaipa AEC investment, along with a separate investment in a technology related company of
approximately $160,000, is included in the investments line item on the balance sheet.
OTHER 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 had
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.
At March 31, 2009, and December 31, 2008, the carrying values of other investments were
approximately $25,000 and $21,000, respectively. These are presented as part of other assets in
the consolidated balance sheets. During the three months ended March 31, 2009 and 2008, the
Company recorded investment impairments of approximately $1,000 and $16,000, respectively, to
adjust the recorded value of its other investments to the estimated future undiscounted cash flows
the Company expects from such investments due to management’s determination that the decline in
fair value of certain investments below their cost bases were other-than-temporary. Of the
approximately $25,000 carrying value of other investments at March 31, 2009, and in accordance with
the fair value hierarchy contained in Statement of Financial Accounting Standard No. 157, “Fair
Value Measurements,” approximately $18,000 was valued using quoted prices in active markets for
identical assets or liabilities (Level 1) and approximately $7,000 was valued using significant
unobservable inputs (Level 3) such as current results, trends and future prospects, capital market
conditions, and other economic factors.
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.
12
6. Earnings Per Share Disclosure
The following is a reconciliation of the numerators and denominators of the basic and diluted EPS
computation for “loss available to common stockholders” and other related disclosures required by
FASB Statement No. 128, “Earnings per Share,” (in thousands, except share and per share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
Income |
|
|
Shares |
|
|
Per Share |
|
|
Income |
|
|
Shares |
|
|
Per Share |
|
|
|
(Numerator) |
|
|
(Denominator) |
|
|
Amount |
|
|
(Numerator) |
|
|
(Denominator) |
|
|
Amount |
|
Basic and Diluted EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
$ |
(387 |
) |
|
|
|
|
|
|
|
|
|
$ |
(811 |
) |
|
|
|
|
|
|
|
|
Preferred stock dividends |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
(340 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
available to common stockholders |
|
$ |
(387 |
) |
|
|
54,201,080 |
|
|
$ |
(0.01 |
) |
|
$ |
(1,151 |
) |
|
|
16,260,324 |
|
|
$ |
(0.07 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations |
|
$ |
(94 |
) |
|
|
54,201,080 |
|
|
$ |
(0.00 |
) |
|
$ |
(36 |
) |
|
|
16,260,324 |
|
|
$ |
(0.00 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(481 |
) |
|
|
|
|
|
|
|
|
|
$ |
(847 |
) |
|
|
|
|
|
|
|
|
Preferred stock dividends |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
(340 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common stockholders |
|
$ |
(481 |
) |
|
|
54,201,080 |
|
|
$ |
(0.01 |
) |
|
$ |
(1,187 |
) |
|
|
16,260,324 |
|
|
$ |
(0.07 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2008, 4,107,281 shares, respectively, on a converted basis of
convertible preferred stock (see Note 8) were not included in the computation of diluted EPS,
because to do so would have been antidilutive. There was no convertible preferred stock
outstanding during the three months ended March 31, 2009. Also, during the three months ended
March 31, 2009 and 2008, 88,000 and 175,000 shares, respectively, 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 did not exceed the weighted average exercise price of such options, because
to do so would have been antidilutive.
7. Note Receivable and Gain on Settlement
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, the assumption of $3.7
million of debt, 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. Because the Company remained secondarily liable under the Winthrop lease
restructuring, recognizing a liability at inception for the fair value of the obligation was 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. The available amount under this letter of credit reduced over time as the underlying
obligation to Winthrop reduced. 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.
13
In December 2005, the Company received notification that 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. Upon default by Cyrk and if such default is not cured within 15 days after
receipt of written notice of default from the Company, Cyrk’s $2.3 million subordinated note
payable to the Company, which was forgiven by the Company in 2003, was subject to reinstatement.
After evaluating its alternatives in December 2005 and providing written notice to Cyrk in January
2006, such $2.3 million subordinated note payable was reinstated in January 2006 pursuant to a
Settlement Agreement and Mutual General Release with Cyrk as explained in the following paragraph.
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 did not default
on the New Subordinated Note or in the event of payment in full, the Company agreed not to enter
the Confession of Judgment relating to the Old Subordinated Note 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. Through August 31, 2008, the
Company collected $1.3 million from Cyrk under the New Subordinated Note. Cyrk did not make a
timely payment on September 1, 2008, and has made no payments since. As a result, the Company
filed the Confession of Judgment in the state of Washington on November 14, 2008, and is in the
process of attempting to execute on the judgment. There is no assurance that the Company will be
successful in enforcing the Confession of Judgment and collecting any further payments.
During the three months ended March 31, 2008, approximately $90,000 in payments were received by
the Company pursuant to the New Subordinated Note. Such amounts received, less imputed interest,
are included in gain on settlement in Note 4.
At March 31, 2009, an allowance was recorded for the balance of the New Subordinated Note totaling
$.3 million as collectibility is not reasonably assured based on the Company’s experience of prior
arrangements with Cyrk including the default of the Winthrop obligation and settlement of
controversy noted above, and as Cyrk did not make a timely payment on September 1, 2008, and has
made no payments since.
8. Redeemable Preferred Stock
In November 1999, Overseas Toys, L.P., an affiliate of Yucaipa, a Los Angeles, California based
investment firm, invested $25 million into the Company in exchange for preferred stock and a
warrant to purchase additional preferred stock. Under the terms of the investment, the Company
issued 25,000 shares of a newly authorized senior cumulative participating convertible preferred
stock (“preferred stock”) to Yucaipa for $25 million. Yucaipa was 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.
Yucaipa had voting rights equivalent to the number of shares of common stock into which their
preferred stock was convertible on the relevant record date and had the right to appoint a total of
three directors to the Company’s seven-member Board of Directors and to designate the Chairman of
the Board. Also, Yucaipa was entitled to receive an annual dividend equal to 4%, paid quarterly, of
the base liquidation preference of $1,000 per share outstanding, payable in cash or in-kind at the
Company’s option.
In the event of liquidation, dissolution or winding up of the affairs of the Company, Yucaipa, as
holder of the preferred stock, would have been 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 were 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 was made to other stockholders. The preferred stock was subject to
a mandatory offer of redemption if a change in control of the Company occurs.
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See Note 2 for information regarding the Recapitalization Agreement, which was subsequently
approved by shareholders on September 18, 2008, pursuant to which the preferred stock was converted
to common stock.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of the financial condition and results of operations of the Company
for the three months ended March 31, 2009, as compared to the same period in the previous year.
This discussion should be read in conjunction with the condensed consolidated financial statements
of the Company and related Notes included elsewhere in this Form 10-Q.
Forward-Looking Statements and Associated Risks
From time to time, the Company may provide forward-looking information such as forecasts of
expected future performance or statements about the Company’s plans and objectives, including
certain information provided below. These forward-looking statements are based largely on the
Company’s expectations and are subject to a number of risks and uncertainties, certain of which are
beyond the Company’s control. The Company wishes to caution readers that actual results may differ
materially from those expressed in any forward-looking statements made by, or on behalf of, the
Company including, without limitation, as a result of factors described in Item 1A. Risk Factors
included in the Company’s December 31, 2008, Form 10-K for Purposes of the “Safe Harbor” Provisions
of the Private Securities Litigation Reform Act of 1995.
General
Prior to August 2001, the Company was a multi-national, full service promotional marketing company.
In August 2001, McDonald’s Corporation (“McDonald’s”), the Company’s principal customer,
terminated its 25-year relationship with the Company as a result of the embezzlement by a former
Company employee of winning game pieces from McDonald’s promotional games administered by the
Company. Other customers also terminated their relationships with the Company, resulting in the
Company no longer having a business. By April 2002, the Company had effectively eliminated a
majority of its ongoing promotions business operations and was in the process of disposing of its
assets and settling its liabilities related to the promotions business and defending and pursuing
related litigation. During the second quarter of 2002, the discontinued activities of the Company,
consisting of revenues, operating costs, general and administrative costs, and certain assets and
liabilities associated with the Company’s promotions business, were classified as discontinued
operations for financial reporting purposes.
As a result of the loss of its customers, the Company no longer has any operating business. Since
August 2001, the Company has concentrated its efforts on reducing its costs and settling numerous
claims, contractual obligations, and pending litigation. As a result of these efforts, the Company
has been able to resolve a significant number of outstanding liabilities that existed at December
31, 2001, or arose subsequent to that date. At March 31, 2009, the Company had reduced its
workforce to 4 employees from 136 employees at December 31, 2001. The Company is currently managed
by the Chief Executive Officer and principal financial officer, Greg Mays, and an acting general
counsel.
Outlook
As a result of significant losses from operations, a lack of any operating revenue and a potential
liquidation in connection with the Recapitalization Agreement, described under “Liquidity and
Capital Resources,” the Company’s independent registered public accounting firm has expressed
substantial doubt about the Company’s ability to continue as a going concern. The accompanying
condensed consolidated financial statements do not include any adjustments that might result from
the outcome of these uncertainties. The Company has taken significant actions and will continue to
take further action to reduce its cost structure. The Board of Directors of the Company continues
to consider various alternative courses of action for the Company going forward, including possibly
acquiring or combining with one or more operating businesses. The Board of Directors has reviewed
and analyzed a number of proposed transactions and will continue to do so until it can determine a
course of action going forward to best benefit all shareholders. 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.
In connection with the Recapitalization Agreement described under “Liquidity and Capital
Resources,” and in the event that the Company does not consummate a business combination by the
later of (i) December 31, 2010 or (ii) December 31, 2011 in the event that a letter of intent, an
agreement in principle or a definitive agreement to complete a business combination was
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executed on or prior to December 31, 2010 but the business combination was not consummated prior to
such time, and no qualified offer have been previously consummated, the officers of the Company
will take all such action necessary to dissolve and liquidate the Company as soon as reasonably
practicable.
Notwithstanding the foregoing, the Company will not be required to be dissolved and liquidated if
Overseas Toys, L. P., the Company’s largest shareholder, and/or any affiliate thereof shall have
made a qualified offer no earlier than one hundred and twenty (120) days and at least sixty (60)
days prior to the termination date and shall have consummated such qualified offer by having
purchased all shares of stock properly and timely tendered and not withdrawn pursuant to the terms
of the qualified offer.
RESULTS OF CONTINUING AND DISCONTINUED OPERATIONS
The discontinued activities of the Company have been classified as discontinued operations in the
accompanying condensed consolidated financial statements. Continuing operations represent the costs
required to maintain the Company’s current corporate infrastructure that will enable the Board of
Directors to pursue various alternative courses of action going forward. These costs primarily
consist of the salaries and benefits of executive management and corporate finance staff,
professional fees, Board of Director fees, and space and facility costs. The Company’s continuing
operations and discontinued operations will be discussed separately, based on the respective
financial results contained in the accompanying condensed consolidated financial statements and
related notes.
RESULTS OF CONTINUING OPERATIONS
Three Months Ended March 31, 2009, Compared to Three Months Ended March 31, 2008
The Company generated no sales or gross profits during the three months ended March 31, 2009 and
2008.
General and administrative expenses totaled $.5 million during the three months ended March 31,
2009, compared to $.9 million during the same period in the prior year. The decrease was primarily
due to the absence of advisory and legal costs in 2009 associated with reviewing the
recapitalization of the Company by the Special Committee of independent directors during 2008.
Interest income totaled approximately $57,000 during the three months ended March 31, 2009,
compared to approximately $108,000 during the same period in the prior year. The Company had a
slightly higher average cash balance during the three months ended March 31, 2009, compared to the
same period in the prior year, but this was more than offset by a reduction in interest rates from
the three months ended March 31, 2008.
The Company recorded an investment impairment of $1,000 during the three months ended March 31,
2009, compared to $16,000 during the same period in the prior year. Such impairments were recorded
to adjust the recorded value of its investments accounted for under the cost method, which does not
include the Company’s investment in Yucaipa AEC, to the estimated future undiscounted cash flows
the Company expects from such investments.
Lastly, there was approximately $8,000 recorded to the Company’s consolidated statement of
operations for equity in the earnings of Yucaipa AEC for the three months ended March 31, 2009,
compared to $0 for the same period in the prior year.
RESULTS OF DISCONTINUED OPERATIONS
Three Months Ended March 31, 2009, Compared to Three Months Ended March 31, 2008
The Company generated no sales or gross profits during the three months ended March 31, 2009 and
2008.
The Company recorded general and administrative expenses of $.1 million during the three months
ended March 31, 2009 and 2008, which primarily consisted of adjustments to the recorded value of a
cash surrender value related asset.
The Company recorded a gain on settlement of approximately $.1 million during the three months
ended March 31, 2008, which represents payments received, net of imputed interest, related to the
New Subordinated Note from Cyrk.
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Interest income totaled approximately $13,000 during the three months ended March 31, 2008, which
represents imputed interest income earned on the New Subordinated Note from Cyrk.
LIQUIDITY AND CAPITAL RESOURCES
The matters discussed in the section “Absence of Operating Business; Going Concern” in Note 2 of
the “Notes to Condensed Consolidated Financial Statements” have had and will continue to have a
substantial adverse impact on the Company’s cash position. As a result of significant losses from
operations, a lack of any operating revenue and a potential liquidation in connection with the
Recapitalization Agreement described below, the Company’s independent registered public accounting
firm has expressed substantial doubt about the Company’s ability to continue as a going concern.
The accompanying condensed consolidated financial statements do not include any adjustments that
might result from the outcome of these uncertainties.
The Company continues to incur operating losses in 2009 within its continuing operations for the
general and administrative expenses incurred to manage the affairs of the Company and resolve
outstanding legal matters. Inasmuch as the Company no longer generates operating income and is
unable to borrow funds, the source of current and future working capital is expected to be cash on
hand and the recovery of certain long-term investments. By utilizing cash received pursuant to the
settlement with McDonald’s in 2004, $2.1 million received from Yucaipa AEC in July 2008 and March
2009 (see Note 5), and $1.75 million received in settlement of the Company’s lawsuit against
PricewaterhouseCoopers LLC, management believes it has sufficient capital resources and liquidity
to operate the Company for the foreseeable future.
The Board of Directors of the Company continues to consider various alternative courses of action
for the Company, 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. 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.
On June 11, 2008, the Company entered into an Exchange and Recapitalization Agreement (the
“Recapitalization Agreement”) with Overseas Toys, L. P. (“Overseas Toys”), the holder of all the
outstanding shares of preferred stock of the Company, pursuant to which all the outstanding
preferred stock would be converted into shares of common stock representing 70% of the shares of
common stock outstanding immediately following the conversion. The Recapitalization Agreement was
negotiated on the Company’s behalf by the Special Committee of disinterested directors which, based
in part upon the opinion of the Special Committee’s financial advisor, determined that the
transaction was fair to the holders of common stock from a financial point of view. At a special
meeting held on September 18, 2008, the stockholders of the Company approved amendments to the
Company’s certificate of incorporation proposed in order to effect a recapitalization of the
Company pursuant to the terms of the Recapitalization Agreement.
The Company has federal net operating loss carryforwards (“NOLs”) of approximately $65.3 million
and state NOLs of approximately $35.1 million that may, subject to applicable tax rules, be used to
reduce certain income tax obligations in the future. In 2008, California suspended the ability of
businesses to use California NOLs to reduce California income tax obligations for tax years 2008
and 2009. Based on a review of the Company’s NOLs by its outside tax advisors and with the
exception of the two-year NOL suspension implemented by California in 2008, the Company does not
anticipate that the recapitalization will materially or adversely impact the Company’s ability to
use its NOLs.
Continuing Operations
Working capital from continuing operations was $16.1 million and $16.6 million at March 31, 2009,
and December 31, 2008, respectively.
Net cash used in operating activities from continuing operations during the three months ended
March 31, 2009, totaled approximately $39,000 primarily due to a loss from continuing operations of
$.4 million partially offset by a net change in working capital items. Net cash used in operating
activities from continuing operations during the three months ended March 31, 2008, totaled $.6
million primarily due to a loss from continuing operations of $.8 million partially offset by a
change of $.2 million in working capital items.
There was nominal cash provided by investing activities during the three months ended March 31,
2009 and 2008.
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There were no financing activities from continuing operations during the three months ended March
31, 2009 and 2008.
On March 2, 2009, the Company received $350,000 from Yucaipa AEC in connection with a December 2007
sale of one of its holdings. This is in addition to the previously reported $1.75 million received
by the Company from Yucaipa AEC on July 10, 2008. The gain related to the sale of this holding was
included in the Company’s consolidated statement of operations included in the Company’s Form 10-K
for the year ended December 31, 2008.
The Company’s remaining investment in Yucaipa AEC totals approximately $12,000 at March 31, 2009.
This item, along with a separate investment in a technology related company of approximately
$160,000, is included in the investments line item on the balance sheet.
Discontinued Operations
Working capital from discontinued operations was a deficit of $.4 million at both March 31, 2009,
and December 31, 2008.
There was $.1 million net cash used in operating activities of discontinued operations during the
three months ended March 31, 2009, as discontinued operations required additional assets from
discontinued operations to cover liabilities from discontinued operations. There was nominal net
cash used in operating activities of discontinued during the three months ended March 31, 2008,
primarily due to the transfer of cash to discontinued operations from continuing operations
totaling approximately $107,000 as discontinued operations required additional assets to cover
liabilities from discontinued operations that were only partially offset by the receipt of payments
related to the New Subordinated Note from Cyrk totaling approximately $95,000.
There was no cash provided by investing activities from discontinued operations during the three
months ended March 31, 2009 and 2008.
There were no net cash flows from financing activities within discontinued operations during the
three months ended March 31, 2009 and 2008.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The disclosure required by this Item is not material to the Company because the Company does not
currently have any exposure to market rate sensitive instruments, as defined in this Item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of March 31, 2009, 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. Greg Mays, the
principal executive and principal financial officer of the Company, reviewed and participated in
this evaluation. Based on this evaluation, the principal executive and principal financial officer
of the Company concluded that the Company’s disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
Since the date of the evaluation noted 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 4T. CONTROLS AND PROCEDURES
Not applicable.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 1A. Risk Factors
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
Exhibits filed herewith:
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Certification of Greg Mays pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 |
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Certification of Greg Mays pursuant to Section 13a-14(b) of the Securities Exchange Act of
1934 and 18 U.S.C. Section 1350 |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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Date: May 14, 2009 |
SIMON WORLDWIDE, INC.
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/s/ Greg Mays
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Greg Mays |
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Chief Executive Officer and
Chief Financial Officer
(duly authorized signatory) |
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