e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended
December 31, 2007
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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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
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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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:
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Name of each exchange
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Title of each class
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on which registered
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Common Stock, $0.01 Par Value Per Share
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NONE
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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 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:
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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
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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(Do not check if a smaller
reporting company)
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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 June 30, 2007, the aggregate market value of voting
stock held by non-affiliates of the registrant was $6,816,285.
At March 24, 2008, 16,260,324 shares of the
registrant’s common stock were outstanding.
SIMON
WORLDWIDE, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007
INDEX
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PART I
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 had been
McDonald’s Corporation (“McDonald’s”), for
which 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 ongoing 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. 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, 2007, 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, 2007, the
Company had a stockholders’ deficit of $14.9 million.
For the year ended December 31, 2007, the Company had a net
loss of $1.8 million. The Company incurred losses within
its continuing operations in 2007 and continues to incur losses
in 2008 for the general and administrative expenses 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, 2007, the
Company’s significant loss from operations and lack of
operating revenue, 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, 2007, the Company held an investment in
Yucaipa AEC Associates, LLC (“Yucaipa AEC”), 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 in turn principally holds an investment in
the common stock of 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 for retailers. 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
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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 at the time of $10.0 million to write down
this investment.
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.
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, and
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.
As the Company’s investment in Yucaipa AEC is accounted for
under the equity method, the Company adjusts its investment
based on 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 the stockholders’
deficit. There were adjustments totaling $5.2 million
during 2007 which reduced the recorded value of the
Company’s investment in Yucaipa AEC. The Company has no
power to dispose of or liquidate its holding in Yucaipa AEC or
its indirect interest in Source which power is held by Yucaipa
AEC. Furthermore, in the event of a sale or liquidation of the
Source shares by Yucaipa AEC, the amount and timing of any
distribution of the proceeds of such sale or liquidation to the
Company is discretionary with Yucaipa AEC.
The Company is currently managed by J. Anthony Kouba, chief
executive officer, in consultation with a principal financial
officer and acting general counsel. In connection with such
responsibility, Mr. Kouba entered into an Executive
Services Agreement dated May 30, 2003, which was
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.
As previously reported on
Form 8-K
dated October 5, 2007, in September 2007 the Board
appointed a Special Committee of independent directors to review
the possible recapitalization of the Company which was approved
by the stockholders as a non-binding stockholder proposal at the
2007 annual meeting of stockholders. In the proposed
recapitalization, the outstanding preferred stock would be
converted into shares of common stock equal to 70% of the shares
outstanding following the recapitalization. The members of the
Special Committee are Joseph Bartlett and Allan Brown.
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, 2007, the
amount of the liquidation preference, which is equal to the sum
of the preferred stock outstanding plus accrued dividends, was
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$33.9 million, and the redemption value, which is equal to
the sum of the preferred stock outstanding plus accrued
dividends multiplied by 101%, was $34.2 million. As of
December 31, 2007, assuming conversion of all of the
convertible preferred stock and accrued dividends, Overseas Toys
L.P. would own approximately 20.1% 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, Stanton and the trusts 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. On April 18, 2006, George Golleher, the
third Yucaipa representative on the Board of Directors and
former co-chief executive officer, resigned from the Board of
Directors and Greg Mays, the Company’s chief financial
officer, was designated by Yucaipa to fill the vacancy created
Mr. Golleher’s resignation.
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 reduced. 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. 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.
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
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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 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. Through December 31, 2007, the
Company has collected $1.1 million from Cyrk under the New
Subordinated Note.
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 lack of
operating revenue, 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
$33.9 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.
As previously reported on
Form 8-K
dated October 5, 2007, in September 2007 the Board
appointed a Special Committee of independent directors to review
the possible recapitalization of the Company which was approved
by the stockholders as a non-binding stockholder proposal at the
2007 annual meeting of stockholders. In the proposed
recapitalization, the outstanding preferred stock would be
converted into shares of common stock equal to 70% of the shares
outstanding following the recapitalization. The members of the
Special Committee are Joseph Bartlett and Allan Brown.
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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 maintaining compliance with
Section 404 of the Sarbanes-Oxley Act of 2002. If
Section 404 compliance is not properly maintained, 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 $3.0 million as
of December 31, 2007.
Forward
Looking Information
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.
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Item 1B.
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Unresolved
Staff Comments
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Not applicable.
In September 2007, 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
$4,700, into which the Company relocated its remaining
scaled-down operations in 2004. For a summary of the
Company’s minimum rental commitments under all
non-cancelable operating leases as of December 31, 2007,
see Notes to Consolidated Financial Statements.
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Item 3.
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Legal
Proceedings
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As a result of the Jacobson embezzlement described above in
Item 1. Business, 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 the United States and Canadian cases settled,
except for any plaintiff who opted out of such settlements. The
opt-out periods have expired, and, to the Company’s
knowledge, no one who has opted out of any of the aforesaid
litigation has commenced any litigation against the Company.
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
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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. On March 14, 2007, the Court granted a
Motion for Summary Judgment brought by PWC entering judgment in
the matter in favor of PWC. The Company has appealed this ruling
and is seeking to reinstate the lawsuit.
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
investigate facts surrounding the alleged payment. The Company
has recorded a contingent loss liability of $.5 million
related to this matter.
On November 19, 2007, the Company was served with a Summons
and Complaint by Winthrop Resources Corporation alleging breach
of contract in connection with a lease the Company had entered
into for an enterprise inventory system. Following the sale of
the CPG business as described above under Item 1.
Business — 2001 Sale of Business, the bulk of the
lease obligations were assumed by the new Cyrk entity, but a
smaller portion relating to previously incurred consulting and
installation services was retained by the Company. The Company
made all monthly payments of $18,354 for the initial term, but
Winthrop contends that the lease was automatically renewed after
such initial term and consequently sued for breach of contract
when no further monthly payments were made. The Company believes
it has satisfied all its financial obligations to Winthrop and
is defending the lawsuit on that basis. The lawsuit is in the
early stages of discovery and it is difficult at this point to
predict what the ultimate outcome will be for the Company. The
complaint seeks damages in excess of $50,000. The Company
believes the Winthrop claim is without merit.
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Item 4.
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Submission
of Matters to a Vote of Security Holders
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None.
PART II
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Item 5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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Until May 3, 2002, the Company’s stock traded on The
Nasdaq Stock Market under the symbol SWWI. On May 3, 2002,
the Company’s stock was delisted by Nasdaq due to the fact
that the Company’s stock was trading at a price below the
minimum Nasdaq requirement. The following table presents, for
the periods indicated, the high and low sales prices of the
Company’s common stock as reported on the
over-the-counter
market in the Pink Sheets. Such
over-the-counter
market quotations reflect inter-dealer prices, without retail
mark-up,
mark-down, or commission and may not necessarily represent
actual transactions.
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2007
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2006
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High
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Low
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High
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Low
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First quarter
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$
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0.40
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$
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0.28
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$
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0.60
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$
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0.22
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Second quarter
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0.45
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0.31
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0.60
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0.30
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Third quarter
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0.50
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0.35
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0.42
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0.30
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Fourth quarter
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0.41
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0.31
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0.38
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0.25
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As of March 12, 2008, the Company had approximately 406
holders of record of its common stock. The last reported sale
price of the Company’s common stock on March 12, 2008,
was $.35.
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 2007, the Company did not repurchase any of its common
stock.
8
Stock
Performance Graph
The following graph assumes an investment of $100 on
December 31, 2002, and compares changes thereafter through
December 31, 2007, 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
part of 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 Cumulative Total Return
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
SWWI
|
|
|
$
|
100
|
|
|
|
$
|
76
|
|
|
|
$
|
165
|
|
|
|
$
|
278
|
|
|
|
$
|
367
|
|
|
|
$
|
506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NASDAQ
|
|
|
|
100
|
|
|
|
|
150
|
|
|
|
|
163
|
|
|
|
|
165
|
|
|
|
|
181
|
|
|
|
|
199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Russell 2000
|
|
|
|
100
|
|
|
|
|
128
|
|
|
|
|
140
|
|
|
|
|
146
|
|
|
|
|
169
|
|
|
|
|
164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See “Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters,” for
information on the Company’s equity compensation plans.
|
|
Item 6.
|
Selected
Financial Data
|
By April 2002, the Company had effectively eliminated a majority
of its ongoing promotions business operations. Accordingly, the
discontinued activities of the Company have been classified as
discontinued operations. The following selected financial data
has been derived from our audited financial statements and
9
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:
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except per share data)
|
|
|
Selected income statement data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Net loss
|
|
|
(2,093
|
)
|
|
|
(2,625
|
)
|
|
|
(2,684
|
)
|
|
|
(3,625
|
)
|
|
|
(5,270
|
)
|
Loss per common share available to common
shareholders — basic and diluted
|
|
|
(0.21
|
)
|
|
|
(0.23
|
)
|
|
|
(0.23
|
)
|
|
|
(0.29
|
)
|
|
|
(0.38
|
)
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net income (loss)
|
|
|
312
|
|
|
|
707
|
|
|
|
(478
|
)
|
|
|
24,261
|
(a)
|
|
|
(3,591
|
)
|
Earnings (loss) per common share available to common
shareholders — basic and diluted
|
|
|
0.02
|
|
|
|
0.04
|
|
|
|
(0.03
|
)
|
|
|
1.46
|
|
|
|
(0.22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Selected balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents(b)
|
|
$
|
16,134
|
|
|
$
|
17,637
|
|
|
$
|
16,473
|
|
|
$
|
18,892
|
|
|
$
|
10,065
|
|
Total assets
|
|
|
20,427
|
|
|
|
26,590
|
|
|
|
31,822
|
|
|
|
26,123
|
|
|
|
19,838
|
|
Redeemable preferred stock
|
|
|
33,696
|
|
|
|
32,381
|
|
|
|
31,118
|
|
|
|
29,904
|
|
|
|
28,737
|
|
Stockholders’ deficit
|
|
|
(14,868
|
)
|
|
|
(7,236
|
)
|
|
|
(841
|
)
|
|
|
(7,749
|
)
|
|
|
(27,213
|
)
|
|
|
|
(a) |
|
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. |
|
(b) |
|
Includes only non-restricted cash and cash included in
discontinued operations in the balance sheets of $408 and $163
as of December 31, 2006 and 2005, respectively. |
|
|
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
10
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 ongoing 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. 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, 2007, 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, 2007, the
Company had a stockholders’ deficit of $14.9 million.
For the year ended December 31, 2007, the Company had a net
loss of $1.8 million. The Company incurred losses within
its continuing operations in 2007 and continues to incur losses
in 2008 for the general and administrative expenses 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, 2007, the
Company’s significant loss from operations and lack of
operating revenue, 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 J. Anthony Kouba, chief
executive officer, in consultation with a principal financial
officer and acting general counsel. In connection with such
responsibilities, Mr. Kouba entered into an Executive
Services Agreement dated May 30, 2003, which was
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.
As previously reported on
Form 8-K
dated October 5, 2007, in September 2007 the Board
appointed a Special Committee of independent directors to review
the possible recapitalization of the Company which was approved
by the stockholders as a non-binding stockholder proposal at the
2007 annual meeting of stockholders. In the proposed
recapitalization, the outstanding preferred stock would be
converted into shares of
11
common stock equal to 70% of the shares outstanding following
the recapitalization. The members of the Special Committee are
Joseph Bartlett and Allan Brown.
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
liabilities. On an ongoing 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 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, 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 $3.0 million as
of December 31, 2007.
Investments are designated as
available-for-sale
in accordance with the provisions of Statement of Financial
Accounting Standard No. 115
(“SFAS No. 115”), “Accounting for
Certain Investments in Debt and Equity Securities,” and as
such, unrealized gains and losses are reported in the
accumulated other comprehensive income (loss) component of
stockholders’ deficit. Other investments, for which there
are no readily available market values, are accounted for under
the cost method and carried at the lower of cost or estimated
fair value. The Company assesses on a periodic basis whether
declines in fair value of investments below their amortized cost
are other than temporary. If the decline in fair value is judged
to be other than temporary, the cost basis of the individual
security is written down to fair value as a new cost basis and
the amount of the write-down is included in earnings. During
2007, 2006 and 2005, the Company recorded investment impairments
of approximately $2,000, $16,000 and $.2 million,
respectively, 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.
At December 31, 2007, the Company held an investment in
Yucaipa AEC Associates, LLC (“Yucaipa AEC”), 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 in turn principally holds an investment in
the common stock of 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 for retailers. 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 had a carrying value of
$10.0 million which was accounted for under the cost
method. In June 2002, certain
12
events occurred which indicated an impairment and the Company
recorded a pre-tax non-cash charge of $10.0 million to
write down this investment in June 2002.
The Company’s accounting policy for long-term investments
is considered critical because long-term investments represent
the Company’s most material asset other than cash. The
Company’s review for impairment relies heavily on its
ability to project future cash flows related to its cost basis
investments. Because these investments are in a portfolio of
primarily privately held companies, readily determinable market
values are not available. Consequently, the Company must use its
judgment in determining the related values of these investments
by considering current results, trends and future prospects,
capital market conditions, and other economic factors. The
Company accounts for its investment in Yucaipa AEC Associates
using the equity method in accordance with Emerging Issues Task
Force (“EITF”) Issue
No. 03-16,
“Accounting Investments in Limited Liability
Companies.”
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, and
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.
As the Company’s investment in Yucaipa AEC is accounted for
under the equity method, the Company adjusts its investment
based on 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 the stockholders’
deficit. There were adjustments during 2007 which reduced the
recorded value of the Company’s investment in Yucaipa AEC
totaling $5.2 million. The Company has no power to dispose
of or liquidate its holding in Yucaipa AEC or its indirect
interest in Source which power is held by Yucaipa AEC.
Furthermore, in the event of a sale or liquidation of the Source
shares by Yucaipa AEC, the amount and timing of any distribution
of the proceeds of such sale or liquidation to the Company is
discretionary with Yucaipa AEC.
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 2007, the Company recorded a nominal investment
impairment 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: (1) 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 (2) 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 November 19, 2007, the Company was served with a Summons
and Complaint by Winthrop Resources Corporation alleging breach
of contract in connection with a lease the Company had entered
into for an enterprise inventory system. Following the sale of
the CPG business as described above under Item 1.
Business — 2001 Sale of Business, the bulk of the
lease obligations were assumed by the new Cyrk entity, but a
smaller portion relating to previously incurred consulting and
installation services was retained by the Company. The Company
made all monthly payments of $18,354 for the initial term, but
Winthrop contends that the lease was automatically renewed after
such initial term and consequently sued for breach of contract
when no further monthly payments were made. The Company believes
it has satisfied all its financial obligations to Winthrop and
is defending the lawsuit on that basis. The lawsuit is in the
early stages of discovery and it is difficult at this point to
predict what the ultimate outcome will be for the Company. The
13
complaint seeks damages in excess of $50,000. The Company
believes the Winthrop claim is without merit. Accordingly, no
contingent loss liability has been recorded in connection with
this case.
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. Such
contingent loss liability remains on the Company’s balance
sheet at December 31, 2007.
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 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 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.
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 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.
Impairment
of Long-Lived Assets
Periodically, the Company assesses, based on undiscounted cash
flows, if there has been an impairment in the carrying value of
its long-lived assets and, if so, the amount of any such
impairment by comparing the estimated fair value 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.
Recently
Issued Accounting Standards
In July 2006, the Financial Accounting Standards Board
(“FASB”) issued FASB Interpretation No. 48
(“FIN 48”), “Accounting for Uncertainty in
Income Taxes-an interpretation of FASB Statement
No. 109,”
14
which prescribes a recognition threshold and measurement process
for recording in the financial statements uncertain tax
positions taken or expected to be taken in a tax return. In
addition, FIN 48 provides guidance on the derecognition,
classification, accounting in interim periods, and disclosure
requirements for uncertain tax positions. FIN 48 was
effective for fiscal years beginning after December 15,
2006. The Company’s adoption of FIN 48 on
January 1, 2007, did not have a material effect on the
Company’s consolidated statements of financial position or
results of operations.
In September 2006, the FASB issued Statement of Financial
Accounting Standard No. 157 (“SFAS 157”),
“Fair Value Measurements,” which provides guidance for
applying the definition of fair value to various accounting
pronouncements. SFAS 157 is effective for financial
statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years. The Company does not expect the adoption SFAS 157 to
have a material effect on its consolidated statements of
financial position or results of operations.
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 provisions of SFAS No. 157
will be applied prospectively. The statement provisions
effective as of January 1, 2008, are not expected to have a
material effect on the Company’s consolidated statements of
financial position or results of operations. The Company does
not believe that the remaining provisions will have a material
effect on the Company’s consolidated financial position and
results of operations when they become effective on
January 1, 2009.
In February 2007, the FASB issued Statement of Financial
Accounting Standard No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities-Including an
amendment of FASB Statement No. 115,”
(“SFAS 159”). SFAS 159 permits entities to
choose to measure many financial instruments and certain other
items at fair value at specified election dates and report
unrealized gains and losses in earnings on items for which the
fair value option has been elected. SFAS 159 is effective
for fiscal years beginning after November 15, 2007. The
Company is currently evaluating the effect that adoption of this
statement will have on the Company’s consolidated
statements of financial position and results of operations when
it becomes effective in 2008.
In December 2007, the FASB issued Statement of Financial
Accounting Standard
No. 141®
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 prospectively 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 uncertain tax positions accounted
for under FIN 48, which is effective on January 1,
2009, for all acquisitions. The Company is currently assessing
the impact, if any, of SFAS 141R on its consolidated
financial statements .
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
15
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 Company does not expect the
adoption of SFAS 160 will have a material impact on its
consolidated financial statements.
Significant
Contractual Obligations
The following table includes certain significant contractual
obligations of the Company at December 31, 2007:
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Payments Due by Period
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Less Than
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1-3
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4-5
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After 5
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Total
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1 Year
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Years
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Years
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Years
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(In thousands)
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Operating leases(a)
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$
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42
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$
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42
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$
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—
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$
|
—
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$
|
—
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(a) |
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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. |
Other
Commercial Commitments
The following table includes certain commercial commitments of
the Company at December 31, 2007:
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Total
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Committed at
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December 31,
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Total Committed at end of
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2007
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1 Year
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2 Years
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3 Years
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4 Years
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5 Years
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Thereafter
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(In thousands)
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Standby letters of credit
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$
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35
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$
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35
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$
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35
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$
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35
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$
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35
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$
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35
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$
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35
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The amount committed at December 31, 2007, relates to a
letter of credit provided by the Company to support the
Company’s periodic payroll tax obligations.
Results
of Continuing and Discontinued Operations
By April 2002, the Company had effectively eliminated a majority
of its ongoing promotions business operations and was in the
process of disposing of its assets and settling its liabilities
related to the promotions business. Accordingly, the
discontinued activities of the Company have been classified as
discontinued operations in the accompanying consolidated
financial statements. Continuing operations represent the direct
costs required to maintain the Company’s current corporate
infrastructure that will enable the Board of Directors to pursue
various alternative courses of action going forward. These costs
primarily consist of the salaries and benefits of executive
management and corporate finance staff, professional fees, board
of director fees, and space and facility costs. The
Company’s continuing operations and discontinued operations
will be discussed separately, based on the respective financial
results contained in the accompanying consolidated financial
statements and related notes.
Continuing
Operations
2007
Compared to 2006
There were no revenues during 2007 and 2006.
General and administrative expenses totaled $2.9 million in
2007 compared to $3.5 million in 2006. The decrease was
primarily due to lump sum payments totaling $.6 million
made in 2006 to certain directors upon
16
termination of their services to the Company in accordance with
their Executive Services Agreements and a reduction in labor
costs associated with the co-chief executive officer leaving the
Company, partially offset by costs associated with the holding
of the Company’s 2007 Annual Meeting of Stockholders on
July 19, 2007. 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.
Interest income totaled $.8 million in 2007 compared to
$.9 million in 2006. The decrease is primarily related a
decrease in the average fed funds rate, to which the
Company’s largest cash account in indexed, as well as a
decrease in the average unrestricted cash balance due to 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.
The Company recorded an investment gain during 2007 of
approximately $3,000, net of a nominal investment impairment of
approximately $2,000. During 2006, the Company recorded an
investment impairment of approximately $16,000. The investment
impairments were recorded to adjust the recorded value of its
investments accounted for under the cost method to the estimated
future undiscounted cash flows the Company expected from such
investments.
Redeemable preferred stock dividends totaled $1.32 million
in 2007 compared to $1.27 million in 2006. Dividends are
paid in additional shares of preferred stock, and accordingly,
any subsequent year’s dividend will be based on a larger
amount of preferred stock outstanding. Thus, each year’s
dividend increases at an annual rate of 4%, compounded
quarterly, in accordance with the terms of the preferred stock.
2006
Compared to 2005
There were no revenues during 2006 and 2005.
General and administrative expenses totaled $3.5 million in
2006 compared to $3.1 million in 2005. The increase was
primarily due to lump sum payments totaling $.6 million
made to certain directors upon termination of their services to
the Company in accordance with their Executive Services
Agreements and an increase in board fees of $.1 million due
to the net addition of two directors, partially offset by a
decrease in insurance costs and labor costs totaling
$.3 million, resulting from the former co-chief executive
officer’s termination of his services to the Company in the
second quarter of 2006.
Interest income totaled $.9 million in 2006 compared to
$.6 million in 2005. The increase is primarily related an
increase in the average fed funds rate, to which the
Company’s largest cash account in indexed, as well as an
increase in the average unrestricted cash balance due to the
Company’s Indemnification Trust which expired during 2006
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 being returned to
the Company.
The Company recorded investment impairments during 2006 and 2005
of approximately $16,000 and $.2 million, respectively, to
adjust the recorded value of its investments accounted for under
the cost method to the estimated future undiscounted cash flows
the Company expected from such investments.
Redeemable preferred stock dividends totaled $1.27 million
in 2006 compared to $1.22 million in 2005.
17
Discontinued
Operations
2007
Compared to 2006
There were no revenues or gross profit during 2007 and 2006. In
addition, there were approximately $47,000 of general and
administrative expenses during 2007 which related to adjustments
to decrease the recorded value of a cash surrender value related
asset. As the Company completed the liquidation of the
Company’s subsidiaries in Europe and Hong Kong, during the
first quarter of 2006, there were no general and administrative
expenses during 2006.
The Company recorded a gain on settlement of approximately
$.3 million during 2007 compared to $.7 million during
2006. These amounts represented collections, net of imputed
interest of approximately $45,000 during 2007 and $60,000 during
2006, related to the New Subordinated Note with Cyrk.
Other income (expense) was $0 during 2007 and $(27,000) during
2006. The amount for 2006 related to a loss on disposal of the
Company’s remaining subsidiaries in Europe and Hong Kong.
Interest income totaled approximately $45,000 during 2007 and
approximately $59,000 during 2006. These amounts relate to
imputed interest income earned on the New Subordinated Note with
Cyrk. As the Company receives payments, a greater portion of
such payment is allocated to principal and a lesser portion of
such payment is allocated to interest which accounts for the
decrease in interest income from 2006 to 2007.
2006
Compared to 2005
There were no revenues or gross profit during 2006 and 2005.
General and administrative expenses totaled $0 in 2006 compared
to $.2 million in 2005. The decrease was primarily due to
the completion of the liquidation of the Company’s
subsidiaries in Europe and Hong Kong, during the first quarter
of 2006.
During 2006, the Company recorded a gain on settlement of
approximately $.7 million which represented collections,
net of imputed interest of approximately $60,000, related to the
New Subordinated Note with Cyrk.
During 2005, the Company recorded a settlement loss related to a
settlement agreement with plaintiff on behalf of the class in an
action pending against the Company in Ontario Provincial Court
in Canada seeking restitution and damages on a
class-wide
basis alleging diversion from seeding in Canada of high-level
winning prizes in certain McDonald’s promotional games
administered by Simon Marketing. 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 paid $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.
Other income (expense) was $(27,000) during 2006 and
$.3 million during 2005. The amount for 2006 related to a
loss on disposal of the Company’s remaining subsidiaries in
Europe and Hong Kong. The amount for 2005 primarily related to a
decrease in a contingent loss accrual of $.8 million
related to a reduction in the Winthrop liability partially
offset by a contingent loss accrual of $.5 million related
to the HA-LO matter. See Item 3. Legal Proceedings.
Interest income totaled approximately $59,000 during 2006 and $0
during 2005. The 2006 amount relates to imputed interest income
earned on the New Subordinated Note with Cyrk. As the New
Subordinated Note with Cyrk began in 2006, there was no interest
income in 2005.
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, 2007, the Company’s significant loss from
operations and lack of operating revenue, the Company’s
independent registered public accounting firm has expressed
substantial doubt about the Company’s ability to continue
as a going concern.
18
The accompanying financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
The Company incurred losses within its continuing operations in
2007 and continues to incur losses in 2008 for the general and
administrative expenses 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, 2007 and 2006 was $15.7 million and
$16.8 million, respectively.
Net cash used in operating activities from continuing operations
during 2007 totaled $2.1 million, primarily due to a loss
from continuing operations resulting from the general and
administrative expenses 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 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 2006 totaled $2.6 million, primarily due to a loss
from continuing operations resulting from the general and
administrative expenses to manage the affairs of the Company and
resolve outstanding legal matters.
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 to manage the affairs of
the Company and resolve outstanding legal matters, partially
offset by a investment impairment charge of $.2 million.
There was nominal cash provided by investing activities during
2007.
Net cash provided by investing activities during 2006 totaled
$2.8 million primarily due to a decrease in restricted cash
resulting from the Company’s Indemnification Trust,
described below, expiring during 2006 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.
Net cash provided by investing activities during 2005 totaled
$.2 million, primarily due to a decrease in restricted cash.
There were no financing cash flows within continuing operations
during 2007, 2006, and 2005.
In March 2002, the Company, Simon Marketing and a Trustee
entered into an Indemnification Trust Agreement (the
“Trust”), which required the Company and Simon
Marketing to fund an irrevocable trust in the amount of
$2.7 million. The Trust was set up to augment the
Company’s existing insurance coverage for indemnifying
directors, officers, and certain described consultants, who were
entitled to indemnification against liabilities arising out of
their status as directors, officers
and/or
consultants. 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.
19
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.
There was no restricted cash included within continuing
operations at December 31, 2007 and 2006. There was,
however, restricted cash amounts included within discontinued
operations of $0 and $.2 million at December 31, 2007
and 2006, respectively.
Discontinued
Operations
Working capital deficit attributable to discontinued operations
at December 31, 2007 and 2006, was $.9 million and
$.2 million, respectively.
Net cash provided by operating activities within discontinued
operations during 2007 totaled $.4 million primarily due to
cash received pursuant to the New Subordinated Note with Cyrk.
In addition, there was $.4 million transferred from
discontinued operations to continuing operations as discontinued
operations already had sufficient assets from discontinued
operations to cover liabilities from discontinued operations.
Net cash provided by operating activities within discontinued
operations during 2006 totaled $.7 million primarily due to
cash received pursuant to the New Subordinated Note with Cyrk.
In addition, there was $.3 million transferred to
discontinued operations from continuing operations as
discontinued operations required additional assets from
discontinued operations to cover liabilities from discontinued
operations.
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 to discontinued 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.
Cash provided by investing activities of discontinued operations
totaled $.2 million, $.2 million, and
$2.4 million during 2007, 2006 and 2005, respectively,
primarily due to reductions in restricted cash.
There were no financing activities of discontinued operations
during 2007, 2006, and 2005.
As of December 31, 2004, the Company had approximately
$3.0 million in outstanding letters of credit with various
expiration dates through August 2007, 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 had agreed to indemnify the Company if Winthrop
made 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
20
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 and has recorded a contingent
loss liability of $.5 million related to this matter.
Restricted cash included within discontinued operations at
December 31, 2007 and 2006, totaled $0 and
$.2 million, respectively. The amount at December 31,
2006, consisted of amounts deposited with lenders to satisfy the
Company’s obligations pursuant to its outstanding standby
letters of credit. There was no restricted cash included within
continuing operations at December 31, 2007 and 2006.
Off-Balance
Sheet Arrangements
The Company has no off-balance sheet arrangements, investments
in special purpose entities, or undisclosed borrowings or debts.
In addition, the Company has no derivative contracts or
synthetic leases.
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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 consisted of
certain consolidated subsidiaries that were denominated in
foreign currencies. However, because the close-down of these
subsidiaries is complete, there are no assets or liabilities
remaining at these subsidiaries. As such, the Company is no
longer 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.
21
|
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Item 8.
|
Financial
Statements and Supplementary Data
|
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|
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Description
|
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Page
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F-1
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F-2
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F-3
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F-4
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F-5
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F-6
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22
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Inapplicable.
|
|
Item 9A(T).
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
As of December 31, 2007, 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, the principal executive officer of the Company, and Greg
Mays, the principal financial officer, reviewed and participated
in this evaluation. Based on this evaluation, the Company made
the determination that its disclosure controls were effective.
Report of
Management on Internal Control Over Financial
Reporting
The management of the Company is responsible for establishing
and maintaining adequate internal control over the
Company’s financial reporting as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Securities Exchange Act of 1934. Internal control over
financial reporting is the process designed to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of the Company’s financial
statements for external purposes in accordance with accounting
principles generally accepted in the United States of America.
There are inherent limitations in the effectiveness of internal
control over financial reporting, including the possibility that
misstatements may not be prevented or detected. Accordingly,
even effective internal controls over financial reporting can
provide only reasonable assurance with respect to financial
statement preparation. Furthermore, the effectiveness of
internal controls can change as circumstances change.
Management has evaluated the effectiveness of internal control
over financial reporting as of December 31, 2007, using
criteria described in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (“COSO”). Based on
management’s assessment, management concluded that the
Company’s internal control over financial reporting was
effective as of December 31, 2007.
This annual report does not include an attestation report of the
Company’s independent registered public accounting firm
regarding internal control over financial reporting.
Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that
permit the Company to provide only management’s report in
this annual report.
Changes
in Internal Control Over Financial Reporting
During the Company’s fourth fiscal quarter and 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.
|
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Item 9B.
|
Other
Information
|
None.
23
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
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, Stanton and the trusts
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 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) 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 also on March 27,
2006, which may be terminated by either party upon 90 days
written notice and 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.
24
The following table sets forth the names and ages of the
Directors, the years in which each individual has served as a
director:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Term
|
|
|
Name
|
|
Age
|
|
Class
|
|
Expires
|
|
Service as Director
|
|
Joseph W. Bartlett
|
|
|
74
|
|
|
|
I
|
|
|
|
2009
|
|
|
1993 to present
|
Allan I. Brown
|
|
|
67
|
|
|
|
I
|
|
|
|
2009
|
|
|
1999 to present
|
Joseph Anthony Kouba
|
|
|
60
|
|
|
|
III
|
|
|
|
2008
|
|
|
1997 to present
|
Greg Mays
|
|
|
61
|
|
|
|
II
|
|
|
|
2010
|
|
|
2004 to present
|
Erika Paulson
|
|
|
34
|
|
|
|
II
|
|
|
|
2010
|
|
|
2006 to present
1999 to 2001
|
Ira Tochner
|
|
|
46
|
|
|
|
II
|
|
|
|
2010
|
|
|
2006 to present
|
Terrence Wallock
|
|
|
63
|
|
|
|
III
|
|
|
|
2008
|
|
|
2006 to present
|
The Company held its 2007 Annual Meeting of Stockholders on
July 19, 2007, at which two Class I directors were
elected to serve for two-year terms, three Class II
directors were elected to serve for three-year terms, and two
Class III directors were elected to serve for one-year
terms.
At the Annual Meeting, all of the existing members of the Board
of Directors were re-elected. Following the meeting, the Board
of Directors continued to be: Joseph Bartlett and Allan Brown,
each serving as Class I Directors; Greg Mays, Erika Paulson
and Ira Tochner, each serving as Class II Directors; and
Joseph Anthony Kouba and Terrence Wallock, each serving as
Class III Directors.
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 Sonnenschein
Nath & Rosenthal LLP. From 2003 through January 2008,
he was of counsel to the law firm of Fish &
Richardson, P.C. 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. Kouba is a private investor and is engaged in
the business of real estate, hospitality, and outdoor
advertising. He has been an attorney and a member of the Bar in
California since 1972.
Mr. Mays is a consultant and private investor. He
has served as the Company’s chief financial officer since
May 2003. Throughout his career, Mr. Mays has held numerous
executive and financial positions, most recently as chairman of
the board of Wild Oats Markets, Inc. from July 2006 to August
2007. Mr. Mays also served 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 The Great
Atlantic & Pacific Tea Company, Inc.
Ms. Paulson is a partner of Yucaipa, which she
joined in 1997. Prior to joining Yucaipa, Ms. Paulson
served from August 1995 to July 1997 as a member of the
corporate finance division at Bear, Stearns & Co., Inc.
Mr. Tochner is a partner at Yucaipa. Prior to
joining Yucaipa in 1990, Mr. Tochner was a manager in the
audit division of Arthur Andersen & Co. He is also a
director of TDS Logistics, Inc., Ceiva Logic, Inc., and Aloha
Airlines.
25
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. Wallock also serves on the Board of Directors
of Source Interlink Companies Inc. and Carttronics L.L.C.
The Company’s ongoing operations are managed by
Mr. Kouba, who has served as chief executive officer since
May 2003, in consultation with Mr. Mays as Principal
Financial Officer and Mr. Wallock, the Company’s
acting general counsel.
Section 16(a)
Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the
Company’s directors, executive officers and holders of more
than 10% of the Company’s common stock on an as-converted
basis (collectively, “Reporting Persons”) to file with
the SEC initial reports of ownership and reports of changes in
ownership of common stock of the Company. Such persons are
required by regulations of the SEC to furnish the Company with
copies of all such filings. Based on its review of the copies of
such filings received by it with respect to the fiscal year
ended December 31, 2007 and written representations from
certain Reporting Persons, the Company believes that all
Reporting Persons complied with all Section 16(a) filing
requirements in the fiscal year ended December 31, 2007.
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), Brown, and Kouba. The Audit
Committee does not currently have a “financial
expert,” as defined in the rules of the Securities and
Exchange Commission, and required under rules applicable to
national stock exchanges. 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. In the event the Company should ever
qualify and seek relisting, the Company would be required to
have an audit committee financial expert.
|
|
Item 11.
|
Executive
Compensation
|
Compensation
Discussion and Analysis
Overview
The principal responsibilities of the Compensation Committee are:
|
|
|
|
•
|
to discharge the Board’s responsibilities relating to the
compensation of the Company’s directors, officers and key
employees;
|
|
|
•
|
to be responsible for the administration of the Company’s
incentive compensation and stock plans;
|
|
|
•
|
to be responsible for the review and recommendation to the Board
of the Company’s Compensation Discussion and
Analysis; and
|
|
|
•
|
to be responsible for the production of an annual report on
executive compensation for inclusion in the Company’s proxy
statement or
Form 10-K,
as applicable.
|
During 2007, the Compensation Committee met one time. At this
meeting, discussion focused on the review of the Company’s
compensation structure for non-employee directors by Pearl
Meyer & Partners which was engaged by the Company to
perform such review. Pearl Meyer was not engaged to review
compensation
26
paid to the Company’s executive officers and, accordingly,
did not provide advice on that topic. Based on the review
undertaken by Pearl Meyer, and in consideration of the role of
the Board of the Company, particularly the fact that it has also
operated as a management committee for the Company, the Board
considered it appropriate to leave the compensation structure
for directors unchanged. The Compensation Committee also
considered all compensation paid to management, including the
Chief Executive Officer and concluded that, in consideration of
the efforts needed in reviewing future transactions and other
matters currently facing the Company, current compensation
levels were appropriate.
Compensation
Philosophy and Objectives
The Compensation Committee has tried to structure compensation
to:
|
|
|
|
•
|
provide competitive compensation that will attract and retain
qualified officers and key employees;
|
|
|
•
|
reward officers and key employees for their contributions to the
Company; and
|
|
|
•
|
align officers’ and key employees’ interests with the
interests of shareholders.
|
The Compensation Committee endeavors to achieve these objectives
while at the same time providing for administrative costs to be
as low as possible.
Setting
Executive Compensation
The Company did not make any change to the compensation
arrangements existing prior to the beginning of 2007 for the
Company’s executive officers, as the Compensation Committee
determined that the existing arrangements were structured to
achieve the key objectives outlined above, which the
Compensation Committee believes will ultimately enhance
shareholder value.
The Compensation Committee considered various factors in
determining the amount of compensation, including wind-down of
the Company’s former promotions business operations,
additional responsibilities and potential liabilities assumed
resulting from the Sarbanes-Oxley Act of 2002, the completion of
projects critical to the Company’s long-term success, and
the Company’s need to retain experienced executives,
knowledgeable about the Company for ongoing administration as
well as future opportunities. These factors, however, were not
assigned individual mathematical weights when the Compensation
Committee made such determinations, and therefore, such
determinations were based on the Compensation Committee’s
judgment as to what is reasonable and appropriate. While the
Compensation Committee considered general market trends in
setting compensation levels under the Executive Services
Agreements, it did not benchmark compensation levels to specific
companies.
2007
Executive Compensation Components
As detailed below under the title “Executive Services
Agreements with Officers,” the agreements that the Company
has entered into with its executive officers are generally
terminable by the Company at any time by the lump sum payment of
one year’s compensation and by the executive upon one
year’s notice, provided that in certain circumstances, the
executive can resign immediately and receive a lump sum payment
of one year’s salary. The Executive Services Agreement with
Mr. Mays is terminable on 90 days notice by either the
Company or Mr. Mays. During any such notice period or for
the time with respect to which an equivalent payment is made,
the executive is entitled to receive health benefits from the
Company and provide for mutual releases upon termination. The
Company believes that it has structured its post-termination
payments so as to be able to attract needed talent, but to
minimize the magnitude of its post-termination financial
obligations. Given that the Company currently has no operating
business, the Compensation Committee has structured compensation
pursuant to the Executive Services Agreement to consist
exclusively of cash compensation, paid currently.
The Company has historically made equity awards to its directors
and executive officers, though did not make any such awards in
2007 as the Compensation Committee believed that the key
objectives of compensation outlined above were more
appropriately satisfied by cash compensation, paid currently,
pending
27
a refocus of the Company’s business. Previously, awards
were made pursuant to the terms of the Company’s 1993
Omnibus Stock Plan, which expired by its terms in 2003, and
pursuant to the terms of the Company’s 1997 Acquisition
Stock Plan, which expired by its terms on April 4, 2007,
although there are no outstanding awards granted under that
plan. The Company does not have any program, plan, or practice
of timing option grants to its executives in coordination with
the release of material non-public information and did not have
any such program, plan, or practice during 2007.
The Company has not formally adopted any stock ownership or
stock retention guidelines, in part due to the illiquid nature
of the Company’s stock.
Tax
and Accounting Implications
Deductibility
of Executive Compensation:
As part of its role, the Compensation Committee reviews and
considers the deductibility of executive compensation under
Section 162(m) of the Internal Revenue Code, which provides
that the Company may not deduct compensation of more than
$1,000,000 that is paid to certain individuals. Given the level
of compensation paid by the Company to its executive officers,
this $1,000,000 limitation has not been a limiting issue for the
Company in structuring its compensation.
Nonqualified
Deferred Compensation:
On October 22, 2004, the American Jobs Creation Act of 2004
was signed into law, changing the tax rules applicable to
nonqualified deferred compensation arrangements. While the
Company does not have any nonqualified deferred compensation
arrangements, the Company will continue to monitor these
regulations in order to be in compliance should it, in the
future, elect to make payments of nonqualified deferred
compensation.
Accounting
for Stock-Based Compensation:
Beginning on January 1, 2006, the Company began accounting
for stock-based payments in accordance with the requirements of
FASB Statement 123(R), “Share-based Payment.”
Summary
Compensation Table
The following table sets forth the compensation the Company paid
or earned by individuals who have served as principal executive
officer or principal financial officer during the year. The
Company has no other executive officers. During 2007 and 2006,
there were no bonuses, stock awards, option awards, non-equity
incentive plan compensation, pension earnings, or non-qualified
deferred compensation earnings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b)
|
|
|
|
|
|
|
(a)
|
|
All Other
|
|
|
Name and Principal Position
|
|
Year
|
|
Salary
|
|
Compensation
|
|
Total
|
|
J. Anthony Kouba
|
|
|
2007
|
|
|
$
|
350,000
|
|
|
$
|
78,000
|
(c)
|
|
$
|
428,000
|
|
Chief Executive Officer and Director
|
|
|
2006
|
|
|
|
350,000
|
|
|
|
88,000
|
(d)
|
|
|
438,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greg Mays
|
|
|
2007
|
|
|
|
210,000
|
|
|
|
66,000
|
(e)
|
|
|
276,000
|
|
Chief Financial Officer and Director
|
|
|
2006
|
|
|
|
210,000
|
|
|
|
289,467
|
(f)
|
|
|
499,467
|
|
|
|
|
(a) |
|
All cash compensation received by each individual in their
capacity as an executive officer consists of salary. |
|
(b) |
|
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 was less than $10,000. |
|
(c) |
|
Amount consists of $50,000 for board retainer and $28,000 for
board meeting fees. |
|
(d) |
|
Amount consists of $50,000 for board retainer and $38,000 for
board meeting fees. |
|
(e) |
|
Amount consists of $50,000 for board retainer and $16,000 for
board meeting fees. |
28
|
|
|
(f) |
|
Consists of $210,000 for severance paid for termination of 2003
Executive Services Agreement, $48,077 for board retainer,
$26,000 for board meeting fees, and $5,390 for other accrued
compensation paid. The Company and Mr. Mays subsequently
entered into a new agreement in March 2006 which provided for
the same annual salary and is terminable by either party upon
90 days notice. |
Grants of
Plan-Based Awards
There were no grants of equity or non-equity plan-based awards
during the last fiscal year.
Executive
Services Agreements with Officers
In May 2003, the Company entered into Executive Services
Agreements with Messrs. Kouba and Mays. 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 provide for compensation at the
rate of $6,731 per week to Messrs. Kouba and $4,040 per
week to Mr. Mays. 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, 2007, no such additional payments have
been made. The Agreements call for the payment of health
insurance benefits and provide for mutual releases upon
termination. Health benefits provided during 2007 by the Company
to Messrs. Kouba and Mays were $18,912 and $34,400,
respectively. 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 amendments health benefits are to be provided
during any notice period or for the time with respect to which
an equivalent payment is made. The Company entered into a new
Executive Services Agreement with Mr. Mays on
March 27, 2006, upon termination of his prior agreement. As
detailed below under the heading “Post-Employment
Compensation,” the New Executive Services Agreement to
which Mr. Mays is party does not provide for any payments
to Mr. Mays in the event of voluntary termination by
Mr. Mays and only 90 days payment to Mr. Mays in
the event of involuntary termination.
Outstanding
Equity Awards at Fiscal Year-End
The following table includes information relating to the value
of all unexercised options previously awarded to the executive
officers named above as of December 31, 2007. In addition,
there were no unexercisable options, unearned options, or stock
awards outstanding as of December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
Number of Securities
|
|
Option
|
|
Option
|
|
|
Underlying Unexercised
|
|
Exercise
|
|
Expiration
|
Name
|
|
Options Exercisable
|
|
Price
|
|
Date
|
|
J. Anthony Kouba
|
|
|
5,000
|
|
|
$
|
15.50
|
|
|
|
03/31/08
|
|
Chief Executive Officer and Director
|
|
|
20,000
|
|
|
|
5.38
|
|
|
|
02/23/09
|
|
|
|
|
5,000
|
|
|
|
7.56
|
|
|
|
03/31/09
|
|
|
|
|
5,000
|
|
|
|
8.81
|
|
|
|
03/31/10
|
|
|
|
|
5,000
|
|
|
|
2.00
|
|
|
|
03/30/11
|
|
|
|
|
20,000
|
|
|
|
0.10
|
|
|
|
05/09/13
|
|
Greg Mays
|
|
|
10,000
|
|
|
|
0.10
|
|
|
|
05/09/13
|
|
Chief Financial Officer and Director
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
Exercises and Stock Vested
There were no options exercised by the executive officers named
above during the year ended December 31, 2007. In addition,
the Company did not made any stock awards and there was no
vesting of stock awards during 2007.
29
Post-Employment
Compensation
The Company does not have any pension plans or non-qualified
deferred compensation arrangements.
As described in the “Executive Services Agreements with
Officers” section above, the Agreements with the executives
call for the payment of health insurance benefits and provide
for mutual releases upon termination. By amendments dated
May 3, 2004, the Agreements were amended to allow
termination at any time by the Company by the lump sum payment
of one year’s compensation and by the executive upon one
year’s notice, except in certain circumstances wherein the
executive can resign immediately and receive a lump sum payment
of one year’s salary. As detailed below, the New Executive
Services Agreement to which Mr. Mays is party is more
limited in its severance payments.
Potential
Payments upon Termination
Voluntary
Termination:
Mr. Kouba may voluntary terminate his Executive Services
Agreement with the Company under certain circumstances and
receive a lump sum payment in the amount of $350,000. The New
Executive Services Agreement between Mr. Mays and the
Company does not provide for any payment in the case of
voluntary termination.
Involuntary
Termination:
In the event that the Company terminates Mr. Kouba’s
Executive Services Agreement without cause, Mr. Kouba would
be entitled to receive a lump sum payment in the amount of
$350,000. The New Executive Services Agreement between
Mr. Mays and the Company does not provide for any payment
in the case of involuntary termination other than the
90-day
notice period which would total $52,500.
Retirement:
Neither Mr. Kouba’s Executive Services Agreement nor
Mr. Mays’ New Executive Services Agreement provides
for any payment in the case of retirement.
Change in
Control:
Mr. Kouba may terminate his Executive Services Agreement
with the Company within 6 months of a change in control and
receive a lump sum payment in the amount of $350,000. The New
Executive Services Agreement between Mr. Mays and the
Company does not provide for any payment in the case of a change
in control.
Health
Insurance Benefits:
In the event of voluntary or involuntary termination or a change
in control, Mr. Kouba and Mr. Mays would be entitled
to health insurance benefits at substantially the same benefit
level as provided during employment in the approximate amounts
of $28,368 and $53,412, respectively, paid in monthly
installments over an
18-month
period.
30
Directors’
Compensation
The following table provides compensation information for 2007
for each member of our Board of Directors except for board
members already disclosed in the Summary Compensation table
above. Also during 2007, there were no stock awards, option
awards, non-equity incentive plan compensation, pension
earnings, non-qualified deferred compensation earnings, or other
compensation:
|
|
|
|
|
|
|
|
|
|
|
Fees
|
|
|
|
|
|
|
Earned
|
|
|
|
|
|
|
or Paid
|
|
|
|
|
Name
|
|
in Cash(a)
|
|
|
Total
|
|
|
Joseph Bartlett
|
|
$
|
112,500
|
(b)
|
|
$
|
112,500
|
|
Allan Brown
|
|
|
107,500
|
(c)
|
|
|
107,500
|
|
Erika Paulson
|
|
|
62,000
|
(d)
|
|
|
62,000
|
|
Ira Tochner
|
|
|
64,000
|
(e)
|
|
|
64,000
|
|
Terry Wallock
|
|
|
66,000
|
(f)
|
|
|
66,000
|
|
|
|
|
(a) |
|
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 Committee meeting attended. The chairmen of the
Audit and the Compensation Committees also receive annual
retainers of $7,500 and $5,000, respectively, plus an additional
$500 for each committee meeting they chair. |
|
(b) |
|
Amount consists of $50,000 for board retainer, $33,000 for board
meeting fees, $12,000 in other board fees, $7,500 for Audit
Committee chair fee, and $10,000 as a fee for serving as member
of the Special Committee described under Item 1.
Business — General. Mr. Bartlett held 80,000
stock options, all of which were vested, at December 31,
2007. |
|
(c) |
|
Amount consists of $50,000 for board retainer, $30,500 for board
meeting fees, $12,000 in other board fees, $5,000 for
Compensation Committee chair fee, and $10,000 as a fee for
serving as member of the Special Committee described under
Item 1. Business — General. Mr. Brown held
20,000 stock options, all of which were vested, at
December 31, 2007. |
|
(d) |
|
Amount consists of $50,000 for board retainer and $12,000 for
board meeting fees. |
|
(e) |
|
Amount consists of $50,000 for board retainer and $14,000 for
board meeting fees. |
|
(f) |
|
Amount consists of $50,000 for board retainer and $16,000 for
board meeting fees. Mr. Wallock held 5,000 stock options,
all of which were vested, at December 31, 2007. |
As indicated above, the Company engaged Pearl Meyer &
Partners to review market practices and make general
recommendations with respect to non-employee director
compensation. In undertaking this review, Pearl Meyer reviewed a
range of companies across multiple business sectors with market
capitalizations of between $50 million and
$150 million. The Compensation Committee considered the
general findings made by Pearl Meyer and considered the nature
of the duties performed by the Company’s non-employee
directors and the challenges faced by the Company. Based on a
consideration of these factors, the Compensation Committee
concluded that it would leave in place the existing compensation
structure for its directors. The Compensation Committee believes
that the existing compensation structure is needed to retain
qualified advisors to the Company, ultimately enhancing
shareholder value, while at the same time providing for
administrative costs to be as low as possible.
Executive
Services Agreements with Directors
In May 2003, the Company entered into Executive Services
Agreements with Messrs. Bartlett, Brown, 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 ongoing administration as
well as future opportunities. The Agreements provide for
compensation at the rate of $1,000 per month to
Messrs. Bartlett and Brown, and $3,365 per week to
Mr. Wallock. Additional hourly compensation is provided
after termination of the Agreements and, in some
31
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.
During 2007, $20,000 of 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 at the expense of the Company for up to an
18-month
period following termination of services.
Compensation
Committee Interlocks and Insider Participation
The Compensation Committee consists of Messrs. Bartlett and
Brown. No person who served as a member of the Compensation
Committee was, during the past fiscal year, an officer or
employee of the Company, was formerly an officer of the Company
or any of its subsidiaries, or had any relationship requiring
disclosure herein. No executive officer of the Company served as
a member of the Board of Directors or compensation committee of
another entity (or other committee of the Board of Directors
performing equivalent functions), one of whose executive
officers served as a director of the Company.
Compensation
Committee Report
We have reviewed and discussed with management the Compensation
Discussion and Analysis to be included in the Company’s
2007
Form 10-K.
Based on such reviews and discussions, we recommend to the Board
of Directors that the Compensation Discussion and Analysis be
included in the Company’s
Form 10-K.
The Compensation Committee consists of:
Allan I. Brown
Joseph W. Bartlett
The information contained in this Report of the Compensation
Committee on Executive Compensation shall not be deemed to be
“soliciting material.” No portion of this Report of
the Compensation Committee on Executive Compensation shall be
deemed to be incorporated by reference into any filing under the
Securities Act, or the Exchange Act, through any general
statement incorporating by reference in its entirety this Annual
Report on
Form 10-K
in which this report appears, except to the extent that the
Company specifically incorporates this report or any portion of
it by reference. In addition, this report shall not be deemed to
be filed under either the Securities Act or the Exchange Act.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The following tables set forth certain information regarding
beneficial ownership of the Company’s common stock at
March 12, 2008. 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.
32
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(a)
|
|
Beneficially Owned
|
|
|
Class
|
|
|
Yucaipa and affiliates(b)(c)
Overseas Toys, L.P.
OA3, LLC Multi-Accounts, LLC
Ronald W. Burkle
|
|
|
4,125,234
|
|
|
|
20.2
|
%
|
Everest Special
Situations Fund L.P.(d)(e)
Maoz Everest Fund Management Ltd.
Elchanan Maoz
Platinum House
21 H’ arba’ a Street
Tel Aviv 64739 Israel
|
|
|
2,411,101
|
|
|
|
14.8
|
%
|
Patrick D. Brady(d)
|
|
|
1,187,414
|
|
|
|
7.3
|
%
|
Hazelton Capital Limited(d)(e)
28 Hazelton Avenue
Toronto, Ontario Canada M5R 2E2
|
|
|
1,130,537
|
|
|
|
7.0
|
%
|
Eric Stanton(d)(f)
39 Gloucester Road
6th Floor
Wanchai
Hong Kong
|
|
|
1,123,023
|
|
|
|
6.9
|
%
|
Gregory P. Shlopak(d)(g)
63 Main Street
Gloucester, MA 01930
|
|
|
1,064,900
|
|
|
|
6.5
|
%
|
H. Ty Warner(d)
P.O. Box 5377
Oak Brook, IL 60522
|
|
|
975,610
|
|
|
|
6.0
|
%
|
|
|
|
(a) |
|
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 March 12,
2008, through the exercise of any option, warrant or other right
including the conversion of the series A preferred stock.
The percentage ownership of the outstanding common stock,
however, is based on the assumption, expressly required by the
rules of the Securities and Exchange Commission, that only the
person or entity whose ownership is being reported has converted
options, warrants or other rights into shares of common stock
including the conversion of the series A preferred stock. |
|
(b) |
|
Represents shares of common stock issuable upon conversion of
34,033 shares of outstanding series A preferred stock.
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 |
33
|
|
|
|
|
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. |
|
(c) |
|
Based on 20,385,558 shares of common stock outstanding and
issuable upon conversion of 34,033 shares of outstanding
series A preferred stock and accrued dividends as of
March 12, 2008. |
|
(d) |
|
Based on 16,260,324 shares of common stock outstanding as
of March 12, 2008. |
|
(e) |
|
The information concerning these holders is based solely on
information contained in filings pursuant to the Securities
Exchange Act of 1934. |
|
(f) |
|
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. |
|
(g) |
|
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. |
Security
Ownership of Management
The following table sets forth information at March 12,
2008, 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
March 12, 2008) 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(a)
|
|
Beneficially Owned
|
|
Class(b)
|
|
Allan I. Brown(c)
|
|
|
1,133,023
|
|
|
|
7.0
|
%
|
Joseph W. Bartlett(d)
|
|
|
80,000
|
|
|
|
|
*
|
J. Anthony Kouba(e)
|
|
|
60,000
|
|
|
|
|
*
|
Greg Mays(f)
|
|
|
10,000
|
|
|
|
|
*
|
Erika Paulson
|
|
|
—
|
|
|
|
—
|
|
Ira Tochner
|
|
|
—
|
|
|
|
—
|
|
Terrence Wallock(g)
|
|
|
5,000
|
|
|
|
|
*
|
All directors and executive officers as a group
(7 persons)(h)
|
|
|
1,288,023
|
|
|
|
7.9
|
%
|
|
|
|
* |
|
Represents less than 1% |
34
|
|
|
(a) |
|
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 March 12, 2008,
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. |
|
(b) |
|
Based on 16,260,324 shares of common stock outstanding as
of March 12, 2008, which does not include the dilutive
effect of the convertible preferred stock. |
|
(c) |
|
Includes 20,000 shares issuable pursuant to stock options
exercisable within 60 days of March 12, 2008.
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. |
|
(d) |
|
The 80,000 shares are issuable pursuant to stock options
exercisable within 60 days of March 12, 2008. |
|
(e) |
|
The 60,000 shares are issuable pursuant to stock options
exercisable within 60 days of March 12, 2008. |
|
(f) |
|
The 10,000 shares are issuable pursuant to stock options
exercisable within 60 days of March 12, 2008. |
|
(g) |
|
The 5,000 shares are issuable pursuant to stock options
exercisable within 60 days of March 12, 2008. |
|
(h) |
|
Includes a total of 175,000 stock options exercisable within
60 days of March 12, 2008. |
Securities
Authorized for Issuance Under Equity Compensation
Plans
The following table sets forth information as of
December 31, 2007, 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, 2007, options to
purchase 175,000 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. The 1997 Plan expired
April 4, 2007, with no options outstanding.
|
|
|
|
|
|
|
|
|
|
|
|
|
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 first column)
|
|
|
Outstanding Stock
|
|
of Outstanding
|
|
Under the Stock
|
|
|
Options
|
|
Stock Options
|
|
Option Plans
|
|
Plans Approved by Stockholders
|
|
175,000
|
|
$4.40 per share
|
|
None
|
Plans Not Approved by Stockholders
|
|
Not applicable
|
|
Not applicable
|
|
Not applicable
|
Total
|
|
175,000
|
|
$4.40 per share
|
|
None
|
|
|
Item 13.
|
Certain
Relationships, Related Transactions and Director
Independence
|
The Board of Directors has determined that
Messrs. Bartlett, Brown and Tochner and Ms. Paulson
are “independent” directors, meeting all applicable
independence standards promulgated by the Securities and
35
Exchange Commission (“SEC”), including
Rule 10A-3(b)(1)
pursuant to the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), and by the National Association of
Securities Dealers, Inc. (“NASD”). In making this
determination, the Board of Directors affirmatively determined
that none of such directors has a relationship that, in the
opinion of the Board of Directors, would interfere with the
exercise of independent judgment in carrying out the
responsibilities of a director. Messrs. Kouba, Mays and
Wallock are not independent directors under the independence
standards promulgated by the SEC and NASD.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The following table presents fees, including reimbursement for
expenses, for professional services rendered by BDO Seidman,
LLP, the Company’s independent registered public accounting
firm for the fiscal years ended December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Audit fees(a)
|
|
$
|
131
|
|
|
$
|
119
|
|
Audit-related fees(b)
|
|
|
—
|
|
|
|
—
|
|
Tax fees(c)
|
|
|
35
|
|
|
|
40
|
|
All other fees(d)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
166
|
|
|
$
|
159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
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. |
|
(b) |
|
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 an employee benefit plan audit. The
Company’s last required employee benefit audit was for
fiscal year 2005. |
|
(c) |
|
Tax fees are related to tax compliance, planning, and consulting. |
|
(d) |
|
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. The Company’s
independent registered public accounting firm did not provide
any non-audit services to the Company except as specifically
pre-approved by the Audit Committee.
36
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, 2007 and 2006
Consolidated Statements of Operations for the years ended
December 31, 2007, 2006 and 2005
Consolidated Statements of Stockholders’ Deficit for the
years ended December 31, 2007, 2006 and 2005
Consolidated Statements of Cash Flows for the years ended
December 31, 2007, 2006 and 2005
Notes to Consolidated Financial Statements
2. Financial Statement Schedules. 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.
37
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.
SIMON WORLDWIDE, INC.
J. Anthony Kouba
J. ANTHONY KOUBA
Chief Executive Officer
Date: March 28, 2008
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
Joseph
W. Bartlett
|
|
Director
|
|
March 28, 2008
|
|
|
|
|
|
/s/ Allan
I. Brown
Allan
I. Brown
|
|
Director
|
|
March 28, 2008
|
|
|
|
|
|
/s/ J.
Anthony Kouba
J.
Anthony Kouba
|
|
Director and Chief Executive Officer
|
|
March 28, 2008
|
|
|
|
|
|
/s/ Greg
Mays
Greg
Mays
|
|
Director and Chief Financial Officer
|
|
March 28, 2008
|
|
|
|
|
|
/s/ Erika
Paulson
Erika
Paulson
|
|
Director
|
|
March 28, 2008
|
|
|
|
|
|
/s/ Ira
Tochner
Ira
Tochner
|
|
Director
|
|
March 28, 2008
|
|
|
|
|
|
/s/ Terrence
Wallock
Terrence
Wallock
|
|
Director
|
|
March 28, 2008
|
38
EXHIBITS
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
2
|
.1(5)
|
|
Securities Purchase Agreement dated September 1, 1999,
between the Registrant and Overseas Toys, L.P.
|
|
2
|
.2(7)
|
|
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(8)
|
|
March 12, 2002, Letter Agreement between Cyrk and Simon, as
amended by Letter Agreement dated as of March 22, 2002
|
|
2
|
.4(8)
|
|
Mutual Release Agreement between Cyrk and Simon
|
|
2
|
.5(9)
|
|
Letter Agreement Between Cyrk and Simon, dated December 20,
2002
|
|
2
|
.6(11)
|
|
Settlement Agreement and Mutual General Release between Cyrk and
Simon dated January 31, 2006
|
|
2
|
.7(11)
|
|
Subordinated Promissory Note in the principal amount of
$1,410,000 from Cyrk to Simon dated January 31, 2006
|
|
3
|
.1(3)
|
|
Restated Certificate of Incorporation of the Registrant
|
|
3
|
.2(11)
|
|
Amended and Restated By-laws of the Registrant, effective
March 27, 2006
|
|
3
|
.3(6)
|
|
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)(4)
|
|
1997 Acquisition Stock Plan
|
|
10
|
.6(4)
|
|
Securities Purchase Agreement dated February 12, 1998, by
and between the Company and Ty Warner
|
|
10
|
.10(6)
|
|
Registration Rights Agreement between the Company and Overseas
Toys, L.P.
|
|
10
|
.18(7)
|
|
Subordinated Promissory Note by Rockridge Partners, Inc. in
favor of the Company dated February 15, 2001
|
|
10
|
.28(10)
|
|
February 7, 2003, letter agreements with J. Anthony Kouba
and Greg Mays regarding 2002 and 2003 compensation
|
|
10
|
.29(10)
|
|
May 30, 2003, Executive Services Agreements with Joseph
Bartlett, Allan Brown, J. Anthony Kouba, Gregory Mays, and
Terrence Wallock
|
|
10
|
.30(11)
|
|
May 3, 2004, Amendment No. 1 to Executive Services
Agreements with Messrs. Bartlett, Brown, and Kouba,
(replaces previously filed copies of these amendments)
|
|
10
|
.31(11)
|
|
March 27, 2006, Amendment No. 2 to Wallock Executive
Services Agreement
|
|
10
|
.32(11)
|
|
March 27, 2006, New Executive Services Agreement with
Mr. Mays
|
|
31
|
|
|
Certifications pursuant to
Rule 13a-14(a)
under the Securities Exchange Act of 1934 (the “Exchange
Act”), filed herewith
|
|
32
|
|
|
Certifications pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to section 906 of the Sarbanes- Oxley Act
of 2002, filed herewith
|
Footnotes:
|
|
|
(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 Annual Report on
Form 10-K
for the year ended December 31, 1997, and incorporated
herein by reference. |
|
(5) |
|
Filed as an exhibit to the Registrant’s Report on
Form 8-K
dated September 1, 1999, and incorporated herein by
reference. |
39
|
|
|
(6) |
|
Filed as an exhibit to the Annual Report on
Form 10-K
for the year ended December 31, 1999, and incorporated
herein by reference. |
|
(7) |
|
Filed as an exhibit to the Registrant’s Report on
Form 8-K
dated February 15, 2001, and incorporated herein by
reference. |
|
(8) |
|
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. |
|
(9) |
|
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. |
|
(10) |
|
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. |
|
(11) |
|
Filed as an exhibit to the Registrant’s Report on
Form 10-K
for the year ended December 31, 2005, filed on
March 31, 2006, and incorporated herein by reference. |
40
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, 2007 and 2006 and the related consolidated
statements of operations, stockholders’ deficit and cash
flows for each of the three years in the period ended
December 31, 2007. These financial statements are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements 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 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 financial statement presentation. 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, 2007 and 2006, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2007 in conformity with
accounting principles generally accepted in the United States of
America.
As discussed in Note 2 to the consolidated financial
statements, effective January 1, 2007, the Company adopted
the provisions of Emerging Issues Task Force Issue
06-5
“Accounting for Purchases of Life Insurance —
Determining the Amount That Could Be Realized in Accordance with
FASB Technical
Bulletin No. 85-4.”
The accompanying consolidated 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 and has
a lack of any operating revenue that raise substantial doubt
about its ability to continue as a going concern.
Management’s plans in regard to these matters are also
described in Note 1. The consolidated financial statements
do not include any adjustments that might result from the
outcome of this uncertainty.
Los Angeles, California
March 28, 2008
F-1
PART IV —
FINANCIAL INFORMATION
SIMON
WORLDWIDE, INC.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
16,134
|
|
|
$
|
17,229
|
|
Prepaid expenses and other current assets
|
|
|
295
|
|
|
|
204
|
|
Assets from discontinued operations to be disposed
of — current (Note 4)
|
|
|
27
|
|
|
|
576
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
16,456
|
|
|
|
18,009
|
|
Non-current assets:
|
|
|
|
|
|
|
|
|
Investments
|
|
|
3,003
|
|
|
|
8,247
|
|
Other assets
|
|
|
64
|
|
|
|
90
|
|
Assets from discontinued operations to be disposed
of — non-current (Note 4)
|
|
|
904
|
|
|
|
244
|
|
|
|
|
|
|
|
|
|
|
Total non-current assets
|
|
|
3,971
|
|
|
|
8,581
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,427
|
|
|
$
|
26,590
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable:
|
|
|
|
|
|
|
|
|
Trade
|
|
$
|
196
|
|
|
$
|
146
|
|
Affiliates
|
|
|
190
|
|
|
|
183
|
|
Accrued expenses and other current liabilities
|
|
|
314
|
|
|
|
296
|
|
Liabilities from discontinued operations — current
(Note 4)
|
|
|
899
|
|
|
|
820
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,599
|
|
|
|
1,445
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Redeemable preferred stock, Series A senior cumulative
participating convertible, $.01 par value; 33,696 and
32,381 shares issued and outstanding at December 31,
2007 and 2006, respectively, stated at redemption value of
$1,000 per share (liquidation preference of $33,886 and $32,564,
respectively)
|
|
|
33,696
|
|
|
|
32,381
|
|
Stockholders’ deficit:
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value; 50,000,000 shares
authorized; 16,260,324 shares issued and outstanding net of
412,869 treasury shares at par value at December 31, 2007,
and 16,673,193 shares issued and outstanding at
December 31, 2006
|
|
|
163
|
|
|
|
167
|
|
Additional paid-in capital
|
|
|
138,506
|
|
|
|
138,502
|
|
Accumulated deficit
|
|
|
(156,385
|
)
|
|
|
(153,990
|
)
|
Unrealized gain on investments
|
|
|
2,848
|
|
|
|
8,085
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ deficit
|
|
|
(14,868
|
)
|
|
|
(7,236
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,427
|
|
|
$
|
26,590
|
|
|
|
|
|
|
|
|
|
|
See the accompanying Notes to Consolidated Financial Statements.
F-2
SIMON
WORLDWIDE, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenues
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
General and administrative expenses
|
|
|
2,896
|
|
|
|
3,488
|
|
|
|
3,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss from continuing operations
|
|
|
(2,896
|
)
|
|
|
(3,488
|
)
|
|
|
(3,086
|
)
|
Interest income
|
|
|
800
|
|
|
|
879
|
|
|
|
623
|
|
Investment income (losses)
|
|
|
3
|
|
|
|
(16
|
)
|
|
|
(221
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(2,093
|
)
|
|
|
(2,625
|
)
|
|
|
(2,684
|
)
|
Income tax benefit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
(2,093
|
)
|
|
|
(2,625
|
)
|
|
|
(2,684
|
)
|
Income (loss) from discontinued operations, net of tax
(Note 4)
|
|
|
312
|
|
|
|
707
|
|
|
|
(478
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(1,781
|
)
|
|
|
(1,918
|
)
|
|
|
(3,162
|
)
|
Preferred stock dividends
|
|
|
(1,322
|
)
|
|
|
(1,270
|
)
|
|
|
(1,224
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common stockholders
|
|
$
|
(3,103
|
)
|
|
$
|
(3,188
|
)
|
|
$
|
(4,386
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share from continuing operations available to common
stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share — basic and diluted
|
|
$
|
(0.21
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(0.23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding — basic and diluted
|
|
|
16,465
|
|
|
|
16,665
|
|
|
|
16,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per common share — basic and diluted
|
|
$
|
0.02
|
|
|
$
|
0.04
|
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding — basic and diluted
|
|
|
16,465
|
|
|
|
16,665
|
|
|
|
16,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share — basic and diluted
|
|
$
|
(0.19
|
)
|
|
$
|
(0.19
|
)
|
|
$
|
(0.26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding — basic and diluted
|
|
|
16,465
|
|
|
|
16,665
|
|
|
|
16,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See the accompanying Notes to Consolidated Financial Statements.
F-3
SIMON
WORLDWIDE, INC.
For
the years ended December 31, 2007, 2006, and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Stock
|
|
|
Additional
|
|
|
|
|
|
Comprehensive
|
|
|
Comprehensive
|
|
|
Total
|
|
|
|
($.01 Par
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Income
|
|
|
Income
|
|
|
Stockholders’
|
|
|
|
Value)
|
|
|
Capital
|
|
|
Deficit
|
|
|
(Loss)
|
|
|
(Loss)
|
|
|
Deficit
|
|
|
|
(In thousands)
|
|
|
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
|
|
|
|
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
|
)
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(1,918
|
)
|
|
$
|
(1,918
|
)
|
|
|
|
|
|
|
(1,918
|
)
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,209
|
)
|
|
|
(3,209
|
)
|
|
|
(3,209
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(5,127
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Dividends on preferred stock
|
|
|
|
|
|
|
|
|
|
|
(1,270
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,270
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
167
|
|
|
|
138,502
|
|
|
|
(153,990
|
)
|
|
|
|
|
|
|
8,085
|
|
|
|
(7,236
|
)
|
Change in accounting principle (Note 2)
|
|
|
|
|
|
|
|
|
|
|
708
|
|
|
|
|
|
|
|
|
|
|
|
708
|
|
Treasury shares
|
|
|
(4
|
)
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(1,781
|
)
|
|
$
|
(1,781
|
)
|
|
|
|
|
|
|
(1,781
|
)
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,237
|
)
|
|
|
(5,237
|
)
|
|
|
(5,237
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(7,018
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on preferred stock
|
|
|
|
|
|
|
|
|
|
|
(1,322
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,322
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
$
|
163
|
|
|
$
|
138,506
|
|
|
$
|
(156,385
|
)
|
|
|
|
|
|
$
|
2,848
|
|
|
$
|
(14,868
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See the accompanying Notes to Consolidated Financial Statements.
F-4
SIMON
WORLDWIDE, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,781
|
)
|
|
$
|
(1,918
|
)
|
|
$
|
(3,162
|
)
|
Income from discontinued operations
|
|
|
312
|
|
|
|
707
|
|
|
|
(478
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(2,093
|
)
|
|
|
(2,625
|
)
|
|
|
(2,684
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
—
|
|
|
|
4
|
|
|
|
9
|
|
Charge for impaired investments
|
|
|
2
|
|
|
|
16
|
|
|
|
221
|
|
Cash provided by (used in) discontinued operations
|
|
|
391
|
|
|
|
718
|
|
|
|
(2,731
|
)
|
Cash transferred from (to) discontinued operations
|
|
|
387
|
|
|
|
(266
|
)
|
|
|
(58
|
)
|
Increase (decrease) in cash from changes in working capital
items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
(91
|
)
|
|
|
112
|
|
|
|
167
|
|
Accounts payable
|
|
|
57
|
|
|
|
(34
|
)
|
|
|
(29
|
)
|
Accrued expenses and other current liabilities
|
|
|
18
|
|
|
|
(77
|
)
|
|
|
(139
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(1,329
|
)
|
|
|
(2,152
|
)
|
|
|
(5,244
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in restricted cash
|
|
|
—
|
|
|
|
2,818
|
|
|
|
155
|
|
Cash provided by discontinued operations
|
|
|
208
|
|
|
|
234
|
|
|
|
2,418
|
|
Other, net
|
|
|
26
|
|
|
|
19
|
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
234
|
|
|
|
3,071
|
|
|
|
2,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(1,095
|
)
|
|
|
919
|
|
|
|
(2,582
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
17,229
|
|
|
|
16,310
|
|
|
|
18,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
16,134
|
|
|
$
|
17,229
|
|
|
$
|
16,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
57
|
|
|
$
|
3
|
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental non-cash investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid in kind on redeemable preferred stock
|
|
$
|
1,315
|
|
|
$
|
1,263
|
|
|
$
|
1,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See the accompanying Notes to Condensed Consolidated Financial
Statements.
F-5
SIMON
WORLDWIDE, INC.
|
|
1.
|
Nature of
Business, Loss of Customers, Resulting Events, Going Concern and
Management’s Plans
|
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. 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, 2007, 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, 2007, the
Company had a stockholders’ deficit of $14.9 million.
For the year ended December 31, 2007, the Company had a net
loss of $1.8 million. The Company incurred losses within
its continuing operations in 2007 and continues to incur losses
in 2008 for the general and administrative expenses 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, 2007, the
Company’s significant loss from operations, lack of
operating revenue, and 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 J. Anthony Kouba, chief
executive officer, in consultation with a principal financial
officer and acting general counsel. In connection with such
responsibility, Mr. Kouba entered into an Executive
Services Agreement dated May 30, 2003, which was
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
F-6
SIMON
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
outstanding redeemable preferred stock (see Note 11). 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 the United States and Canadian cases settled,
except for any plaintiff who opted out of such settlements. The
opt-out periods have expired, and, to the Company’s
knowledge, no one who has opted out of any of the aforesaid
litigation has commenced any litigation against the Company.
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. On March 14, 2007,
the Court granted a Motion for Summary Judgment brought by PWC
entering judgment in the matter in favor of PWC. The Company has
appealed this ruling and is seeking to reinstate the lawsuit.
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.
|
|
2.
|
Significant
Accounting Policies
|
Principles
of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and subsidiaries. All intercompany
accounts and transactions have been eliminated in consolidation.
Change
in Accounting Principle
In September 2006, the Emerging Issues Task Force
(“EITF”) reached a consensus on EITF Issue
06-5,
“Accounting for Purchases of Life Insurance —
Determining the Amount That Could Be Realized in Accordance with
FASB Technical
Bulletin No. 85-4”
(“EITF 06-5”).
EITF 06-5
provides guidance on consideration of any additional amounts
included in the contractual terms of an insurance policy other
than the cash surrender value in determining the amount that
could be realized under an insurance contract, consideration of
the contractual ability to surrender individual-life policies
(or certificates in a group policy) at the same time in
determining the amount that could be realized under an insurance
contract, and whether the cash surrender value component of the
amount that could be realized under an insurance contract should
be discounted when contractual limitations on the ability to
surrender a policy exist.
EITF 06-5
was effective for the Company’s fiscal year beginning
January 1, 2007, and required the recognition of the
effects of adoption be recorded as either a change in accounting
principle through a cumulative-effect adjustment to beginning
retained earnings in the year of adoption or a change in
accounting principle through retrospective application to all
prior periods. The Company adopted
EITF 06-5
on January 1, 2007, and elected the cumulative-effect
transition method of adoption. This resulted in an increase in
the recorded amount of a cash surrender value
F-7
SIMON
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
related asset on the Company’s consolidated statement of
financial position within discontinued operations by
$.7 million with a corresponding cumulative-effect
adjustment to the Company’s accumulated deficit as of
January 1, 2007.
Stock-Based
Compensation Plans and Pro Forma Stock-Based Compensation
Expense
At December 31, 2007, the Company had one stock-based
compensation plan. The Company adopted the disclosure provisions
of Financial Accounting Standards Board (“FASB”)
Statement No. 123, “Accounting for Stock-Based
Compensation,” as amended by FASB Statement No. 148,
“Accounting for Stock-Based Compensation —
Transition and Disclosure — An Amendment of FASB
Statement No. 123,” and revised by FASB Statement
No. 123(R), “Share-Based Payment.” Statement
No. 123(R) eliminated the alternative to use the intrinsic
value method of accounting under APB Opinion No. 25,
“Accounting for Stock Issued to Employees,” 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
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 adopted Statement No. 123(R) using the modified
prospective transition method as of January 1, 2006. The
modified prospective transition method requires only newly
issued or modified awards of equity instruments, or previously
issued but unvested awards of equity instruments to be accounted
for at fair value. As such, the Company’s consolidated
financial statements for prior periods have not been restated to
reflect, and do not include, the impact of Statement No. 123(R).
In addition, because there were no employee stock options
granted or vested after the effective date of Statement
No. 123(R), there is no impact on net income as reported in
the accompanying consolidated financial statements.
Had compensation cost for the Company’s grants for
stock-based compensation plans been determined consistent with
Statement No. 123 prior to the Company’s adoption date
of January 1, 2006, 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
|
|
|
|
(In thousands)
|
|
|
Net loss available to common stockholders — as reported
|
|
$
|
(4,386
|
)
|
Add:
|
|
|
|
|
Stock-based compensation expense included in
reported net income, 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 loss available to common stockholders — pro forma
|
|
$
|
(4,397
|
)
|
|
|
|
|
|
Loss per common share — basic and diluted —
as reported
|
|
$
|
(0.26
|
)
|
Loss per common share — basic and diluted —
pro forma
|
|
$
|
(0.26
|
)
|
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 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.
F-8
SIMON
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
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, accounts
payable, and accrued liabilities 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 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 the accumulated other comprehensive income (loss)
component of stockholders’ deficit. Other investments, for
which there are no readily available market values, are
accounted for under the cost method and carried at the lower of
cost or estimated fair value. The Company assesses on a periodic
basis whether declines in fair value of investments below their
amortized cost are other than temporary. If the decline in fair
value is judged to be other than temporary, the cost basis of
the individual security is written down to fair value as a new
cost basis and the amount of the write-down is included in
earnings. During 2007, 2006 and 2005, the Company recorded
investment impairments of approximately $2,000, $16,000 and
$.2 million, respectively, 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.
The Company accounts for its investment in Yucaipa AEC
Associates using the equity method in accordance with Emerging
Issues Task Force (“EITF”) Issue
No. 03-16,
“Accounting Investments in Limited Liability
Companies.”
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 impairment in the carrying value of
its long-lived assets and, if so, the amount of any such
impairment by comparing the estimated fair value 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 accounts for income 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 enacted tax
rates. Deferred income tax
F-9
SIMON
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
expenses or credits are based on the changes in the asset or
liability from period to period. A valuation allowance is
recognized if, based on the available evidence, it is more
likely than not that some or all of the deferred tax asset will
not be realized.
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 15).
Recently
Issued Accounting Standards
In July 2006, the Financial Accounting Standards Board
(“FASB”) issued FASB Interpretation No. 48
(“FIN 48”), “Accounting for Uncertainty in
Income Taxes-an interpretation of FASB Statement No. 109,
“which prescribes a recognition threshold and measurement
process for recording in the financial statements uncertain tax
positions taken or expected to be taken in a tax return. In
addition, FIN 48 provides guidance on the derecognition,
classification, accounting in interim periods, and disclosure
requirements for uncertain tax positions. FIN 48 was
effective for fiscal years beginning after December 15,
2006. The Company’s adoption of FIN 48 on
January 1, 2007, did not have a material effect on the
Company’s consolidated statements of financial position or
results of operations.
In September 2006, the FASB issued Statement of Financial
Accounting Standard No. 157 (“SFAS 157”),
“Fair Value Measurements,” which provides guidance for
applying the definition of fair value to various accounting
pronouncements. SFAS 157 is effective for financial
statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years. The Company does not expect the adoption SFAS 157 to
have a material effect on its consolidated statements of
financial position or results of operations.
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
provisions of SFAS No. 157 will be applied
prospectively. The statement provisions effective as of
January 1, 2008, are not expected to have a material effect
on the Company’s consolidated statements of financial
position or results of operations. The Company does not believe
that the remaining provisions will have a material effect on the
Company’s consolidated financial position and results of
operations when they become effective on January 1, 2009.
In February 2007, the FASB issued Statement of Financial
Accounting Standard No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities-Including an
amendment of FASB Statement No. 115,”
(“SFAS 159”). SFAS 159 permits entities to
choose to measure many financial instruments and certain other
items at fair value at specified election dates and report
unrealized gains and losses in earnings on items for which the
fair value option has been elected. SFAS 159 is effective
for fiscal years beginning after November 15, 2007. The
Company is currently evaluating the effect that adoption of this
statement will have on the Company’s consolidated
statements of financial position and results of operations when
it becomes effective in 2008.
In December 2007, the FASB issued Statement of Financial
Accounting Standard No. 141(R) Business Combinations
(“SFAS 1418”), 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
F-10
SIMON
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
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 prospectively 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 uncertain tax
positions accounted for under FIN 48, which is effective on
January 1, 2009 for all acquisitions. The Company is
currently assessing the impact, if any, of SFAS 141R on its
consolidated financial statements .
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 Company does not expect the
adoption of SFAS 160 will have a material impact on its
consolidated financial statements.
|
|
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 November 19, 2007, the Company was served with a Summons
and Complaint by Winthrop Resources Corporation alleging breach
of contract in connection with a lease the Company had entered
into for an enterprise inventory system. Following the sale of
the CPG business as described above under Item 1.
Business — 2001 Sale of Business, the bulk of the
lease obligations were assumed by the new Cyrk entity, but a
smaller portion relating to previously incurred consulting and
installation services was retained by the Company. The Company
made all monthly payments of $18,354 for the initial term, but
Winthrop contends that the lease was automatically renewed after
such initial term and consequently sued for breach of contract
when no further monthly payments were made. The Company believes
it has satisfied all its financial obligations to Winthrop and
is defending the lawsuit on that basis. The lawsuit is in the
early stages of discovery and it is difficult at this point to
predict what the ultimate outcome will be for the Company. The
complaint seeks damages in excess of $50,000. The Company
believes the Winthrop claim is without merit. Accordingly, no
contingent loss liability has been recorded in connection with
this case.
In connection with the October 2005 notice of a lawsuit brought
against it by the Committee representing the unsecured creditors
of H A 2003 Inc., formerly known as HA-LO Industries, Inc. (see
Note 1), the Company recorded a contingent loss liability
of $.5 million. Such contingent loss liability remains at
December 31, 2007.
F-11
SIMON
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
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.
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.
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 does not default on the New
Subordinated Note or in the event of payment in full, the
Company has 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. In the event of a
default by Cyrk of its obligations under
F-12
SIMON
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
the New Subordinated Note, there is no assurance that the
Company will be successful in enforcing the Confession of
Judgment.
During 2007 and 2006, the Company collected approximately
$360,000 and $734,000, respectively, under the New Subordinated
Note with a reserve recorded for the remaining balance, except
for $27,000 at December 31, 2007, 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.
See Note 4.
|
|
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. During 2006, the Company’s elimination
of its promotions business operations in Europe and Hong Kong
was completed.
Assets and liabilities related to discontinued operations at
December 31, 2007 and 2006, as disclosed in the
accompanying consolidated financial statements, consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
—
|
|
|
$
|
408
|
|
Restricted cash
|
|
|
—
|
|
|
|
168
|
|
Note receivable
|
|
|
27
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
27
|
|
|
|
576
|
|
Other assets, non-current
|
|
|
904
|
|
|
|
244
|
|
|
|
|
|
|
|
|
|
|
Total assets from discontinued operations to be disposed of
|
|
$
|
931
|
|
|
$
|
820
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accrued expenses and other current liabilities
|
|
$
|
899
|
|
|
$
|
820
|
|
|
|
|
|
|
|
|
|
|
Liabilities from discontinued operations
|
|
$
|
899
|
|
|
$
|
820
|
|
|
|
|
|
|
|
|
|
|
F-13
SIMON
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Net income (loss) from discontinued operations for the years
ended December 31, 2007, 2006 and 2005, as disclosed in the
accompanying consolidated financial statements, consists of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Net sales
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Cost of sales
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
General and administrative expenses
|
|
|
47
|
|
|
|
—
|
|
|
|
175
|
|
Loss (gain) on settlement of obligations
|
|
|
(314
|
)
|
|
|
(675
|
)
|
|
|
555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
267
|
|
|
|
675
|
|
|
|
(730
|
)
|
Interest income
|
|
|
45
|
|
|
|
59
|
|
|
|
—
|
|
Other income (expense)
|
|
|
—
|
|
|
|
(27
|
)
|
|
|
252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
312
|
|
|
|
707
|
|
|
|
(478
|
)
|
Income tax expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
312
|
|
|
$
|
707
|
|
|
$
|
(478
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and Administrative Expenses
There were approximately $47,000 of general and administrative
expenses during 2007 which related to adjustments to decrease
the recorded value of a cash surrender value related asset. As
the Company completed the liquidation of the Company’s
subsidiaries in Europe and Hong Kong, during the first quarter
of 2006, there were no general and administrative expenses
during 2006 and the amount for 2005 related to final general and
administrative expenses for such subsidiaries.
Loss
(Gain) on Settlement of Obligations
During 2007, the Company collected approximately $359,000, of
which approximately $314,000 represented collections of
principal and approximately $45,000 represented collections of
imputed interest, under the New Subordinated Note with a reserve
recorded for the remaining balance except for $27,000 as
collectibility is not reasonably assured.
During 2006, the Company collected approximately $734,000, of
which approximately $675,000 represented collections of
principle and approximately $59,000 represented collections of
imputed interest, under the New Subordinated Note with a reserve
recorded for the remaining balance as collectibility was not
reasonably assured.
As previously reported, an action had 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 paid
$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.
Interest
Income
Interest income totaled approximately $45,000 during 2007 and
approximately $59,000 during 2006. These amounts relate to
imputed interest income earned on the New Subordinated Note with
Cyrk. As the Company receives payments, a greater portion of
such payment is allocated to principal and a lesser portion of
such payment is allocated to interest which accounts for the
decrease in interest income from 2006 to 2007.
F-14
SIMON
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Other
Income (Expense)
Other income (expense) for 2006 primarily related to a loss on
disposal of the Company’s remaining subsidiaries in Europe
and Hong Kong.
Other income (expense) for 2005 primarily related to a decrease
in a contingent loss accrual of $.8 million related to a
reduction in the Winthrop liability partially offset by a
contingent loss accrual of $.5 million related to the HA-LO
matter. See Note 3.
Restricted cash included within discontinued operations at
December 31, 2007 and 2006, totaled $0 and
$.2 million, respectively. The amount at December 31,
2006, primarily consisted of amounts deposited with lenders to
satisfy the Company’s obligations pursuant to its
outstanding standby letters of credit.
There was no restricted cash within continuing operations at
December 31, 2007 and 2006.
Yucaipa
AEC Associates
At December 31, 2007, 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 holder of the Company’s outstanding preferred
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.
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 on
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 the stockholders’
deficit. There were adjustments during 2007 and 2006 which
reduced the recorded value of the Company’s investment in
Yucaipa AEC totaling $5.2 million and $3.2 million,
respectively. There were no such adjustments during 2005. The
Company has no power to dispose of or liquidate its holding in
Yucaipa AEC or its indirect interest in Source
F-15
SIMON
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
which power is held by Yucaipa AEC. Furthermore, in the event of
a sale or liquidation of the Source shares by Yucaipa AEC, the
amount and timing of any distribution of the proceeds of such
sale or liquidation to the Company is discretionary with Yucaipa
AEC.
Other
Investments
At December 31, 2007 and 2006, the carrying values of other
investments were $59,000 and $82,000, respectively. These are
presented as part of other assets in the consolidated balance
sheets. During 2007, 2006 and 2005, the Company recorded
impairment charges of approximately $2,000, $16,000 and
$.2 million, respectively, due to management’s
determination that the declines in fair value of certain
investments below their cost bases were
other-than-temporary.
|
|
7.
|
Lease
Obligations and Other Commercial Commitments
|
The approximate minimum rental commitments under all
noncancelable leases at December 31, 2007, totaled
approximately $42,000, which are due in 2008.
For the years ended December 31, 2007, 2006, and 2005,
rental expense for all operating leases included within
continuing operations was approximately $50,000, $45,000 and
$44,000, respectively. There was no rental expense for operating
leases within discontinued operations during 2007, 2006, and
2005. Rent is charged to operations on a straight-line basis.
The Company also has a letter of credit totaling approximately
$35,000 at December 31, 2007, which supports the
Company’s periodic payroll tax obligations.
The Company had no provision or benefit for income taxes for
2007, 2006, and 2005.
As required by Statement of Financial Accounting Standard
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 $45.8 million and
$45.5 million is required at December 31, 2007 and
2006, respectively. The tax effects of temporary differences
that gave rise to deferred tax assets as of December 31,
2007 and 2006, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating losses
|
|
$
|
25,576
|
|
|
$
|
25,429
|
|
Capital losses
|
|
|
10,085
|
|
|
|
9,818
|
|
Other asset reserves
|
|
|
9,470
|
|
|
|
9,501
|
|
AMT credit
|
|
|
649
|
|
|
|
649
|
|
Deferred compensation
|
|
|
9
|
|
|
|
7
|
|
Foreign tax credits
|
|
|
—
|
|
|
|
82
|
|
Depreciation
|
|
|
1
|
|
|
|
2
|
|
Valuation allowance
|
|
|
(45,790
|
)
|
|
|
(45,488
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
F-16
SIMON
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
As of December 31, 2007, the Company had federal and state
net operating loss carryforwards of approximately
$66.1 million and $35.1 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, 2007, the Company had
federal and state capital loss carryforwards of
$23.5 million which expire in 2008.
The following is a reconciliation of the statutory federal
income tax rate to the actual effective income tax rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
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
|
|
|
—
|
|
|
|
(128
|
)
|
|
|
2
|
|
Change in valuation allowance
|
|
|
37
|
|
|
|
166
|
|
|
|
37
|
|
Life insurance
|
|
|
3
|
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In February 2007, the Company received a notice of audit from
the Internal Revenue Service (“IRS”) covering the tax
year 2004. The IRS has completed its audit and, in February
2008, the Company received notice from the IRS that it had no
changes to the 2004 tax year under audit.
|
|
9.
|
Accrued
Expenses and Other Current Liabilities
|
At December 31, 2007 and 2006, accrued expenses and other
current liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
|
|
|
Continuing
|
|
|
|
|
|
|
Operations
|
|
|
Operations
|
|
|
Total
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
Accrued payroll, related items and deferred compensation
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
23
|
|
|
$
|
18
|
|
|
$
|
23
|
|
|
$
|
18
|
|
Contingent loss
|
|
|
460
|
|
|
|
460
|
|
|
|
—
|
|
|
|
—
|
|
|
|
460
|
|
|
|
460
|
|
Professional fees
|
|
|
—
|
|
|
|
—
|
|
|
|
291
|
|
|
|
278
|
|
|
|
291
|
|
|
|
278
|
|
Insurance premiums
|
|
|
439
|
|
|
|
360
|
|
|
|
—
|
|
|
|
—
|
|
|
|
439
|
|
|
|
360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
899
|
|
|
$
|
820
|
|
|
$
|
314
|
|
|
$
|
296
|
|
|
$
|
1,213
|
|
|
$
|
1,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.
|
Indemnification
Trust Agreement
|
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
would 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
was 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. On March 1,
F-17
SIMON
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
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.
|
|
11.
|
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, a total of
40,000 shares of preferred stock were authorized for
issuance. Pursuant to this authorization, the Company issued
25,000 shares of senior cumulative participating
convertible 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
(4,107,476 shares as of December 31, 2007, and
3,947,203 shares as of December 31, 2006).
In connection with the issuance of the preferred stock, the
Company also issued a warrant to purchase 15,000 shares of
preferred stock at a purchase price of $15 million. The
warrant expired on November 10, 2004. Each share of this
series of preferred stock issued upon exercise of the warrant
was convertible, at Yucaipa’s option, into common stock
equal to the sum of $1,000 per share plus all accrued and unpaid
dividends, divided by $9.00 (1,666,667 shares as of
December 31, 2003).
Assuming conversion of all of the convertible preferred stock,
Yucaipa would own approximately 20.1% and 19.1% of the then
outstanding common shares at December 31, 2007 and 2006,
respectively.
Yucaipa has voting rights equivalent to the number of shares of
common stock into which their preferred stock is convertible on
the relevant record date. Also, Yucaipa is entitled to receive
an annual dividend equal to 4% of the base liquidation
preference of $1,000 per share outstanding, payable quarterly 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 and prior to
November 10, 2004. The preferred stock is subject to a
mandatory offer of redemption if a change in control of the
Company occurs. As of December 31, 2007, the amount of the
liquidation preference, which is equal to the sum of the
preferred stock outstanding plus accrued dividends, was
$33.9 million, and the redemption value, which is equal to
the sum of the preferred stock outstanding plus accrued
dividends multiplied by 101%, was $34.2 million. As of
December 31, 2007, assuming conversion of all of the
convertible preferred stock and accrued dividends, Overseas Toys
L.P. would own approximately 20.1% of the then outstanding
common stock.
In connection with this investment, Yucaipa is entitled to
appoint the chairman of the Company’s Board of Directors
and to nominate two additional individuals to a seven person
board.
F-18
SIMON
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
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.
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 became
exercisable in two equal installments commencing on the first
anniversary of the date of grant. As the Omnibus Plan terminated
in May 2003 except as to options outstanding at that time, no
further options may be granted under the plan.
1997
Acquisition Stock Plan
The 1997 Acquisition Stock Plan (the “1997 Plan”) was
intended to provide incentives in connection with the
acquisitions of other businesses by the Company. The 1997 Plan
was identical in all material respects to the Omnibus Plan,
except that the number of shares available for issuance under
the 1997 Plan was 1,000,000 shares. The 1997 Plan expired
on April 4, 2007. There were no stock options granted under
the 1997 Plan during 2007, 2006, and 2005.
The following summarizes the status of the Company’s stock
options as of December 31, 2007, 2006 and 2005, and changes
for the years then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Outstanding at the beginning of year
|
|
|
180,000
|
|
|
$
|
4.62
|
|
|
|
215,000
|
|
|
$
|
4.51
|
|
|
|
220,000
|
|
|
$
|
4.80
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
20,000
|
|
|
|
0.10
|
|
|
|
—
|
|
|
|
—
|
|
Expired/Forfeited
|
|
|
5,000
|
|
|
|
12.25
|
|
|
|
15,000
|
|
|
|
9.10
|
|
|
|
5,000
|
|
|
|
17.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
175,000
|
|
|
|
4.40
|
|
|
|
180,000
|
|
|
|
4.62
|
|
|
|
215,000
|
|
|
|
4.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at year-end
|
|
|
175,000
|
|
|
|
4.40
|
|
|
|
180,000
|
|
|
|
4.62
|
|
|
|
215,000
|
|
|
|
4.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options available for future grant
|
|
|
—
|
|
|
|
|
|
|
|
1,000,000
|
(a)
|
|
|
|
|
|
|
1,000,000
|
(a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted during the year
|
|
|
Not
applicable
|
|
|
|
|
|
|
|
Not
applicable
|
|
|
|
|
|
|
|
Not
applicable
|
|
|
|
|
|
|
|
|
(a) |
|
Available for issuance under the 1997 Plan. The 1997 Plan
expired on April 4, 2007. |
F-19
SIMON
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
The following table summarizes information about stock options
outstanding at December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
Number
|
|
|
Remaining
|
|
|
Average
|
|
|
Intrinsic
|
|
|
Number
|
|
|
Average
|
|
|
Intrinsic
|
|
Range of Exercise Prices
|
|
Outstanding
|
|
|
Contractual Life
|
|
|
Price
|
|
|
Value
|
|
|
Exercisable
|
|
|
Price
|
|
|
Value
|
|
|
$0.10 - $1.99
|
|
|
75,000
|
|
|
|
5.35
|
|
|
$
|
0.10
|
|
|
$
|
22,500
|
|
|
|
75,000
|
|
|
$
|
0.10
|
|
|
$
|
22,500
|
|
$2.00 - $5.38
|
|
|
60,000
|
|
|
|
1.49
|
|
|
|
4.81
|
|
|
|
—
|
|
|
|
60,000
|
|
|
|
4.81
|
|
|
|
—
|
|
$7.56 - $8.81
|
|
|
20,000
|
|
|
|
1.74
|
|
|
|
8.19
|
|
|
|
—
|
|
|
|
20,000
|
|
|
|
8.19
|
|
|
|
—
|
|
$12.25 - $15.50
|
|
|
20,000
|
|
|
|
0.24
|
|
|
|
15.50
|
|
|
|
—
|
|
|
|
20,000
|
|
|
|
15.50
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.10 - $15.50
|
|
|
175,000
|
|
|
|
3.03
|
|
|
$
|
4.40
|
|
|
|
|
|
|
|
175,000
|
|
|
$
|
4.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.
|
Related
Party Transactions
|
In May 2003, the Company entered into Executive Services
Agreements with Messrs. Bartlett, Brown, 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 replaced the letter
agreements with Messrs. Bartlett 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 Mr. 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. During
2007, $20,000 of 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.
During 2006, 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 with Yucaipa. 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 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 may be
terminated by either party upon 90 days written notice and
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 April 18, 2006, George Golleher, a former Yucaipa
representative on the Board of Director and former co-chief
executive officer, resigned from the Board of Directors and the
Company terminated his Executive Services Agreement and pursuant
thereto the parties exchanged mutual releases and
Mr. Golleher was paid severance under the Agreement of
$350,000.
F-20
SIMON
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
|
|
14.
|
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 2007, 2006, and 2005. In addition,
the Company had no accounts receivable at December 31, 2007
and 2006.
All the Company’s long-lived assets as of December 31,
2007 and 2006, were in the United States.
|
|
15.
|
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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Income
|
|
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
(Loss)
|
|
|
Shares
|
|
|
Per Share
|
|
|
(Loss)
|
|
|
Shares
|
|
|
Per Share
|
|
|
(Loss)
|
|
|
Shares
|
|
|
Per Share
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
|
(In thousands, except share data)
|
|
|
Basic and diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(2,093
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(2,625
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(2,684
|
)
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
(1,322
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,270
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,224
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations available to common stockholders
|
|
$
|
(3,415
|
)
|
|
|
16,465,062
|
|
|
$
|
(0.21
|
)
|
|
$
|
(3,895
|
)
|
|
|
16,665,248
|
|
|
$
|
(0.23
|
)
|
|
$
|
(3,908
|
)
|
|
|
16,653,193
|
|
|
$
|
(0.23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
$
|
312
|
|
|
|
16,465,062
|
|
|
$
|
0.02
|
|
|
$
|
707
|
|
|
|
16,665,248
|
|
|
$
|
0.04
|
|
|
$
|
(478
|
)
|
|
|
16,653,193
|
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,781
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(1,918
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(3,162
|
)
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
(1,322
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,270
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,224
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common stockholders
|
|
$
|
(3,103
|
)
|
|
|
16,465,062
|
|
|
$
|
(0.19
|
)
|
|
$
|
(3,188
|
)
|
|
|
16,665,248
|
|
|
$
|
(0.19
|
)
|
|
$
|
(4,386
|
)
|
|
|
16,653,193
|
|
|
$
|
(0.26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2007, 2006, and 2005,
4,084,390, 3,947,203, and 3,793,185, respectively, shares of
redeemable 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,
2007, 2006, and 2005, 176,233, 193,753, and 199,445, weighted
average 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
during such periods of $.36, $.34, and $.23, respectively, did
not exceed the weighted average exercise price of such options
of $4.40, $4.62, and $4.51, respectively.
F-21
SIMON
WORLDWIDE, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
|
|
16.
|
Quarterly
Results of Operations (Unaudited)
|
The following is a tabulation of the quarterly results of
operations for the years ended December 31, 2007 and 2006,
respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
2007
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
(In thousands, except per share data)
|
|
|
Continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Gross profit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net loss
|
|
|
(430
|
)
|
|
|
(485
|
)
|
|
|
(644
|
)
|
|
|
(534
|
)
|
Loss per common share available to common —
basic & diluted
|
|
|
(0.05
|
)
|
|
|
(0.05
|
)
|
|
|
(0.06
|
)
|
|
|
(0.05
|
)
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Gross profit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net income
|
|
|
78
|
|
|
|
105
|
|
|
|
91
|
|
|
|
38
|
|
Income per common share available to common —
basic & diluted
|
|
|
0.005
|
|
|
|
0.006
|
|
|
|
0.006
|
|
|
|
0.005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
2006
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
(In thousands, except per share data)
|
|
|
Continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Gross profit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net loss
|
|
|
(797
|
)
|
|
|
(852
|
)
|
|
|
(498
|
)
|
|
|
(478
|
)
|
Loss per common share available to common —
basic & diluted
|
|
|
(0.07
|
)
|
|
|
(0.07
|
)
|
|
|
(0.05
|
)
|
|
|
(0.04
|
)
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Gross profit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net income
|
|
|
438
|
|
|
|
89
|
|
|
|
90
|
|
|
|
90
|
|
Income per common share available to common —
basic & diluted
|
|
|
0.026
|
|
|
|
0.005
|
|
|
|
0.005
|
|
|
|
0.005
|
|
F-22