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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________________to_________________________
Commission file number: 0-21878
SIMON WORLDWIDE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3081657
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1900 AVENUE OF THE STARS 101 EDGEWATER DRIVE
LOS ANGELES, CALIFORNIA 90067 WAKEFIELD, MASSACHUSETTS 01880
(Address of principal executive offices) (Former address of principal executive offices)
(Zip code) (Zip code)
Registrant's telephone number, including area code: (310) 553-4460
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
COMMON STOCK, $0.01 THE NASDAQ STOCK MARKET
PAR VALUE PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
At February 28, 2002, the aggregate market value of voting stock held by
non-affiliates of the registrant was $2,331,026.
At February 28, 2002, 16,653,193 shares of the registrant's common stock were
outstanding.
PART I
ITEM 1. BUSINESS.
GENERAL
In August 2001, Simon Worldwide, Inc. (referred to herein as "Simon Worldwide"
or "the Company"), experienced the loss of its two largest customers: McDonald's
Corporation ("McDonald's") and, to a lesser extent, Philip Morris Incorporated
("Philip Morris") (see Loss of Customers, Resulting Events and Going Concern
section below). Until the unanticipated events of August 2001 occurred, Simon
Worldwide, a Delaware corporation that was 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 product and services companies seeking to promote their
brand names and corporate identities and build brand loyalty. Net sales to
McDonald's and Philip Morris accounted for 78% and 8%, 65% and 9% and 61% and 9%
of total net sales in 2001, 2000 and 1999, respectively.
Beginning in 1996, the Company grew as a result of a series of acquisitions of
companies engaged in the corporate catalog and advertising specialty segment of
the promotion industry. Certain of these acquired companies operated within the
Company's Corporate Promotions Group ("CPG") and had a history of disappointing
financial results. As a result, the Company sold these businesses in February of
2001 (see 2001 Sale of Business section below).
In 1997, the Company expanded into the consumer promotion arena with its
acquisition of Simon Marketing, Inc. ("Simon Marketing"), a Los Angeles-based
marketing and promotion agency. The Company conducted its business with
McDonald's through its Simon Marketing subsidiary. Simon Marketing designed and
implemented marketing promotions for McDonald's, which included premiums, games,
sweepstakes, events, contests, coupon offers, sports marketing, licensing and
promotional retail items.
In May 2000, Simon Worldwide announced that it would restructure the Company by
integrating and streamlining the operations of its Custom Product and Licensing
group, its division that provides custom designed product for large consumer
promotions, and its CPG division into one product-focused business unit. As a
result of the February 2001 sale of its CPG business, the Company implemented a
second quarter 2001 restructuring plan with the objective of restoring
consistent profitability through a more rationalized, cost-efficient business
model.
LOSS OF CUSTOMERS, RESULTING EVENTS AND GOING CONCERN
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 was alleged to have embezzled winning game pieces from
McDonald's promotional games administered by Simon Marketing. The Second
Superseding Indictment filed December 7, 2001 by the U.S. Attorney in the United
States District Court for the Middle District of Florida alleges that Mr.
Jacobson "embezzled more than $20 million worth of high value winning McDonald's
promotional game pieces from his employer, [Simon]". Simon Marketing is
identified in the Indictment, along with McDonald's, as one of the victims of
Mr. Jacobson's alleged fraudulent scheme. (Also, see section, Legal Actions
Associated with the McDonald's Matter, below.) Further, on August 23, 2001, the
Company was notified that its second largest customer, Philip Morris, was also
ending their approximately nine year relationship with the Company. Net sales to
McDonald's and Philip Morris accounted for 78% and 8%, 65% and 9% and 61% and 9%
of total net sales in 2001, 2000 and 1999, respectively. The Company's financial
condition, results of operations and net cash flows have been and will continue
to be materially adversely affected by the loss of the McDonald's and Philip
Morris business, as well as the loss of its other customers. At December 31,
2001, Simon Worldwide had no customer backlog as compared to $236.9 million of
written customer purchase orders at December 31, 2000. In addition, the absence
of business from McDonald's and Philip Morris has adversely affected the
Company's relationship with and access to foreign manufacturing sources.
As a result of the loss of these major customers (as well as its other
customers), along with the resulting legal matters discussed further below,
there is substantial doubt about Simon Worldwide'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. Simon
Worldwide has taken and will continue to take action to reduce its cost
structure. The Company has
2
eliminated, or is in the process of eliminating, much of its operations
throughout the world, including its sourcing arm in Asia and most of its
worldwide sales and general and administrative operations. As of December 31,
2001, the Company had 136 employees worldwide and the Company expects to reduce
its worldwide workforce to approximately 46 employees by the end of the first
quarter of 2002. It is anticipated that the Company will be wound up and
liquidated, possibly through bankruptcy proceedings, in the near future.
As a result of actions taken in the second half of 2001, the Company recorded
third and fourth quarter pre-tax charges totaling approximately $80.3 million.
These charges relate principally to the write-down of goodwill attributable to
Simon Marketing ($46.7 million) and to a substantial reduction of its worldwide
infrastructure; including, asset write-downs ($22.4 million), lump-sum severance
costs associated with the termination of approximately 377 employees ($6.3
million), lease cancellations ($1.8 million), legal fees ($1.7 million) and
other costs associated with the McDonald's and Philip Morris matters ($1.4
million).
In order to induce their continued commitment to provide vital services to the
Company in the wake of the events of August 2001, in the third quarter of 2001
the Company entered into retention arrangements with its Chief Executive
Officer, each of the three non-management members of the Company's Board of
Directors (the "Board") and key members of management of Simon Marketing. As a
further inducement to the Company's directors to continue their service to the
Company, and to provide assurances that the Company will be able to fulfill its
obligations to indemnify directors, officers and agents of the Company and its
subsidiaries ("Indemnitees") under Delaware law and pursuant to various
contractual arrangements, in March 2002 the Company entered into an
Indemnification Trust Agreement ("Agreement") for the benefit of the
Indemnitees. (See notes to consolidated financial statements.) Pursuant to
this Agreement, the Company has deposited a total of $2.7 million with an
independent trustee in order to fund any indemnification amounts owed to an
Indemnitee which the Company is unable to pay. These arrangements, and the
severance arrangements described below, were negotiated by the Company on an
arms-length basis with the advice of the Company's counsel and other advisors.
In connection with the wind-down of its business operations and pursuant to
negotiations that began in the fourth quarter of 2001, the Company entered into
a Termination, Severance and General Release Agreement ("Agreement") with its
Chief Executive Officer ("CEO") in March 2002. In accordance with the terms of
this Agreement, the CEO's employment with the Company terminated in March 2002
(the CEO will remain on the Company's Board of Directors) and substantially all
other agreements, obligations and rights existing between the CEO and the
Company were terminated, including the CEO's Employment Agreement dated
September 1, 1999, as amended, and his retention agreement dated August 29,
2001. (For additional information related to the CEO's retention agreement, see
the Company's 2001 third quarter Form 10-Q.) The ongoing operations of the
Company and Simon Marketing are being managed by the Executive Committee of the
Board consisting of Messrs. Golleher and Kouba, in consultation with outside
financial, accounting, legal and other advisors. As a result of the foregoing,
the Company recorded a 2001 fourth quarter pre-tax charge of $4.6 million,
relating principally to the forgiveness of indebtedness of the CEO to the
Company, a lump-sum severance payment and the write-off of an asset associated
with an insurance policy on the life of the CEO. The Company received a full
release from the CEO in connection with this Agreement, and the Company provided
the CEO with a full release. Additionally, the Agreement calls for the CEO to
provide consulting services to the Company for a period of six months after the
CEO's employment with the Company terminated in exchange for a fee of $46,666
per month, plus specified expenses. See notes to consolidated financial
statements and Executive Compensation.
On August 28, 2001, the Company entered into retention letter agreements with
each of Joseph Bartlett, George Golleher and Anthony Kouba, the non-management
members of the Board, pursuant to which the Company paid each of them a
retention fee of $150,000 in exchange for their agreement to serve as a director
of the Company for at least six months. If a director resigned before the end of
the six-month period, the director would have been required to refund to the
Company the pro rata portion of the retention fee equal to the percentage of the
six-month period not served. Additionally, the Company agreed to compensate
these directors at an hourly rate of $750 for services outside of Board and
committee meetings (for which they are paid $2,000 per meeting in accordance
with existing Company policy). See Directors' Compensation.
In addition, retention agreements were entered into in September and October
2001 with certain key employees which provide for retention payments ranging
from 8% to 100% of their respective salaries conditioned upon continued
employment through specified dates and/or severance payments up to 100% of these
employee's respective annual salaries should such employees be terminated within
the parameters of their agreements (for example, termination
3
without cause). In the first quarter of 2002, additional similar agreements were
entered into with certain employees of one of the Company's subsidiaries. The
terms of these severance agreements were generally consistent with the terms of
the employees' prior retention agreements. Payments under these agreements have
been made at various dates from September 2001 through March 2002. The Company's
obligations under these agreements are approximately $3.1 million. Approximately
$1.7 million of these commitments had been segregated in separate cash accounts
in October 2001, in which security interests had been granted to certain
employees, and have been released back to the Company in 2002 upon making of
retention and severance payments to these applicable employees.
Legal Actions Associated with the McDonald's Matter
Subsequent to August 21, 2001, numerous consumer class action and representative
action lawsuits (hereafter variously referred to as, "actions", "complaints" or
"lawsuits") have been filed in multiple jurisdictions nationwide. Plaintiffs in
these actions assert diverse causes of action, including negligence, breach of
contract, fraud, restitution, unjust enrichment, misrepresentation, false
advertising, breach of warranty, unfair competition and violation of various
state consumer fraud statutes. Complaints filed in federal court in New Jersey
and Illinois also allege a pattern of racketeering.
Plaintiffs in many of these actions allege, among other things, that defendants,
including the Company, Simon Marketing, and McDonald's, misrepresented that
plaintiffs had a chance at winning certain high-value prizes when in fact the
prizes were stolen by Mr. Jacobson. Plaintiffs seek various forms of relief,
including restitution of monies paid for McDonald's food, disgorgement of
profits, recovery of the "stolen" game prizes, other compensatory damages,
attorney's fees, punitive damages and injunctive relief.
The lawsuits remain in the very early stages and discovery has yet to commence
in any of these proceedings. Simon Marketing has consented to the removal to
federal court by McDonald's of each of the complaints filed in state courts
other than in California and Illinois. Plaintiffs in some of these cases have
moved to remand the cases to state court. In those cases in which courts have
ruled on the remand motions, they have been denied in all but the case pending
in Florida district court, which recently remanded the case to Florida state
court. Other remand motions remain pending. On October 9, 2001, McDonald's filed
a motion with the Judicial Panel on Multidistrict Litigation seeking to transfer
all complaints pending in federal courts nationwide, including the removed cases
and subsequently filed cases, to a single federal court in the Northern District
of Illinois. On February 21, 2002, the Judicial Panel granted McDonald's motion
and ordered cases pending in the districts of Arizona, the Eastern District of
Arkansas, the Northern District of Florida, the Northern District of Illinois,
New Jersey, the Eastern District of Pennsylvania, and the Western District of
Tennessee transferred to the Northern District of Illinois. The Judicial Panel
further identified subsequently filed actions now pending in the District of
Columbia, the Western District of Kentucky, the Middle District of Louisiana,
the Eastern District of Missouri, and the Northern District of Ohio as subject
to potential transfer as tag along actions. On October 12, 2001, McDonald's,
with Simon Marketing's consent, filed a Petition to Coordinate in a single court
in Orange County all actions pending in California State Superior Court.
Recently, the Petition was granted and on February 7, 2002 all cases pending in
California state court were assigned to the Honorable Ronald Bauer in Orange
County. In addition, the Illinois state court actions remain consolidated before
a single judge.
The Company is currently involved in negotiations to settle these actions as
part of a single nationwide class action settlement. The Company is unable to
predict the outcome of any or all of these lawsuits and the ultimate effect, if
any, on the Company's financial condition, results of operations or net cash
flows.
On October 23, 2001, Simon Marketing and the Company filed suit against
McDonald's in California Superior Court for the County of Los Angeles. The
complaint alleges, among other things, fraud, defamation and breach of contract
in connection with the termination of Simon Marketing's relationship with
McDonald's.
Also on October 23, 2001, the Company and Simon Marketing were named as
defendants, along with a former employee of Simon Marketing, and certain other
individuals unrelated to the Company or Simon Marketing, in a complaint filed by
McDonald's in the United States District Court for the Northern District of
Illinois. The complaint alleges that Simon Marketing has engaged in fraud,
breach of contract, breach of fiduciary obligations and civil conspiracy and
alleges that McDonald's is entitled to indemnification and damages of an
unspecified amount.
4
On November 13, 2001, the Company filed suit against Philip Morris in California
Superior Court for the County of Los Angeles, asserting numerous causes of
action arising from Philip Morris' termination of the Company's relationship
with Philip Morris. Subsequently, the Company dismissed the action without
prejudice, so that the Company and Philip Morris could attempt to resolve this
dispute outside of litigation. Settlement discussions are ongoing.
The Company is unable to predict the outcome of the McDonald's complaint, or of
its suit against McDonald's or its settlement discussions with Philip Morris,
and their ultimate effects, if any, on the Company's financial condition,
results of operations or net cash flows.
In March 2002, Simon Marketing initiated a lawsuit against certain suppliers and
agents of McDonald's in California Superior Court for the County of Los Angeles.
The complaint alleges, among other things, breach of contract and intentional
interference with contractual relations. The Company is unable to predict the
outcome of this lawsuit or the ultimate effect, if any, of it on the Company's
financial condition, results of operations or net cash flows.
Outlook
As a result of the loss of its McDonald's and Philip Morris business, along with
the resulting legal matters as discussed above, there is substantial doubt about
the Company's ability to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty. The Company has taken and will continue to take action to reduce
its cost structure. It is anticipated that the Company will be wound up and
liquidated, possibly through bankruptcy proceedings, in the near future.
For additional information related to certain matters discussed in this section,
reference is made to the Company's Reports on Form 8-K dated August 21, 2001,
September 17, 2001, September 21, 2001 and October 30, 2001, respectively.
1999 YUCAIPA INVESTMENT
In November 1999, The Yucaipa Companies ("Yucaipa"), a Los Angeles-based
investment firm, invested $25 million into Simon Worldwide in exchange for
25,000 shares of a new series A convertible preferred stock and a warrant to
purchase an additional 15,000 shares of series A convertible preferred stock. In
connection with the investment, which was approved by Simon Worldwide's
stockholders, Simon Worldwide's Board of Directors was increased to seven and
three designees of Yucaipa, including Yucaipa's managing partner, Ronald W.
Burkle, were elected to Simon Worldwide's board and Mr. Burkle was elected
chairman. Mr. Burkle and Erika Paulson, a Yucaipa representative on the Board of
Directors, resigned from Simon Worldwide's Board of Directors in August 2001.
Additionally, in November 1999, the Company entered into a five year Management
Agreement with Yucaipa whereby Yucaipa provides Simon Worldwide with management
and consultation services in exchange for an annual fee of $500,000 per year.
2000 CORPORATE RESTRUCTURING
In May 2000, the Company announced that it would implement a plan to restructure
its operations by integrating and streamlining its traditional promotional
products business into one product-focused business unit. As a result of the
restructuring plan, the Company eliminated 85 positions or 7% of its domestic
workforce. The restructuring plan was substantially complete by the end of 2000,
and was terminated with respect to the CPG business as a result of the February
2001 sale of CPG.
2001 SALE OF BUSINESS
Pursuant to its decision in December 2000, the Company sold its CPG business on
February 15, 2001 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. $2.3 million of the purchase price
was paid with a 10% per annum five-year subordinated note from Cyrk, with the
balance being paid in cash. The 2000 financial statements reflected this
transaction and included a pre-tax charge recorded in the fourth quarter of 2000
of $50.1 million due to the loss on the sale of the CPG business, $22.7 million
of which was associated with the write-off of goodwill attributable to CPG. CPG
was engaged in the corporate catalog and specialty advertising segment of the
promotions industry. The group was formed as a result of the Company's
acquisitions of Marketing Incentives, Inc. and Tonkin, Inc. in 1996 and 1997,
respectively. The sale of CPG effectively terminated the restructuring effort
announced by the Company in May 2000
5
with respect to the CPG business. For additional information related to this
transaction, reference is made to the Company's Report on Form 8-K dated
February 15, 2001.
Following the closing of the sale of the CPG business, certain disputes arose
between the Company and Cyrk. In March 2002, the Company entered into a
settlement agreement with Cyrk. Under the settlement agreement: (1) the Company
contributed $500,000 towards the settlement of a lawsuit against the Company and
Cyrk made by a former employee, (2) the Company cancelled the remaining
indebtedness outstanding under Cyrk's subordinated promissory note in favor of
the Company in the original principal amount of $2.3 million, (3) Cyrk agreed to
vacate the Danvers, Massachusetts facility by June 15, 2002 and that lease shall
terminate as of June 30, 2002 (see Item 2. Properties below), (4) Cyrk and the
Company each released the other from all known and unknown claims (subject to
limited exceptions) including Cyrk's release of all indemnity claims made
against the Company arising out of its purchase of the CPG business, and (5) a
letter of credit in the amount of $500,000 will be provided by Cyrk for the
benefit of the Company to support a portion of a $4.2 million letter of credit
provided by the Company for the benefit of Cyrk in connection with Cyrk's
purchase of the CPG business. If Cyrk fails to perform its obligations under
this agreement, or fails to perform and discharge liabilities assumed in
connection with its purchase of the CPG business, then all or a portion of
Cyrk's indebtedness to the Company under the subordinated promissory note may be
reinstated. Pursuant to this agreement, the Company's 2001 financial statements
have been adjusted to reflect the settlement, and include a pre-tax charge of
$2.3 million associated with the write-off of the subordinated note.
2001 RESTRUCTURING
After the February 2001 sale of its CPG business, the Company implemented a
second quarter 2001 restructuring plan to shutdown or consolidate certain
businesses, sell certain assets and liabilities related to its legacy corporate
catalog business in the United Kingdom and eliminate approximately two-thirds
(40 positions) of its Wakefield, Massachusetts corporate office workforce.
Additionally, the Company announced the resignation of its co-chief executive
officer and two other executive officers, including the Company's chief
financial officer. Consequently, the Company announced that all responsibilities
for the chief executive officer position had been consolidated under Allan I.
Brown, who had served as co-chief executive officer since November 1999 and as
the chief executive officer of Simon Marketing, Inc., the Company's wholly-owned
subsidiary based in Los Angeles, California since 1975. The restructuring plan
was substantially complete by the end of 2001. For additional information
related to these events, reference is made to the Company's Report on Form 8-K
dated June 15, 2001.
ITEM 2. PROPERTIES.
As a consequence of the loss of its two major customers and its resulting
effects (see Item 1 above), including substantial doubt about the Company's
ability to continue as a going concern, the Company has taken action to
significantly reduce its worldwide infrastructure. As such, the Company has
eliminated approximately 377 positions worldwide and has taken and will continue
to take action to reduce its global property commitments as it winds down its
business.
At December 31, 2001, Simon Worldwide leased approximately 47,900 square feet of
office space in Wakefield, Massachusetts under a lease that expires in March
2005 and has an annual base rent of approximately $623,000. The Company is
currently negotiating with its landlord to settle its remaining lease obligation
and the Company expects to vacate its Wakefield premises in the first half of
2002 and transfer all remaining Simon Worldwide activity to Los Angeles.
Until February 2001, the Company also leased approximately 120,000 square feet
of warehouse space in Danvers, Massachusetts under the terms of a lease which
expires in December 2011 and has an annual base rent of approximately $460,000.
As a result of the CPG sale in February 2001, the buyer became the primary
obligor under this lease; however, Simon Worldwide remained liable under this
lease to the extent that the buyer does not perform its obligations under the
lease. Pursuant to an agreement entered into in March 2002 among the Company,
the buyer and the landlord, the lease will terminate effective June 30, 2002,
along with any and all obligations of the Company under the lease.
Related to its Simon Marketing operations, the Company negotiated early
terminations of all its domestic leases in the first quarter of 2002. Simon
Marketing will remain in a portion of its Los Angeles office space until the
second quarter of 2002, at which time it expects to relocate its remaining
scaled-down operations to smaller office space.
6
In addition to its domestic lease facilities, the Company has also negotiated or
is in the process of negotiating early lease terminations of its Asian and
European office and warehouse space.
The Company expects to make aggregate payments totaling approximately $2.2
million in the first half of 2002 related to the early termination of its
various worldwide facilities leases.
For a summary of the Company's minimum rental commitments under all
noncancelable operating leases as of December 31, 2001, see notes to
consolidated financial statements.
ITEM 3. LEGAL PROCEEDINGS.
Legal Actions Associated with the McDonald's Matter
Subsequent to August 21, 2001, numerous consumer class action and representative
action lawsuits (hereafter variously referred to as, "actions", "complaints" or
"lawsuits") have been filed in multiple jurisdictions nationwide. Plaintiffs in
these actions assert diverse causes of action, including negligence, breach of
contract, fraud, restitution, unjust enrichment, misrepresentation, false
advertising, breach of warranty, unfair competition and violation of various
state consumer fraud statutes. Complaints filed in federal court in New Jersey
and Illinois also allege a pattern of racketeering.
Plaintiffs in many of these actions allege, among other things, that defendants,
including the Company, Simon Marketing, and McDonald's, misrepresented that
plaintiffs had a chance at winning certain high-value prizes when in fact the
prizes were stolen by Mr. Jacobson. Plaintiffs seek various forms of relief,
including restitution of monies paid for McDonald's food, disgorgement of
profits, recovery of the "stolen" game prizes, other compensatory damages,
attorney's fees, punitive damages and injunctive relief.
The lawsuits remain in the very early stages and discovery has yet to commence
in any of these proceedings. Simon Marketing has consented to the removal to
federal court by McDonald's of each of the complaints filed in state courts
other than in California and Illinois. Plaintiffs in some of these cases have
moved to remand the cases to state court. In those cases in which courts have
ruled on the remand motions, they have been denied in all but the case pending
in Florida district court, which recently remanded the case to Florida state
court. Other remand motions remain pending. On October 9, 2001, McDonald's filed
a motion with the Judicial Panel on Multidistrict Litigation seeking to transfer
all complaints pending in federal courts nationwide, including the removed cases
and subsequently filed cases, to a single federal court in the Northern District
of Illinois. On February 21, 2002, the Judicial Panel granted McDonald's motion
and ordered cases pending in the districts of Arizona, the Eastern District of
Arkansas, the Northern District of Florida, the Northern District of Illinois,
New Jersey, the Eastern District of Pennsylvania, and the Western District of
Tennessee transferred to the Northern District of Illinois. The Judicial Panel
further identified subsequently filed actions now pending in the District of
Columbia, the Western District of Kentucky, the Middle District of Louisiana,
the Eastern District of Missouri, and the Northern District of Ohio as subject
to potential transfer as tag along actions. On October 12, 2001, McDonald's,
with Simon Marketing's consent, filed a Petition to Coordinate in a single court
in Orange County all actions pending in California State Superior Court.
Recently, the Petition was granted and on February 7, 2002 all cases pending in
California state court were assigned to the Honorable Ronald Bauer in Orange
County. In addition, the Illinois state court actions remain consolidated before
a single judge.
The Company is currently involved in negotiations to settle these actions as
part of a single nationwide class action settlement. The Company is unable to
predict the outcome of any or all of these lawsuits and the ultimate effect, if
any, on the Company's financial condition, results of operations or net cash
flows.
On October 23, 2001, Simon Marketing and the Company filed suit against
McDonald's in California Superior Court for the County of Los Angeles. The
complaint alleges, among other things, fraud, defamation and breach of contract
in connection with the termination of Simon Marketing's relationship with
McDonald's.
Also on October 23, 2001, the Company and Simon Marketing were named as
defendants, along with a former employee of Simon Marketing, and certain other
individuals unrelated to the Company or Simon Marketing, in a complaint filed by
McDonald's in the United States District Court for the Northern District of
Illinois. The complaint
7
alleges that Simon Marketing has engaged in fraud, breach of contract, breach of
fiduciary obligations and civil conspiracy and alleges that McDonald's is
entitled to indemnification and damages of an unspecified amount.
On November 13, 2001, the Company filed suit against Philip Morris in California
Superior Court for the County of Los Angeles, asserting numerous causes of
action arising from Philip Morris' termination of the Company's relationship
with Philip Morris. Subsequently, the Company dismissed the action without
prejudice, so that the Company and Philip Morris could attempt to resolve this
dispute outside of litigation. Settlement discussions are ongoing.
The Company is unable to predict the outcome of the McDonald's complaint, or of
its suit against McDonald's or its settlement discussions with Philip Morris,
and their ultimate effects, if any, on the Company's financial condition,
results of operations or net cash flows.
In March 2002, Simon Marketing initiated a lawsuit against certain suppliers and
agents of McDonald's in California Superior Court for the County of Los Angeles.
The complaint alleges, among other things, breach of contract and intentional
interference with contractual relations. The Company is unable to predict the
outcome of this lawsuit or the ultimate effect, if any, of it on the Company's
financial condition, results of operations or net cash flows.
For additional information related to certain matters discussed in this section,
reference is made to the Company's Reports on Form 8-K dated August 21, 2001,
September 17, 2001, September 21, 2001 and October 30, 2001, respectively.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
NONE
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's stock is traded on The Nasdaq Stock Market under the symbol SWWI.
The Company has been informed by Nasdaq that its shares of common stock will be
delisted from the The Nasdaq Stock Market on or after May 15, 2002 as a result
of the Company not satisfying certain Nasdaq listing requirements. The following
table presents, for the periods indicated, the high and low sales prices of the
Company's common stock as reported by The Nasdaq Stock Market's National Market.
2001 2000
High Low High Low
---- --- ---- ---
First Quarter $4.13 $2.00 $13.63 $7.00
Second Quarter 2.99 1.72 9.31 4.31
Third Quarter 3.34 .16 7.50 2.94
Fourth Quarter .37 .09 4.47 1.81
As of February 28, 2002, the Company had approximately 346 holders of record
(representing approximately 5,500 beneficial owners) of its common stock. The
last reported sale price of the Company's common stock on February 28, 2002 was
$.15.
The Company has never paid cash dividends, other than Series A preferred stock
distributions in 2000 and stockholder distributions of Subchapter S earnings
during 1993 and 1992.
9
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED INCOME For the Years Ended December 31,
STATEMENT DATA: 2001 2000 1999 1998 1997(5)
---- ---- ---- ---- ----
(In thousands, except per share data)
Net sales $ 324,040 $768,450 $988,844 $757,753 $558,623
Net income (loss) (122,345)(1) (69,715)(2) 11,136(3) (3,016)(4) 3,236
Earnings (loss) per
common share - basic (7.50)(1) (4.43)(2) 0.70(3) (0.20)(4) 0.26
Earnings (loss) per
common share - diluted (7.50)(1) (4.43)(2) 0.67(3) (0.20)(4) 0.25
SELECTED BALANCE December 31,
SHEET DATA: 2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(In thousands)
Working capital $ 4,572 $ 60,371 $110,823 $ 87,517 $ 61,314
Total assets 77,936 252,435 369,148 337,341 313,845
Long-term obligations 6,785 6,587 9,156 12,099 9,611
Redeemable preferred
stock 26,538 25,500 25,000 -- --
Stockholders' (deficit) equity (11,497) 116,176 186,077 177,655 160,353
(1) Includes $46,671 of pre-tax impairment of intangible asset, $33,644 of
pre-tax charges attributable to loss of significant customers and $20,212
of pre-tax restructuring and nonrecurring charges. See notes to
consolidated financial statements.
(2) Includes $50,103 of pre-tax loss on sale of business and $6,395 of pre-tax
restructuring and nonrecurring charges. See notes to consolidated
financial statements.
(3) Includes $1,675 of pre-tax nonrecurring charges. See notes to consolidated
financial statements.
(4) Includes $15,288 of pre-tax restructuring and nonrecurring charges.
(5) Includes the results of operations of acquired companies from the
acquisition dates.
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
From time to time, the Company may provide forward-looking information such as
forecasts of expected future performance or statements about the Company's plans
and objectives, including certain information provided below. These
forward-looking statements are based largely on the Company's expectations and
are subject to a number of risks and uncertainties, certain of which are beyond
the Company's control. The Company wishes to caution readers that actual results
may differ materially from those expressed in any forward-looking statements
made by, or on behalf of, the Company including, without limitation, as a result
of factors described in the Company's Amended Cautionary Statement for Purposes
of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act
of 1995, filed as Exhibit 99.1 to this Report on Form 10-K.
GENERAL
In August 2001, the Company experienced the loss of its two largest customers:
McDonald's Corporation ("McDonald's") and, to a lesser extent, Philip Morris
Incorporated ("Philip Morris") (see Loss of Customers, Resulting Events and
Going Concern section below). Until the unanticipated events of August 2001
occurred, the Company 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 product and
services companies seeking to promote their brand names and corporate identities
and build brand loyalty. Net sales to McDonald's and Philip Morris accounted for
78% and 8%, 65% and 9% and 61% and 9% of total net sales in 2001, 2000 and 1999,
respectively.
Beginning in 1996, the Company grew as a result of a series of acquisitions of
companies engaged in the corporate catalog and advertising specialty segment of
the promotion industry. Certain of these acquired companies operated within the
Company's Corporate Promotions Group ("CPG") and had a history of disappointing
financial results. As a result, the Company sold these businesses in February of
2001 (see Sale of Business section below).
In 1997, the Company expanded into the consumer promotion arena with its
acquisition of Simon Marketing, Inc. ("Simon Marketing"), a Los Angeles-based
marketing and promotion agency. The Company conducted its business with
McDonald's through its Simon Marketing subsidiary. Simon Marketing designed and
implemented marketing promotions for McDonald's, which included premiums, games,
sweepstakes, events, contests, coupon offers, sports marketing, licensing and
promotional retail items.
LOSS OF CUSTOMERS, RESULTING EVENTS AND GOING CONCERN
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 was alleged to have embezzled winning game pieces from
McDonald's promotional games administered by Simon Marketing. The Second
Superseding Indictment filed December 7, 2001 by the U.S. Attorney in the United
States District Court for the Middle District of Florida alleges that Mr.
Jacobson "embezzled more than $20 million worth of high value winning McDonald's
promotional game pieces from his employer, [Simon]". Simon Marketing is
identified in the Indictment, along with McDonald's, as one of the victims of
Mr. Jacobson's alleged fraudulent scheme. (Also, see section, Legal Actions
Associated with the McDonald's Matter, below.) Further, on August 23, 2001, the
Company was notified that its second largest customer, Philip Morris, was also
ending their approximately nine year relationship with the Company. Net sales to
McDonald's and Philip Morris accounted for 78% and 8%, 65% and 9% and 61% and 9%
of total net sales in 2001, 2000 and 1999, respectively. The Company's financial
condition, results of operations and net cash flows have been and will continue
to be materially adversely affected by the loss of the McDonald's and Philip
Morris business, as well as the loss of its other customers. In addition, the
absence of business from McDonald's and Philip Morris has adversely affected the
Company's relationship with and access to foreign manufacturing sources.
At December 31, 2001, the Company had no customer backlog as compared to $236.9
million of written customer purchase orders at December 31, 2000.
11
As a result of the loss of these major customers (as well as its other
customers), along with the resulting legal matters discussed further below,
there is substantial doubt about Simon Worldwide'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. Simon
Worldwide has taken and will continue to take action to reduce its cost
structure. The Company has eliminated, or is in the process of eliminating, much
of its operations throughout the world, including its sourcing arm in Asia and
most of its worldwide sales and general and administrative operations. As of
December 31, 2001, the Company had 136 employees worldwide and the Company
expects to reduce its worldwide workforce to approximately 46 employees by the
end of the first quarter of 2002. It is anticipated that the Company will be
wound up and liquidated, possibly through bankruptcy proceedings, in the near
future.
As a result of actions taken in the second half of 2001, the Company recorded
third and fourth quarter pre-tax charges totaling approximately $80.3 million.
These charges relate principally to the write-down of goodwill attributable to
Simon Marketing ($46.7 million) and to a substantial reduction of its worldwide
infrastructure; including, asset write-downs ($22.4 million), lump-sum severance
costs associated with the termination of approximately 377 employees ($6.3
million), lease cancellations ($1.8 million), legal fees ($1.7 million) and
other costs associated with the McDonald's and Philip Morris matters ($1.4
million).
In order to induce their continued commitment to provide vital services to the
Company in the wake of the events of August 2001, in the third quarter of 2001
the Company entered into retention arrangements with its Chief Executive
Officer, each of the three non-management members of the Company's Board of
Directors (the "Board") and key members of management of Simon Marketing. As a
further inducement to the Company's directors to continue their service to the
Company, and to provide assurances that the Company will be able to fulfill its
obligations to indemnify directors, officers and agents of the Company and its
subsidiaries ("Indemnitees") under Delaware law and pursuant to various
contractual arrangements, in March 2002 the Company entered into an
Indemnification Trust Agreement ("Agreement") for the benefit of the
Indemnitees. (See notes to consolidated financial statements.) Pursuant to
this Agreement, the Company has deposited a total of $2.7 million with an
independent trustee in order to fund any indemnification amounts owed to an
Indemnitee which the Company is unable to pay. These arrangements, and the
severance arrangements described below, were negotiated by the Company on an
arms-length basis with the advice of the Company's counsel and other advisors.
In connection with the wind-down of its business operations and pursuant to
negotiations that began in the fourth quarter of 2001, the Company entered into
a Termination, Severance and General Release Agreement ("Agreement") with its
Chief Executive Officer ("CEO") in March 2002. In accordance with the terms of
this Agreement, the CEO's employment with the Company terminated in March 2002
(the CEO will remain on the Company's Board of Directors) and substantially all
other agreements, obligations and rights existing between the CEO and the
Company were terminated, including the CEO's Employment Agreement dated
September 1, 1999, as amended, and his retention agreement dated August 29,
2001. (For additional information related to the CEO's retention agreement, see
the Company's 2001 third quarter Form 10-Q.) The ongoing operations of the
Company and Simon Marketing are being managed by the Executive Committee of the
Board consisting of Messrs. Golleher and Kouba, in consultation with outside
financial, accounting, legal and other advisors. As a result of the foregoing,
the Company recorded a 2001 fourth quarter pre-tax charge of $4.6 million,
relating principally to the forgiveness of indebtedness of the CEO to the
Company, a lump-sum severance payment and the write-off of an asset associated
with an insurance policy on the life of the CEO. The Company received a full
release from the CEO in connection with this Agreement, and the Company provided
the CEO with a full release. Additionally, the Agreement calls for the CEO to
provide consulting services to the Company for a period of six months after the
CEO's employment with the Company terminated in exchange for a fee of $46,666
per month, plus specified expenses. See notes to consolidated financial
statements and Executive Compensation.
On August 28, 2001, the Company entered into retention letter agreements with
each of Joseph Bartlett, George Golleher and Anthony Kouba, the non-management
members of the Board, pursuant to which the Company paid each of them a
retention fee of $150,000 in exchange for their agreement to serve as a director
of the Company for at least six months. If a director resigned before the end of
the six-month period, the director would have been required to refund to the
Company the pro rata portion of the retention fee equal to the percentage of the
six-month period not served. Additionally, the Company agreed to compensate
these directors at an hourly rate of $750 for services outside of Board and
committee meetings (for which they are paid $2,000 per meeting in accordance
with existing Company policy). See Directors' Compensation.
12
In addition, retention agreements were entered into in September and October
2001 with certain key employees which provide for retention payments ranging
from 8% to 100% of their respective salaries conditioned upon continued
employment through specified dates and/or severance payments up to 100% of these
employee's respective annual salaries should such employees be terminated within
the parameters of their agreements (for example, termination without cause). In
the first quarter of 2002, additional similar agreements were entered into with
certain employees of one of the Company's subsidiaries. The terms of these
severance agreements were generally consistent with the terms of the employees'
prior retention agreements. Payments under these agreements have been made at
various dates from September 2001 through March 2002. The Company's obligations
under these agreements are approximately $3.1 million. Approximately $1.7
million of these commitments had been segregated in separate cash accounts in
October 2001, in which security interests had been granted to certain employees,
and have been released back to the Company in 2002 upon making of retention and
severance payments to these applicable employees.
Legal Actions Associated with the McDonald's Matter
Subsequent to August 21, 2001, numerous consumer class action and representative
action lawsuits (hereafter variously referred to as, "actions", "complaints" or
"lawsuits") have been filed in multiple jurisdictions nationwide. Plaintiffs in
these actions assert diverse causes of action, including negligence, breach of
contract, fraud, restitution, unjust enrichment, misrepresentation, false
advertising, breach of warranty, unfair competition and violation of various
state consumer fraud statutes. Complaints filed in federal court in New Jersey
and Illinois also allege a pattern of racketeering.
Plaintiffs in many of these actions allege, among other things, that defendants,
including the Company, Simon Marketing, and McDonald's, misrepresented that
plaintiffs had a chance at winning certain high-value prizes when in fact the
prizes were stolen by Mr. Jacobson. Plaintiffs seek various forms of relief,
including restitution of monies paid for McDonald's food, disgorgement of
profits, recovery of the "stolen" game prizes, other compensatory damages,
attorney's fees, punitive damages and injunctive relief.
The lawsuits remain in the very early stages and discovery has yet to commence
in any of these proceedings. Simon Marketing has consented to the removal to
federal court by McDonald's of each of the complaints filed in state courts
other than in California and Illinois. Plaintiffs in some of these cases have
moved to remand the cases to state court. In those cases in which courts have
ruled on the remand motions, they have been denied in all but the case pending
in Florida district court, which recently remanded the case to Florida state
court. Other remand motions remain pending. On October 9, 2001, McDonald's filed
a motion with the Judicial Panel on Multidistrict Litigation seeking to transfer
all complaints pending in federal courts nationwide, including the removed cases
and subsequently filed cases, to a single federal court in the Northern District
of Illinois. On February 21, 2002, the Judicial Panel granted McDonald's motion
and ordered cases pending in the districts of Arizona, the Eastern District of
Arkansas, the Northern District of Florida, the Northern District of Illinois,
New Jersey, the Eastern District of Pennsylvania, and the Western District of
Tennessee transferred to the Northern District of Illinois. The Judicial Panel
further identified subsequently filed actions now pending in the District of
Columbia, the Western District of Kentucky, the Middle District of Louisiana,
the Eastern District of Missouri, and the Northern District of Ohio as subject
to potential transfer as tag along actions. On October 12, 2001, McDonald's,
with Simon Marketing's consent, filed a Petition to Coordinate in a single court
in Orange County all actions pending in California State Superior Court.
Recently, the Petition was granted and on February 7, 2002 all cases pending in
California state court were assigned to the Honorable Ronald Bauer in Orange
County. In addition, the Illinois state court actions remain consolidated before
a single judge.
The Company is currently involved in negotiations to settle these actions as
part of a single nationwide class action settlement. The Company is unable to
predict the outcome of any or all of these lawsuits and the ultimate effect, if
any, on the Company's financial condition, results of operations or net cash
flows.
On October 23, 2001, Simon Marketing and the Company filed suit against
McDonald's in California Superior Court for the County of Los Angeles. The
complaint alleges, among other things, fraud, defamation and breach of contract
in connection with the termination of Simon Marketing's relationship with
McDonald's.
Also on October 23, 2001, the Company and Simon Marketing were named as
defendants, along with a former employee of Simon Marketing, and certain other
individuals unrelated to the Company or Simon Marketing, in a
13
complaint filed by McDonald's in the United States District Court for the
Northern District of Illinois. The complaint alleges that Simon Marketing has
engaged in fraud, breach of contract, breach of fiduciary obligations and civil
conspiracy and alleges that McDonald's is entitled to indemnification and
damages of an unspecified amount.
On November 13, 2001, the Company filed suit against Philip Morris in California
Superior Court for the County of Los Angeles, asserting numerous causes of
action arising from Philip Morris' termination of the Company's relationship
with Philip Morris. Subsequently, the Company dismissed the actions without
prejudice, so that the Company and Philip Morris could attempt to resolve this
dispute outside of litigation. Settlement discussions are ongoing.
The Company is unable to predict the outcome of the McDonald's complaint, or of
its suit against McDonald's or its settlement discussions with Philip Morris,
and their ultimate effects, if any, on the Company's financial condition,
results of operations or net cash flows.
In March 2002, Simon Marketing initiated a lawsuit against certain suppliers and
agents of McDonald's in California Superior Court for the County of Los Angeles.
The complaint alleges, among other things, breach of contract and intentional
interference with contractual relations. The Company is unable to predict the
outcome of this lawsuit or the ultimate effect, if any, of it on the Company's
financial condition, results of operations or net cash flows.
Outlook
As a result of the loss of its McDonald's and Philip Morris business, along with
the resulting legal matters as discussed above, there is substantial doubt about
the Company's ability to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty. The Company has taken and will continue to take action to reduce
its cost structure. It is anticipated that the Company will be wound up and
liquidated, possibly through bankruptcy proceedings, in the near future.
For additional information related to certain matters discussed in this section,
reference is made to the Company's Reports on Form 8-K dated August 21, 2001,
September 17, 2001, September 21, 2001 and October 30, 2001, respectively.
SALE OF BUSINESS
Pursuant to its decision in December 2000, the Company sold its CPG business on
February 15, 2001 to Cyrk, Inc. ("Cyrk"), formerly known as Rockridge Partners,
Inc., an investor group led by Gemini Investors LLC, a Wellesley,
Massachusetts-based private equity investment firm, pursuant to a Purchase
Agreement entered into as of January 20, 2001 (as amended, the "Purchase
Agreement") for approximately $14.0 million, which included the assumption of
approximately $3.7 million of Company debt. $2.3 million of the purchase price
was paid with a 10% per annum five-year subordinated note from Cyrk, with the
balance being paid in cash. The 2000 financial statements reflected this
transaction and included a pre-tax charge recorded in the fourth quarter of 2000
of $50.1 million due to the loss on the sale of the CPG business, $22.7 million
of which was associated with the write-off of goodwill attributable to CPG. This
charge had the effect of increasing the 2000 net loss available to common
stockholders by approximately $49.0 million or $3.07 per share. Net sales in
2000 attributable to the CPG business were $146.8 million, or 19% of
consolidated Company revenues. Net sales in the first quarter of 2001, for the
period through February 14, 2001, attributable to the CPG business, were $17.7
million, or 17% of consolidated Company revenues. Net sales in the first quarter
of 2000 attributable to the CPG business were $33.6 million, or 19% of
consolidated Company revenues.
CPG was engaged in the corporate catalog and specialty advertising segment of
the promotions industry. The group was formed as a result of the Company's
acquisitions of Marketing Incentives, Inc. ("MI") and Tonkin, Inc. ("Tonkin") in
1996 and 1997, respectively.
Pursuant to the Purchase Agreement, Cyrk purchased from the Company (i) all of
the outstanding capital stock of Cyrk Acquisition Corp. ("CAC"), successor to
the business of MI, and Tonkin, each a wholly-owned subsidiary of the Company,
(ii) certain other assets of the Company, including those assets at the
Company's Danvers and Wakefield, Massachusetts facilities necessary for the
operation of the CPG business and (iii) all intellectual property of the CPG
business as specified in the Purchase Agreement. Cyrk assumed certain
liabilities of the CPG business as specified in
14
the Purchase Agreement and all of the assets and liabilities of CAC and Tonkin
and, pursuant to the Purchase Agreement, the Company agreed to transfer its
former name, Cyrk, to the buyer. Cyrk extended employment offers to certain
former employees of the Company who had performed various support activities,
including accounting, human resources, information technology, legal and other
various management functions. 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.
The sale of CPG effectively terminated the restructuring effort announced by the
Company in May 2000 with respect to the CPG business.
For additional information related to this transaction, reference is made to the
Company's Report on Form 8-K dated February 15, 2001.
Following the closing of the sale of the CPG business, certain disputes arose
between the Company and Cyrk. In March 2002, the Company entered into a
settlement agreement with Cyrk. Under the settlement agreement: (1) the Company
contributed $500,000 towards the settlement of a lawsuit against the Company and
Cyrk made by a former employee, (2) the Company cancelled the remaining
indebtedness outstanding under Cyrk's subordinated promissory note in favor of
the Company in the original principal amount of $2.3 million, (3) Cyrk agreed to
vacate the Danvers, Massachusetts facility by June 15, 2002 and that lease shall
terminate as of June 30, 2002, (4) Cyrk and the Company each released the other
from all known and unknown claims (subject to limited exceptions) including
Cyrk's release of all indemnity claims made against the Company arising out of
its purchase of the CPG business, and (5) a letter of credit in the amount of
$500,000 will be provided by Cyrk for the benefit of the Company to support a
portion of a $4.2 million letter of credit provided by the Company for the
benefit of Cyrk in connection with Cyrk's purchase of the CPG business. If Cyrk
fails to perform its obligations under this agreement, or fails to perform and
discharge liabilities assumed in connection with its purchase of the CPG
business, then all or a portion of Cyrk's indebtedness to the Company under the
subordinated promissory note may be reinstated. Pursuant to this agreement, the
Company's 2001 financial statements have been adjusted to reflect the
settlement, and include a pre-tax charge of $2.3 million associated with the
write-off of the subordinated note.
2001 RESTRUCTURING
After the February 2001 sale of its CPG business, the Company conducted a second
quarter 2001 evaluation of its remaining businesses with the objective of
restoring consistent profitability through a more rationalized, cost-efficient
business model. As a result of this evaluation, and pursuant to a plan approved
by its Board of Directors, the Company has taken action to shutdown or
consolidate certain businesses, sell certain assets and liabilities related to
its legacy corporate catalog business in the United Kingdom and eliminate
approximately two-thirds (40 positions) of its Wakefield, Massachusetts
corporate office workforce. Additionally, the Company announced the resignation
of its co-chief executive officer and two other executive officers, including
the Company's chief financial officer. Consequently, the Company announced that
all responsibilities for the chief executive officer position had been
consolidated under Allan I. Brown, who had served as co-chief executive officer
since November 1999 and as the chief executive officer of Simon Marketing, Inc.,
the Company's wholly-owned subsidiary based in Los Angeles, California since
1975. For additional information related to these events, reference is made to
the Company's Report on Form 8-K dated June 15, 2001.
As a result of these actions, the Company recorded a second quarter 2001 pre-tax
charge of approximately $20.2 million for restructuring expenses. The second
quarter charge relates principally to employee termination costs ($10.5
million), asset write-downs which were primarily attributable to a consolidation
of its Wakefield, Massachusetts workspace ($6.5 million), a loss on the sale of
the UK business ($2.1 million) and the settlement of certain lease obligations
($1.1 million). Total cash outlays related to restructuring activities are
expected to be approximately $11.3 million. The restructuring plan was
substantially complete by the end of 2001.
2000 CORPORATE RESTRUCTURING
On May 11, 2000, the Company announced that, pursuant to a plan approved by its
Board of Directors, it was integrating and streamlining its traditional
promotional product divisions, Corporate Promotions Group and Custom
15
Product & Licensing, into one product-focused business unit. As a result of this
action, the Company recorded a 2000 pre-tax charge to operations of
approximately $5.7 million principally for involuntary termination costs, asset
write-downs and the settlement of lease obligations. See notes to consolidated
financial statements.
1999 EQUITY INVESTMENT
In November 1999, The Yucaipa Companies ("Yucaipa"), a Los Angeles-based
investment firm, invested $25 million in the Company in exchange for convertible
preferred stock and a warrant to purchase an additional $15 million of
convertible preferred stock. Under the terms of the investment, which was
approved at a Special Meeting of Stockholders held on November 10, 1999,
Yucaipa, through an affiliate, purchased 25,000 shares of a new series of
Company convertible preferred stock (initially convertible into 3,030,303 shares
of Company common stock) and received a warrant to purchase an additional 15,000
shares of a new series of Company convertible preferred stock (initially
convertible into 1,666,667 shares of Company common stock). The net proceeds
($20.6 million) from this transaction were used for general corporate purposes.
As of December 31, 2001, assuming conversion of all of the convertible preferred
stock, Yucaipa would own approximately 16% of the then outstanding common
shares. Assuming the preceding conversion, and assuming the exercise of the
warrant and the conversion of the preferred stock issuable upon its exercise,
Yucaipa would own a total of approximately 23% of the then outstanding common
shares making it the Company's largest shareholder.
In connection with this transaction, Ronald W. Burkle, managing partner of
Yucaipa, was appointed chairman of the Company's Board of Directors. In addition
to Mr. Burkle, Yucaipa is entitled to nominate two individuals to a seven-person
Simon Worldwide Board of Directors. Mr. Burkle and Erika Paulson, a Yucaipa
representative on the Board of Directors, resigned from Simon Worldwide's Board
of Directors in August 2001. Additionally, in November 1999, the Company agreed
to pay Yucaipa an annual management fee of $500,000 for a five-year term for
which Yucaipa will provide general business consultation and advice and
management services. See notes to consolidated financial statements.
For additional information related to this transaction, reference is made to the
Company's Report on Form 8-K and its proxy statement filed on Schedule 14A with
the Securities and Exchange Commission, dated September 1, 1999 and October 12,
1999, respectively.
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 and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, management evaluates
its estimates and bases its estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgements 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:
Accounts Receivable/Allowance for Doubtful Accounts. The Company evaluates the
collectibility of its accounts receivable on a specific identification basis. In
circumstances where the Company is aware of a customer's inability or
unwillingness to pay outstanding amounts, the Company records a specific reserve
for bad debts against amounts due to reduce the receivable to its estimated
collectible balance. The Company recorded bad debt expense of approximately
$15.5 million in 2001. The allowance for doubtful accounts at December 31, 2001,
of approximately $15.6 million, includes a reserve to cover amounts due
primarily from McDonald's. See Loss of Customers, Resulting Events and Going
Concern above and see notes to consolidated financial statements.
Long-term Investments. At December 31, 2001, the Company has investments in
two privately-held, Internet-related companies, totaling $10.5 million that are
being accounted for under the cost method. ($10.0
16
million is an indirect investment, through a limited liability company that is
controlled by Yucaipa, in Alliance Entertainment Corp. ("Alliance"). Yucaipa
is believed to be indirectly a significant shareholder in Alliance. Alliance is
one of the nation's largest home entertainment product distribution,
fulfillment, and infrastructure companies providing both brick-and-mortar and
e-commerce home entertainment retailers with complete business-to-business
solutions.) These companies are subject to all the risks inherent in the
Internet, including their dependency upon the widespread acceptance and use of
the Internet as an effective medium of commerce. Periodically, the Company
performs a review of the carrying value of its investments in these two
companies and considers such factors as current results, trends and future
prospects, capital market conditions and other economic factors. If deemed
necessary, the Company would adjust the carrying value of its investments to
reflect an impairment that is considered to be other than temporary. Based on
its year-end evaluation, the Company believes that the carrying value of these
investments at December 31, 2001 is fairly and properly stated. While the
Company will continue to periodically evaluate its investments, there can be no
assurance as to the future success of these companies, and thus the Company
might not ever realize any benefits from, or recover the cost of, its
investments. See notes to consolidated financial statements.
Accounts Payable, Trade and Accrued Expenses. The Company's trade payables at
year-end represent specific amounts due to a variety of suppliers and vendors
("vendors") worldwide for products and services delivered to and/or provided to
the Company through December 31, 2001. Additionally, accrued expenses at
year-end include specific Company liabilities and contingent payment obligations
to various vendors and former employees, respectively. Subsequent to December
31, 2001, and related to the winding down of its business affairs associated
with the loss of its two largest customers (as well as its other customers) (see
Loss of Customers, Resulting Events and Going Concern above and see notes to
consolidated financial statements), the Company has negotiated and will continue
to negotiate settlements related to many of its year-end liabilities.
Approximately $14.0 million of the Company's liabilities have been settled
subsequent to year-end. The negotiated settlements were on terms generally more
favorable to the Company than required by the original terms of these
obligations.
SIGNIFICANT CONTRACTUAL OBLIGATIONS
The following table includes certain significant contractual obligations of the
Company at December 31, 2001. See notes to consolidated financial statements for
additional information related to these and other obligations.
Payments Due by Period
Less Than 1-3 4-5 After 5
Total 1 Year Years Years Years
------- ------- ------- ------ -----
(In thousands)
Long-term debt $ -- $ -- $ -- $ -- $ --
Capital lease obligations 1,920 457 1,463 -- --
Operating leases (1) 23,535 2,524 13,484 7,527 --
Unconditional purchase obligations -- -- -- -- --
Contingent payment obligations (2) 5,872 5,872 -- -- --
Other long-term obligations 5,322 -- 5,322 -- --
------- ------ ------- ------ -----
Total contractual cash obligations $36,649 $8,853 $20,269 $7,527 $ --
======= ====== ======= ====== =====
(1) Payments for operating leases are recognized as an expense in the
Consolidated Statement of Operations as incurred.
(2) Contingent payment obligations arose from the acquisition of Simon
Marketing in 1997 and payment is due in June 2002. See Note 21 in
consolidated notes to financial statements.
17
OTHER COMMERCIAL COMMITMENTS
The following table includes certain commercial commitments of the Company at
December 31, 2001. See notes to consolidated financial statements for additional
information related to these and other commitments.
Amount of Commitment Expiration
Per Period
Total
Amounts Less Than 1-3 4-5 Over 5
Committed 1 Year Years Years Years
--------- ------ ----- ----- ------
(In thousands)
Lines of credit (1) $21,000 $21,000 $ -- $ -- $ --
Standby letters of credit (1) 5,700 5,700 -- -- --
Guarantees 328 328 -- -- --
Standby repurchase obligations -- -- -- -- --
Other commercial commitments -- -- -- -- --
------- ------- ----- ----- -----
Total commercial commitments $27,028 $27,028 $ -- $ -- $ --
======= ======= ===== ===== =====
(1) As a result of the loss of its McDonald's and Philip Morris business (see
Loss of Customers, Resulting Events and Going Concern above and see notes
to consolidated financial statements), the Company no longer has the
ability to borrow under its revolving credit facility or to issue a letter
of credit under any of its existing credit facilities without it being
fully cash collateralized.
RESULTS OF OPERATIONS
2001 Compared to 2000
As noted in the Loss of Customers, Resulting Events and Going Concern and the
2001 Restructuring sections above, the Company took a series of actions in 2001
which resulted in recording a 2001 pre-tax charge of approximately $80.3
million. See notes to consolidated financial statements.
Net sales decreased $444.4 million, or 58%, to $324.0 million in 2001 from
$768.4 million in 2000. The decrease in net sales was primarily attributable to
revenues associated with McDonald's and Philip Morris and revenues associated
with the CPG business sold in February 2001. See notes to consolidated financial
statements.
Gross profit decreased $72.3 million, or 50%, to $71.7 million in 2001 from
$144.0 million in 2000. As a percentage of net sales, gross profit increased to
22.1% in 2001 from 18.7% in 2000. The decrease in nominal gross margin dollars
is primarily attributable to the decrease in revenues associated with McDonald's
and Philip Morris and the revenues associated with the CPG business. The
increase in the gross margin percentage was due to the sales mix associated with
certain promotional programs.
Selling, general and administrative expenses totaled $81.4 million in 2001 as
compared to $162.2 million in 2000. The Company's decreased spending was due
principally to the effects of the sale of the CPG business and the effects
associated with the loss of its McDonald's and Philip Morris business. See notes
to consolidated financial statements. As a percentage of net sales, selling,
general and administrative costs totaled 25.1% in 2001 as compared to 21.1% in
2000 as a result of a lower sales base.
In connection with its May 2000 announcement to restructure its promotional
product divisions, the Company recorded a pre-tax restructuring charge of $5.7
million (including the $1.7 million inventory write-down charged against gross
profit). See notes to consolidated financial statements.
The Company also recorded a nonrecurring pre-tax charge to operations of $.7
million in 2000 associated with the settlement of a change in control agreement
with an employee of the Company who was formerly an executive officer. See notes
to consolidated financial statements.
18
Other income in 2001 includes a $4.2 million gain realized on the sale of an
investment which was partially offset by a $3.2 million charge to reflect an
other-than-temporary investment impairment. Other expense in 2000 includes a
$4.5 million charge related to an other-than-temporary investment impairment
associated with the Company's venture portfolio which was partially offset by a
$3.2 million gain realized on the sale of an investment. See notes to
consolidated financial statements.
Pursuant to a March 2002 settlement agreement with Cyrk as described above, the
Company recorded a 2001 pre-tax loss of $2.3 million associated with the
write-off of a subordinated note from Cyrk. In connection with the February 2001
sale of its CPG business, the Company recognized a 2000 pre-tax loss of $50.1
million, $22.7 million of which is associated with the write-off of goodwill
attributable to CPG. See notes to consolidated financial statements.
As required by Statement of Financial Accounting Standards 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
has considered recent events (see notes to consolidated financial statements)
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. To the extent that these assets have been deemed to be
unrealizable, a valuation allowance and tax provision of $22.6 million was
recorded in the third quarter of 2001. See notes to consolidated financial
statements.
RESULTS OF OPERATIONS
2000 Compared to 1999
Net sales decreased $220.4 million, or 22%, to $768.4 million in 2000 from
$988.8 million in 1999. The decrease in net sales was primarily attributable to
a decrease in revenues associated with McDonald's and Beanie Babies related
product sales in 2000.
Gross profit decreased $28.3 million, or 16%, to $144.0 million in 2000 from
$172.3 million in 1999. As a percentage of net sales, gross profit increased to
18.7% in 2000 from 17.4% in 1999. The increase in the gross margin percentage
was due principally to a more favorable sales mix in which sales volume
associated with certain promotional programs that have gross margin limitations
were less than the levels of a year ago.
Selling, general and administrative expenses totaled $162.2 million in 2000 as
compared to $155.0 million in 1999. As a percentage of net sales, selling,
general and administrative costs totaled 21.1% as compared to 15.7% in 1999. The
Company's increased spending was due principally to an increase in client
service costs and a $1.2 million charge for a contingent payment of cash and
stock which was associated with the acquisition of a previously acquired
company.
In connection with its May 2000 announcement to restructure its promotional
product divisions, the Company recorded a nonrecurring pre-tax restructuring
charge of $5.7 million (including the $1.7 million inventory write-down charged
against gross profit) attributable to employee termination costs, asset
write-downs and lease cancellations costs. See notes to consolidated financial
statements.
The Company also recorded a nonrecurring pre-tax charge to operations of $.7
million in 2000 associated with the settlement of a change in control agreement
with an employee of the Company who was formerly an executive officer. See notes
to consolidated financial statements. The Company recorded a 1999 nonrecurring
pre-tax charge to operations of $1.7 million associated with the settlement of
previously issued incentive stock options in a subsidiary which were issued to
principals of a previously acquired company. The settlement was reached to
facilitate the integration of the acquired company into other operations within
the Company's CPG division.
Other expense in 2000 includes a $4.5 million charge related to an
other-than-temporary investment impairment associated with the Company's venture
portfolio which was partially offset by a $3.2 million gain realized on the sale
of an investment. See notes to consolidated financial statements. Other income
of $2.8 million in 1999 represents a gain realized on the sale of an investment.
19
In connection with the February 2001 sale of its CPG business, the Company
recognized a 2000 pre-tax loss of $50.1 million, $22.7 million of which is
associated with the write-off of goodwill attributable to CPG. See notes to
consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
The matters discussed in the Loss of Customers, Resulting Events and Going
Concern section above, which will have a substantial adverse impact on the
Company's cash position, raise substantial concern about the Company's ability
to meet its future working capital obligations and raises substantial doubts
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 has taken and will continue to take
action to reduce its cost structure. It is anticipated that the Company will be
wound up and liquidated, possibly through bankruptcy proceedings, in the near
future. Since inception, the Company has financed its working capital and
capital expenditure requirements through cash generated from operations, and
investment and financing activities such as public and private sales of common
and preferred stock, bank borrowings, asset sales and capital equipment leases.
Working capital at December 31, 2001 was $4.6 million compared to $60.4 million
at December 31, 2000. Net cash used in operating activities during 2001 was
$22.2 million, due primarily to a net loss of $122.3 million which was partially
offset by a $69.1 million charge for impaired assets (primarily goodwill and
accounts receivable), $11.9 million of deferred income taxes, $9.0 million of
non-cash restructuring charges, $5.2 million of depreciation and amortization
and a $.9 million net increase in cash from working capital items. Net cash used
in operating activities during 2000 was $11.8 million, due principally to a net
loss of $69.7 million and a $34.9 million decrease in accrued expenses, which
were partially offset by the loss on sale of business of $47.9 million, a $20.1
million decrease in inventories, a $10.7 million decrease in accounts receivable
and $9.6 million of depreciation and amortization.
Net cash used in investing activities in 2001 was $.3 million, which was
primarily attributable to an $8.7 million increase in restricted cash, $7.9
million of investment purchases and $2.9 million of purchases of property and
equipment, which were partially offset by $11.1 million of proceeds from the
sale of investments and $8.4 million of proceeds from the sale of the CPG
business. See notes to consolidated financial statements. Net cash used in
investing activities in 2000 was $13.9 million, which was primarily attributable
to $12.8 million of purchases of property and equipment.
Net cash used in financing activities in 2001 was $4.2 million, which was
primarily attributable to $5.1 million of repayments of short-term borrowings.
Net cash used in financing activities in 2000 was $5.9 million which was
primarily attributable to $5.9 million of repayments of short-term borrowings
and long-term obligations.
In February 2001, the Company sold its CPG business for approximately $14.0
million, which included approximately $3.7 million of Company debt that was
assumed by the buyer. $2.3 million of the purchase price was paid with a 10% per
annum five-year subordinated note, with the balance being paid in cash. Pursuant
to a March 2002 settlement agreement between the Company and Cyrk, this note has
been cancelled. See Sale of Business above and notes to consolidated
financial statements.
Subsequent to December 31, 2001, and related to the winding down of its business
affairs associated with the loss of its two largest customers, as well as the
loss of its other customers, (see notes to consolidated financial statements),
the Company has negotiated early terminations on many of its facility and
non-facility operating leases, and has also negotiated settlements related to
liabilities with many of its suppliers. Approximately $20.0 million of the
Company's liabilities have been settled subsequent to year-end. These
settlements were on terms generally more favorable to the Company than required
by the existing terms of these obligations.
As a result of the precipitous drop in the value of the Company's common stock
after the announcement of the loss of its two largest customers (see notes to
consolidated financial statements), the Company recorded a $5.0 million
charge in the third quarter of 2001 to accelerate the recognition of contingent
payment obligations (due in June 2002) arising from the acquisition of Simon
Marketing in 1997. Pursuant to Separation, Settlement and General Release
Agreements entered into in the first quarter of 2002 with three former
employees, the Company settled its contingent payment obligation with these
individuals at an aggregate amount of approximately $1.0 million less than its
recorded liability. Settlement discussions with the remaining three individuals
associated with this contingent obligation are ongoing.
20
In March 2002, the Company, Simon Marketing and a Trustee entered into an
Indemnification Trust Agreement (the "Trust") which requires the Company and
Simon Marketing to fund an irrevocable trust in the amount of $2.7 million. The
Trust was set up and will be used to augment the Company's existing insurance
coverage for indemnifying directors, officers and certain described consultants,
who are entitled to indemnification against liabilities arising out of their
status as directors, officers and/or consultants. (See notes to consolidated
financial statements.)
The Company has available several worldwide bank letter of credit and revolving
credit facilities which expire at various dates beginning in May 2002. In June
2001, the Company secured a new primary domestic letter of credit facility of up
to $21.0 million for the purpose of financing the importation of various
products from Asia and for issuing standby letters of credit. Pursuant to the
provisions of this facility, the Company had bank commitments to issue or
consider issuing for product related letter of credit borrowings of up to $15.0
million and bank commitments to issue or consider issuing for standby letters of
credit of up to $6.0 million through May 15, 2002. As a result of the loss of
its McDonald's and Philip Morris business (see notes to consolidated financial
statements) the Company no longer has the ability to borrow under its revolving
credit facility or to issue a letter of credit under any of its existing credit
facilities without it being fully cash collateralized. As of December 31, 2001,
the Company's borrowing capacity was $21.0 million, of which $.5 million in
letters of credit were outstanding. In addition, bank guarantees totaling $.3
million were outstanding at December 31, 2001. Borrowings under these facilities
are collateralized by substantially all of the assets of the Company.
Restricted cash consists of $6.2 million deposited with lenders to satisfy the
Company's obligations pursuant to its outstanding standby letters of credit and
$2.5 million which was segregated in separate cash accounts in which security
interests have been granted to certain employees for retention payments. The
$2.5 million was released back to the Company in the first quarter of 2002 upon
making of retention and severance payments to these applicable employees. The
outstanding standby letters of credit have maturities ranging from February 2002
through October 2002.
The Company's second quarter 2001 restructuring actions (see notes to
consolidated financial statements) have had and will continue to have an adverse
impact on the Company's cash position. Total cash outlays related to
restructuring activities are expected to be approximately $11.3 million.
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
PAGE
----
Report of Independent Accountants 39
Consolidated Balance Sheets as of December 31, 2001 and 2000 40
Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999 41
Consolidated Statements of Stockholders' (Deficit) Equity for the years ended December 31,
2001, 2000 and 1999 42
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 43
Notes to Consolidated Financial Statements 44-59
Schedule II: Valuation and Qualifying Accounts 60
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
NONE
22
PART III
ITEM 10. DIRECTORS OF THE REGISTRANT.
The Company's certificate of incorporation provides that the number of directors
shall be determined from time to time by the Board of Directors (but shall be no
less than three and no more than fifteen) and that the Board shall be divided
into three classes. On September 1, 1999, Simon Worldwide entered into a
Securities Purchase Agreement with the Yucaipa Companies ("Yucaipa"), an
affiliate of Overseas Toys, L.P., the holder of all of the Company's outstanding
series A senior cumulative participating convertible preferred stock, pursuant
to which Simon Worldwide agreed to fix the size of the Board at seven members,
of which Yucaipa currently has the right to designate three individuals to the
Board. 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 which
Mr. Burkle became Chairman. Mr. Wolpert resigned from the Board on February 7,
2000. Thereafter, Yucaipa requested that Erika Paulson be named as its third
designee to the Board and on May 25, 2000 the Board elected Ms. Paulson to fill
the vacancy created by Mr. Wolpert's resignation. On August 24, 2001, Mr. Burkle
and Ms. Paulson resigned from the Board and subsequently Yucaipa has not
designated replacement nominees to the Board. On June 15, 2001, Patrick D. Brady
resigned from the Board. See Executive Compensation.
The following table sets forth the names and ages of the directors, the year in
which each individual was first elected a director and the year his term
expires:
Name Age Class Year Term Expires Director Since
---- --- ----- ----------------- --------------
Joseph W. Bartlett 68 I 2003 1993
Allan I. Brown 61 I 2003 1999
Joseph Anthony Kouba 54 III 2002 1997
George G. Golleher 54 II 2004 1999
BUSINESS HISTORY OF DIRECTORS
MR. BARTLETT has been a partner in the law firm of Morrison & Foerster LLP since
March 1996. 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 had been the Company's Chief Executive Officer and President from July
2001 until March 2002 when his employment with the Company was terminated. Mr.
Brown will remain on the Company's Board of Directors. (See Executive
Compensation.) Prior to July 2001, Mr. Brown served as the Company's Co-Chief
Executive Officer and Co-President since November 1999. Since March 2000, Mr.
Brown was responsible for the global operations of Simon Worldwide's traditional
businesses, including the Company's Simon Marketing, Inc. subsidiary. Since
November of 1975, Mr. Brown had also served as the Chief Executive Officer of
Simon Marketing, Inc. Since 1992, Mr. Brown had also served as President of
Simon Marketing, Inc. Mr. Brown is party to a Voting Agreement 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 Mr. Brown and each of Messrs. Brady, Shlopak and Stanton have agreed to
vote all of the shares beneficially held by them to elect Yucaipa's nominees to
the Company's Board.
MR. GOLLEHER is a consultant and private equity investor. Mr. Golleher served as
President and Chief Operating Officer of Fred Meyer, Inc. from March 1998 to
June 1999, and also served as a member of its Board of Directors. Mr. Golleher
served as Chief Executive Officer of Ralphs Grocery Company from January 1996 to
March 1998 and was Vice Chairman from June 1995 to January 1996. He was a
director of Food 4 Less Supermarkets since its inception in
23
1989 and was the President and Chief Operating Officer of Food 4 Less
Supermarkets from January 1990 until its merger with Ralphs Grocery Company in
June 1995. Mr. Golleher serves as Chairman of the Board of American Restaurant
Group and also serves on the Board of Directors of Rite-Aid Corporation.
Pursuant to a Voting Agreement, dated September 1, 1999, among Yucaipa, Mr.
Brady, Mr. Brown, Mr. Shlopak, the Shlopak Foundation, Cyrk International
Foundation and the Eric Stanton Self-Declaration of Revocable Trust, if Mr.
Golleher is nominated for election as a director at Yucaipa's request, each of
Messrs. Brady, Brown, Shlopak and Stanton have agreed to vote all of the shares
beneficially held by them to elect him to the Board.
MR. KOUBA has served since 1980 as the President and a director of Highwood
Properties, Inc. and its affiliates, a company which is engaged in the real
estate investment business. Additionally, since 1998, Mr. Kouba has been a
principal of Summit Media LLC, a provider of outdoor advertising services. Since
1972 he has been an attorney and a member of the Bar in California.
The Company does not currently have any executive officers. The Company's
ongoing operations are now being managed by an Executive Committee of the Board
of Directors consisting of Messrs. Golleher and Kouba, in consultation with
outside financial, accounting, legal and other advisors.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth the compensation the Company paid or accrued for
services rendered in 2001, 2000 and 1999, respectively, by its executive
officers.
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION(1) COMPENSATION
------------------------------------------ ------------
SECURITIES
NAME AND OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION
------------------ ---- ------ ----- ------------ ------- ------------
Allan I. Brown(2) 2001 $750,000 $ 500,000 -- 167,000 $1,710,507(3)
Chief Executive Officer 2000 $628,846 $ 800,000 -- -- $1,213,508
and President 1999 $300,000 $2,850,000 -- -- $ 994,428
Patrick D. Brady(4) 2001 $357,704 -- -- -- $3,437,245(5)
Co-Chief Executive 2000 $600,000 -- -- -- $ 114,524
Officer and Co-President 1999 $346,153 $ 500,000 -- -- $ 287,114
Dominic F. Mammola(6) 2001 $208,268 $ 125,000 -- -- $1,748,242(7)
Executive Vice President 2000 $300,000 $ 250,000 -- -- $ 105,241
and Chief Financial 1999 $250,000 $ 250,000 -- -- $ 26,443
Officer
Ted L. Axelrod(8) 2001 $185,583 $ 125,000 -- -- $1,818,090(9)
Executive Vice President 2000 $250,000 $ 300,000 -- -- $ 41,244
1999 $250,000 $ 250,000 -- -- $ 16,123
- -----------------
1. In accordance with the rules of the Securities and Exchange Commission,
other compensation in the form of perquisites and other personal benefits
have been omitted for all of the executive officers, except for Mr. Brown,
24
because the aggregate amount of such perquisites and other personal
benefits constituted less than the lesser of $50,000 or 10% of the total
annual salary and bonuses for such executive officers for 2001, 2000 and
1999.
2. Mr. Brown resigned from his position as Chief Executive Officer and
President of the Company in March 2002. Mr. Brown will remain on the
Company's Board of Directors. (See Employment and Severance Agreements.)
3. Represents (1) $800,000 in forgiveness of indebtedness of Mr. Brown to the
Company, (2) $5,100 contributed by the Company to its 401(k) plan on
behalf of Mr. Brown, (3) $182,283 of other compensation paid directly by
the Company to Mr. Brown or on his behalf, (4) $273,460 paid by the
Company on behalf of Mr. Brown for medical, legal, accounting and other
expenses and, (5) $449,664, the benefit to Mr. Brown of the payment in
2001 with respect to a split dollar life insurance policy, calculated as
the present value of an interest free loan of the premiums to Mr. Brown
over his present actuarial life expectancy. (See Insurance Arrangements.)
4. Mr. Brady resigned from his position as Co-Chief Executive Officer and
Co-President of the Company and as a member of the Board effective June
15, 2001.
5. Represents (1) $3,234,673 in severance payments made to Mr. Brady
associated with his resignation from the Company in June 2001 (See
Employment and Severance Agreements), (2) $85,060 in forgiveness of
loans by the Company to Mr. Brady, (3) $5,100 contributed by the Company
to its 401(k) plan on behalf of Mr. Brady, (4) $3,724 paid by the Company
associated with an automobile lease, (5) $23,140 in premiums paid by the
Company with respect to the cash surrender value benefit payable to Mr.
Brady's estate under certain reverse split-dollar life insurance policies
(6) $5,548 in premiums paid by the Company for a supplemental disability
insurance policy, and (7) $80,000, such amount representing the benefit to
Mr. Brady of the payment by the Company in 2001 of premiums with respect
to certain split-dollar life insurance policies, calculated as the present
value of an interest-free loan of the premiums to Mr. Brady over his
present actuarial life expectancy. (See Insurance Arrangements.)
6. Mr. Mammola resigned from his position as Executive Vice President and
Chief Financial Officer of the Company effective June 30, 2001, and
continued as a consultant to the Company until March 31, 2002.
7. Represents (1) $1,665,300 in severance payments made to Mr. Mammola
associated with his resignation from the Company in June 2001 (See
Employment and Severance Agreements), (2) $5,100 contributed by the
Company to its 401(k) plan on behalf of Mr. Mammola, (3) $3,640 in
premiums paid for by the Company for a term life insurance policy for the
benefit of Mr. Mammola's estate, (4) $28,150 paid by the Company
associated with an automobile lease and related taxes, (5) $20,610 in
premiums paid by the Company for a supplemental disability insurance
policy, and (6) $25,442, such amount representing the benefit to Mr.
Mammola of the payment by the Company in 2001 of premiums with respect to
a split-dollar life insurance policy, calculated as the present value of
an interest-free loan of the premium to Mr. Mammola over his present
actuarial life expectancy. (See Insurance Arrangements.)
8. Mr. Axelrod resigned from his position as Executive Vice President of the
Company effective June 30, 2001.
9. Represents (1) $1,665,300 in severance payments made to Mr. Axelrod
associated with his resignation from the Company in June 2001 (See
Employment and Severance Agreements), (2) $100,000 in forgiveness of
loans by the Company to Mr. Axelrod, (3) $5,100 contributed by the
Company to its 401(k) plan on behalf of Mr. Axelrod, (4) $31,699 paid by
the Company associated with an automobile lease and related taxes, (5)
$1,037 in premiums paid by the Company for a supplemental disability
insurance policy, and (6) $14,954, such amount representing the benefit to
Mr. Axelrod of the payment by the Company in 2001 of premiums with respect
to a split-dollar life insurance policy, calculated as the present value
of an interest-free loan of the premium to Mr. Axelrod over his present
actuarial life expectancy. (See Insurance Arrangements.)
25
OPTION GRANTS IN THE LAST FISCAL YEAR
The following table sets forth certain information with respect to stock options
granted to each of the Company's executive officers during 2001.
POTENTIAL REALIZED
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM(3)
----------------------------------------------------------------------------------- --------------------
Number of Percent of Total
Securities Options Granted to
Underlying Employees in Fiscal
Options Granted (1) Year Exercise Price(2) Expiration Date 5% 10%
------------------- ---- ----------------- --------------- -- ---
Allan I. Brown 167,000 100% $0.20 04/10/03 $344,020 $380,760
- ---------------------
1. These non-qualified stock options became exercisable in December 2001.
2. The exercise price per share of each option was below the fair market
value of the Company's common stock on the date of grant and, as a result,
the Company recorded compensation expense of $459,250 in 2001.
3. The potential realizable value is calculated based on the term of the
option (two years) at its date of grant. It is calculated by assuming that
the stock price on the date of grant appreciates at the indicated annual
rate compounded annually for the entire term of the option and that the
option is exercised and sold on the last day of its term for the
appreciated stock price. However, the optionee will not actually realize
any benefit from the option unless the market value of the Company's stock
price in fact increases over the option price.
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth for each of the Company's executive officers
certain information regarding exercises of stock options during 2001 and stock
options held at the end of 2001.
Number of Securities Value of Unexercised
Shares Underlying In-the-Money
Acquired Unexercised Options Options at
on Value at Fiscal Year-End Fiscal Year-End(1)
Name Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
---- -------- -------- ------------------------- -------------------------
Allan I. Brown -- -- 167,000/-- --/--
Patrick D. Brady(2) -- -- --/-- --/--
Dominic F. Mammola -- -- 67,312/-- --/--
Ted L. Axelrod -- -- 59,786/-- --/--
1. This "value" is the difference between the market price of the Company's
common stock subject to the options on December 31, 2001 ($0.16 per share)
and the option exercise (purchase) price, assuming the options were
exercised and the shares sold on that date.
2. In connection with his resignation from the Company in June 2001, Mr.
Brady forfeited all of his options.
26
INSURANCE ARRANGEMENTS
The Company provides Mr. Brady, and provided Mr. Brown, split-dollar life
insurance benefits. The Company has also agreed to pay the premiums for two
whole life policies on the life of Mr. Brady. The Company has certain rights to
borrow against these policies insuring the life of Mr. Brady and the right to
receive an amount equal to all premiums paid by the Company not later than upon
the death of the insured executive. The irrevocable trusts established by Mr.
Brady and Mr. Brown which own the foregoing policies are entitled to borrow
against these policies, subject to certain limitations, while the Company has an
interest in these policies. The trusts are also entitled to receive the death
benefits under the policies net of the cumulative premiums paid by the Company.
The aggregate annual premium amount payable by the Company in 2001 in respect of
the split-dollar policies insuring the lives of Mr. Brady and Mr. Brown are
$80,000 and $449,664, respectively.
The Company also provides Mr. Brady with a reverse split-dollar life insurance
policy pursuant to which the Company pays the premiums on universal life
insurance policies on the life of Mr. Brady. Upon the death of Mr. Brady,
assuming the policies are still in force, the Company is entitled to receive the
death benefit ($4,250,000 on the life) and Mr. Brady's estate is entitled to
receive the cash surrender value of the policy. Simon Worldwide is obligated to
pay no more than $80,000 per year in annual premiums under his split-dollar
insurance policies under its severance agreement with Mr. Brady.
In accordance with their respective severance agreements, the Company also
provides split-dollar life insurance benefits to Messrs. Axelrod and Mammola,
and have agreed to pay the premiums for a whole life policy on the life of Mr.
Mammola through June 30, 2003. See Employment and Severance Agreements. The
Company has certain rights to borrow against these policies and the right to
receive upon the death of the insured executive an amount equal to the lesser of
(1) the cash surrender value of the policy and (2) the aggregate amount of
premiums paid by the Company at such date. The aggregate annual premium amount
payable by the Company for the split-dollar policies insuring the lives of
Messrs. Axelrod and Mammola is $14,954 and $25,442, respectively.
EMPLOYMENT AND SEVERANCE AGREEMENTS
In March 2002, pursuant to negotiations that began in the fourth quarter of
2001, the Company entered into a Termination, Severance and General Release
Agreement ("Agreement") with Allan Brown. Pursuant to this Agreement, Mr.
Brown's employment with the Company terminated in March 2002 (Mr. Brown will
remain on the Company's Board of Directors) and substantially all other
agreements, obligations and rights existing between Mr. Brown and the Company
were terminated, including Mr. Brown's Employment Agreement dated September 1,
1999, as amended, and his retention agreement dated August 29, 2001. (For
additional information related to Mr. Brown's retention agreement, see the
Company's 2001 third quarter Form 10-Q.) Pursuant to this Agreement, the Company
made a lump-sum payment to Mr. Brown of $1,010,000, Mr. Brown agreed to transfer
to the Company 52,904 shares of the Company's common stock in payment of Mr.
Brown's non-recourse loan for the principal amount of $575,000, and the Company
cancelled $2,652,546 of indebtedness of Mr. Brown to the Company. The Company
received a full release from Mr. Brown in connection with this Agreement, and
the Company provided Mr. Brown with a full release. Additionally, the Agreement
calls for Mr. Brown to provide consulting services to the Company for a period
of six months after Mr. Brown's employment with the Company terminated in
exchange for a fee of $46,666 per month, plus specified expenses. See notes to
consolidated financial statements and Executive Compensation.
The Company entered into a severance agreement with Mr. Brady. Pursuant to this
agreement, Mr. Brady's employment with the Company terminated effective June 15,
2001, he received two lump-sum payments in the amounts of $3,200,000 and
$34,673, respectively, and $85,060 of Mr. Brady's indebtedness to the Company
was forgiven. The Company also agreed to continue to make payments to maintain
certain life insurance coverage for Mr. Brady until 2009, and to maintain
certain life, medical and dental coverage for Mr. Brady through November 2002.
The Company received a general release from Mr. Brady in connection with his
separation agreement, and the Company provided Mr. Brady with a general release,
subject to limited exceptions.
The Company entered into severance agreements with Messrs. Axelrod and Mammola
in November 1998. Pursuant to these agreements, Messrs. Axelrod and Mammola
terminated their employment with the Company and each received a lump-sum
payment of $1,665,300. Under these agreements, the Company is required to
continue to provide certain life, medical, dental, and disability insurance
coverage to them until June 2003. In addition, pursuant to these agreements, all
of their respective stock options became immediately exercisable. The Company
received a full release
27
from Messrs. Axelrod and Mammola in connection with the payment of their
severance payments. Mr. Axelrod has agreed to escrow a portion of his severance
payment. The Company may use the escrow to satisfy certain federal tax
obligations, if any, imposed upon the Company as a result of Mr. Axelrod's
severance payment.
Upon a change of control of Simon Worldwide, The Yucaipa Companies L.L.C. may be
entitled to certain payments pursuant to its management agreement with Simon
Worldwide. See Item 13, Transactions with Certain Stockholders.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Decisions concerning executive compensation are made by the Compensation
Committee of the Board, which during 2001 consisted of Messrs. Bartlett, Burkle
(until his resignation in August 2001) and Kouba. Neither Messrs. Bartlett,
Burkle nor Kouba is or was an officer or employee of the Company or any of its
subsidiaries. In 2001, none of the Company's executive officers served as an
executive officer, or on the Board of Directors, of any entity of which Messrs.
Bartlett, Burkle or Kouba also served as an executive officer or as a member of
its Board of Directors.
DIRECTORS' COMPENSATION
Directors who are also employees (or are affiliated with Yucaipa) receive no
compensation for their services on the Board. Directors who are not employees
(and are not affiliated with Yucaipa) are reimbursed for reasonable
out-of-pocket expenses incurred in attending any meetings. In addition, such
non-employee directors (who are not affiliated with Yucaipa) are entitled to
receive an annual payment of $25,000, a payment of $2,000 for each Board of
Directors meeting that such non-employee director attends in person, and 5,000
options each year.
On August 28, 2001, the Company entered into retention letter agreements with
each of Joseph Bartlett, George Golleher and Anthony Kouba, the non-management
members of the Board, pursuant to which the Company paid each of them a
retention fee of $150,000 in exchange for their agreement to serve as a director
of the Company for at least six months. If a director resigned before the end of
the six-month period, the director would have been required to refund to the
Company the pro rata portion of the retention fee equal to the percentage of the
six-month period not served. Additionally, the Company agreed to compensate
these directors at an hourly rate of $750 for services outside of Board and
committee meetings (for which they are paid $2,000 per meeting in accordance
with existing Company policy).
In 2001, payments totaling $276,291, $462,500 and $479,671 were made to Messrs.
Bartlett, Golleher and Kouba, respectively.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following tables set forth certain information regarding beneficial
ownership of the Company's common stock at December 31, 2001. 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.
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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 5% or more of the
outstanding common stock.
NUMBER OF SHARES
NAME AND ADDRESS OF COMMON STOCK PERCENTAGE OF
OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED CLASS(2)
---------------------- ------------------ --------
Yucaipa and affiliates:
Overseas Toys, L.P.(3)
OA3, LLC(3)
Multi-Accounts, LLC(3)
Ronald W. Burkle(3) 4,883,395 22.7%
Dimensional Fund A