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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2002
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.)
1888 CENTURY PARK EAST, LOS ANGELES, CALIFORNIA 90067
(Address of principal executive offices)
(Zip Code)
(310) 552-6800
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [X]
Indicate by a check mark whether registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act). [ ]
At June 30, 2003, 16,653,193 shares of the Registrant's common stock were
outstanding.
SIMON WORLDWIDE, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE NUMBER
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -
September 30, 2002 and December 31, 2001 3
Consolidated Statements of Operations -
For the three and nine months ended
September 30, 2002 and 2001 4
Consolidated Statements of Comprehensive Income -
For the three and nine months ended
September 30, 2002 and 2001 5
Consolidated Statements of Cash Flows -
For the nine months ended September 30, 2002 and 2001 6
Notes to Consolidated Financial Statements 7-16
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17-21
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
Item 4. Controls and Procedures 21
PART II OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23-26
2
PART I - FINANCIAL INFORMATION
SIMON WORLDWIDE, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share data)
September 30, December 31,
2002 2001
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,189 $ --
Restricted cash 8,140 2,868
Prepaid expenses and other current assets 291 1,077
Assets from discontinued operations to be disposed of - current 20,554 56,737
-------------- --------------
Total current assets 31,174 60,682
Property and equipment, net 81 124
Investments 500 10,500
Other assets 517 767
-------------- --------------
32,272 72,073
Assets from discontinued operations to be disposed of - non-current 1,721 5,863
-------------- --------------
$ 33,993 $ 77,936
============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable:
Trade $ 51 $ 20
Affiliates 155 141
Accrued expenses and other current liabilities 178 134
Liabilities from discontinued operations - current 22,275 55,815
-------------- --------------
22,659 56,110
Liabilities from discontinued operations - non-current -- 6,785
-------------- --------------
22,659 62,895
Commitments and contingencies
Mandatorily redeemable preferred stock, Series A1 senior cumulative
participating convertible, $.01 par value, 27,342 shares issued and
outstanding at September 30, 2002 and 26,538 shares issued and outstanding
at December 31, 2001, stated at redemption value of $1,000 per share 27,342 26,538
Stockholders' deficit:
Common stock, $.01 par value; 50,000,000 shares authorized; 16,653,193 shares
issued and outstanding at September 30, 2002 and
16,653,193 shares issued and outstanding at December 31, 2001 167 167
Additional paid-in capital 138,500 135,966
Retained deficit (154,675) (145,515)
Accumulated other comprehensive loss:
Cumulative translation adjustment -- (2,115)
-------------- --------------
Total stockholders' deficit (16,008) (11,497)
-------------- --------------
$ 33,993 $ 77,936
============== ==============
The accompanying notes are an integral part of the consolidated
financial statements.
3
SIMON WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
For the three months For the nine months
ended September 30, ended September 30,
---------------------- ----------------------
2002 2001 2002 2001
-------- -------- -------- --------
Revenues $ -- $ -- $ -- $ --
General and administrative expenses 1,068 1,419 3,614 3,286
Investment Losses 250 500 10,250 1,250
-------- -------- -------- --------
Loss from continuing operations before income taxes (1,318) (1,919) (13,864) (4,536)
Income tax provision -- -- -- --
-------- -------- -------- --------
Net loss from continuing operations (1,318) (1,919) (13,864) (4,536)
Income (loss) from discontinued operations, net of tax benefit (405) (65,274) 5,522 (81,730)
-------- -------- -------- --------
Net loss (1,723) (67,193) (8,342) (86,266)
Preferred stock dividends 280 261 818 778
-------- -------- -------- --------
Net loss available to common stockholders $ (2,003) $(67,454) $ (9,160) $(87,044)
======== ======== ======== ========
Loss per share from continuing operations available to common stockholders:
Loss per common share - basic and diluted $ (0.10) $ (0.13) $ (0.88) $ (0.32)
======== ======== ======== ========
Weighted average shares outstanding - basic and diluted 16,653 16,652 16,653 16,389
======== ======== ======== ========
Income (loss) per share from discontinued operations:
Income (loss) per common share - basic and diluted $ (0.02) $ (3.92) $ 0.33 $ (4.99)
======== ======== ======== ========
Weighted average shares outstanding - basic and diluted 16,653 16,652 16,653 16,389
======== ======== ======== ========
Net loss available to common stockholders:
Loss per common share - basic and diluted $ (0.12) $ (4.05) $ (0.55) $ (5.31)
======== ======== ======== ========
Weighted average shares outstanding - basic and diluted 16,653 16,652 16,653 16,389
======== ======== ======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
4
SIMON WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(in thousands)
For the three months For the nine months
ended September 30, ended September 30,
---------------------- ----------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net loss $ (1,723) $(67,193) $ (8,342) $(86,266)
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments -- 343 2,115 (1,016)
Unrealized holding gains (losses) arising during period -- (7,404) -- 1,472
-------- -------- -------- --------
Other comprehensive income (loss), before tax -- (7,061) 2,115 456
Income tax expense (benefit) related to items of
other comprehensive income (loss) -- (3,700) -- 94
-------- -------- -------- --------
Other comprehensive income (loss), net of tax -- (3,361) 2,115 362
-------- -------- -------- --------
Comprehensive loss $ (1,723) $(70,554) $ (6,227) $(85,904)
======== ======== ======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
5
SIMON WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
For the nine months
ended September 30,
----------------------
2002 2001
-------- --------
Cash flows from operating activities:
Net loss $ (8,342) $(86,266)
Income (loss) from discontinued operations 5,522 (81,730)
-------- --------
Loss from continuing operations (13,864) (4,536)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 43 43
Charge for impaired investments 10,250 1,500
Increase (decrease) in cash from changes in working capital items:
Prepaid expenses and other current assets 786 122
Accounts payable 45 (28)
Accrued expenses and other current liabilities 44 9
-------- --------
Net cash used in operating activities (2,696) (2,890)
-------- --------
Cash flows from investing activities:
Increase in restricted cash (5,272) --
-------- --------
Net cash used in investing activities (5,272) --
-------- --------
Net cash provided by financing activities -- --
-------- --------
Net used in continuing operations (7,968) (2,890)
Net cash provided by (used in) discontinued operations 10,157 (30,967)
-------- --------
Net increase (decrease) in cash and cash equivalents 2,189 (33,857)
Cash and cash equivalents, beginning of year -- 60,473
-------- --------
Cash and cash equivalents, end of period $ 2,189 $ 26,616
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 22 $ 328
======== ========
Income taxes $ 72 $ 429
======== ========
Supplemental non-cash investing activities:
Issuance of additional stock related to acquisitions $ -- $ 1,413
======== ========
Dividends paid in kind on mandatorily redeemable preferred stock $ 804 $ 775
======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
6
SIMON WORLDWIDE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except share data and except dollar amounts followed
immediately by the word "million")
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
by Simon Worldwide, Inc. ("the Company") pursuant to the rules and regulations
of the Securities and Exchange Commission regarding interim financial reporting.
Accordingly, they do not include all of the information and footnotes in
accordance with generally accepted accounting principles for complete financial
statements and should be read in conjunction with the consolidated financial
statements included in the Company's Annual Report on Form 10-K/A for the year
ended December 31, 2001.
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments, consisting only of those considered
necessary for fair presentation of the Company's consolidated financial
position, results of operations and cash flows at the dates and for the periods
presented.
By April 2002, the Company had effectively eliminated a majority of its ongoing
operations and was in the process of disposing of its assets and settling its
liabilities related to the promotions business. During the second quarter of
2002, the discontinued activities of the Company, consisting of certain
revenues, operating costs, general and administrative costs and certain assets
and liabilities associated with the Company's promotions business, have been
classified as discontinued operations for financial statement reporting
purposes. Prior period historical financial information, pertaining to the
promotions business has been reclassified to discontinued operations (see Note
4).
The embezzlement by a former employee caused McDonald's Corporation
("McDonald's") and Philip Morris Incorporated ("Philip Morris", now known as
Altria, Inc.), substantial customers, to terminate their relationships with the
Company. See Note 2. The loss of these customers resulted in the Company no
longer having a business. Prior to the loss of its customers, the Company had
operated as a multi-national full service promotional marketing company.
Substantially all of the Company's assets and liabilities are in the same
business segment. The disposal of the Company's long-lived assets and settlement
of its liabilities is ongoing and will continue throughout 2003 and possibly
into 2004.
At September 30, 2002 and December 31, 2001, the Company had a passive
investment in a limited liability company controlled by an affiliate. See Note
6.
The operating results for the nine months ended September 30, 2002 are not
necessarily indicative of the results to be expected for the full year.
2. LOSS OF CUSTOMERS, RESULTING EVENTS AND GOING CONCERN
In August 2001, the Company experienced the loss of its two largest customers:
McDonald's and, to a lesser extent, Philip Morris. Since August 2001, the
Company has concentrated its efforts on reducing its costs and settling numerous
claims, contractual obligations and pending litigation. As a result of these
efforts the Company has been able to resolve a significant number of outstanding
liabilities that existed at December 31, 2001 or arose subsequent to that date
(see Notes 5 and 8). As of December 31, 2001, the Company had 136 employees
worldwide and had reduced its worldwide workforce to 9 employees as of December
31, 2002.
At September 30, 2002 and December 31, 2001, the Company had a stockholders'
deficit of $16,008 and $11,497, respectively and a net loss of $8,342 and
$86,266 for the nine months ended September 30, 2002 and 2001, respectively.
Subsequent to December 31, 2001, the Company continued to incur losses in 2002
and continues to incur losses in 2003 for the general and administrative
expenses being incurred to manage the affairs of the Company and resolve
outstanding legal matters. Management believes it has sufficient capital
resources and liquidity to operate the Company for the foreseeable future.
However, as a result of the loss of these major customers, along with the
resulting legal matters discussed further below, there is substantial doubt
about the Company's ability to continue as a going concern. As a result of the
stockholders' deficit, loss of customers and the related legal matters at
December 31, 2001, the Company's independent public accountants have expressed
substantial doubt about the Company's ability to continue as a going concern.
The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
As noted above, by April 2002, the Company had effectively eliminated a majority
of its ongoing operations and was in the process of disposing of its assets and
settling its liabilities related to the promotions business. The process is
ongoing and will continue throughout 2003 and possibly into 2004. The Board of
Directors of the Company continues to consider various alternative courses of
action for the Company going forward, including possibly acquiring one or more
operating businesses, selling the Company or distributing its net assets, if
any, to shareholders. The decision on which course to take will depend upon a
7
number of factors including the outcome of the significant litigation matters in
which the Company is involved (see Legal Actions Associated with the McDonald's
Matter). To date, the Board of Directors has made no decision on which course of
action to take.
On August 21, 2001, the Company was notified by McDonald's that they were
terminating their approximately 25-year relationship with Simon Marketing, Inc.
("Simon Marketing"), a subsidiary of the company, as a result of the arrest of
Jerome P. Jacobson ("Mr. Jacobson"), a former employee of Simon Marketing who
subsequently plead guilty to embezzling winning game pieces from McDonald's
promotional games administered by Simon Marketing. No other Company employee was
found or alleged to have any knowledge of or complicity in his illegal scheme.
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 charged that
that Mr. Jacobson "embezzled more than $20 million worth of high value winning
McDonald's promotional game pieces from his employer, [Simon]". Simon Marketing
was identified in the Indictment, along with McDonald's, as an innocent victim
of Mr. Jacobson's 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 September 30,
2002, the Company had no customer backlog as compared to $2,200 of written
customer purchase orders at September 30, 2001. 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.
During the nine months ended September 30, 2002, the Company recorded a pre-tax
net charge totaling approximately $3,569 associated with the loss of customers
included as part of discontinued operations (see Note 4). Charges totaling
$6,742, primarily related to asset write-downs ($2,388), professional fees
($3,531), labor and other costs ($823), were partially offset by recoveries of
accounts receivable balances, totaling ($1,293), that had been written off in
previous periods and other gains ($1,880).
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 Illinois, the headquarters of McDonald's, and in
multiple jurisdictions nationwide and in Canada. Plaintiffs in these actions
asserted 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 also alleged a
pattern of racketeering.
Plaintiffs in many of these actions alleged, among other things, that
defendants, including the Company, its subsidiary 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 class and/or representative actions filed in Illinois state court were
consolidated in the Circuit Court of Cook County, Illinois (the "Boland" case).
Numerous class and representative actions filed in California have been
consolidated in California Superior Court for the County of Orange (the
"California Court"). Numerous class and representative actions filed in federal
courts nationwide have been transferred by the Judicial Panel on Multidistrict
Litigation (the "MDL Panel") to the federal district court in Chicago, Illinois
(the "MDL Proceedings"). Numerous of the class and representative actions filed
in state courts other than in Illinois and California were removed to federal
court and transferred by the MDL Panel to the MDL Proceedings.
On April 19, 2002, McDonald's entered into a Stipulation of Settlement (the
"Boland Settlement") with certain plaintiffs in the Boland case pending in the
Circuit Court of Cook County, Illinois (the "Illinois Circuit Court"). The
Boland Settlement purports to settle and release, among other things, all claims
related to the administration, execution and operation of the McDonald's
promotional games, or to "the theft, conversion, misappropriation, seeding,
dissemination, redemption or non-redemption of a winning prize or winning game
piece in any McDonald's Promotional Game," including without limitation claims
brought under the consumer protection statutes or laws of any jurisdiction, that
have been or could or might have been alleged by any class member in any forum
in the United States of America, subject to a right of class members to opt out
on an individual basis, and includes a full release of the Company and Simon
Marketing, as well as their officers, directors, employees, agents, and vendors.
Under the terms of the Boland Settlement, McDonald's agrees to sponsor and run a
"Prize Giveaway" in which a total of fifteen (15) $1 million prizes, payable in
twenty equal annual installments with no interest, shall be randomly awarded to
persons in attendance at McDonald's restaurants. The Company has been informed
that McDonald's, in its capacity as an additional insured, has tendered a claim
to Simon Marketing's Errors & Omissions insurance carriers to cover some or all
of the cost of the Boland Settlement, including the cost of running the "Prize
Giveaway," of the prizes themselves, and of attorneys' fees to be paid to
plaintiffs' counsel up to an amount of $3 million.
8
On June 6, 2002, the Illinois Circuit Court issued a preliminary order approving
the Boland Settlement and authorizing notice to the class. On August 28, 2002,
the opt-out period pertaining thereto expired. The Company has been informed
that approximately 250 persons in the United States and Canada purport to have
opted out of the Boland Settlement. Furthermore, actions may move forward in
Canada and in certain of the cases asserting claims not involving the Jacobson
theft. On January 3, 2003, the Illinois Circuit Court issued an order approving
the Boland Settlement and overruling objections thereto and on April 8, 2003 a
final order was issued approving plaintiffs' attorneys' fees in the amount of
$2.8 million. Even if the Boland Settlement is approved and is enforceable to
bar claims of persons who have not opted out, individual claims may be asserted
by those persons who are determined to have properly opted out of the Boland
Settlement. Claims may also be asserted in Canada and by individuals whose
claims do not involve the Jacobson theft if a court were to determine the claim
to be distinguishable from and not barred by the Boland Settlement.
The remaining cases in the MDL Proceedings were dismissed on April 29, 2003,
other than a case originally filed in federal district court in Kentucky, in
which the plaintiff has opted out of the Boland Settlement. The plaintiff in
that case asserts that McDonald's and Simon Marketing failed to redeem a
purported $1 million winning ticket. This case has been ordered to arbitration.
In the California Court, certain of the California plaintiffs purported to have
opted out of the Boland Settlement individually and also on behalf of all
California consumers. In its final order approving the Boland Settlement, the
Illinois court rejected the attempt by the California plaintiffs to opt out on
behalf of all California consumers. On June 2, 2003, the California Court
granted the motion of McDonald's and Simon Marketing to dismiss all class and
representative claims as having been barred by the Boland Settlement. Even with
the Boland Settlement, individual claims may go forward as to those plaintiffs
who are determined to have properly opted out of the Boland Settlement or who
have asserted claims not involving the Jacobson theft. The Company does not know
which California and non-California claims will go forward notwithstanding the
Boland Settlement.
On or about August 20, 2002, an action was filed against Simon Marketing in
Florida State Court alleging that McDonald's and Simon Marketing deliberately
diverted from seeding in Canada game pieces with high-level winning prizes in
certain McDonald's promotional games. The plaintiffs are Canadian citizens and
seek restitution and damages on a class-wide basis in an unspecified amount.
Simon Marketing and McDonald's removed this action to federal court on September
10, 2002 and the MDL Panel has transferred the case to the MDL Proceedings in
Illinois, where it was dismissed on April 29, 2003. The plaintiffs in this case
did not opt out of the Boland Settlement.
On or about September 13, 2002, an action was filed against Simon Marketing in
Ontario Provincial Court in which the allegations are similar to those made in
the above Florida action. On October 28, 2002, an action was filed against Simon
Marketing in Ontario Provincial Court containing similar allegations. The
plaintiffs in the aforesaid actions seek an aggregate of $110 million in damages
and an accounting on a class-wide basis. Simon Marketing has retained Canadian
local counsel to represent it in these actions. The Company believes that the
plaintiffs in these actions did not opt out of the Boland Settlement. The
Company and McDonald's have filed motions to dismiss or stay these cases on the
basis of the Boland Settlement. There has been no ruling on this motion and the
actions are in the earliest stages.
On October 23, 2001, the Company and Simon Marketing 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 Mr. Jacobson, 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 had 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. The federal
lawsuit by McDonald's has been dismissed for lack of federal jurisdiction.
Subsequently, a substantially similar lawsuit was filed by McDonald's in
Illinois state court which the Company has moved to dismiss as a compulsory
counter-claim which must properly be filed in the Company's California state
court action. As of the date of filing of this report, there had been no ruling
on the Company's motion.
The Company is unable to predict the outcome of the lawsuits against the Company
and their ultimate effects, if any, on the Company's financial condition,
results of operations or net cash flows.
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
9
resolve this dispute outside of litigation. During 2002, a settlement was
reached resulting in a payment of $1.5 million by Philip Morris to the Company.
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. In July 2002, a stay was granted in the
case on the basis of "forum non conveniens", which would require the case to be
refiled in Illinois state court. The Company has filed an appeal of the stay.
On March 29, 2002, Simon Marketing filed a lawsuit against
PricewaterhouseCoopers LLP ("PWC") and two other accounting firms, citing the
accountants' failure to oversee, on behalf of Simon Marketing, various steps in
the distribution of high-value game pieces for certain McDonald's promotional
games. The complaint alleges that this failure allowed the misappropriation of
certain of these high-value game pieces by Mr. Jacobson. The lawsuit, filed in
Los Angeles Superior Court, seeks unspecified actual and punitive damages
resulting from economic injury, loss of income and profit, loss of goodwill,
loss of reputation, lost interest, and other general and special damages. The
defendants' motion to dismiss for "forum non conveniens" has been denied in the
case and, following demurrers by the defendants, the Company subsequently filed
a first amended complaint against two firms, PWC and one of the two other
accounting firms named as defendants in the original complaint, KPMG LLP. The
defendants' demurrer to the first amended complaint was sustained in part, and a
second amended complaint was filed. The date for filing an answer has not yet
been set pending a status conference on the case, the date for which has not yet
been determined.
As a result of this lawsuit, PWC resigned as the Company's independent public
accountants on April 17, 2002. In addition, on April 17, 2002, PWC withdrew its
audit report dated March 26, 2002 filed with the Company's original 2001 Annual
Report on Form 10-K. PWC indicated that it believed the lawsuit resulted in an
impairment of its independence in connection with the audit of the Company's
2001 financial statements. The Company does not believe that PWC's independence
was impaired. On June 6, 2002, the Company engaged BDO Seidman LLP as the
Company's new independent public accountants. In connection with obtaining PWC's
consent to the inclusion of their audit report dated March 26, 2002 in its
annual report on Form 10-K/A for the year ended December 31, 2001, the Company
agreed to indemnify PWC against any legal costs and expenses incurred by PWC in
the successful defense of any legal action that arises as a result of such
inclusion. Such indemnification will be void if a court finds PWC liable for
professional malpractice. The Company has been informed that in the opinion of
the Securities and Exchange Commission indemnification for liabilities arising
under the Securities Act of 1933 is against public policy and therefore
unenforceable. PWC has provided the Company with a copy of a 1995 letter from
the Office of the Chief Accountant of the Commission, which states that, in a
similar situation, his Office would not object to an indemnification agreement
of the kind between the Company and PWC.
For additional information related to certain matters discussed in this section,
reference is made to the Company's Reports on Form 8-K dated April 17, 2002, and
June 6, 2002.
3. RECENTLY ISSUED ACCOUNTING STANDARDS
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets". This statement supersedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of". The statement retains the previously existing
accounting treatments related to the recognition and measurement of the
impairment of long-lived assets to be held and used while expanding the
measurement requirements of long-lived assets to be disposed of by sale to
include discontinued operations. It also expands the previously existing
reporting requirements for discontinued operations to include a component of an
entity that either has been disposed of or is classified as held for sale. The
Company implemented SFAS No. 144 on January 1, 2002. By April 2002, the Company
had effectively eliminated a majority of its ongoing operations and was in the
process of disposing of its assets and settling its liabilities related to the
promotions business. The process is ongoing and will continue throughout 2003
and possibly into 2004. During the second quarter of 2002, the discontinued
activities of the Company, consisting of revenues, operating costs, certain
general and administrative costs and certain assets and liabilities associated
with the Company's promotions business, were classified as discontinued
operations for financial reporting purposes.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 requires companies to recognize
costs associated with exit or disposal activities initiated by the Company after
December 31, 2002. Management does not expect this statement to have a material
impact on the Company's consolidated financial position or results of
operations.
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". FIN No. 45 clarifies that a
guarantor is required to recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken in issuing the guarantee. The
initial recognition and initial measurement provisions of FIN No. 45 are
applicable on a prospective basis to guarantees issued or
10
modified after December 31, 2002, while the disclosure requirements became
applicable in 2002. The Company is complying with the disclosure requirements of
FIN No. 45. The other requirements did not materially affect the Company's
consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair-value-based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. As provided
for in SFAS No. 123, the company has elected to apply APB No. 25 "Accounting for
Stock Issued to Employees" and related interpretations in accounting for its
stock-based compensation plans. APB No. 25 does not require options to be
expensed when granted with an exercise price equal to fair market value. The
company is complying with the disclosure requirements of SFAS No. 148.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities, an Interpretation of ARB 51". The primary objectives of FIN No. 46 are
to provide guidance on the identification of entities for which control is
achieved through means other than through voting rights ("variable interest
entities" or "VIEs") and how to determine when and which business enterprise
should consolidate the VIE. This new model for consolidation applies to an
entity for which either: (a) the equity investors (if any) do not have a
controlling financial interest; or (b) the equity investment at risk is
insufficient to finance that entity's activities without receiving additional
subordinated financial support from other parties. In addition, FIN No. 46
requires that both the primary beneficiary and all other enterprises with a
significant variable interest in a VIE make additional disclosures. The Company
is required to apply FIN No. 46 to all new variable interest entities created or
acquired after January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, the Company is required to apply FIN No. 46
beginning on July 1, 2003. The Company does not anticipate that FIN No. 46 will
materially affect its consolidated financial statements.
In June 2003 the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". This statement
established standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify the following financial instruments as
liabilities (or assets in some circumstances) in its financial statements:
instruments issued in the form of shares that are manditorily redeemable through
the transfer of the issuer's assets at a specified date or upon an event that is
likely to occur; an instrument (other than an outstanding share) that embodies
an obligation to repurchase the issuer's equity shares and that requires or may
require the issuer to settle the obligation through the transfer of assets; an
instrument that embodies an unconditional obligation; or an instrument (other
than an outstanding share) that embodies a conditional obligation that the
issuer must or may settle by issuing a variable number of equity shares. SFAS
No. 150 is effective for financial instruments entered into or modified after
May 31, 2003 and is otherwise effective at the beginning of the first interim
period beginning after June 15, 2003. The Company is currently assessing the
impact of this statement on its consolidated financial statements.
4. DISCONTINUED OPERATIONS
As discussed in Note 1, by April 2002, the Company had effectively eliminated a
majority of its ongoing operations and was in the process of disposing all of
its assets and settling its liabilities related to its promotions business.
Accordingly, the discontinued activities of the Company have been classified as
discontinued operations in the accompanying consolidated financial statements.
Continuing operations represent the direct costs required to maintain the
Company's current corporate infrastructure that will enable the Board of
Directors to pursue various alternative courses of action going forward. These
costs primarily consist of the salaries and benefits of executive management and
corporate finance staff, professional fees, Board of Director fees, space and
facility costs and losses on certain investments.
Assets and liabilities from discontinued operations as of September 30, 2002 and
December 31, 2001, as disclosed in the accompanying consolidated financial
statements, consist of the following:
September 30, December 31,
2002 2001
------------- --------------
Assets:
Cash and cash equivalents $ 19,296 $ 40,851
Restricted cash 0 5,865
Investments - 152
Accounts receivable:
Trade, less allowance for doubtful accounts of $13,371
at September 30, 2002 and $15,616 at December 31, 2001 575 7,253
Prepaid expenses and other current assets 683 2,616
------------- --------------
Total current assets 20,554 56,737
Property and equipment, net - 2,690
Other assets 1,721 3,173
------------- --------------
Assets from discontinued operations to be disposed of $ 22,275 $ 62,600
============= ==============
11
Liabilities:
Short-term borrowings $ - $ 457
Accounts payable:
Trade 9,907 21,491
Affiliates - 42
Accrued expenses and other current liabilities 12,368 31,381
Accrued restructuring expenses - 2,444
------------ -----------
Total current liabilities 22,275 55,815
Long-term obligations - 6,785
------------ -----------
Liabilities from discontinued operations $ 22,275 $ 62,600
=========== ===========
Net income (loss) from discontinued operations for the three and nine months
ended September 30, 2002 and 2001, as disclosed in the accompanying consolidated
financial statements, consists of the following:
For the three months For the nine months
ended September 30, ended September 30,
------------------------- -------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net sales $ -- $ 93,819 $ -- $ 311,413
Cost of sales -- 73,421 -- 247,079
---------- ---------- ---------- ----------
Gross profit -- 20,398 -- 64,334
Selling, general and administrative expenses (381) 18,266 4,221 68,426
Goodwill amortization expense -- 454 -- 1,574
Impairment of intangible asset -- 46,671 -- 46,671
Charges attributable to loss of significant
customers, net 1,991 -- 3,569 --
Severance, retention and other charges -- 2,124 -- 2,124
Gain on settlement of obligations (369) -- (9,632) --
Restructuring -- -- (750) 20,212
---------- ---------- ---------- ----------
Operating income (loss) (1,241) (47,117) 2,592 (74,673)
Interest income (100) (533) (306) (1,756)
Interest expense -- 94 35 487
Other income (736) (4,048) 827 (4,048)
---------- ---------- ---------- ----------
Income (loss) before income taxes (405) (42,630) 2,036 (69,356)
Income tax provision (benefit) -- 22,644 (3,486) 12,374
---------- ---------- ---------- ----------
Net income (loss) from discontinued operations $ (405) $ (65,274) $ 5,522 $ (81,730)
========== ========== ========== ==========
5. ACCOUNTS RECEIVABLE
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. During 2002, a settlement was reached resulting
in a payment of $1,500 by Philip Morris to the Company. As this payment was in
excess of the Company's net outstanding receivable due from Philip Morris, a
gain of approximately $463 was recorded during the second quarter, included as a
reduction to selling, general and administrative expenses within discontinued
operations (see Note 4). During the second quarter of 2002, the Company also
received payments, totaling approximately $877, relating to accounts receivable
from other former customers that had been previously deemed to be uncollectible
and written off during 2001. The Company also received $416 in connection with
the termination of a retirement plan held by one of its foreign subsidiaries.
These recoveries, totaling $1,293, have been recorded as reductions to Charges
Attributable to Loss of Significant Customers within discontinued operations
(see Note 4).
12
6. LONG-TERM INVESTMENTS
The Company has made strategic and venture investments in a portfolio of
privately held companies that are being accounted for under the cost method.
These investments are in Internet-related companies that are at varying stages
of development, including startups, and were intended to provide the Company
with an expanded Internet presence, to enhance the Company's position at the
leading edge of e-business and to provide venture investment returns. These
companies in which the Company has invested are subject to all the risks
inherent in the Internet, including their dependency upon the widespread
acceptance and use of the Internet as an effective medium for commerce. In
addition, these companies are subject to the valuation volatility associated
with the investment community and the capital markets. The carrying value of the
Company's investments in these Internet-related companies is subject to the
aforementioned risks inherent in the Internet business. Periodically, the
Company performs a review of the carrying value of all its investments in these
Internet-related companies, and considers such factors as current results,
trends and future prospects, capital market conditions and other economic
factors.
In June 2002, certain events occurred which indicated an impairment of its
investment in Alliance Entertainment Corp. ("Alliance"), an indirect investment
through a limited liability company that is controlled by The Yucaipa Companies
("Yucaipa"), an affiliate of the Company. This investment had a carrying value
of $10,000 at December 31, 2001. Yucaipa is believed to be indirectly a
significant shareholder in Alliance, which is a home entertainment product
distribution, fulfillment, and infrastructure company providing both
brick-and-mortar and e-commerce home entertainment retailers with complete
business-to-business solutions. The Company recorded a pre-tax non-cash charge
of $10,000 in June 2002 to write-down its investment, included in Investment
Losses as part of continuing operations in the accompanying consolidated
financial statements. For the years ended December 31, 2001 and December 31,
2000, the Company also recorded impairment charges of $1,500 and $2,500,
respectively, related to other investments in affiliate-controlled entities.
During the third quarter of 2002, the Company received a final return of
capital, totaling approximately $275, on an investment with a carrying value
totaling approximately $525 as of December 31, 2001. A loss of approximately
$250 was recorded in connection with this final distribution, included in
Investment Losses as part of continuing operations in the accompanying
consolidated financial statements.
While the Company will continue to periodically evaluate its Internet-related
investments, there can be no assurance that the companies in which it has
invested will be successful, and thus the Company might not ever realize any
benefits from its portfolio of investments.
7. SHORT-TERM BORROWINGS
The company's Credit and Security Agreements, which provided for working capital
and other financing arrangements expired on May 15, 2002. At September 30, 2002
the Company had various pre-existing letters of credit outstanding, which are
cash collateralized and have various expiration dates through August 2007. As a
result of the loss of its McDonald's and Philip Morris business (see Note 2),
the Company no longer has the ability to borrow under any of its existing credit
facilities without it being fully cash collateralized.
Restricted Cash at September 30, 2002 and December 31, 2001 included $5,380 and
$6,228, respectively, consisting of amounts deposited with lenders to satisfy
the Company's obligations pursuant to its outstanding standby letters of credit.
The balance of Restricted Cash as of September 30, 2002 primarily represents
$2,700 deposited in an irrevocable trust included in continuing operations. See
Note 12.
8. SETTLEMENT OF OBLIGATIONS
During the nine months ended September 30, 2002 the Company negotiated
settlements related to outstanding liabilities with many of its suppliers.
During this period, the Company also settled all of its outstanding domestic and
international real estate and equipment lease obligations, except for one
expired warehouse lease with approximately $70 of unpaid rent, and relocated its
remaining scaled-down operations to smaller office space in Los Angeles,
California. These settlements were on terms generally more favorable to the
Company than required by the existing terms of the liabilities. The difference
between the final settlement payments and the outstanding obligations was
recorded as a gain, totaling approximately $14,065, included in Gain on
Settlement of Obligations within discontinued operations (see Note 4). See also
Note 15.
13
9. TAX LIABILITIES
Accrued Expenses as of December 31, 2001 included a tax accrual totaling
approximately $3,486. An audit by the Internal Revenue Service covering the tax
years 1996 through 2000 was in process during 2002. Based on the Company filing
its 2001 tax return in September 2002 and preliminary discussions with the IRS,
management believed that the Company had no additional tax obligations.
Therefore, the aforementioned accrual was reversed during 2002 through Income
Tax Provision (Benefit) disclosed in Note 4.
10. RESTRUCTURING
2001 Restructuring
The Company recorded a second quarter 2001 pre-tax charge of approximately
$20,212 for restructuring expenses principally related to employee termination
costs, asset write-downs, loss on the sale of the United Kingdom business and
settlement of certain lease obligations. The restructuring plan was complete by
the first quarter of 2002. During 2002, the Company revised its initial estimate
of future restructuring activities and, as a result, recorded a $304 reduction
to the restructuring accrual outstanding as of December 31, 2001. As these
restructuring efforts related to the promotions business, this activity is
included within discontinued operations (see Note 4). A summary of activity in
the restructuring accrual related to the 2001 restructuring action is as
follows:
BALANCE AT JANUARY 1, 2001 $ --
Restructuring provision 20,212
Non-cash asset write-downs (8,874)
Employee termination costs
and other cash payments (9,340)
--------
BALANCE AT DECEMBER 31, 2001 1,998
Employee termination costs
and other cash payments (1,544)
Non-cash asset write-downs (150)
Accrual reversal (304)
--------
BALANCE AT SEPTEMBER 30, 2002 $ --
========
2000 Restructuring
As a result of its May 2000 restructuring, the Company recorded a net charge to
2000 operations of $5,735 for involuntary termination costs, asset write-downs
and the settlement of lease obligations. The restructuring plan was complete by
the first quarter of 2002. During 2002, the Company revised its initial estimate
of future restructuring activities and, as a result, recorded a $446 reduction
to the restructuring accrual outstanding as of December 31, 2001. As these
restructuring efforts related to the promotions business, this activity is
included within discontinued operations (see Note 4). A summary of activity in
the restructuring accrual related to the 2000 restructuring action is as
follows:
BALANCE AT JANUARY 1, 2001 $ 1,193
Employee termination costs
and other cash payments (657)
Non-cash asset write-downs (90)
BALANCE AT DECEMBER 31, 2001 446
Accrual reversal (446)
--------
BALANCE AT SEPTEMBER 30, 2002 $ --
========
11. CONTINGENCIES
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 Note 2),
the Company had recorded a $5,042 charge in the third quarter 2001 to accelerate
the recognition of contingent payment obligations (due in June 2002) arising
from the acquisition of Simon Marketing in 1997. This obligation was recorded as
a charge to Additional Paid in Capital during 2001. Pursuant to Separation,
Settlement and General Release Agreements entered into during 2002, the Company
paid approximately $1,996 to settle these obligations, resulting in an
adjustment of approximately $2,994, was recorded as Additional Paid in Capital
during the second quarter of 2002.
14
12. INDEMNIFICATION TRUST AGREEMENT
In March 2002, the Company, Simon Marketing and a Trustee entered into an
Indemnification Trust Agreement (the "Agreement" or the "Trust") which requires
the Company and Simon Marketing to fund an irrevocable trust in the amount of
$2,700. The Trust was set up and will be used to augment the Company's existing
insurance coverage for indemnifying directors, officers and certain described
consultants, who are entitled to indemnification against liabilities arising out
of their status as directors, officers and/or consultants (individually,
"Indemnitee" or collectively, "Indemnitees"). The Trust will pay Indemnitees for
amounts to which the Indemnitees are legally and properly entitled under the
Company's indemnity obligation and which amounts are not paid to the Indemnitees
by another party. During the term of the Trust, which continues until the
earlier to occur of: (i) the later of: (a) four years from the date of the
Agreement; or (b) as soon thereafter as no claim is pending against any
Indemnitee which is indemnifiable under the Company's indemnity obligations; or
(ii) March 1, 2022, the Company is required to replenish the Trust (up to
$2,700) for funds paid out to an Indemnitee. Upon termination of the Trust, if,
after payment of all outstanding claims against the Trust have been satisfied,
there are funds remaining in the Trust, such funds and all other assets of the
Trust shall be distributed to Simon Marketing. These funds are included in
Restricted Cash within continuing operations in the accompanying consolidated
balance sheet as of September 30, 2002.
13. EARNINGS PER SHARE DISCLOSURE
The following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computation for "loss available to common stockholders"
and other related disclosures required by SFAS No. 128, "Earnings per Share" (in
thousands, except share data):
For the Three Months Ended September 30,
2002 2001
------------------------------------- -------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
Basic and diluted EPS:
Loss from continuing operations $ (1,318) $ (1,919)
Preferred stock dividends 280 261
---------- ----------
Loss from continuing operations available
to common stockholders (1,598) 16,653,193 $ (0.10) (2,180) 16,651,796 $ (0.13)
========== ========== ========= ========== ========== ========
Income (loss) from discontinued operations (405) 16,653,193 $ (0.02) (65,274) 16,651,796 $ (3.92)
========== ========== ========= ========== ========== ========
Net loss (1,723) (67,193)
Preferred stock dividends 280 261
---------- ----------
Net loss available to common stockholders $ (2,003) 16,653,193 $ (0.12) $ (67,454) 16,651,796 $ (4.05)
========== ========== ========= ========== ========== ========
For the three months ended September 30, 2002 and 2001, 3,299,930 shares of
convertible preferred stock and 3,319,482 shares of convertible preferred stock
and common stock equivalents, respectively, were not included in the computation
of diluted EPS because to do so would have been antidilutive.
For the Nine Months Ended September 30,
2002 2001
------------------------------------- -------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
Basic and diluted EPS:
Loss from continuing operations $ (13,864) $ (4,536)
Preferred stock dividends 818 778
---------- ----------
Loss from continuing operations available
to common stockholders (14,682) 16,653,193 $ (0.88) (5,314) 16,388,641 $ (0.32)
========== ========== ========= ========== ========== ========
Income (loss) from discontinued operations 5,522 16,653,193 $ 0.33 (81,730) 16,388,641 $ (4.99)
========== ========== ========= ========== ========== ========
Net loss (8,342) (86,266)
Preferred stock dividends 818 778
---------- ----------
Net loss available to common stockholders $ (9,160) 16,653,193 $ (0.55) $ (87,044) 16,388,641 $ (5.31)
========== ========== ========= ========== ========== ========
15
For the nine months ended September 30, 2002, 3,267,569 shares of convertible
preferred stock were not included in the computation of diluted EPS and for the
nine months ended September 30, 2001, 3,451,351 shares of convertible preferred
stock, common stock equivalents and contingently and non-contingently issuable
shares related to acquired companies, were not included in the computation of
diluted EPS because to do so would have been antidilutive.
14. OTHER EVENTS
The Company's common stock was delisted from the Nasdaq Stock Market by Nasdaq
on May 3, 2002 due to the Company's failure to comply with certain Nasdaq
listing requirements. For more information related to this matter, reference is
made to the Company's Report on Form 8-K dated May 3, 2002.
Pursuant to a consulting agreement among Eric Stanton, Simon Worldwide and Simon
Marketing, Mr. Stanton, a stockholder of the Company, provided consulting
services to Simon Marketing in 2001 in exchange for $350,000. In the first
quarter of 2002, the Company entered into an Amended Consulting Agreement and
General Release ("Agreement") with Mr. Stanton. Pursuant to the terms of the
Agreement, Mr. Stanton's consulting relationship with the Company terminated on
June 30, 2002. Additionally, the Company received a full release from Mr.
Stanton in connection with this Agreement, and the Company provided Mr. Stanton
with a full release.
Mr. Stanton's wife, Vivian Foo, was employed by the Company's Simon Marketing
(Hong Kong) Limited subsidiary until the first quarter of 2002. In the first
quarter of 2002, the Company entered into a Settlement and General Release
Agreement ("Agreement") with Ms. Foo. Pursuant to the terms of the Agreement,
Ms. Foo's employment with the Company terminated in March 2002 and all other
agreements, obligations and rights existing between Ms. Foo and the Company
(including the agreement described in the next paragraph) were terminated in
exchange for a lump-sum payment of approximately $759,000. Additionally, the
Company received a full release from Ms. Foo in connection with this Agreement,
and the Company provided Ms. Foo with a full release.
The Company entered into an agreement with Ms. Foo in connection with the
Company's 1997 acquisition of Simon Marketing. Pursuant to this agreement, Ms.
Foo had received annual payments of cash and the Company's common stock (based
on the average closing price of the Company's common stock for the 20 trading
days immediately preceding each June 9) in the aggregate amount of $600,000.
Accordingly, the Company issued 113,895 of its shares of common stock to Ms. Foo
in 2001 as the common stock portion of such payment. In 2001, Ms. Foo's annual
base salary and bonus was $1,148,383 in the aggregate. In addition, pursuant to
Ms. Foo's agreement, she was entitled to certain employee benefits in connection
with her expatriate status. In 2001, these benefits had an aggregate value of
$490,215.
15. SUBSEQUENT EVENTS
SETTLEMENT OF OBLIGATIONS
During the fourth quarter of 2002, the Company negotiated settlements related to
outstanding liabilities with additional suppliers. These settlements were on
terms generally more favorable to the Company than required by the existing
terms of the liabilities. The difference between the final settlement payment
and the outstanding obligations was recorded as a gain within discontinued
operations, totaling approximately $2,390, during the fourth quarter.
RELATED PARTY TRANSACTIONS
On October 17, 2002, the Management Agreement between the Company and Yucaipa
was terminated by agreement of the parties and a payment was made to Yucaipa of
$1,500 and each party was released from further obligations thereunder. This
payment was recorded as a related party expense within discontinued operations
during the fourth quarter of 2002.
OTHER
In the fourth quarter of 2002, Cyrk, Inc. ("Cyrk") informed the Company that
Cyrk: (1) was suffering substantial financial difficulties, (2) may not be able
to discharge its obligations secured by the Company's $4,200 letter of credit
and (3) would be able to obtain a $2,500 equity infusion if it was able to
decrease Cyrk's liability for these obligations. As a result, in December 2002,
the Company granted Cyrk an option until April 20, 2003 (extended to May 7,
2003) to pay the Company $1,500 in exchange for the Company's agreement to apply
its $3,700 restricted cash to discharge Cyrk's obligations to Winthrop Resources
Corporation ("Winthrop"), with any remainder to be turned over to Cyrk. The
option provided that it could only be exercised after the satisfaction of
several conditions, including the Company's confirmation of Cyrk's financial
condition, Cyrk and the Company obtaining all necessary third party consents,
Cyrk and its subsidiaries providing the Company with a full release of all known
and unknown claims, and the Company having no further liability to Winthrop as a
guarantor of Cyrk's obligations. To the extent Cyrk exercises this option, the
Company would incur a loss ranging from $2,200 to $3,700. Cyrk was unable to
satisfy all conditions to the option, and it expired unexercised.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion of the financial condition and results of
operations of Simon Worldwide, Inc. ("the Company") as of and for the three and
nine months ended September 30, 2002 as compared to the same periods in the
previous year. This discussion should be read in conjunction with the
consolidated financial statements of the Company and related notes included
elsewhere in this Form 10-Q.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
From time to time, the Company may provide forward-looking information such as
forecasts of expected future performance or statements about the Company's plans
and objectives, including certain information provided below. These
forward-looking statements are based largely on the Company's expectations and
are subject to a number of risks and uncertainties, certain of which are beyond
the Company's control. The Company wishes to caution readers that actual results
may differ materially from those expressed in any forward-looking statements
made by, or on behalf of, the Company including, without limitation, as a result
of factors described in the Company's Amended Cautionary Statement for Purposes
of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act
of 1995, filed as Exhibit 99.1 to the Company's 2001 Report on Form 10-K/A which
is incorporated herein by reference.
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"), now known as Altria, Inc. Since August 2001, the
Company has concentrated its efforts on reducing its costs and settling numerous
claims, contractual obligations and pending litigation. As a result of these
efforts the Company has been able to resolve a significant number of outstanding
liabilities that existed at December 31, 2001 or arose subsequent to that date.
As of December 31, 2001, the Company had 136 employees worldwide and had reduced
its worldwide workforce to 9 employees as of December 31, 2002. See Notes 8 and
15 in the accompanying consolidated financial statements.
At September 30, 2002 and December 31, 2001, the Company had a stockholders'
deficit of $16.0 million and $11.5 million, respectively and a net loss of $8.3
million and $86.3 million for the nine months ending September 30, 2002 and
2001, respectively. Subsequent to December 31, 2001, the Company continued to
incur losses in 2002 and continues to incur losses in 2003 for the general and
administrative expenses being incurred to manage the affairs of the Company and
resolve outstanding legal matters. Management believes it has sufficient capital
resources and liquidity to operate the Company for the foreseeable future.
However, as a result of the loss of these major customers, along with the
resulting legal matters discussed further below, there is substantial doubt
about the Company's ability to continue as a going concern. As a result of the
stockholders' deficit, loss of customers, and related legal matters at December
31, 2001, the Company's independent public accountants have expressed
substantial doubt about the Company's ability to continue as a going concern.
The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
By April 2002, the Company had effectively eliminated a majority of its ongoing
operations and was in the process of disposing of its assets and settling its
liabilities related to the promotions business. The process is ongoing and will
continue throughout 2003 and possibly into 2004. During the second quarter of
2002, the discontinued activities of the Company, consisting of revenues,
operating costs, certain general and administrative costs and certain assets and
liabilities associated with the Company's promotions business were classified as
discontinued operations for financial reporting purposes. The Board of Directors
of the Company continues to consider various alternative courses of action for
the Company going forward, including possibly acquiring one or more operating
businesses, selling the Company or distributing its net assets, if any, to
shareholders. The decision on which course to take will depend upon a number of
factors including the outcome of the significant litigation matters in which the
Company is involved (see Legal Actions Associated with the McDonald's Matter).
To date, the Board of Directors has made no decision on which course of action
to take.
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 products 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%, respectively, of total
net sales in 2001
17
OUTLOOK
As a result of the loss of its McDonald's and Philip Morris business, along with
the resulting legal matters there is substantial doubt about the Company's
ability to continue as a going concern. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
these uncertainties. The Company has taken significant actions and will continue
to take further action to reduce its cost structure. The Board of Directors of
the Company continues to consider various alternative courses of action for the
Company going forward, including possibly acquiring one or more operating
businesses, selling the Company or distributing its net assets, if any, to
shareholders. The decision on which course to take will depend upon a number of
factors including the outcome of the significant litigation matters in which the
Company is involved (see Legal Actions Associated with the McDonald's Matter).
To date, the Board of Directors has made no decision on which course of action
to take. Management believes it has sufficient capital resources and liquidity
to operate the Company for the foreseeable future.
RESULTS OF CONTINUING AND DISCONTINUED OPERATIONS
By April 2002, the Company had effectively eliminated a majority of its ongoing
operations and was in the process of disposing all of its assets and settling
its liabilities related to the promotions business. Accordingly, the
discontinued activities of the Company have been classified as discontinued
operations in the accompanying consolidated financial statements. Continuing
operations represent the direct costs required to maintain the Company's current
corporate infrastructure that will enable the Board of Directors to pursue
various alternative courses of action going forward. These costs primarily
consist of the salaries and benefits of executive management and corporate
finance staff, professional fees, Board of Director fees, space and facility
costs and losses on certain investments. The Company's continuing operations and
discontinued operations will be discussed separately, based on the respective
financial results contained in the accompanying consolidated financial
statements and the notes thereto.
RESULTS OF CONTINUING OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2001
Selling, general and administrative expenses totaled $1.1 million in the third
quarter of 2002 as compared to $1.4 million in the third quarter of 2001,
primarily due to decreases in Board of Director fees and labor costs. Investment
losses for the quarters ending September 30, 2002 and 2001 represents charges
related to an other-than-temporary investment impairment associated with the
Company's venture portfolio, totaling $.3 million and $.5 million, respectively.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2001
Selling, general and administrative expenses totaled $3.6 million in the first
nine months of 2002 as compared to $3.3 million for the same period in 2001,
primarily due to increases in Board of Director and insurance expense.
Investment losses for the nine months ending September 30, 2002 and 2001
represents charges related to an other-than-temporary investment impairment
associated with the Company's venture portfolio, totaling $10.3 million and $1.3
million, respectively.
RESULTS OF DISCONTINUED OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2001
Net sales decreased $93.8 million to $0 in the third quarter of 2002 from $93.8
million in the third quarter of 2001. The decrease in the Company's net sales
was primarily attributable to the effects associated with the loss of its
McDonald's and Philip Morris business. See notes to consolidated financial
statements.
Gross profit decreased $20.4 million to $0 in the third quarter of 2002 from
$20.4 million in the third quarter of 2001. Gross profit as a percentage of net
sales was 21.7% in the third quarter of 2001. The decrease in the Company's
gross margin dollars is primarily attributable to effects associated with the
loss of its McDonald's and Philip Morris business. See notes to consolidated
financial statements.
Selling, general and administrative expenses totaled $(.4) million in the third
quarter of 2002 as compared to $18.3 million in the third quarter of 2001.
Selling, general and administrative expenses in the third quarter of 2002 of
$(.4) million include a settlement of lease and other obligations of $.4 million
less than the amounts accrued. The Company's decreased spending was due
principally to the effects associated with the loss of its McDonald's and Philip
Morris business. See notes to consolidated financial statements. In the third
quarter of 2001, selling, general and administrative expenses as a percentage of
net sales was 19.5%.
During the three months ended September 30, 2002, the Company recorded a pre-tax
net charge totaling approximately $2.0 million associated with the loss of
customers. These charges were primarily related to asset write-downs ($.2
million), professional fees ($1.0 million) and labor and other costs ($.8
million).
18
During the three months ended September 30, 2002, the Company negotiated
settlements related to outstanding liabilities with many of its suppliers on
terms generally more favorable to the Company than required by the existing
terms of the liabilities. The Company recorded gain totaling approximately $1.1
million during the third quarter of 2002 in connection with these settlements,
included in Gains on Settlement of Obligations in Note 4 to the accompanying
consolidated financial statements.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2001
Net sales decreased $311.4 million to $0 in the first nine months of 2002 from
$311.4 million in the first nine months of 2001. The decrease in the Company's
net sales was primarily attributable to the effects associated with the loss of
its McDonald's and Philip Morris business. See notes to consolidated financial
statements.
Gross profit decreased $64.3 million to $0 in the first nine months of 2002 from
$64.3 million in the first nine months of 2001. Gross profit as a percentage of
net sales was 20.6% in the first nine months of 2001. The decrease in the
Company's gross margin dollars is primarily attributable to effects associated
with the loss of its McDonald's and Philip Morris business. See notes to
consolidated financial statements.
Selling, general and administrative expenses totaled $4.2 million in the first
nine months of 2002 as compared to $68.4 million in the first nine months of
2001. Selling, general, and administrative expenses for the first nine months of
2002 of $4.2 million includes a settlement of lease and other obligations of
$4.5 million less than the amounts accrued. The Company's decreased spending was
due principally to the effects associated with the loss of its McDonald's and
Philip Morris business. See notes to consolidated financial statements. In the
first nine months of 2001, selling, general and administrative expenses as a
percentage of net sales was 22.0%.
During the nine months ended September 30, 2002, the Company recorded a pre-tax
net charge totaling approximately $3.6 million associated with the loss of
customers (see Note 4). Charges totaling $6.7 million, primarily related to
asset write-downs ($2.4 million), professional fees ($3.5 million), labor and
other costs ($.8 million), were partially offset by a recoveries of certain
assets, totaling ($1.3 million), that had been written off and included in the
2001 charges attributable to the loss of significant customers and other gains
($1.8 million).
During the nine months ended September 30, 2002 the Company negotiated
settlements related to outstanding liabilities with many of its suppliers.
During this period, the Company also settled all of its outstanding domestic and
international real estate and equipment lease obligations, except for one
expired warehouse lease with approximately $.1 million of unpaid rent, and
relocated its remaining scaled-down operations to smaller office space in Los
Angeles, California. These settlements were on terms generally more favorable to
the Company than required by the existing terms of the liabilities. The
difference between the final settlement payment and the outstanding obligations
was recorded as a gain, totaling approximately $9.6 million related to the
settlement of vendor payables included in Gain on Settlement of Obligations and
$4.5 million related to the settlement of lease and other obligations recorded
as a reduction to selling, general, and administrative expenses disclosed in
Note 4 to the consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
The matters discussed in the Loss of Customers, Resulting Events and Going
Concern section above, which have and will continue to have a substantial
adverse impact on the Company's cash position, raise substantial doubts about
the Company's ability to continue as a going concern. The accompanying
consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties. The Company has taken and will
continue to take action to reduce its cost structure. The Company is focused on
resolving all litigation matters in which it is a party and settling all claims
and vendor payables. Subsequent to December 31, 2001, the Company continued to
incur losses in 2002 and continues to incur losses in 2003 for the general and
administrative expenses being incurred to manage the affairs of the Company and
resolve outstanding legal matters. Inasmuch as the Company no longer generates
operating income and is unable to borrow funds, the source of current and future
working capital is expected to be cash on hand, the recovery of long-term assets
and any future proceeds from litigation. Management believes it has sufficient
capital resources and liquidity to operate the Company for the foreseeable
future. The Board of Directors of the Company continues to consider various
alternative courses of action for the Company going forward, including possibly
acquiring one or more operating businesses, selling the Company or distributing
of its net assets, if any, to shareholders. The decision on which course to take
will depend upon a number of factors including the outcome of the significant
litigation matters in which the Company is involved (see Legal Actions
Associated with the McDonald's Matter). To date, the Board of Directors has made
no decisions on which course of action to take.
19
CONTINUING OPERATIONS
Working capital from continuing operations at September 30, 2002 was $10.2
million compared to $3.6 million at December 31, 2001. Net cash used in
operating activities from continuing operations during the nine months ending
September 30, 2002 totaled $2.7 million, primarily due to a loss from continuing
operations of $13.9 million partially offset by a charge for impaired
investments of $10.3 million and a decrease in prepaid expenses and other
current assets of $.8 million. Net cash used in operating activities from
continuing operations totaled $2.9 million during 2001, primarily due to a loss
from continuing operations of $4.5 million partially offset by a charge for
impaired investments of $1.5 million.
Net cash used in investing activities from continuing operations during the nine
months ended September 30, 2002 totaled $2.8 million, primarily relating to the
establishment of the indemnification trust agreement during 2002. There were no
investing activities during the nine months ended September 2001. There were
also no financing activities from continuing operations during the nine months
ended September 30, 2002 and 2001.
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.
Restricted cash included within continuing operations at September 30, 2002
totaled $8.1 million, primarily representing amounts deposited in an irrevocable
trust discussed above and amounts deposited with lenders to satisfy the
Company's obligations pursuant to its standby letters of credit. Restricted
cash within continuing operations at December 31, 2001 of $2.9 million
primarily consisted of amounts deposited with lenders to satisfy the Company's
obligations pursuant to its outstanding standby letters of credit.
DISCONTINUED OPERATIONS
Working capital from discontinued operations at September 30, 2002 was $(1.7)
million compared to $.9 million at December 31, 2001. Net cash provided by
discontinued operations during the nine months ended September 30, 2002 totaled
$10.2 million, which was primarily due to net cash provided by investing
activities of $6.6 million and a reallocation of funds, totaling approximately
$21.6 million, between continuing and discontinued operations due to changes in
minimum working capital requirements, partially offset by net cash used in
operating activities of $16.5 million and net cash used in financing activities
of $1.5 million.
Net cash used in discontinued operations during the nine months ended September
30, 2001 totaled $31.0 million, which was primarily due to net cash used in
operating activities of $5.2 million, net cash provided by investing activities
of $5.1 million, net cash used in financing activities of $4.3 million and a
reallocation of funds, totaling approximately $26.4 million, between continuing
and discontinued operations due to changes in minimum working capital
requirements.
Net cash used in operating activities of discontinued operations during the nine
months ended September 30, 2002 of $16.5 million primarily consisted of a net
change in working capital items of $11.3 million and gain on settlement of
vendor payables of $9.6 million and settlement of lease and other obligations of
$4.5 million, partially offset by income from discontinued operations of $5.5
million and charges for impaired assets of $2.9 million. Net cash used in
operating activities of discontinued operations during the nine months ended
September 30, 2001 of $5.2 million primarily consisted of a loss from
discontinued operations of $81.7 million, a gain on sale of investments of $4.0
million, partially offset by bad debt expense of $2.9 million, a decrease in
deferred tax assets of $11.8 million, a charge for impaired assets of $46.9
million, non-cash restructuring charges of $8.9 million, depreciation and
amortization expense of $4.3 million and a net reduction in working capital
items of $5.3 million.
Net cash provided by investing activities of discontinued operations during the
nine months ended September 30, 2002 of $6.6 million primarily consisted of a
decrease in restricted cash of $5.9 million, proceeds from the sale of
investments of $.1 million, and a $.7 million net change in other investments.
Net cash provided by investing activities during the nine months ended September
30, 2001 of $5.1 million primarily consisted of proceeds from the sale of
investments and the CPG division of $7.5 million and $8.4 million, respectively,
partially offset by $2.9 million of property and equipment purchases and
purchases of investments totaling $7.9 million.
Net cash used in financing activities of discontinued operations during the nine
months ended September 30, 2002 of $1.5 million primarily consisted of
repayments of short and long-term borrowings. Net cash used in financing
activities of discontinued operations during the nine months ended September 30,
2001 of $4.3 million primarily consisted of $5.1 million related to repayments
of short-term borrowings partially offset by $.1 million of proceeds from
long-term obligations and $.6 million of proceeds from the issuance of common
stock.
20
During 2002, the Company 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. As of September 30, 2002,
approximately $21.7 million of the Company's recorded net liabilities have been
settled. These settlements were on terms generally more favorable to the Company
than required by the existing terms of these obligations. See Note 8 to the
accompanying consolidated financial statements.
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 during 2002 with former employees, the Company settled its
contingent payment obligations for an amount less than its recorded liability.
See notes to the accompanying consolidated financial statements.
In the fourth quarter of 2002, Cyrk informed the Company that it: (1) was
suffering substantial financial difficulties, (2) may not be able to discharge
its obligations secured by the Company's $4.2 million letter of credit and (3)
would be able to obtain a $2.5 million equity infusion if it were able to
decrease Cyrk's liability for these obligations. As a result, in December 2002,
the Company granted Cyrk an option until April 20, 2003 (extended to May 7,
2003) to pay the Company $1.5 million in exchange for the Company's agreement to
apply its $3.7 million restricted cash to discharge Cyrk's obligations to
Winthrop, with any remainder to be turned over to Cyrk. The option was only to
be exercised after the satisfaction of several conditions, including the
Company's confirmation of Cyrk's financial condition, Cyrk and the Company
obtaining all necessary third party consents, Cyrk and its subsidiaries
providing the Company with a full release of all known and unknown claims, and
the Company having no further liability to Winthrop as a guarantor of Cyrk's
obligations. To the extent Cyrk were to exercise this option, the Company would
incur a loss ranging from $2.2 million to $3.7 million. Cyrk was unable to
satisfy all conditions to the option, and it expired unexercised.
Restricted cash included within discontinued operations at September 30, 2002
and December 31, 2001 totaled $0 million and $5.9 million, respectively,
primarily consisting of amounts deposited with lenders to satisfy the Company's
obligations pursuant to its outstanding standby letters of credit.
The Company's common stock was delisted from the Nasdaq Stock Market by Nasdaq
on May 3, 2002 due to the Company's failure to comply with certain Nasdaq
listing requirements. For additional information related to this matter,
reference is made to the Company's report on Form 8-K dated May 3, 2002.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The disclosure required by this Item is not material to the Company because the
Company does not currently have any exposure to market rate sensitive
instruments, as defined in this Item. Part of the Company's discontinued
operations consists of certain consolidated subsidiaries that are denominated in
foreign currencies. As the assets of these subsidiaries are largely offset by
liabilities, the Company is not materially exposed to foreign currency exchange
risk.
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES: Within 90 days before filing this Report,
the Company evaluated the effectiveness and design and operation of its
disclosure controls and procedures. The Company's disclosure controls and
procedures are the controls and other procedures that the Company designed to
ensure that it records, processes, summarizes and reports in a timely manner the
information that it must disclose in reports that the Company files with or
submits to the Securities and Exchange Commission. Anthony Kouba and George
Golleher, the members of the Executive Committee, which has the responsibility
for the role of chief executive officer of the Company, and Greg Mays, who has
assumed the role of Chief Financial Officer, reviewed and participated in this
evaluation. Based on this evaluation, the Company's disclosure controls were
effective.
INTERNAL CONTROLS: Since the date of the evaluation described above, there have
not been any significant changes in the Company's internal controls or in other
factors that could significantly affect those controls.
21
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See "Legal Actions Associated with the McDonald's Matter" located in Part I of
this Report on Form 10-Q for disclosure related to legal proceedings involving
the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed herewith:
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
The Company filed a Report on Form 8-K dated June 6, 2002 with respect to
engaging BDO Seidman LLP as the Company's independent public accountants.
The Company filed a Report on Form 8-K dated August 14, 2002 with respect to the
filing of its quarterly report on Form 10-Q for the quarter ending June 30,
2002.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: July 25, 2003 SIMON WORLDWIDE, INC.
/s/ J. ANTHONY KOUBA
--------------------
J. Anthony Kouba
Executive Committee Member
(duly authorized signatory)
23
I, George G. Golleher, a member of the Executive Committee of the Board of
Directors which has responsibility for the role of principal executive officer
of the Company, certify that:
1. I have reviewed this report on Form 10-Q of the Company.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report.
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a - 14 and 15d - 14) for the Company
and we have:
a.) designed such disclosure controls and procedures to ensure
that material information relating to the Company, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
the quarterly report is being prepared;
b.) evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to
filing this quarterly report (the "Evaluation Date"); and
c.) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The Company's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Company's auditors and the
Company's Board of Directors:
a.) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the Company's auditors
any material weaknesses in internal controls; and
b.) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Company's internal controls; and
6. The Company's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
July 25, 2003 /s/ GEORGE G. GOLLEHER
------------------------------
BY: George G. Golleher
Executive Committee Member
24
I, J. Anthony Kouba, a member of the Executive Committee of the Board of
Directors which has responsibility for the role of principal executive officer
of the Company, certify that:
1. I have reviewed this report on Form 10-Q of the Company.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report.
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a - 14 and 15d - 14) for the Company
and we have:
a.) designed such disclosure controls and procedures to ensure
that material information relating to the Company, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
the quarterly report is being prepared;
b.) evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to
filing this quarterly report (the "Evaluation Date"); and
c.) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The Company's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Company's auditors and the
Company's Board of Directors:
a.) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the Company's auditors
any material weaknesses in internal controls; and
b.) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Company's internal controls; and
6. The Company's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
July 25, 2003 /s/ J. ANTHONY KOUBA
------------------------------
BY: J. Anthony Kouba
Executive Committee Member
25
I, Greg Mays, principal financial officer of the Company, certify that:
1. I have reviewed this report on Form 10-Q of the Company.
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report.
4. The Company's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a - 14 and 15d - 14) for the Company
and we have:
a.) designed such disclosure controls and procedures to ensure
that material information relating to the Company, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
the quarterly report is being prepared;
b.) evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to
filing this quarterly report (the "Evaluation Date"); and
c.) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The Company's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Company's auditors and the
Company's Board of Directors:
a.) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the Company's auditors
any material weaknesses in internal controls; and
b.) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Company's internal controls; and
6. The Company's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
July 25, 2003 /s/ GREG MAYS
-------------------------------
BY: Greg Mays
Principal Financial Officer
26