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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-K

 

 

 

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended: December 31, 2012

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

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

18952 MacArthur Boulevard, Irvine, California 92612

(Address of principal executive office)

(949) 251-4660

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, $0.01 Par Value Per Share   NONE

Securities registered pursuant to Section 12(g) of the Act:

NONE

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act:    Yes  ¨    No  þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act:    Yes  ¨    No  þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days:    Yes  þ    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files):    Yes  þ    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K:  þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in
Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer    ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company    þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act):    Yes  ¨    No  þ

At June 30, 2012, the aggregate market value of voting stock held by non-affiliates of the registrant was $1,155,810.

At March 20, 2013, 50,611,879 shares of the registrant’s common stock were outstanding.

 

 

 


Table of Contents

SIMON WORLDWIDE, INC.

FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2012

INDEX

 

PART I      3   
 

Item 1. Business

     3   
 

Item 1A. Risk Factors

     4   
 

Item 1B. Unresolved Staff Comments

     5   
 

Item 2. Properties

     5   
 

Item 3. Legal Proceedings

     5   
 

Item 4. Mine Safety Disclosure

     5   
PART II      6   
 

Item  5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     6   
 

Item 6. Selected Financial Data

     6   
 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     6   
 

Item 8. Financial Statements and Supplementary Data

     9   
 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     9   
 

Item 9A. Controls and Procedures

     9   
 

Item 9B. Other Information

     10   
PART III      11   
 

Item 10. Directors, Executive Officers and Corporate Governance

     11   
 

Item 11. Executive Compensation

     13   
 

Item  12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     19   
 

Item 13. Certain Relationships, Related Transactions and Director Independence

     21   
 

Item 14. Principal Accountant Fees and Services

     21   
PART IV      22   
 

Item 15. Exhibits and Financial Statement Schedules

     22   
SIGNATURES      23   
Ex-31 Section 302 Certification of CEO and CFO   
Ex-32 Section 906 Certification of CEO and CFO   
Ex-101 Instance Document   
Ex-101 Schema Document   
Ex-101 Calculation Linkbase Document   
Ex-101 Definition Linkbase Document   
Ex-101 Labels Linkbase Document   
Ex-101 Presentation Linkbase Document   

 

2


Table of Contents

PART I

Item 1. Business

General

Prior to August 2001, Simon Worldwide, Inc. (the “Company”), incorporated in Delaware and founded in 1976, had been operating as a multi-national full-service promotional marketing company, specializing in the design and development of high-impact promotional products and sales promotions. The major client of the Company had been McDonald’s Corporation (“McDonald’s”), for which the Company’s Simon Marketing subsidiary designed and implemented marketing promotions, which included premiums, games, sweepstakes, events, contests, coupon offers, sports marketing, licensing, and promotional retail items. Net sales to McDonald’s and Philip Morris, another significant former client, accounted for 78% and 8%, respectively, of total net sales in 2001.

On August 21, 2001, the Company was notified by McDonald’s that it was terminating its approximately 25-year relationship with Simon Marketing as a result of the arrest of Jerome P. Jacobson (“Mr. Jacobson”), a former employee of Simon Marketing who subsequently pled guilty to embezzling winning game pieces from McDonald’s promotional games administered by Simon Marketing. No other Company employee was found to have any knowledge of or complicity in his illegal scheme. Simon Marketing was identified in the criminal indictment of Mr. Jacobson, along with McDonald’s, as an innocent victim of Mr. Jacobson’s fraudulent scheme. Further, on August 23, 2001, the Company was notified that its second largest customer, Philip Morris, was also ending its approximately nine-year relationship with the Company. As a result of the above events, the Company no longer has an ongoing promotions business.

Since August 2001, the Company has concentrated its efforts on reducing its costs and settling numerous claims, contractual obligations, and pending litigation. By April 2002, the Company had effectively eliminated a majority of its ongoing promotions business operations and was in the process of disposing of its assets and settling its liabilities related to the promotions business and defending and pursuing litigation with respect thereto. In essence, the Company discontinued its promotions business and changed the nature of its operation to focus on its pending litigation and winding down its contracted obligations. As a result of these efforts, the Company has been able to resolve a significant number of outstanding liabilities that existed in August 2001 or arose subsequent to that date. As of December 31, 2012, the Company had reduced its workforce to 4 employees from 136 employees as of December 31, 2001.

During the second quarter of 2002, the discontinued activities of the Company, consisting of revenues, operating costs, certain general and administrative costs and certain assets and liabilities associated with the Company’s promotions business, were classified as discontinued operations for financial reporting purposes. In October 2010, the Company settled the remaining liability in its discontinued promotions business which was a post-employment obligation. At December 31, 2012 and 2011, the Company had stockholders’ equity of $7.6 million and $9.1 million, respectively. With no revenues from operations, the Company closely monitors and controls its expenditures within a reasonably predictable range. Cash used in operating activities was $1.5 million and $1.9 million for the years ended December 31, 2012 and 2011, respectively. The Company incurred losses in 2012 and continues to incur losses in 2013 for the general and administrative expenses incurred to manage the affairs of the Company. By utilizing cash which had been received pursuant to the settlement of the Company’s litigation with McDonald’s in 2004, $2.1 million received from Yucaipa AEC Associates, LLC (“Yucaipa AEC”) in July 2008 and March 2009, and $1.75 million received in August 2008 in settlement of the Company’s lawsuit against PricewaterhouseCoopers LLC, management believes it has sufficient capital resources and liquidity to operate the Company for at least one year.

The Company is currently managed by the Chief Executive Officer and principal financial officer, Greg Mays, together with an acting general counsel. The Board of Directors has considered various alternative courses of action for the Company, including possibly acquiring or combining with one or more operating businesses. The Board of Directors has reviewed and analyzed a number of proposed transactions. On March 22, 2013, the

 

3


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Company announced in a current report of Form 8-K that it, together with Richard Beckman, Joel Katz and OA3 had entered into the limited liability company agreement (the “Operating Agreement”) of Three Lions Entertainment, LLC (“Three Lions”). Pursuant to the Operating Agreement, the Company made an initial capital contribution of $3,150,000 with respect to membership units representing 60% of the voting power of Three Lions. The membership units received by the Company represent a 60% interest in the economic returns of Three Lions, including certain preferences with respect to common holders on operating returns and on a liquidation or sale of Three Lions. The Company has the ability to, but is not required to, make certain additional capital contributions. If the Company does not make additional contributions, OA3 is obligated to make such contributions in the amounts that would otherwise be made by the Company. If OA3 makes such contributions, OA3 will receive a proportionate interest in Three Lions, subject to certain exceptions. The Company cannot predict whether such course of action will be successful.

On June 11, 2008, the Company entered into an Exchange and Recapitalization Agreement (the “Recapitalization Agreement”) with Overseas Toys, L.P. (“Overseas Toys”), the then holder of all the outstanding shares of preferred stock of the Company, pursuant to which all the outstanding preferred stock would be converted into shares of common stock representing 70% of the shares of common stock outstanding immediately following the conversion. Subsequently, Overseas Toys’ holding of common stock increased to 82.5% due to: i) the reduction in outstanding shares of common stock in connection with the Company’s April 26, 2010, purchase of 3,589,201 shares from Everest Special Situations Fund L.P. and ii) the December 10, 2010, purchase of 3,822,912 shares by Overseas Toys in connection with its tender offer to purchase shares of the Company’s common stock it did not already own (further described below). The Recapitalization Agreement was negotiated on the Company’s behalf by the Special Committee of disinterested directors which, based in part upon the opinion of the Special Committee’s financial advisor, determined that the transaction was fair to the holders of common stock from a financial point of view. At a special meeting held on September 18, 2008, the stockholders of the Company approved amendments to the Company’s certificate of incorporation proposed in order to effect a recapitalization of the Company pursuant to the terms of the Recapitalization Agreement.

Under the Recapitalization Agreement, the Company issued 37,940,756 shares of common stock with a fair value of $15.2 million in exchange for 34,717 shares of preferred stock (representing all outstanding preferred shares) with a carrying value of $34.7 million and related accrued dividends of approximately $147,000. The Company recorded $19.7 million to retained earnings in September 2008 representing the excess of carrying value of the preferred stock received over the fair market value of the common shares issued as such difference essentially represented a return to the Company.

In 2010, Overseas Toys, L.P. completed a tender offer for all shares of the Company not owned by Overseas Toys, L.P. As a result of the 2010 tender offer, the officers of the Company were not required to dissolve and liquidate the Company as would have been required under the Recapitalization Agreement if such tender offer had not been consummated.

Item 1A. Risk Factors

The following important factors, among others, in some cases have affected, and in the future could affect, the Company’s actual results and could cause the Company’s actual consolidated results for the Company’s current year and beyond to differ materially from those expressed in any forward-looking statements made by or on behalf of the Company.

Uncertain Outlook

The Company no longer has any revenue generating business. The Board of Directors has considered various alternative courses of action for the Company, including possibly acquiring or combining with one or more operating businesses. The Board of Directors has reviewed and analyzed a number of proposed transactions. On March 22, 2013, the Company announced in a current report of Form 8-K that it, together with Richard Beckman, Joel Katz and OA3 had entered into the Operating Agreement of Three Lions. Pursuant to the

 

4


Table of Contents

Operating Agreement, the Company made an initial capital contribution of $3,150,000 with respect to membership units representing 60% of the voting power of Three Lions. The membership units received by the Company represent a 60% interest in the economic returns of Three Lions, including certain preferences with respect to common holders on operating returns and on a liquidation or sale of Three Lions. The Company has the ability to, but is not required to, make certain additional capital contributions. If the Company does not make additional contributions, OA3 is obligated to make such contributions in the amounts that would otherwise be made by the Company. If OA3 makes such contributions, OA3 will receive a proportionate interest in Three Lions, subject to certain exceptions. The Company cannot predict whether such course of action will be successful.

Dependence on Key Personnel

We are dependent on several key personnel, including our directors. In light of our uncertain outlook, there is no assurance that our key personnel can be retained. The loss of the services of our key personnel would harm the Company. In addition, the Company has a limited number of personnel. As such, this presents a challenge in maintaining compliance with Section 404 of the Sarbanes-Oxley Act of 2002. If Section 404 compliance is not properly maintained, the Company’s internal control over financial reporting may be adversely affected.

Investments

The Company held an investment in a privately held technology company, which was sold in 2011. The Company continues to hold investments in other privately held companies. One of these investments was originally intended primarily to also provide the Company with an expanded technology presence. The other private company in which the Company has an investment is in a biotechnology company which is subject to all the risks inherent in biotechnology. In addition, these companies are subject to the valuation volatility associated with the investment community and capital markets. The carrying value of the Company’s investments in these companies is subject to the aforementioned risks. Periodically, the Company performs a review of the carrying value of its investments in these companies, and considers such factors as current results, trends and future prospects of the investee, general market conditions, and other economic factors.

Forward Looking Information

From time to time, the Company may provide forward looking information such as forecasts of expected future performance or statements about the Company’s plans and objectives. This information may be contained in filings with the Securities and Exchange Commission, press releases, or oral statements by the officers of the Company. The Company desires to take advantage of the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995 and these risk factors are intended to do so.

Item 1B. Unresolved Staff Comments

Not applicable.

Item 2. Properties

In September 2011, the Company signed a 12-month lease agreement for 2,000 square feet of office space in Irvine, California, with a monthly rent of approximately $3,700, into which the Company relocated its remaining scaled-down operations. In March 2012, this lease was extended an additional 12-months through August 2013 at a monthly rent of approximately $3,800. For a summary of the Company’s minimum rental commitments under all non-cancelable operating leases as of December 31, 2012, see Notes to Consolidated Financial Statements.

Item 3. Legal Proceedings

None.

Item 4. Mine Safety Disclosure

Not applicable.

 

5


Table of Contents

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Until May 3, 2002, the Company’s stock traded on The Nasdaq Stock Market under the symbol SWWI. On May 3, 2002, the Company’s stock was delisted by Nasdaq due to the fact that the Company’s stock was trading at a price below the minimum Nasdaq requirement. The following table presents, for the periods indicated, the high and low sales prices of the Company’s common stock as reported on the over-the-counter market in the Pink Sheets. Such over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission and may not necessarily represent actual transactions.

 

     2012      2011  
     High      Low      High      Low  

First quarter

   $ 0.14       $ 0.10       $ 0.33       $ 0.20   

Second quarter

     0.10         0.10         0.24         0.15   

Third quarter

     0.14         0.10         0.20         0.14   

Fourth quarter

     0.12         0.09         0.14         0.12   

As of March 20, 2013, the Company had approximately 341 holders of record of its common stock. The last reported sale price of the Company’s common stock on March 20, 2013, was $0.11.

The Company has never paid cash dividends, other than series A preferred stock distributions in 2000 and stockholder distributions of Subchapter S earnings during 1993 and 1992.

On April 26, 2010, the Company purchased 3,589,201 shares of its outstanding common stock from Everest Special Situations Fund L.P., formerly the Company’s second largest shareholder, for $1,256,220. These shares are held by the Company as treasury stock resulting in 50,611,879 shares outstanding as of December 31, 2012.

Item 6. Selected Financial Data

Not applicable.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements and Associated Risks

From time to time, the Company may provide forward-looking information such as forecasts of expected future performance or statements about the Company’s plans and objectives, including certain information provided below. These forward-looking statements are based largely on the Company’s expectations and are subject to a number of risks and uncertainties, certain of which are beyond the Company’s control. The Company wishes to caution readers that actual results may differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company including, without limitation, as a result of factors described in Item 1A. Risk Factors.

Critical Accounting Policies

Management’s discussion and analysis of financial condition and results of operations is based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent liabilities. On an ongoing basis, management evaluates its estimates and bases its estimates on historical experience and on various other assumptions that are believed

 

6


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to be reasonable under the circumstances, the results of which form the basis for judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

Management applies the following critical accounting policies in the preparation of the Company’s consolidated financial statements:

Long-Term Investments

The Company’s accounting policy for long-term investments is considered critical because long-term investments are one of the Company’s most material assets other than cash and cash equivalents.

The Company held an investment in a privately held technology company, which was sold in 2011. The Company continues to hold investments in other privately held companies. One of these investments was originally intended primarily to also provide the Company with an expanded technology presence. The other private company in which the Company has an investment is in a biotechnology company which is subject to all the risks inherent in biotechnology. In addition, these companies are subject to the valuation volatility associated with the investment community and capital markets. The carrying value of the Company’s investments in these companies is subject to the aforementioned risks. Periodically, the Company performs a review of the carrying value of its investments in these companies, and considers such factors as current results, trends and future prospects of the investee, general market conditions, and other economic factors.

Certain investments are designated as available-for-sale in accordance with the provisions primarily codified under ASC 320-10-25, “Investments—Debt and Equity Securities,” and as such, unrealized gains and losses are reported in the accumulated other comprehensive income component of stockholders’ equity. These investments are included in other assets in the accompanying consolidated balance sheets.

Contingencies

The Company records an accrued liability and related charge for an estimated loss from a loss contingency if two conditions are met: (1) information is available prior to the issuance of the financial statements that indicates it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and (2) the amount of loss can be reasonably estimated. Accruals for general or unspecified business risks are not recorded. Gain contingencies are recognized when realized.

Recently Issued Accounting Standards

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, to improve the transparency of reporting reclassifications out of accumulated other comprehensive income. ASU 2013-02 does not change the current requirements for reporting net income or other comprehensive income in financial statements. Instead, the new amendments require an organization to: 1) Present (either on the face of the statement where net income is presented or in the notes) the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income – but only if the item reclassified is required under U.S. generally accepted accounting principles (U.S. GAAP) to be reclassified to net income in its entirety in the same reporting period; and 2) Cross-reference to other disclosures currently required under U.S. GAAP for other reclassification items (that are not required under U.S. GAAP) to be reclassified directly to net income in their entirety in the same reporting period. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is initially transferred to a balance sheet instead of directly to income or expenses.

ASU No. 2013-02 will be effective for the Company beginning January 1, 2013. The Company does not expect this adoption to have a material effect on the Company’s consolidated statements of financial position or results of operations.

 

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Results of Operations

Operations consist of activities 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. Operational costs primarily consist of the salaries and benefits of executive management and corporate finance staff, professional fees, board of director fees, and space and facility costs.

2012 Compared to 2011

There were no revenues during 2012 and 2011.

General and administrative expenses totaled $1.6 million in 2012 compared to $2.0 million in 2011. The decrease can be primarily attributed to a reduction in director fees and labor costs.

Interest income totaled $9,000 in 2012 compared to $25,000 in 2011. The decrease is primarily due to reductions in average cash balances and average interest rates in 2012 when compared to 2011.

Other income totaled $34,000 in 2012 and $15,000 in 2011. The amount for 2012 relates to the Company providing limited accounting and administrative services to another company controlled by the Company’s largest shareholder. The arrangement entails providing these services through an undetermined end date, including payments totaling $9,000 for the first quarter of 2013. The Company does not consider this arrangement to be part of its recurring operations. The amount for 2011 related to investment income and was the result of a sale of the Company’s remaining equity investment in a technology related company that had a cost basis of $59,000.

Equity in Yucaipa AEC (loss) earnings totaled $(9,000) for 2012 and $1,000 for 2011. The Company expects this investment to be liquidated during 2013 and does not expect any future economic benefit prior to its liquidation. Accordingly, the book value of the investment is $0 at December 31, 2012.

Liquidity and Capital Resources

The lack of any operating revenue has had and will continue to have a substantial adverse impact on the Company’s cash position. The Company incurred losses in 2012 and continues to incur losses in 2013 for the general and administrative expenses incurred to manage the affairs of the Company. Inasmuch as the Company no longer generates operating income, the source of current and future working capital is expected to be cash on hand and proceeds from the sale of its remaining long-term investments. Management believes it has sufficient capital resources and liquidity to operate the Company for at least one year.

The Board of Directors has considered various alternative courses of action for the Company, including possibly acquiring or combining with one or more operating businesses. The Board of Directors has reviewed and analyzed a number of proposed transactions. On March 22, 2013, the Company announced in a current report of Form 8-K that it, together with Richard Beckman, Joel Katz and OA3 had entered into the limited liability company agreement (the “Operating Agreement”) of Three Lions Entertainment, LLC (“Three Lions”). Pursuant to the Operating Agreement, the Company made an initial capital contribution of $3,150,000 with respect to membership units representing 60% of the voting power of Three Lions. The membership units received by the Company represent a 60% interest in the economic returns of Three Lions, including certain preferences with respect to common holders on operating returns and on a liquidation or sale of Three Lions. The Company has the ability to, but is not required to, make certain additional capital contributions. If the Company does not make additional contributions, OA3 is obligated to make such contributions in the amounts that would otherwise be made by the Company. If OA3 makes such contributions, OA3 will receive a proportionate interest in Three Lions, subject to certain exceptions. The Company cannot predict whether such course of action will be successful. Considering our current cash position of $7.3 million at December 31, 2012 and our average spending to support operations, management believes it has sufficient capital resources and liquidity to operate the Company for at least one year.

 

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Working capital at December 31, 2012 and 2011 was $7.3 million and $8.8 million, respectively.

Net cash used in operating activities during 2012 and 2011 totaled $1.5 million and $1.9 million, respectively, primarily due to a loss from operations resulting from the general and administrative expenses to manage the affairs of the Company.

There was no cash provided by investing activities during 2012. Net cash received from investing activities during 2011 totaled $73,000 due to the sale of one of the Company’s equity investments.

There were no financing cash flows during 2012 and 2011.

The Company is also involved in other litigation and legal matters from time to time in the ordinary course of business in which it is the plaintiff. The Company does not believe that the ultimate resolution of these other litigation and legal matters, if any, will have a material adverse effect on its financial condition, results of operations, or net cash flows. However, the results of legal proceedings cannot be predicted with certainty. During 2012, there were no litigation or legal matters settled. Thus, there was no impact on the Company’s financial condition, results of operations, or net cash flows.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements, investments in special purpose entities, or undisclosed borrowings or debts. In addition, the Company has no derivative contracts or synthetic leases.

Item 8. Financial Statements and Supplementary Data

 

Description

  

Page

 

Report of Independent Registered Public Accounting Firm

     F-1   

Consolidated Balance Sheets as of December 31, 2012 and 2011

     F-2   

Consolidated Statements of Operations for the Years Ended December 31, 2012 and 2011

     F-3   

Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2012 and 2011

     F-4   

Consolidated Statements of Stockholders’ Equity for the Years ended December 31, 2012 and 2011

     F-5   

Consolidated Statements of Cash Flows for the Years ended December 31, 2012 and 2011

     F-6   

Notes to Consolidated Financial Statements

     F-7   

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of December 31, 2012, the Company evaluated the effectiveness and design and operation of its disclosure controls and procedures. The Company’s disclosure controls and procedures are the controls and other procedures that the Company designed to ensure that it records, processes, summarizes, and reports in a timely manner the information that it must disclose in reports that the Company files with or submits to the Securities and Exchange Commission. Greg Mays, the principal executive officer and principal financial officer, reviewed and participated in this evaluation. Based on this evaluation, the Company made the determination that its disclosure controls were effective.

 

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Report of Management on Internal Control Over Financial Reporting

The management of the Company is responsible for establishing and maintaining adequate internal control over the Company’s financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Internal control over financial reporting is the process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

There are inherent limitations in the effectiveness of internal control over financial reporting, including the possibility that misstatements may not be prevented or detected. Accordingly, even effective internal controls over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Furthermore, the effectiveness of internal controls can change as circumstances change.

Management has evaluated the effectiveness of internal control over financial reporting as of December 31, 2012, using criteria described in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on management’s assessment, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2012.

Changes in Internal Control Over Financial Reporting

During the Company’s fourth fiscal quarter and since the date of the evaluation noted above, there have not been any significant changes in the Company’s internal controls or in other factors that could significantly affect those controls.

Item 9B. Other Information

None.

 

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PART III

Item 10. Directors, Executive Officers and Corporate Governance

The Company’s certificate of incorporation provides that the number of directors shall be determined from time to time by the Board of Directors (but shall be no less than three and no more than fifteen) and that the Board of Directors shall be divided into three classes. The size of the Company’s Board of Directors is six members. Overseas Toys, the Company’s controlling shareholder, had the right to designate three individuals to the Board of Directors and to designate the chairman of the board.

In accordance with the Company’s Restated Certificate of Incorporation filed with the state of Delaware on September 18, 2008, Overseas Toys may designate 70% of the members of the Board of Directors, rounded up or down to the nearest director, and such percentage is limited to 70% even in the case of additional stock purchases by Overseas Toys. The designees of Overseas Toys currently serving on the Board of Directors are Ira Tochner, Bradford Nugent, and Greg Mays.

The following table sets forth the names and ages of the Directors, and the years in which each individual has served as a director:

 

Name

   Age    Class    Year Term
Expires
  

Service as Director

Joseph W. Bartlett

   79    I    2009    1993 to present

Allan I. Brown

   72    I    2009    1999 to present

Greg Mays

   66    II    2010    2004 to present

Bradford Nugent

   33    II    2010    2009 to present

Ira Tochner

   51    II    2010    2006 to present

Terrence Wallock

   68    III    2008    2006 to present

No stockholders meeting to elect directors has been held since 2007. In accordance with Delaware law and the Company’s by-laws, the directors’ terms continue until their successors are elected and qualified.

There were four meetings of the Board of Directors held during 2012.

Business History of Directors and Executive Officers

Mr. Bartlett has served as a director of the Company since 1993 due to his experience in venture capital, corporate restructurings, mergers and acquisitions, and corporate governance matters. He is also currently engaged in the private practice of law as of counsel to the law firm of Sullivan & Worcester LLP. He was of counsel to the law firm of Sonnenschein Nath & Rosenthal LLP from February 2008 through September 2008, and he was of counsel to the law firm of Fish & Richardson, P.C. from 2003 through January 2008. From 1996 through 2002, Mr. Bartlett was a partner in the law firm of Morrison & Foerster LLP. He was a partner in the law firm of Mayer, Brown & Platt from July 1991 until March 1996. From 1969 until November 1990, Mr. Bartlett was a partner of, and from November 1990 until June 1991 he was of counsel to, the law firm of Gaston & Snow. Mr. Bartlett served as Under Secretary of the United States Department of Commerce from 1967 to 1968 and as law clerk to the Chief Justice of the United States in 1960.

Mr. Brown has served as a director of the Company since 1999 due to his marketing, strategic planning, and executive experience. He was the Company’s chief executive officer and president from July 2001 until March 2002 when his employment with the Company terminated. From November 1999 to July 2001, Mr. Brown served as the Company’s co-chief executive officer and co-president. From November 1975 until March 2002, Mr. Brown served as the chief executive officer of Simon Marketing.

Mr. Mays has been the Company’s Chief Executive Officer since October 2008, Chief Financial Officer since May 2003, and a director of the Company since May 2004. Mr. Mays brings to the board of directors

 

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considerable operational experience in corporate restructurings, mergers and acquisitions, and corporate finance. Beginning in 2001, Mr. Mays liquidated the business components of the Company. Since 2000, Mr. Mays has had a private consulting practice, specializing in management and company reorganization. During that period of time, he has been Chairman and Chief Executive Officer of three different public companies and one private company, all requiring various levels of restructuring. Most recently, Mr. Mays served as Chairman and Chief Executive Officer of Source Interlink Companies from October 2008 to August 2010. In 2006 and 2007, Mr. Mays served as Chairman and Chief Executive Officer of Wild Oats, which was subsequently acquired by Whole Foods in September 2007. Prior to that, he worked under an umbrella of equity companies in a very active merger and acquisition environment. Specializing in the supermarkets retail business, Mr. Mays held numerous executive positions in the acquired supermarket companies all of which had an emphasis of improving shareholder value with the exit strategy to realize value to all stakeholders. Mr. Mays is currently a director of the Great Atlantic and Pacific Tea Company, Source Interlink Companies, and Americold Realty Trust.

Mr. Nugent joined The Yucaipa Companies (“Yucaipa”) in 2005. Prior to joining Yucaipa, he was a member of the Leveraged Finance Group at CIBC World Markets in addition to serving as an Investment Associate at Flag Capital Management, a multi-strategy hedge fund. Mr. Nugent has served as a director of the Company since 2009 due to his extensive experience in venture capital and corporate finance. Mr. Nugent currently serves on several boards of Yucaipa investments, including AFA Foods, Inc. and is actively involved in originating, structuring and executing Yucaipa investments.

Mr. Tochner has served as a member of our board of directors since 2006 and has served as the chairman of our board of directors since 2006. Mr. Tochner provides the Company with extensive experience in mergers and acquisitions, strategic planning, and corporate finance and accounting. Mr. Tochner is also a partner at Yucaipa. In addition to serving on our board of directors, Mr. Tochner serves as a director of Allied Holdings, Inc. and trustee of Americold Realty Trust.

Mr. Wallock is an attorney, consultant, and private investor. He serves as the Company’s secretary and acting general counsel and has served as a director of the Company since 2006 due to his considerable experience in corporate restructurings, mergers and acquisitions, and corporate governance matters. Prior to engaging in a consulting and private legal practice in 2000, he served a number of public companies as senior executive and general counsel, including Denny’s Inc., The Vons Companies, Inc., and Ralphs Grocery Company. Mr. Wallock also serves on the Board of Trustees of Americold Realty Trust and on the Board of Managers of New Market Impressions LLC and TEN Media LLC. He previously served on the Board of Directors of the Great Atlantic and Pacific Tea Company.

The Company’s ongoing operations are managed by Greg Mays, Chief Executive Officer and Principal Financial Officer, in consultation with Terry Wallock, the Company’s acting general counsel.

Board Committees

The Board has two standing committees: an Audit Committee and a Compensation Committee. The members of each committee are appointed by the Board and are noted below. Actions taken by any committee of the Board are reported to the Board, usually at the next Board meeting following a committee meeting. Each standing committee is governed by a committee-specific charter that is reviewed periodically by the applicable committee pursuant to the rules set forth in each charter. The two members of the Audit Committee and the two members of the Compensation Committee are independent directors.

The Audit Committee

The Audit Committee members are Messrs. Bartlett (chairman) and Brown. Messrs. Bartlett and Brown meet the independence requirements promulgated by the SEC. The Audit Committee’s oversight responsibilities include matters relating to the Company’s financial disclosure and reporting process, including the system of internal controls, the performance of an internal audit function, compliance with legal and regulatory requirements, and the appointment and activities of the Company’s independent auditors.

 

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The Audit Committee does not currently have a “financial expert,” as defined in the rules of the Securities and Exchange Commission, and required under rules applicable to national stock exchanges because the Company is no longer listed on a national stock exchange. On May 3, 2002, the Company’s stock was delisted by Nasdaq due to the fact that the Company’s stock was trading at a price below the minimum Nasdaq requirement. In the event the Company should ever qualify and seek relisting, the Company would be required to have an audit committee financial expert. The Audit Committee held four meetings during 2012.

The Compensation Committee

The Compensation Committee members are Messrs. Bartlett and Brown (chairman). Messrs. Bartlett and Brown meet the independence requirements promulgated by the SEC. The Compensation Committee’s responsibilities include the discharge of the Board’s responsibilities relating to the compensation of the Company’s directors, officers, and key employees, the administration of any incentive compensation and stock plan, the review and recommendation to the Board of the Company’s Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K, and the production of an annual report on executive compensation for inclusion in the Company’s proxy statement or 10-K in accordance with applicable rules and regulations. While there were no meetings held by the Compensation Committee during 2012, the full Board acted on compensation matters by unanimous written consent once during 2012.

Nominating Committee

The Company does not have a standing nominating committee or a committee performing similar functions. Given the status of the Company’s operations and the Company’s belief that it has benefited from having a board composed of individuals familiar with the Company’s operations, the Company has not found it necessary to obtain nominees from outside its Board of Directors.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires the Company’s directors, executive officers and holders of more than 10% of the Company’s common stock on an as-converted basis (collectively, “Reporting Persons”) to file with the SEC initial reports of ownership and reports of changes in ownership of common stock of the Company. Such persons are required by regulations of the SEC to furnish the Company with copies of all such filings. Based on its review of the copies of such filings received by it with respect to the fiscal year ended December 31, 2012, and written representations from certain Reporting Persons, the Company believes that all Reporting Persons complied with all Section 16(a) filing requirements in the fiscal year ended December 31, 2012.

Code of Ethics

The Company has adopted a code of ethics applicable to all directors, officers, and employees which is designed to deter wrongdoing and to promote honest and ethical conduct and compliance with applicable laws and regulations. The Company undertakes to provide a copy to any person without charge upon written request.

Item 11. Executive Compensation

Compensation Discussion and Analysis

Overview

The principal responsibilities of the Compensation Committee are:

 

   

to discharge the Board of Directors’ responsibilities relating to the compensation of the Company’s directors, officers and key employees;

 

   

to be responsible for the administration of any incentive compensation and stock plans;

 

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to be responsible for the review and recommendation to the Board of Directors of the Company’s Compensation Discussion and Analysis; and

 

   

to be responsible for the production of an annual report on executive compensation for inclusion in the Company’s proxy statement or Form 10-K, as applicable.

Compensation Philosophy and Objectives

The Compensation Committee has tried to structure compensation to:

 

   

provide competitive compensation that will attract and retain qualified officers and key employees;

 

   

reward officers and key employees for their contributions to the Company; and

 

   

align officers’ and key employees’ interests with the interests of shareholders.

The Compensation Committee endeavors to achieve these objectives while at the same time providing for administrative costs to be as low as possible.

Setting Executive Compensation

The Company did not make any change to the compensation arrangements existing prior to the beginning of 2012 for the Company’s executive officers, as the Compensation Committee determined that the existing arrangements were structured to achieve the key objectives outlined above, which the Compensation Committee believes will ultimately enhance shareholder value.

In establishing the compensation arrangements that were continued in 2012, the Compensation Committee considered various factors in determining the amount of compensation, including wind-down of the Company’s former promotions business operations, additional responsibilities and potential liabilities assumed resulting from the Sarbanes-Oxley Act of 2002, the completion of projects critical to the Company’s long-term success, and the Company’s need to retain experienced executives, knowledgeable about the Company for ongoing administration as well as future opportunities. These factors, however, were not assigned individual mathematical weights when the Compensation Committee made such determinations, and therefore, such determinations were based on the Compensation Committee’s judgment as to what is reasonable and appropriate. While the Compensation Committee considered general market trends in setting compensation levels under the Executive Services Agreements, it did not benchmark compensation levels to specific companies.

2012 Executive Compensation Components

As detailed below under the title “Executive Services Agreements with Officers,” the agreement that the Company has entered into with its remaining executive officer is terminable on 90 days notice by either the Company or Greg Mays. During any such notice period or for the time with respect to which an equivalent payment is made, the executive is entitled to receive health benefits from the Company and provide for mutual releases upon termination. The Company believes that it has structured its post-termination payments so as to be able to attract needed talent, but to minimize the magnitude of its post-termination financial obligations. Given that the Company currently has no operating business, the Compensation Committee has structured compensation pursuant to the Executive Services Agreement to consist exclusively of cash compensation, paid currently.

The Company has historically made equity awards to its directors and executive officers, though did not make any such awards in 2012 as the Compensation Committee believed that the key objectives of compensation outlined above were more appropriately satisfied by cash compensation, paid currently, pending a refocus of the Company’s business. The Company does not have any program, plan, or practice of timing option grants to its executives in coordination with the release of material non-public information and did not have any such program, plan, or practice during 2012.

 

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The Company has not formally adopted any stock ownership or stock retention guidelines, in part due to the illiquid nature of the Company’s stock.

The Company believes that its compensation policies and practices are not reasonably likely to have a material adverse effect on the Company because none of its compensation policies and practices reward risk taking by its directors, officers, and employees.

Tax and Accounting Implications

Deductibility of Executive Compensation:

As part of its role, the Compensation Committee reviews and considers the deductibility of executive compensation under Section 162(m) of the Internal Revenue Code, which provides that the Company may not deduct compensation of more than $1,000,000 that is paid to certain individuals. Given the level of compensation paid by the Company to its executive officers, this $1,000,000 limitation has not been a limiting issue for the Company in structuring its compensation.

Nonqualified Deferred Compensation:

On October 22, 2004, the American Jobs Creation Act of 2004 was signed into law, changing the tax rules applicable to nonqualified deferred compensation arrangements. While the Company does not have any nonqualified deferred compensation arrangements, the Company will continue to monitor these regulations in order to be in compliance should it, in the future, elect to make payments of nonqualified deferred compensation.

Summary Compensation Table

The following table sets forth the compensation the Company paid or earned by the individual who served as principal executive officer and principal financial officer during the year. The Company had no other executive officers. During 2012 and 2011, there were no bonuses, stock awards, option awards, non-equity incentive plan compensation, pension earnings, or non-qualified deferred compensation earnings.

 

Name

  

Year

    

(a)

Salary

    

(b)

All Other
Compensation

   

Total

 

Greg Mays

     2012       $ 114,808       $ 37,731  (c)    $ 152,539   

Chief Executive Officer,

Chief Financial Officer,

and Director

     2011         210,000         58,000  (d)      268,000   

 

(a) All cash compensation received in capacity as an executive officer consists of salary.
(b) In accordance with the rules of the Securities and Exchange Commission, other compensation in the form of perquisites and other personal benefits have been omitted because the aggregate amount of such perquisites and other personal benefits was less than $10,000.
(c) Amount consists of $31,731 for board retainer and $6,000 for board meeting fees.
(d) Amount consists of $50,000 for board retainer and $8,000 for board meeting fees.

Grants of Plan-Based Awards

There were no grants of equity or non-equity plan-based awards during the last fiscal year.

Executive Services Agreements with Officers

In May 2003, the Company entered into an Executive Services Agreement with Mr. Mays. The purpose of the Agreement was to substantially lower the administrative costs of the Company going forward while at the same

 

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time retaining the availability of an experienced executive knowledgeable about the Company for ongoing administration as well as future opportunities. The Agreement provided for compensation at the rate of $4,040 per week to Mr. Mays. Additional hourly compensation is provided after termination of the Agreement and, in some circumstances during the term, for extensive commitments of time related to any legal or administrative proceedings and merger and acquisition activities in which the Company may be involved. During 2012, no such additional payments were made. The Agreement provides for the payment of health insurance benefits and for mutual releases upon termination.

By amendments dated May 3, 2004, the Agreement was amended to allow termination at any time by the Company by the lump sum payment of one year’s compensation and by the executive upon one year’s notice, except in certain circumstances wherein the executive can resign immediately and receive a lump sum payment of one year’s salary. Under the amendment health benefits are to be provided during any notice period or for the time with respect to which an equivalent payment is made.

The Company entered into a new Executive Services Agreement with Mr. Mays on March 27, 2006, upon termination of his prior agreement. As detailed below under the heading “Post-Employment Compensation,” the New Executive Services Agreement to which Mr. Mays is party does not provide for any payments to Mr. Mays in the event of voluntary termination by Mr. Mays and only 90 days payment to Mr. Mays in the event of involuntary termination.

Health benefits provided during 2012 by the Company to Mr. Mays totaled $30,006.

Outstanding Equity Awards at Fiscal Year-End

The following table includes information relating to the value of all unexercised options previously awarded to the executive officers named above as of December 31, 2012. In addition, there were no unexercisable options, unearned options, or stock awards outstanding as of December 31, 2012.

 

Name and Principal Position

  

Number of
Securities
Underlying
Unexercised
Options
Exercisable

    

Option
Exercise
Price

    

Option
Expiration
Date

 

Greg Mays

Chief Executive Officer,

Chief Financial Officer, and

Director

     10,000       $ 0.10         05/09/13   

Option Exercises and Stock Vested

There were no options exercised by the executive officer named above during the year ended December 31, 2012. In addition, the Company did not make any stock awards and there was no vesting of stock awards during 2012.

Post-Employment Compensation

The Company does not have any pension plans or non-qualified deferred compensation arrangements.

Potential Payments upon Termination

Voluntary Termination:

The New Executive Services Agreement between Mr. Mays and the Company does not provide for any payment in the case of voluntary termination.

 

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Involuntary Termination:

The New Executive Services Agreement between Mr. Mays and the Company does not provide for any payment in the case of involuntary termination other than the payment of salary during the 90-day notice period which would total $52,500.

Retirement:

Mr. Mays’ New Executive Services Agreement does not provide for any payment in the case of retirement.

Change in Control:

The New Executive Services Agreement between Mr. Mays and the Company does not provide for any payment in the case of a change in control.

Health Insurance Benefits:

In the event of voluntary or involuntary termination or a change in control, Mr. Mays would be eligible to continue health coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA) as long as permissible under COBRA (currently 18 months) at the expense of the Company following termination of employment at substantially the same benefit level as provided during employment in the approximate amount of $25,300, paid in monthly installments over an 18-month period.

Directors’ Compensation

On August 20, 2012, the Company suspended all compensation arrangements to Directors. The following table provides compensation information for 2012 for each member of our Board of Directors except for board members already disclosed in the Summary Compensation table above. Also during 2012, there were no stock awards, option awards, non-equity incentive plan compensation, pension earnings, non-qualified deferred compensation earnings, or other compensation:

 

Name

  

(a)

Fees
Earned

or Paid

in Cash

   

Total

 

Joseph Bartlett

   $  60,491  (b)    $ 60,491   

Allan Brown

     57,404  (c)      57,404   

Bradford Nugent

     31,731  (d)      31,731   

Ira Tochner

     37,731  (e)      37,731   

Terry Wallock

     37,731  (f)      37,731   

 

(a) Until August 20, 2012, directors were paid an annual retainer of $50,000 and received a fee of $2,000 for each Board of Directors, Audit and Compensation Committee meeting attended. Also until August 20, 2012, the chairmen of the Audit and the Compensation Committees also received annual retainers of $7,500 and $5,000, respectively, plus an additional $500 for each committee meeting they chaired.
(b) Amount consists of $31,731 for board retainer, $6,000 for board meeting fees, $7,500 for Audit Committee meeting fees, $10,500 in other board fees, and $4,760 for Audit Committee chair fee. Mr. Bartlett held 20,000 stock options, all of which were vested, at December 31, 2012.
(c) Amount consists of $31,731 for board retainer, $6,000 for board meeting fees, $6,000 for Audit Committee meeting fees, $10,500 in other board fees, and $3,173 for Compensation Committee chair fee. Mr. Brown held 20,000 stock options, all of which were vested, at December 31, 2012.
(d) Amount consists of board retainer.
(e) Amount consists of $31,731 for board retainer and $6,000 for board meeting fees.
(f) Amount consists of $31,731 for board retainer and $6,000 for board meeting fees. Mr. Wallock held 5,000 stock options, all of which were vested, at December 31, 2012.

 

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Executive Services Agreements with Directors

In May 2003, the Company entered into Executive Services Agreements with Messrs. Bartlett, Brown, and Wallock. The purpose of the agreements was to substantially lower the administrative costs of the Company going forward while at the same time retaining the availability of experienced executives knowledgeable about the Company for ongoing administration as well as future opportunities. The agreements provide for compensation at the rate of $1,000 per month to Messrs. Bartlett and Brown, and $3,365 per week to Mr. Wallock. Additional hourly compensation is provided after termination of the agreements and, in some circumstances during the term, for extensive commitments of time related to any legal or administrative proceedings and merger and acquisition activities in which the Company may be involved. During 2011, no such additional payments were made. The agreements provide for the payment of health insurance benefits and provide for mutual releases upon termination. By amendments dated May 3, 2004, and, in the case of Mr. Wallock, May 27, 2006, the agreements were amended to allow termination at any time by the Company by the lump sum payment of one year’s compensation and by the executive upon one year’s notice, except in certain circumstances wherein the executive can resign immediately and receive a lump sum payment of one year’s salary. By amendment dated November 10, 2008, the Agreement with Mr. Wallock was further amended to comply with Section 409A of the Internal Revenue Code by deleting the right by Mr. Wallock to resign and receive any lump sum payments. On August 20, 2012, the Company suspended all compensation for director service, which included the Executive Services Agreements with Messrs. Bartlett and Brown described above. Under the amendments health benefits may be continued under the Consolidated Omnibus Budget Reconciliation Act (COBRA) as long as permissible under COBRA (currently 18 months) at the expense of the Company following termination of services.

Compensation Committee Interlocks and Insider Participation

The Compensation Committee consists of Messrs. Bartlett and Mr. Brown. No person who served as a member of the Compensation Committee was, during the past fiscal year, an officer or employee of the Company, was formerly an officer of the Company or any of its subsidiaries, or had any relationship requiring disclosure herein. No executive officer of the Company served as a member of the Board of Directors or compensation committee of another entity (or other committee of the Board of Directors performing equivalent functions), one of whose executive officers served as a director of the Company.

Compensation Committee Report

We have reviewed and discussed with management the Compensation Discussion and Analysis to be included in the Company’s 2012 Form 10-K. Based on such reviews and discussions, we recommend to the Board of Directors that the Compensation Discussion and Analysis be included in the Company’s Form 10-K.

The Compensation Committee consists of:

Allan I. Brown

Joseph W. Bartlett

The information contained in this Report of the Compensation Committee on Executive Compensation shall not be deemed to be “soliciting material.” No portion of this Report of the Compensation Committee on Executive Compensation shall be deemed to be incorporated by reference into any filing under the Securities Act, or the Exchange Act, through any general statement incorporating by reference in its entirety this Annual Report on Form 10-K in which this report appears, except to the extent that the Company specifically incorporates this report or any portion of it by reference. In addition, this report shall not be deemed to be filed under either the Securities Act or the Exchange Act.

 

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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The following tables set forth certain information regarding beneficial ownership of the Company’s common stock at March 20, 2013. Except as otherwise indicated in the footnotes, the Company believes that the beneficial owners of its common stock listed below, based on information furnished by such owners, have sole investment and voting power with respect to the shares of the Company’s common stock shown as beneficially owned by them.

Security Ownership of Certain Beneficial Owners

The following table sets forth each person known by the Company (other than directors and executive officers) to own beneficially more than 5% of the outstanding common stock:

 

Name and Address

Of Beneficial Owner (a)

   Number of Shares
Of Common Stock
Beneficially Owned
     Percentage
Of Class
 

Overseas Toys, L.P. (b)(c)(d)

Multi-Accounts, LLC

OA3, LLC

Ronald W. Burkle

     41,763,668         82.5

 

(a) The number of shares beneficially owned by each stockholder is determined in accordance with the rules of the Securities and Exchange Commission and is not necessarily indicative of beneficial ownership for any other purpose. Under these rules, beneficial ownership includes those shares of common stock that the stockholder has sole or shared voting or investment power and any shares of common stock that the stockholder has a right to acquire within sixty (60) days after March 20, 2013, through the exercise of any option, warrant or other right. The percentage ownership of the outstanding common stock, however, is based on the assumption, expressly required by the rules of the Securities and Exchange Commission, that only the person or entity whose ownership is being reported has converted options, warrants or other rights into shares of common stock.
(b) As the sole general partner of Overseas Toys, L.P. (“Overseas Toys”), Multi-Accounts, LLC (“Multi-Accounts”) may be deemed to beneficially own the shares held by Overseas Toys. As the managing member of Multi-Accounts, OA3, LLC (“OA3”) may be deemed to beneficially own the shares held by Overseas Toys. As the managing member of OA3, Ronald Burkle may be deemed to beneficially own the shares held by Overseas Toys. Each of Multi-Accounts, OA3 and Mr. Burkle disclaims ownership of such shares except to the extent of its or his pecuniary interest therein. The address of each of Overseas Toys, L.P., Multi-Accounts, LLC, OA3, LLC, and Ronald W. Burkle is 9130 West Sunset Boulevard, Los Angeles, California 90069.
(c) Based on 50,611,879 shares of common stock outstanding as of March 20, 2013.
(d) The information concerning these holders is based solely on information contained in filings pursuant to the Securities Exchange Act of 1934.

 

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Security Ownership of Management

The following table sets forth information at March 20, 2013, regarding the beneficial ownership of the Company’s common stock (including common stock issuable upon the exercise of stock options exercisable within 60 days of March 20, 2013) by each director and each executive officer named in the Summary Compensation Table, and by all of the Company’s directors and persons performing the roles of executive officers as a group:

 

Name and Address

Of Beneficial Owner (a)

   Number of Shares
Of Common Stock
Beneficially Owned
     Percentage Of
Class (b)
 

Allan I. Brown (c)

     1,133,023         2.2

Joseph W. Bartlett (d)

     20,000         *   

Greg Mays (e)

     10,000         *   

Bradford Nugent

     —           —     

Ira Tochner

     —           —     

Terrence Wallock (f)

     5,000         *   

All directors and executive officers as a group (6 persons)

     1,168,023         2.3

 

* Represents less than 1%
(a) The address of each of the directors and executive officers is c/o Simon Worldwide, Inc., 18952 MacArthur Boulevard Suite 470, Irvine, California, 92612. The number of shares beneficially owned by each stockholder is determined in accordance with the rules of the Securities and Exchange Commission and is not necessarily indicative of beneficial ownership for any other purpose. Under these rules, beneficial ownership includes those shares of common stock that the stockholder has sole or shared voting or investment power and any shares of common stock that the stockholder has a right to acquire within sixty (60) days after March 20, 2013, through the exercise of any option, warrant or other right. The percentage ownership of the outstanding common stock, however, is based on the assumption, expressly required by the rules of the Securities and Exchange Commission, that only the person or entity whose ownership is being reported has converted options, warrants or other rights.
(b) Based on 50,611,879 shares of common stock outstanding as of March 20, 2013.
(c) Includes 20,000 shares issuable pursuant to stock options exercisable within 60 days of March 20, 2013. Mr. Brown has the sole power to vote, or to direct the vote of, and the sole power to dispose, or to direct the disposition of, 1,113,023 shares of common stock.
(d) The 20,000 shares are issuable pursuant to stock options exercisable within 60 days of March 20, 2013.
(e) The 10,000 shares are issuable pursuant to stock options exercisable within 60 days of March 20, 2013.
(f) The 5,000 shares are issuable pursuant to stock options exercisable within 60 days of March 20, 2013.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table sets forth information as of December 31, 2012, regarding the Company’s 1993 Omnibus Stock Plan (the “1993 Plan”). The Company’s stockholders previously approved the 1993 Plan and all amendments that were subject to stockholder approval. As of December 31, 2012, options to purchase 55,000 shares of common stock were outstanding under the 1993 Plan. The 1993 Plan expired in May 2003, except as to options outstanding.

 

     Number of Shares
of Common Stock
to be Issued Upon
Exercise of
Outstanding Stock
Options
   Weighted-
Average
Exercise Price
of Outstanding
Stock Options
   Number of Shares
of Common Stock
Available for
Future Issuance
(excluding those
in column (a))
Under the Stock
Option Plans

Plans Approved by Stockholders

   55,000    $.10 per share    None

Plans Not Approved by Stockholders

   Not applicable    Not applicable    Not applicable

Total

   55,000    $.10 per share    None

 

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Item 13. Certain Relationships, Related Transactions and Director Independence

The Board of Directors has determined that Messrs. Bartlett, Brown, and Tochner are “independent” directors, meeting all applicable independence standards promulgated by the SEC, including Rule 10A-3(b)(1) pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and by the National Association of Securities Dealers, Inc. (“NASD”). In making this determination, the Board of Directors affirmatively determined that none of such directors has a relationship that, in the opinion of the Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. Messrs. Mays, Nugent and Wallock are not independent directors under the independence standards promulgated by the SEC and NASD.

Item 14. Principal Accountant Fees and Services

The following table presents fees, including reimbursement for expenses, for professional services rendered by Ernst & Young LLP (“EY”):

 

     Fiscal Year  
         2012              2011      
     (in thousands)  

Audit fees (a)

   $ 136       $ 130   

Audit-related fees (b)

     3         4   

Tax fees (c)

     —           —     

All other fees (d)

     —           —     
  

 

 

    

 

 

 

Total

   $ 139       $ 134   
  

 

 

    

 

 

 

 

(a) Audit fees are related to the audit of the Company’s consolidated annual financial statements, review of the interim consolidated financial statements, and services normally provided by the Company’s independent registered public accounting firm in connection with statutory and regulatory filings and engagements.
(b) Audit-related fees are for assurance and related services that are reasonably related to the performance of the audit or review of the Company’s consolidated financial statements and are not reported under Audit fees.
(c) Tax fees are related to tax compliance, planning, and consulting.
(d) All other fees are for services other than those reported in the other categories.

Policy on Audit Committee Pre-Approval of Audit and Non-Audit Services of Independent Auditor

Pre-approval is provided by the Audit Committee for up to one year of all audit and permissible non-audit services provided by the Company’s independent auditor. Any pre-approval is detailed as to the particular service or category of service and is generally subject to a specific fee. The Company’s independent registered public accounting firm did not provide any non-audit services to the Company except as specifically pre-approved by the Audit Committee.

 

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PART IV

Item 15. Exhibits and Financial Statement Schedules

(a) Documents Filed as Part of this Report

1. Financial Statements:

 

   

Consolidated Balance Sheets as of December 31, 2012 and 2011

 

   

Consolidated Statements of Operations for the years ended December 31, 2012 and 2011

 

   

Consolidated Statements of Comprehensive Loss for the years ended December 31, 2012 and 2011

 

   

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2012 and 2011

 

   

Consolidated Statements of Cash Flows for the years ended December 31, 2012 and 2011

 

   

Notes to Consolidated Financial Statements

2. Financial Statement Schedules. Schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not applicable, and therefore have been omitted.

(b) Exhibits

Reference is made to the Exhibit Index, which follows.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

SIMON WORLDWIDE, INC.
/S/ GREG MAYS
Greg Mays

Chief Executive Officer and

Chief Financial Officer

March 29, 2013

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

/S/ JOSEPH W. BARTLETT

Joseph W. Bartlett

   Director   March 29, 2013

/S/ ALLAN I. BROWN

Allan I. Brown

   Director   March 29, 2013

/S/ GREG MAYS

Greg Mays

   Director, Chief Executive Officer, and Chief Financial Officer   March 29, 2013

/S/ BRADFORD NUGENT

Bradford Nugent

   Director   March 29, 2013

/S/ IRA TOCHNER

Ira Tochner

   Director   March 29, 2013

/S/ TERRENCE WALLOCK

Terrence Wallock

   Director   March 29, 2013

 

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EXHIBITS

 

Exhibit
Number

 

Description

    2.6(6)   Settlement Agreement and Mutual General Release between Cyrk and Simon dated January 31, 2006
    2.7(6)   Subordinated Promissory Note in the principal amount of $1,410,000 from Cyrk to Simon dated January 31, 2006
    3.1(7)   Restated Certificate of Incorporation of the Registrant
    3.2(6)   Amended and Restated By-laws of the Registrant, effective March 27, 2006
    4.1(1)   Specimen certificate representing Common Stock
  10.1(2)(3)   1993 Omnibus Stock Plan, as amended
  10.10(4)   Registration Rights Agreement between the Company and Overseas Toys, L.P.
  10.29(5)   May 30, 2003, Executive Services Agreements with Joseph Bartlett, Allan Brown, Gregory Mays, and Terrence Wallock
  10.30(6)   May 3, 2004, Amendment No. 1 to Executive Services Agreements with Messrs. Bartlett and Brown, (replaces previously filed copies of these amendments)
  10.31(6)   March 27, 2006, Amendment No. 2 to Wallock Executive Services Agreement
  10.32(6)   March 27, 2006, New Executive Services Agreement with Mr. Mays
  31   Certifications pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 (the “Exchange Act”), filed herewith
  32   Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes- Oxley Act of 2002, filed herewith
101.INS*   XBRL Instance Document
101.SCH*   XBRL Taxonomy Extension Schema Document
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*   XBRL Taxonomy Extension Label Linkbase Document
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document

 

* XBRL (Extensible Business Reporting Language) information is furnished and not filed herewith, is not a part of a registration statement or Prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

Footnotes:

 

(1) Filed as an exhibit to the Registrant’s Registration Statement on Form S-1 (Registration No. 33-63118) or an amendment thereto and incorporated herein by reference.
(2) Management contract or compensatory plan or arrangement.
(3) Filed as an exhibit to the Annual Report on Form 10-K for the year ended December 31, 1994, and incorporated herein by reference.
(4) Filed as an exhibit to the Annual Report on Form 10-K for the year ended December 31, 1999, and incorporated herein by reference.
(5) Filed as an exhibit to the Registrant’s Report on Form 10-K for the year ended December 31, 2002, filed on July 29, 2003, and incorporated herein by reference.
(6) Filed as an exhibit to the Registrant’s Report on Form 10-K for the year ended December 31, 2005, filed on March 31, 2006, and incorporated herein by reference.
(7) Filed as an exhibit to the Registrant’s Report on Form 8-K, filed on September 23, 2008, and incorporated herein by reference.

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Simon Worldwide, Inc.

We have audited the accompanying consolidated balance sheets of Simon Worldwide, Inc. as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Simon Worldwide, Inc. at December 31, 2012 and 2011, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP

Los Angeles, California

March 29, 2013

 

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PART IV — FINANCIAL INFORMATION

SIMON WORLDWIDE, INC.

CONSOLIDATED BALANCE SHEETS

As of December 31, 2012 and 2011

(in thousands, except share data)

 

     December 31,
2012
    December 31,
2011
 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 7,303      $ 8,779   

Prepaid expenses and other current assets

     105        138   
  

 

 

   

 

 

 

Total current assets

     7,408        8,917   

Investments

     —          9   

Other assets

     295        321   
  

 

 

   

 

 

 

Total non-current assets

     295        330   
  

 

 

   

 

 

 
   $ 7,703      $ 9,247   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Accounts payable

   $ 58      $ 73   

Accrued expenses and other current liabilities

     49        57   
  

 

 

   

 

 

 

Total current liabilities

     107        130   

Commitments and Contingencies

    

Stockholders’ equity:

    

Common stock, $.01 par value; 100,000,000 shares authorized; 54,613,949 shares issued at December 31, 2012 and 2011; 50,611,879 shares outstanding net of 4,002,070 treasury shares at par value at December 31, 2012 and 2011

     506        506   

Additional paid-in capital

     152,083        152,083   

Accumulated deficit

     (144,998     (143,476

Accumulated other comprehensive income

     5        4   
  

 

 

   

 

 

 

Total stockholders’ equity

     7,596        9,117   
  

 

 

   

 

 

 
   $ 7,703      $ 9,247   
  

 

 

   

 

 

 

 

 

See the accompanying Notes to Consolidated Financial Statements.

 

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SIMON WORLDWIDE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Years Ended December 31, 2012 and 2011

(in thousands, except per share data)

 

     2012     2011  

Revenue

   $ —        $ —     

General and administrative expenses

     1,552        2,017   
  

 

 

   

 

 

 

Operating loss

     (1,552     (2,017

Interest income

     9        25   

Other income

     34        15   

Equity in Yucaipa AEC (loss) earnings

     (9     1   
  

 

 

   

 

 

 

Loss before income taxes

     (1,518     (1,976

Income tax provision

     (4     —     
  

 

 

   

 

 

 

Net loss

   $ (1,522   $ (1,976
  

 

 

   

 

 

 

Net loss per share – basic and diluted:

    

Loss per common share

   $ (0.03   $ (0.04
  

 

 

   

 

 

 

Weighted average shares outstanding

     50,612        50,612   
  

 

 

   

 

 

 

 

 

See the accompanying Notes to Consolidated Financial Statements.

 

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SIMON WORLDWIDE, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

For the Years Ended December 31, 2012 and 2011

(in thousands, except per share data)

 

     2012     2011  

Net loss

   $ (1,522   $ (1,976

Other comprehensive income (loss):

    

Unrealized gain (loss) on investments

     1        (3
  

 

 

   

 

 

 

Other comprehensive income (loss)

     1        (3
  

 

 

   

 

 

 

Comprehensive loss

   $ (1,521   $ (1,979
  

 

 

   

 

 

 

See the accompanying Notes to Consolidated Financial Statements.

 

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SIMON WORLDWIDE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Years ended December 31, 2012 and 2011

(in thousands)

 

     Common
Stock
($.01 Par  Value)
     Additional
Paid-in
Capital
     Retained
Deficit
    Accumulated
Other
Comprehensive
Income (Loss)
    Total
Stockholders’
Equity
 

Balance, December 31, 2010

   $ 506       $ 152,083       $ (141,500   $ 7      $ 11,096   

Net loss

           (1,976       (1,976

Other comprehensive loss

             (3     (3
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance, December 31, 2011

     506         152,083         (143,476     4        9,117   

Net loss

           (1,522       (1,522

Other comprehensive income

             1        1   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance, December 31, 2012

   $ 506       $ 152,083       $ (144,998   $ 5      $ 7,596   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

See the accompanying Notes to Consolidated Financial Statements.

 

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SIMON WORLDWIDE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2012 and 2011

(in thousands)

 

     2012     2011  

Cash flows from operating activities:

    

Net loss

   $ (1,522   $ (1,976

Adjustments to reconcile net loss to net cash used in operating activities:

    

Equity in Yucaipa AEC loss (earnings)

     9        (1

Gain on sale of investment

     —         (15

Increase (decrease) in cash from changes in working capital items:

    

Prepaid expenses and other current assets

     58        138   

Accounts payable

     (15     (62

Accrued expenses and other current liabilities

     (6     (3
  

 

 

   

 

 

 

Net cash used in operating activities

     (1,476     (1,919

Cash flows from investing activities:

    

Proceed from sale of investment

     —          73   
  

 

 

   

 

 

 

Net cash provided by investing activities

     —          73   

Net cash provided by financing activities

     —          —     
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (1,476     (1,846

Cash and cash equivalents, beginning of period

     8,779        10,625   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 7,303      $ 8,779   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid during the period for:

    

Income taxes

   $ 3      $ 3   
  

 

 

   

 

 

 

See the accompanying Notes to Condensed Consolidated Financial Statements.

 

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SIMON WORLDWIDE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of Business, Loss of Customers, Resulting Events, and Management’s Plans

Prior to August 2001, the Company, incorporated in Delaware and founded in 1976, had been operating as a multi-national full-service promotional marketing company, specializing in the design and development of high-impact promotional products and sales promotions. The majority of the Company’s revenue was derived from the sale of products to consumer products and services companies seeking to promote their brand names and corporate identities and build brand loyalty. The major client of the Company was McDonald’s Corporation (“McDonald’s”), for whom the Company’s Simon Marketing subsidiary designed and implemented marketing promotions, which included premiums, games, sweepstakes, events, contests, coupon offers, sports marketing, licensing, and promotional retail items. Net sales to McDonald’s and Philip Morris, another significant former client, accounted for 78% and 8%, respectively, of total net sales in 2001.

On August 21, 2001, the Company was notified by McDonald’s that they were terminating their approximately 25-year relationship with Simon Marketing as a result of the arrest of Jerome P. Jacobson (“Mr. Jacobson”), a former employee of Simon Marketing who subsequently pled guilty to embezzling winning game pieces from McDonald’s promotional games administered by Simon Marketing. No other Company employee was found to have any knowledge of or complicity in his illegal scheme. Simon Marketing was identified in the criminal indictment of Mr. Jacobson, along with McDonald’s, as an innocent victim of Mr. Jacobson’s fraudulent scheme. Further, on August 23, 2001, the Company was notified that its second largest customer, Philip Morris, was also ending its approximately nine-year relationship with the Company. As a result of the above events, the Company no longer has an on-going promotions business.

Since August 2001, the Company has concentrated its efforts on reducing its costs and settling numerous claims, contractual obligations, and pending litigation. By April 2002, the Company had effectively eliminated a majority of its ongoing promotions business operations and was in the process of disposing of its assets and settling its liabilities related to the promotions business and defending and pursuing litigation with respect thereto. In essence, the Company discontinued its promotions business and changed the nature of its operation to focus on its pending litigation and winding down its contracted obligations. As a result of these efforts, the Company has been able to resolve a significant number of outstanding liabilities that existed in August 2001 or arose subsequent to that date. As of December 31, 2012, the Company had reduced its workforce to 4 employees from 136 employees as of December 31, 2001.

With no revenues from operations, the Company closely monitors and controls its expenditures within a reasonably predictable range. Cash used by operating activities was $1.5 million and $1.9 million in the years ended December 31, 2012 and 2011, respectively. The Company incurred losses within its operations in 2012 and continues to incur losses in 2013 for the general and administrative expenses incurred to manage the affairs of the Company. By utilizing cash available at December 31, 2012, to maintain its scaled back operations, management believes it has sufficient capital resources and liquidity to operate the Company for at least one year.

2. Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of

 

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assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Stock-Based Compensation

At December 31, 2012, the Company had one stock-based compensation plan. In accordance with Accounting Standards Codification (“ASC”) 718-10-30, the Company accounts for awards of equity instruments at their grant date fair value with the stock-based compensation cost expensed ratably on a straight-line basis over the requisite service period. There were no employee stock-based awards granted or vested during 2012 and 2011.

Concentration of Credit Risk

The Company deposits its cash and cash equivalent in U.S.-denominated amounts with what it believes to be credit-worthy U.S. financial institutions. However, cash and cash equivalent balances exceed FDIC insured levels at various times during the year.

Financial Instruments

The carrying amounts of cash equivalents, accounts payable, and accrued liabilities approximate their fair values.

Cash Equivalents

Cash equivalents consist of short-term, highly liquid investments, which have original maturities at the date of purchase of three-months or less.

Investments

The Company accounted for its investment in Yucaipa AEC Associates, a related party, using the equity method in accordance with ASC 272-10, “Limited Liability Entities.” In the fourth quarter of 2012, the Company wrote down the carrying value of this investment to zero and discontinued applying the equity-method of accounting as the Company has no additional investment in Yucaipa AEC Associates to absorb further losses.

Certain investments are designated as available-for-sale in accordance with the provisions primarily codified under ASC 320-10-25, “Investments—Debt and Equity Securities,” and as such, unrealized gains and losses are reported in the accumulated other comprehensive income component of stockholders’ equity. These investments are included in other assets in the accompanying consolidated balance sheets.

Income Taxes

The Company accounts for income taxes in accordance with ASC 740-10, “Income Taxes,” which requires that deferred tax assets and liabilities be computed based on the difference between the financial statement and income tax bases of assets and liabilities using enacted tax rates. Deferred income tax expenses or credits are based on the changes in the asset or liability from period to period. A valuation allowance is recognized if, based on the available evidence, it is more likely than not that some or all of the deferred tax asset will not be realized.

The Company records liabilities related to uncertain tax positions in accordance with ASC 740, which provides guidance in accounting for uncertainty in income taxes recognized in an enterprise’s financial statements by prescribing a minimum recognition threshold and measurement attribute for a tax position taken and expected to be taken in a tax return. For tax benefits to be recognized under ASC 740, a tax position must be more likely-than-not to be sustained upon examination by the taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon settlement. The Company does not have a liability for unrecognized tax benefits at December 31, 2012 and 2011, respectively.

 

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Earnings (Loss) Per Common Share

Earnings (loss) per common share have been determined in accordance with the provisions of ASC 260-10, “Earnings Per Share,” which requires dual presentation of basic and diluted earnings per share on the face of the income statement and a reconciliation of the numerator and denominator of the basic earnings per share computation to the numerator and denominator of the diluted earnings per share computation (see Note 8).

Recently Issued Accounting Standards

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, to improve the transparency of reporting reclassifications out of accumulated other comprehensive income. ASU 2013-02 does not change the current requirements for reporting net income or other comprehensive income in financial statements. Instead, the new amendments require an organization to: 1) Present (either on the face of the statement where net income is presented or in the notes) the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income — but only if the item reclassified is required under U.S. generally accepted accounting principles (U.S. GAAP) to be reclassified to net income in its entirety in the same reporting period; and 2) Cross-reference to other disclosures currently required under U.S. GAAP for other reclassification items (that are not required under U.S. GAAP) to be reclassified directly to net income in their entirety in the same reporting period. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is initially transferred to a balance sheet instead of directly to income or expenses.

ASU No. 2013-02 will be effective for the Company beginning January 1, 2013. The Company does not expect this adoption to have a material effect on the Company’s consolidated statements of financial position or results of operations.

3. Commitments and Contingencies

The Company is involved in litigation and legal matters which have arisen in the ordinary course of business. The Company does not believe that the ultimate resolution of these litigation and legal matters will have a material adverse effect on its financial condition, results of operations, or net cash flows.

4. Lease Obligations and Other Commercial Commitments

The approximate minimum rental commitments under all noncancelable leases at December 31, 2012, totaled $31,000 and are due in 2013.

Rental expense for all operating leases was approximately $46,000 and $64,000 in 2012 and 2011, respectively. Rent is charged to operations on a straight-line basis.

The Company also has a letter of credit totaling approximately $36,000 at December 31, 2012, which supports the Company’s periodic payroll obligations and is considered restricted.

5. Income Taxes

The Company had no current federal provision for 2012 and 2011, and a state provision for income taxes of $4,000 and $0 for 2012 and 2011, respectively.

 

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The Company annually evaluates the positive and negative evidence bearing upon the realizability of its deferred tax assets. The Company, however, has considered results of operations and concluded that it is more likely than not that the deferred tax assets will not be realizable. As a result, the Company has determined that a valuation allowance of $31.4 million and $35.0 million is required at December 31, 2012 and 2011, respectively. The valuation allowance decreased by $3.5 million primarily due to the expiration of a capital loss carry forward and a decrease in the other asset reserves partially offset by an increase in deferred tax assets arising from current year’s net operating losses. The tax effects of temporary differences that gave rise to deferred tax assets as of December 31, 2012 and 2011, were as follows (in thousands):

 

     December 31,  
     2012     2011  

Deferred tax assets:

    

Net operating losses

   $ 28,824      $ 28,196   

Capital losses

     3,907        6,173   

Other asset reserves

     268        2,335   

AMT credit

     —          649   

Deferred compensation

     19        9   
  

 

 

   

 

 

 

Total deferred tax assets

     33,018        37,362   

Valuation allowance

     (31,432     (34,968
  

 

 

   

 

 

 
     1,586        2,394   

Deferred tax liabilities:

    

State deferreds

     (1,586     (2,394
  

 

 

   

 

 

 

Total deferred tax liabilities

     (1,586     (2,394
  

 

 

   

 

 

 

Net deferred taxes

   $ —        $ —     
  

 

 

   

 

 

 

As of December 31, 2012, the Company had federal NOLs of approximately $73.6 million that will expire from 2021 through 2032. The Company had post-apportionment state NOLs of approximately $42.4 million that will expire from 2013 through 2032. The Company also has pre-apportionment NOLs from New York State and New York City totaling $105.1 million at December 31, 2012. Since the Company has no revenue-generating operations, the apportionment factor is zero and thus no deferred tax asset is recognized. The NOLs from New York State and New York City carry forward for 20 years (expiring between 2020 and 2032). If the Company were to commence operations in New York State or New York City in future years, the apportionment factor would exceed zero resulting in deferred tax assets for which realization would be assessed.

In connection with the September, 18, 2008, recapitalization of the Company, the Company completed a review of any potential limitation on the use of its NOLs under Section 382 of the Internal Revenue Code. Because of our current lack of operations, we have established a valuation allowance for the entire amount of federal and state NOLs as it is unlikely that we can realize these deferred tax benefits in the future. Based on such review, the Company does not believe Section 382 of the Internal Revenue Code will adversely impact its ability to use its current net operating losses.

The following is a reconciliation of the statutory federal income tax rate to the actual effective income tax rate for continuing operations:

 

         2012             2011      

Federal tax (benefit) rate

     (34.0 )%      (34.0 )% 

Increase (decrease) in taxes resulting from:

    

State income taxes

     (5.8     (5.8

Change in valuation allowance

     39.1        38.1   

Permanent differences

     0.7        1.6   

Minimum tax

     0.3        0.1   
  

 

 

   

 

 

 
     0.3     0.0
  

 

 

   

 

 

 

 

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6. Accrued Expenses and Other Current Liabilities

At December 31, 2012 and 2011, accrued expenses and other current liabilities consisted of the following (in thousands):

 

     December 31,  
         2012              2011      

Accrued payroll, related items and deferred compensation

   $ 40       $ 38   

Professional and other service providers

     —           8   

Franchise tax payable

     9         11   
  

 

 

    

 

 

 
   $ 49       $ 57   
  

 

 

    

 

 

 

7. Stock Plan

1993 Omnibus Stock Plan

Under its 1993 Omnibus Stock Plan, as amended (the “Omnibus Plan”), the Company reserved up to 3,000,000 shares of its common stock for issuance pursuant to the grant of incentive stock options, nonqualified stock options, or restricted stock. The Omnibus Plan is administered by the Compensation Committee of the Board of Directors. Subject to the provisions of the Omnibus Plan, the Compensation Committee had the authority to select the optionees or restricted stock recipients and determine the terms of the options or restricted stock granted, including: (i) the number of shares; (ii) the exercise period (which may not exceed ten years); (iii) the exercise or purchase price (which in the case of an incentive stock option cannot be less than the market price of the common stock on the date of grant); (iv) the type and duration of options or restrictions, limitations on transfer, and other restrictions; and (v) the time, manner, and form of payment.

Generally, an option is not transferable by the option holder except by will or by the laws of descent and distribution. Also, generally, no incentive stock option may be exercised more than 60 days following termination of employment. However, in the event that termination is due to death or disability, the option is exercisable for a maximum of 180 days after such termination.

Options granted under this plan generally become exercisable in three equal installments commencing on the first anniversary of the date of grant. Options granted during 2003 became exercisable in two equal installments commencing on the first anniversary of the date of grant. As the Omnibus Plan terminated in May 2003 except as to options outstanding at that time, no further options were granted under the plan.

The following summarizes the status of the Company’s incentive stock options as of December 31, 2012 and 2012 and changes for the years then ended:

 

     2012      2011  
     Shares      Weighted
Exercise
Price
     Shares     Weighted
Exercise
Price
 

Outstanding at the beginning of year

     55,000       $ 0.10         60,000      $ 0.26   

Granted

     —           —           —          —     

Exercised

     —           —           —          —     

Expired/Forfeited

     —           —           (5,000     2.00   
  

 

 

    

 

 

    

 

 

   

Outstanding at end of year

     55,000         0.10         55,000        0.10   
  

 

 

    

 

 

    

 

 

   

Options exercisable at year-end

     55,000         0.10         55,000        0.10   
  

 

 

    

 

 

    

 

 

   

Options available for future grant

     —              —       
  

 

 

    

 

 

    

 

 

   

Weighted average fair value of options granted during the year

     Not applicable            Not applicable     

 

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The following table summarizes information about stock options outstanding at December 31, 2012:

 

     Options Outstanding and Exercisable  

Range of

Exercise

Prices

  

Number
Outstanding and
Exercisable

    

Weighted
Average
Remaining
Contractual
Life

    

Weighted
Average
Price

    

Aggregate
Intrinsic
Value

 

$ 0.10 – $ 0.10

     55,000         0.35       $ 0.10       $ —     
    

 

 

    

 

 

    

 

 

    

 

 

 

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the Company’s closing stock price of $0.10 on December 31, 2012.

8. Earnings per Share Disclosure

The Company calculates its earnings per share in accordance with ASC 260-10, “Earnings Per Share.” There were 50,611,879 weighted average shares outstanding on a basic and diluted basis for the years ended December 31, 2012 and 2011. In addition, there were 55,000 weighted average shares related to stock options exercisable for the years ended December 31, 2012 and 2011, that were not included in the computation of diluted earnings per share because to do so would have been antidilutive as the Company has a net loss for each period presented.

9. Subsequent Event

On March 22, 2013, the Company announced in a current report of Form 8-K that it, together with Richard Beckman, Joel Katz and OA3 had entered into the limited liability company agreement (the “Operating Agreement”) of Three Lions Entertainment, LLC (“Three Lions”). Pursuant to the Operating Agreement, the Company made an initial capital contribution of $3,150,000 with respect to membership units representing 60% of the voting power of Three Lions. The membership units received by the Company represent a 60% interest in the economic returns of Three Lions, including certain preferences with respect to common holders on operating returns and on a liquidation or sale of Three Lions. The Company has the ability to, but is not required to, make certain additional capital contributions. If the Company does not make additional contributions, OA3 is obligated to make such contributions in the amounts that would otherwise be made by the Company. If OA3 makes such contributions, OA3 will receive a proportionate interest in Three Lions, subject to certain exceptions.

 

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