-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QMTUVnYib2pneiNEf72OHjvwX77f0oPI3SptiEd2aX0MlchlmYJx8SozZQtnwhch oe4R6svd1MIo9XUeh0+W4A== 0000950135-01-502316.txt : 20010810 0000950135-01-502316.hdr.sgml : 20010810 ACCESSION NUMBER: 0000950135-01-502316 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010809 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIMON WORLDWIDE INC CENTRAL INDEX KEY: 0000864264 STANDARD INDUSTRIAL CLASSIFICATION: APPAREL & OTHER FINISHED PRODS OF FABRICS & SIMILAR MATERIAL [2300] IRS NUMBER: 043081657 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21878 FILM NUMBER: 1701476 BUSINESS ADDRESS: STREET 1: 101 EDGEWATER DRIVE CITY: WAKEFIELD STATE: MA ZIP: 01880 BUSINESS PHONE: 5082835800 MAIL ADDRESS: STREET 1: 101 EDGEWATER DRIVE CITY: WAKEFIELD STATE: MA ZIP: 01880 FORMER COMPANY: FORMER CONFORMED NAME: CYRK INC DATE OF NAME CHANGE: 19940214 FORMER COMPANY: FORMER CONFORMED NAME: CYRK INTERNATIONAL INC DATE OF NAME CHANGE: 19930521 10-Q 1 b40102swe10-q.txt SIMON WORLDWIDE 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ____________________ Commission File Number 0-21878 SIMON WORLDWIDE, INC. (Exact name of Registrant as specified in its charter) DELAWARE 04-3081657 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 101 EDGEWATER DRIVE, WAKEFIELD, MASSACHUSETTS 01880 (Address of principal executive offices) (Zip Code) (781) 876-5800 (Registrant's telephone number, including area code) CYRK, INC. (Former name, if changed since last report.) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] At July 31, 2001, 16,649,046 shares of the Registrant's common stock were outstanding. 2 SIMON WORLDWIDE, INC. FORM 10-Q TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE NUMBER Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets - June 30, 2001 and December 31, 2000 3 Consolidated Statements of Operations - For the three and six months ended June 30, 2001 and 2000 4 Consolidated Statements of Comprehensive Income - For the three and six months ended June 30, 2001 and 2000 5 Consolidated Statements of Cash Flows - For the six months ended June 30, 2001 and 2000 6 Notes to Consolidated Financial Statements 7-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-15 PART II OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 16 Item 6. Exhibits and Reports on Form 8-K 16 SIGNATURES 17
2 3 PART I - FINANCIAL INFORMATION SIMON WORLDWIDE, INC. CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands, except share data)
June 30, 2001 December 31, 2000 ------------- ----------------- ASSETS Current assets: Cash and cash equivalents $ 73,295 $ 68,162 Investment 16,845 7,969 Accounts receivable: Trade, less allowance for doubtful accounts of $1,032 at June 30, 2001 and $2,074 at December 31, 2000 32,103 48,877 Officers, stockholders and related parties 3,773 4,340 Inventories 6,556 10,175 Prepaid expenses and other current assets 3,164 5,120 Refundable income taxes - 4,417 Deferred income taxes 7,120 7,120 Proceeds from sale of business 460 8,363 --------- --------- Total current assets 143,316 164,543 Property and equipment, net 11,883 12,510 Excess of cost over net assets acquired, net 47,125 48,033 Investments 11,750 12,500 Deferred income taxes 15,837 4,734 Other assets 5,361 7,815 Proceeds from sale of business 1,840 2,300 --------- --------- $ 237,112 $ 252,435 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings $ 434 $ 5,523 Accounts payable: Trade 37,469 36,035 Affiliates 141 281 Accrued expenses and other current liabilities 44,580 53,265 Investment payable - 7,875 Deferred income taxes 3,794 - Accrued restructuring expenses 15,527 1,193 --------- --------- Total current liabilities 101,945 104,172 Long-term obligations 6,817 6,587 --------- --------- Total liabilities 108,762 110,759 --------- --------- Commitments and contingencies Mandatorily redeemable preferred stock, Series A1 senior cumulative participating convertible, $.01 par value, 26,015 shares issued and outstanding at June 30, 2001 and 25,500 shares issued and outstanding at December 31, 2000, stated at redemption value of $1,000 per share 26,015 25,500 Stockholders' equity: Preferred stock, $.01 par value; 1,000,000 shares authorized; 26,015 Series A1 shares issued at June 30, 2001 and 25,500 Series A1 shares issued at December 31, 2000 - - Common stock, $.01 par value; 50,000,000 shares authorized; 16,649,046 shares issued and outstanding at June 30, 2001 and 16,059,130 shares issued and outstanding at December 31, 2000 167 161 Additional paid-in capital 140,998 138,978 Retained deficit (41,718) (22,128) Accumulated other comprehensive income (loss): Unrealized gain on investment 5,176 94 Cumulative translation adjustment (2,288) (929) --------- --------- Total stockholders' equity 102,335 116,176 --------- --------- $ 237,112 $ 252,435 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 3 4 SIMON WORLDWIDE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except per share data)
For the three months For the six months ended June 30, ended June 30, -------------- -------------- 2001 2000 2001 2000 ---- ---- ---- ---- Net sales $ 111,089 $ 224,333 $ 217,594 $ 401,636 Cost of sales 92,118 190,285 173,658 334,654 Write-down of inventory in connection with restructuring - 1,695 - 1,695 --------- --------- --------- --------- Gross profit 18,971 32,353 43,936 65,287 Selling, general and administrative expenses 21,831 40,394 52,027 77,579 Goodwill amortization expense 454 895 1,120 1,776 Restructuring and other nonrecurring charges 20,212 5,325 20,212 5,325 --------- --------- --------- --------- Operating loss (23,526) (14,261) (29,423) (19,393) Interest income (601) (1,077) (1,223) (2,114) Interest expense 141 280 393 644 Other (income) expense 250 1,000 750 (2,245) --------- --------- --------- --------- Loss before income taxes (23,316) (14,464) (29,343) (15,678) Income tax benefit (8,462) (4,941) (10,270) (5,487) --------- --------- --------- --------- Net loss (14,854) (9,523) (19,073) (10,191) Preferred stock dividends 259 250 517 500 --------- --------- --------- --------- Net loss available to common stockholders $ (15,113) $ (9,773) $ (19,590) $ (10,691) ========= ========= ========= ========= Loss per common share - basic and diluted $ (0.92) $ (0.61) $ (1.21) $ (0.67) ========= ========= ========= ========= Weighted average shares outstanding - basic and diluted 16,419 16,001 16,257 15,890 ========= ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 4 5 SIMON WORLDWIDE, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (In thousands)
For the three months For the six months ended June 30, ended June 30, -------------- -------------- 2001 2000 2001 2000 ---- ---- ---- ---- Net loss $(14,854) $ (9,523) $(19,073) $(10,191) -------- -------- -------- -------- Other comprehensive income (loss), before tax: Foreign currency translation adjustments (984) (243) (1,359) (136) Unrealized holding gains (losses) arising during period 3,854 - 8,876 (2,290) -------- -------- -------- -------- Other comprehensive income (loss), before tax 2,870 (243) 7,517 (2,426) Income tax expense (benefit) related to items of other comprehensive income (loss) 2,259 - 3,794 (954) -------- -------- -------- -------- Other comprehensive income (loss), net of tax 611 (243) 3,723 (1,472) -------- -------- -------- -------- Comprehensive loss $(14,243) $ (9,766) $(15,350) $(11,663) ======== ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 5 6 SIMON WORLDWIDE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
For the six months ended June 30, -------------- 2001 2000 ---- ---- Cash flows from operating activities: Net loss $(19,073) $(10,191) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 3,381 4,419 Loss (gain) on sale of property and equipment 16 (73) Realized gain on sale of investments - (3,245) Provision for doubtful accounts 474 1,023 Deferred income taxes (11,103) - Non-cash restructuring charges 4,616 - Charge for impaired investments 750 1,000 Issuance of common stock related to acquisition agreement 575 575 Increase (decrease) in cash from changes in working capital items: Accounts receivable 16,150 792 Inventories 1,526 4,104 Prepaid expenses and other current assets 1,527 1,084 Refundable income taxes 4,417 (6,340) Accounts payable 1,244 2,666 Accrued expenses and other current liabilities 6,028 (12,492) -------- -------- Net cash provided by (used in) operating activities 10,528 (16,678) -------- -------- Cash flows from investing activities: Purchase of property and equipment (2,130) (2,622) Proceeds from sale of property and equipment 66 213 Purchase of investments (7,875) (4,500) Proceeds from sale of CPG division 8,363 - Proceeds from sale of investments - 3,378 Other, net 229 56 -------- -------- Net cash used in investing activities (1,347) (3,475) -------- -------- Cash flows from financing activities: Repayments of short-term borrowings, net (5,089) (4,748) Proceeds from (repayments of) long-term obligations 230 (348) Proceeds from issuance of common stock 613 308 Dividends paid - (500) -------- -------- Net cash used in financing activities (4,246) (5,288) -------- -------- Effect of exchange rate changes on cash 198 185 -------- -------- Net increase (decrease) in cash and cash equivalents 5,133 (25,256) Cash and cash equivalents, beginning of year 68,162 99,698 -------- -------- Cash and cash equivalents, end of period $ 73,295 $ 74,442 ======== ======== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 213 $ 507 ======== ======== Income taxes $ 342 $ 2,652 ======== ======== Supplemental non-cash investing activities: Issuance of additional stock related to acquisitions $ 1,413 $ 1,413 ======== ======== Dividends paid in kind on mandatorily redeemable preferred stock $ 515 $ -- ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 6 7 SIMON WORLDWIDE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Change in Company Name At its annual meeting on May 22, 2001, the Company's shareholders approved a corporate name change from Cyrk, Inc. to Simon Worldwide, Inc. The Company's trading symbol on the Nasdaq National Market is SWWI. 2. Basis of Presentation The accompanying unaudited financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes in accordance with generally accepted accounting principles for complete financial statements and should be read in conjunction with the audited financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. In the opinion of management, the accompanying unaudited financial statements contain all adjustments necessary for fair presentation of the Company's financial position, results of operations and cash flows at the dates and for the periods presented. The operating results for the six months ended June 30, 2001 are not necessarily indicative of the results to be expected for the full year. 3. Sale of Business Pursuant to its decision in December 2000, the Company sold its Corporate Promotions Group ("CPG") business on February 15, 2001 to Cyrk Holdings, Inc., formerly known as Rockridge Partners, Inc. ("Rockridge"), an investor group led by Gemini Investors LLC, a Wellesley, Massachusetts-based private equity investment firm, pursuant to a Purchase Agreement entered into as of January 20, 2001 (as amended, the "Purchase Agreement") for approximately $14.0 million which included the assumption of approximately $3.7 million of Company debt. $2.3 million of the purchase price was paid with a 10% per annum five-year subordinated note from Rockridge, with the balance being paid in cash. The 2000 financial statements reflected this transaction and included a pre-tax charge recorded in the fourth quarter of 2000 of $50.1 million due to the loss on the sale of the CPG business, $22.7 million of which was associated with the write-off of goodwill attributable to CPG. This charge had the effect of increasing the 2000 net loss available to common stockholders by approximately $49.0 million or $3.07 per share. Net sales in 2000 attributable to the CPG business were $146.8 million, or 19% of consolidated Company revenues. Net sales in the first quarter of 2001, for the period through February 14, 2001, attributable to the CPG business, were $17.7 million, or 17% of consolidated Company revenues. Net sales in the first quarter of 2000 attributable to the CPG business were $33.6 million, or 19% of consolidated Company revenues. CPG was engaged in the corporate catalog and specialty advertising segment of the promotions industry. The group was formed as a result of the Company's acquisitions of Marketing Incentives, Inc. ("MI") and Tonkin, Inc. ("Tonkin") in 1996 and 1997, respectively. Pursuant to the Purchase Agreement, Rockridge purchased from the Company (i) all of the outstanding capital stock of MI and Tonkin, each a wholly-owned subsidiary of the Company, (ii) certain other assets of the Company, including those assets at the Company's Danvers and Wakefield, Massachusetts facilities necessary for the operation of the CPG business and (iii) all intellectual property of the CPG business as specified in the Purchase Agreement. Rockridge assumed certain liabilities of the CPG business as specified in the Purchase Agreement and, pursuant to the Purchase Agreement, the Company agreed to transfer its former name ("Cyrk") to the buyer. Rockridge extended employment offers to certain former employees of the Company who had performed various support activities, including accounting, human resources, information technology, legal and other various management functions. There is no material relationship between Rockridge and the Company or any of its affiliates, directors or officers, or any associate thereof, other than the relationship created by the Purchase Agreement and related documents. The sale of CPG effectively terminated the restructuring effort announced by the Company in May 2000 with respect to the CPG business. 7 8 4. Inventories Inventories consist of the following (in thousands):
June 30, 2001 December 31, 2000 ------------- ----------------- Raw materials $ -- $ 178 Work in process 2,539 3,099 Finished goods 4,017 6,898 ------- ------- $ 6,556 $10,175 ======= =======
5. Investments Current In December 2000, the Company purchased 1,500,000 shares of a marketable security at $5.25 per share. As of June 30, 2001 and December 31, 2000, these shares are stated at fair value of approximately $16.8 million and $8.0 million, respectively. Long-term The Company has made strategic and venture investments in a portfolio of privately-held companies that are being accounted for under the cost method. These investments are in Internet-related companies that are at varying stages of development, including startups, and are intended to provide the Company with expanded Internet presence, to enhance the Company's position at the leading edge of e-business and to provide venture investment returns. These companies in which the Company has invested are subject to all the risks inherent in the Internet, including their dependency upon the widespread acceptance and use of the Internet as an effective medium for commerce. In addition, these companies are subject to the valuation volatility associated with the investment community and the capital markets. The carrying value of the Company's investments in these Internet-related companies is subject to the aforementioned risks inherent in Internet business. Each quarter, the Company performs a review of the carrying value of all its investments in these Internet-related companies, and considers such factors as current results, trends and future prospects, capital market conditions and other economic factors. Based on its reviews in 2001, the Company has recorded a year to date charge to other expense of $.8 million for an other-than-temporary investment impairment associated with its venture portfolio. While the Company will continue to periodically evaluate its Internet investments, there can be no assurance that its investment strategy will be successful, and thus the Company might not ever realize any benefits from its portfolio of investments. 6. Short-Term Borrowings In June 2001, the Company secured a new primary domestic letter of credit facility of up to $21.0 million for the purpose of financing the importation of various products from Asia and for issuing standby letters of credit. Pursuant to the provisions of this facility, the Company has bank commitments to issue or consider issuing for product related letter of credit borrowings of up to $15.0 million and bank commitments to issue or consider issuing for standby letters of credit of up to $6.0 million through May 15, 2002. At June 30, 2001, the Company was contingently liable for letters of credit used to finance the purchase of inventory in the aggregate amount of $2.6 million. Such letters of credit expire at various dates through August 2001. 8 9 7. Restructuring and Other Nonrecurring Charges A summary of restructuring and other nonrecurring charges for the six months ended June 30, 2001 and 2000 are as follows (in thousands):
2001 2000 ---- ---- Restructuring charge $20,212 $ 6,360 Settlement charge -- 660 ------- ------- $20,212 $ 7,020 ======= =======
2001 Restructuring Pursuant to the February 2001 sale of its CPG business, and its previously announced intentions, the Company conducted a second quarter 2001 evaluation of its remaining businesses with the objective of restoring consistent profitability through a more rationalized, cost-efficient business model. As a result of this evaluation, and pursuant to a plan approved by its Board of Directors, the Company has taken action to shutdown or consolidate certain businesses, sell certain assets and liabilities related to its legacy corporate catalog business in the United Kingdom and eliminate approximately two-thirds (40 positions) of its Wakefield, Massachusetts corporate office workforce. Additionally, the Company announced the resignation of its co-chief executive officer and two other executive officers, including the Company's chief financial officer. Consequently, the Company announced that all responsibilities for the chief executive officer position have been consolidated under Allan I. Brown, who has served as co-chief executive officer since November 1999 and as the chief executive officer of Simon Marketing Inc., the Company's wholly-owned subsidiary based in Los Angeles, California since 1975. For additional information related to these events, reference is made to the Company's Report on Form 8-K dated June 15, 2001. As a result of these actions, the Company recorded a second quarter 2001 pre-tax charge of approximately $20.2 million for restructuring expenses. The second quarter charge relates principally to employee termination costs ($10.5 million), asset write-downs which were primarily attributable to a consolidation of its Wakefield, Massachusetts workspace ($6.5 million), a loss on the sale of the UK business ($2.1 million) and the settlement of certain lease obligations ($1.1 million). This charge has had the effect of reducing year to date after tax earnings by $13.1 million or $0.81 per share. Total cash outlays related to restructuring activities are expected to be approximately $11.3 million. The restructuring plan is anticipated to be substantially complete by the end of 2001, and is expected to yield annualized savings of approximately $14.0 million to $16.0 million once complete. A summary of activity in the restructuring accrual related to the 2001 restructuring action is as follows (in thousands): Balance at March 31, 2001 $ -- Restructuring provision 20,212 Non-cash asset write-downs (4,603) Employee termination costs and other cash payments made through June 30, 2001 (745) -------- Balance at June 30, 2001 $ 14,864 ========
2000 Restructuring As a result of its May 2000 restructuring, the Company recorded a net charge to 2000 operations of $5.7 million for involuntary termination costs, asset write-downs and the settlement of lease obligations. The original restructuring charge of nearly $6.4 million was revised downward to $5.7 million as a result of the sale of the CPG business (see Note 3). The restructuring plan was substantially complete by the end of 2000. A summary of activity in the restructuring accrual related to the 2000 restructuring action is as follows (in thousands): Balance at January 1, 2000 $-- Restructuring provision 6,360 Employee termination costs and other cash payments made through December 31, 2000 (2,858) Non-cash asset write-downs (1,684) Accrual reversal (625) ------- Balance at December 31, 2000 1,193 Employee termination costs and other cash payments made through June 30, 2001 (517) Non-cash asset write-downs (13) ------- Balance at June 30, 2001 $ 663 =======
2000 Settlement Charge The Company recorded a second quarter 2000 nonrecurring pre-tax charge to operations of $.7 million associated with the settlement of a change in control agreement with an employee of the Company who was formerly an executive officer. 9 10 8. Earnings Per Share Disclosure The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computation for "loss available to common stockholders" and other related disclosures required by Statement of Financial Accounting Standards No. 128, "Earnings per Share" (in thousands, except share data):
For the Quarters Ended June 30, 2001 2000 -------------------------------------------- -------------------------------------------- Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount -------------------------------------------- -------------------------------------------- Basic and diluted EPS: Net loss $ (14,854) 16,419,222 $(0.91) $ (9,523) 16,000,989 $(0.60) Preferred stock dividends 259 250 Loss available to common ---------------------------- ---------------------------- stockholders $ (15,113) 16,419,222 $(0.92) $ (9,773) 16,000,989 $(0.61) ============================ ======= ============================ =======
For the quarters ended June 30, 2001 and 2000, 3,151,174 of convertible preferred stock and common stock equivalents and 3,420,734 of convertible preferred stock, common stock equivalents and contingently and non-contingently issuable shares related to acquired companies, respectively, were not included in the computation of diluted EPS because to do so would have been antidilutive.
For the Six Months Ended June 30, 2001 2000 -------------------------------------------- -------------------------------------------- Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount -------------------------------------------- -------------------------------------------- Basic and diluted EPS: Net loss $ (19,073) 16,257,063 $(1.17) $ (10,191) 15,889,633 $(0.64) Preferred stock dividends 517 500 Loss available to common ---------------------------- ---------------------------- stockholders $ (19,590) 16,257,063 $(1.21) $ (10,691) 15,889,633 $(0.67) ============================ ======= ============================ =======
For the six months ended June 30, 2001 and 2000, 3,487,286 and 3,498,326, respectively, of convertible preferred stock, common stock equivalents and contingently and non-contingently issuable shares related to acquired companies were not included in the computation of diluted EPS because to do so would have been antidilutive. 10 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion of the financial condition and results of operations of the Company for the three and six month periods ended June 30, 2001 as compared to the same periods in the previous year. This discussion should be read in conjunction with the Consolidated Financial Statements of the Company and related Notes included elsewhere in this Form-10Q. FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS From time to time, the Company may provide forward-looking information such as forecasts of expected future performance or statements about the Company's plans and objectives, including certain information provided below. These forward-looking statements are based largely on the Company's expectations and are subject to a number of risks and uncertainties, certain of which are beyond the Company's control. The Company wishes to caution readers that actual results may differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company including, without limitation, as a result of factors described in the Company's Amended Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995, filed herewith as Exhibit 99.1. GENERAL The Company is a 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 is derived from the sale of products to consumer product and services companies seeking to promote their brand names and corporate identities and build brand loyalty. The Company's business is heavily concentrated with McDonald's Corporation ("McDonald's") and, to a lesser extent, Philip Morris Incorporated ("Philip Morris"). Net sales to McDonald's and Philip Morris accounted for 65% and 9%, respectively, of total net sales in 2000 and 77% and 8%, respectively, of total net sales in the first six months of 2001. Beginning in 1996, the Company grew as a result of a series of acquisitions of companies engaged in the corporate catalog and advertising specialty segment of the promotion industry. Certain of these acquired companies operated within the Company's Corporate Promotions Group ("CPG") and have had a history of disappointing financial results. As a result, the Company sold these businesses in February of 2001 (see Sale of Business section below). In 1997, the Company expanded into the consumer promotion arena with its acquisition of Simon Marketing, Inc. ("Simon"), a Los Angeles-based marketing and promotion agency. The Company conducts its business with McDonald's through its Simon subsidiary. Simon designs and implements marketing promotions for McDonald's, which include games, sweepstakes, premiums, events, contests, coupon offers, sports marketing, licensing and promotional retail items. The Company's business with McDonald's and Philip Morris (as well as other promotional customers) is based upon purchase orders placed from time to time during the course of promotions. Except for a two year agreement with McDonald's in Europe which expires in December 2001 and guarantees certain minimum order quantities, there are no written agreements which commit McDonald's or Philip Morris to maintain fee levels or make a certain level of purchases. The actual level of purchases depends on a number of factors, including the duration of the promotion and consumer redemption rates. Consequently, the Company's level of net sales is difficult to predict accurately and can fluctuate greatly from quarter to quarter. The Company expects that a significant percentage of its net sales in 2001 will be to McDonald's. At June 30, 2001, the Company had written purchase orders for $207.4 million as compared to $303.2 million at June 30, 2000. The Company's purchase orders are generally subject to cancellation with limited penalty and are also subject to agreements with certain customers that limit gross margin levels. Therefore, the Company cautions that the backlog amounts may not necessarily be indicative of future revenues or earnings. 11 12 SALE OF BUSINESS Pursuant to its decision in December 2000, the Company sold its CPG business on February 15, 2001 to Cyrk Holdings, Inc., formerly known as Rockridge Partners, Inc. ("Rockridge"), an investor group led by Gemini Investors LLC, a Wellesley, Massachusetts-based private equity investment firm, pursuant to a Purchase Agreement entered into as of January 20, 2001 (as amended, the "Purchase Agreement") for approximately $14.0 million, which included the assumption of approximately $3.7 million of Company debt. $2.3 million of the purchase price was paid with a 10% per annum five-year subordinated note from Rockridge, with the balance being paid in cash. The 2000 financial statements reflected this transaction and included a pre-tax charge recorded in the fourth quarter of 2000 of $50.1 million due to the loss on the sale of the CPG business, $22.7 million of which was associated with the write-off of goodwill attributable to CPG. This charge had the effect of increasing the 2000 net loss available to common stockholders by approximately $49.0 million or $3.07 per share. Net sales in 2000 attributable to the CPG business were $146.8 million, or 19% of consolidated Company revenues. Net sales in the first quarter of 2001, for the period through February 14, 2001, attributable to the CPG business, were $17.7 million, or 17% of consolidated Company revenues. Net sales in the first quarter of 2000 attributable to the CPG business were $33.6 million, or 19% of consolidated Company revenues. CPG was engaged in the corporate catalog and specialty advertising segment of the promotions industry. The group was formed as a result of the Company's acquisitions of Marketing Incentives, Inc. ("MI") and Tonkin, Inc. ("Tonkin") in 1996 and 1997, respectively. Pursuant to the Purchase Agreement, Rockridge purchased from the Company (i) all of the outstanding capital stock of MI and Tonkin, each a wholly-owned subsidiary of the Company, (ii) certain other assets of the Company, including those assets at the Company's Danvers and Wakefield, Massachusetts facilities necessary for the operation of the CPG business and (iii) all intellectual property of the CPG business as specified in the Purchase Agreement. Rockridge assumed certain liabilities of the CPG business as specified in the Purchase Agreement and, pursuant to the Purchase Agreement, the Company agreed to transfer its former name ("Cyrk") to the buyer. Rockridge extended employment offers to certain former employees of the Company who had performed various support activities, including accounting, human resources, information technology, legal and other various management functions. There is no material relationship between Rockridge and the Company or any of its affiliates, directors or officers, or any associate thereof, other than the relationship created by the Purchase Agreement and related documents. The sale of CPG effectively terminated the restructuring effort announced by the Company in May 2000 with respect to the CPG business. For additional information related to this transaction, reference is made to the Company's Report on Form 8-K dated February 15, 2001. RESTRUCTURING Pursuant to the February 2001 sale of its CPG business, and its previously announced intentions, the Company conducted a second quarter 2001 evaluation of its remaining businesses with the objective of restoring consistent profitability through a more rationalized, cost-efficient business model. As a result of this evaluation, and pursuant to a plan approved by its Board of Directors, the Company has taken action to shutdown or consolidate certain businesses, sell certain assets and liabilities related to its legacy corporate catalog business in the United Kingdom and eliminate approximately two-thirds (40 positions) of its Wakefield, Massachusetts corporate office workforce. Additionally, the Company announced the resignation of its co-chief executive officer and two other executive officers, including the Company's chief financial officer. Consequently, the Company announced that all responsibilities for the chief executive officer position have been consolidated under Allan I. Brown, who has served as co-chief executive officer since November 1999 and as the chief executive officer of Simon Marketing Inc., the Company's wholly-owned subsidiary based in Los Angeles, California since 1975. For additional information related to these events, reference is made to the Company's Report on Form 8-K dated June 15, 2001. As a result of these actions, the Company recorded a second quarter 2001 pre-tax charge of approximately $20.2 million for restructuring expenses. The second quarter charge relates principally to employee termination costs ($10.5 million), asset write-downs which were primarily attributable to a consolidation of its Wakefield, Massachusetts workspace ($6.5 million), a loss on the sale of the UK business ($2.1 million) and the settlement of certain lease obligations ($1.1 million). This charge has had the effect of reducing year to date after tax earnings by $13.1 million or $0.81 per share. Total cash outlays related to restructuring activities are expected to be approximately $11.3 million. The restructuring plan is anticipated to be substantially complete by the end of 2001, and is expected to yield annualized savings of approximately $14.0 million to $16.0 million once complete. See notes to consolidated financial statements. OUTLOOK The Company believes that the February 2001 sale of the CPG business and the restructuring action taken in the second quarter establishes a more rationalized, cost-efficient business model. As discussed above, the Company initiated significant restructuring action during the second quarter of 2001 and incurred a $20.2 million restructuring charge. The business model that has emerged from the recent restructuring action is driven by the Company's business with McDonald's and to the lesser extent, Philip Morris, and as such the Company's ability to achieve its financial objective is subject to risks including, without limitation, all the risk factors described in the Company's Amended Cautionary Statement for 12 13 Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995, filed herewith as Exhibit 99.1. RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000 During the second quarter of 2001, the Company evaluated its remaining businesses with the objective of restoring consistent profitability through a more rationalized, cost-efficient business model. As a result of this evaluation, and pursuant to a plan approved by its Board of Directors, the Company has taken action to shutdown or consolidate certain businesses, sell certain assets and liabilities related to its legacy corporate catalog business in the United Kingdom and eliminate approximately two-thirds (40 positions) of its Wakefield, Massachusetts corporate office workforce. Additionally, the Company announced the resignation of its co-chief executive officer and two other executive officers, including the Company's chief financial officer. Consequently, the Company announced that all responsibilities for the chief executive officer position have been consolidated under Allan I. Brown, who has served as co-chief executive officer since November 1999 and as the chief executive officer of Simon Marketing Inc., the Company's wholly-owned subsidiary based in Los Angeles, California since 1975. For additional information related to these events, reference is made to the Company's Report on Form 8-K dated June 15, 2001. As a result of these actions, the Company recorded a second quarter 2001 pre-tax charge of approximately $20.2 million for restructuring expenses. See notes to consolidated financial statements. In connection with its May 2000 announcement to restructure its promotional product divisions, the Company recorded a pre-tax restructuring charge of $6.4 million. See notes to consolidated financial statements. The Company also recorded a nonrecurring pre-tax charge to operations of $.7 million in the second quarter of 2000 associated with the settlement of a change in control agreement with an employee of the Company who was formerly an executive officer. See notes to consolidated financial statements. Net sales decreased $113.2 million, or 50%, to $111.1 million in the second quarter ended June 30, 2001 from $224.3 million in the second quarter of 2000. The decrease in net sales was primarily attributable to revenues associated with McDonald's and revenues associated with the CPG business sold in February 2001. See notes to consolidated financial statements. Gross profit (excluding the restructuring charge in 2000) decreased $15.0 million, or 44%, to $19.0 million in the second quarter of 2001 from $34.0 million in the second quarter of 2000. As a percentage of net sales, gross profit increased to 17.1% in the second quarter of 2001 from 15.2% in the second quarter of 2000. The decrease in nominal gross margin dollars is primarily attributable to the sale of the CPG business. The increase in the gross margin percentage was due to the sales mix associated with continuing client promotional programs. Selling, general and administrative expenses excluding amortization of goodwill totaled $21.8 million in the second quarter of 2001 as compared to $40.4 million in the second quarter of 2000. The Company's decreased spending was due principally to the effects of the sale of the CPG business. See notes to consolidated financial statements. As a percentage of net sales, selling, general and administrative costs totaled 19.7% as compared to 18.0% in the second quarter of 2000 as a result of a lower sales base. The Company has recorded a $.3 million and $1.0 million charge to other expense in the second quarters of 2001 and 2000, respectively, to reflect an other-than-temporary investment impairment associated with its venture portfolio. See notes to consolidated financial statements. SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000 During the second quarter of 2001, the Company evaluated its remaining businesses with the objective of restoring consistent profitability through a more rationalized, cost-efficient business model. As a result of this evaluation, and pursuant to a plan approved by its Board of Directors, the Company has taken action to shutdown of consolidate certain businesses, sell certain assets and liabilities related to its legacy corporate catalog business in the United Kingdom and eliminate approximately two-thirds (40 positions) of its Wakefield, Massachusetts corporate office workforce. Additionally, the Company announced the resignation of its co-chief executive officer and two other executive officers, including the Company's chief financial officer. Consequently, the Company announced that all responsibilities for the chief executive officer position have been consolidated under Allan I. Brown, who has served as co-chief executive officer since November 1999 and as the chief executive officer of Simon Marketing Inc., the Company's wholly-owned subsidiary based in Los Angeles, California since 1975. For additional information related to these events, reference is made to the Company's Report on Form 8-K dated June 15, 2001. As a result of these actions, the Company recorded a second quarter 2001 pre-tax charge of approximately $20.2 million for restructuring expenses. See notes to consolidated financial statements. In connection with its May 2000 announcement to restructure its promotional product divisions, the Company recorded a pre-tax restructuring charge of $6.4 million. See notes to consolidated financial statements. The Company also recorded a nonrecurring pre-tax charge to operations of $.7 million in the second quarter of 2000 associated with the settlement of a change in control agreement with an employee of the Company who was formerly an executive officer. See notes to consolidated financial statements. Net sales decreased $184.0 million, or 46%, to $217.6 million in the first six months of 2001 from $401.6 million in the first six months of 2000. The decrease in net sales was primarily attributable to revenues associated with McDonald's and revenues associated with the CPG business sold in February 2001. See notes to consolidated financial statements. Gross profit (excluding the restructuring charge in 2000) decreased $23.1 million, or 34%, to $43.9 million in the first six months of 2001 from $67.0 million in the first six months of 2000. As a percentage of net sales, gross profit increased to 20.2% in 2001 from 16.7% in 2000. The decrease in nominal gross margin dollars is primarily attributable to the sale of the CPG business. The increase in the gross margin percentage was due to the sales mix associated with continuing client promotional programs. Selling, general and administrative expenses, excluding amortization of goodwill, totaled $52.0 million in the first six months of 2001 as compared to $77.6 million in the first six months of 2000. The Company's decreased spending was due principally to the effects of the sale of the CPG business and the effects of the May 2000 restructuring. See notes to consolidated financial statements. As a percentage of net sales, selling, general and administrative costs totaled 23.9% as compared to 19.3% in the first six months of 2000. 13 14 The Company has recorded a $.8 million charge to other expense in the first six months of 2001 to reflect an other-than-temporary investment impairment associated with its venture portfolio. Other income in 2000 includes a $3.2 million gain realized on the sale of an investment in the first quarter which was partially offset by a $1.0 million charge in the second quarter of 2000 related to an other-than-temporary investment impairment associated with its venture portfolio. See notes to consolidated financial statements. LIQUIDITY AND CAPITAL RESOURCES Working capital at June 30, 2001 was $41.4 million compared to $60.4 million at December 31, 2000. Net cash provided by operating activities during the first six months of 2001 was $10.5 million, due principally to a $16.2 million decrease in accounts receivable. Net cash used in investing activities in the first six months of 2001 was $1.3 million, which was primarily attributable to a $7.9 million purchase of a marketable security and $2.1 million of property and equipment purchases, which were partially offset by $8.4 million of proceeds from the sale of the CPG business. See notes to consolidated financial statements. Net cash used in financing activities in the first six months of 2001 was $4.2 million, which was primarily attributable to $5.1 million of repayments of short-term borrowings. Since inception, the Company has financed its working capital and capital expenditure requirements through cash generated from operations, and investment and financing activities such as public and private sales of common and preferred stock, bank borrowings, asset sales and capital equipment leases. The Company currently has available several worldwide bank letters of credit and revolving credit facilities which expire at various dates beginning in May 2002. In June 2001, the Company secured a new primary domestic letter of credit facility of up to $21.0 million for the purpose of financing the importation of various products from Asia and for issuing standby letters of credit. Pursuant to the provisions of this facility, the Company has bank commitments to issue or consider issuing for product related letter of credit borrowings of up to $15.0 million and bank commitments to issue or consider issuing for standby letters of credit of up to $6.0 million through May 15, 2002. As of June 30, 2001, the Company's borrowing capacity was $61.8 million, of which $8.8 million in letters of credit were outstanding. In addition, bank guarantees totaling $.3 million were outstanding at June 30, 2001. Borrowings under these facilities are collateralized by substantially all assets of the Company. The Company's second quarter 2001 restructuring action (see notes to consolidated financial statements) will have an adverse impact on the Company's cash position. Total cash outlays related to restructuring activities are expected to be approximately $11.3 million. Management believes, however, that the Company's existing cash position and credit facilities combined with internally generated cash flow will satisfy its liquidity and capital needs through the end of 2001. The Company's ability to generate internal cash flow is highly dependent upon its continued relationships with McDonald's and Philip Morris. Any material adverse change from the Company's revenues and related contribution from McDonald's and Philip Morris could adversely affect the Company's cash position and capital availability. In July 2000, the Company announced that it had retained an investment banker to explore strategic alternatives. The objective of seeking strategic alternatives is to maximize shareholder value including, without limitation, by examining ways to enhance the Company's ability to generate more consistent revenue and earnings growth. Pursuant to its decision in December 2000, the Company sold its CPG business in February 2001. See notes to consolidated financial statements. As of June 30, 2001, and since that date, the investment banker continues to explore further strategic alternatives. The Company 14 15 has not made a decision as to any additional specific alternatives and there can be no assurance that any additional transactions will result from this process. 15 16 PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On May 22, 2001, the Company held its Annual Meeting of Stockholders. The matters considered at the meeting consisted of the following: The election of three Class II directors to serve for a term of three years and until their successors are elected and qualified. The results of the voting were as follows:
Nominee For Votes Withheld Broker Non-Votes ------- --- -------------- ---------------- Ronald W. Burkle 13,238,818 1,760,210 0 George G. Golleher 13,231,130 1,767,898 0 Erika Paulson 13,238,458 1,760,570 0
The ratification of the appointment of PricewaterhouseCoopers LLP as the Company's independent auditors for the 2001 fiscal year. The results of the voting were as follows:
For Against Abstain Broker Non-Votes --- ------- ------- ---------------- 14,897,647 96,675 4,706 0
The approval of an amendment to the Company's Certificate of Incorporation to change the name of the Company from Cyrk, Inc. to Simon Worldwide, Inc. The results of the voting were as follows:
For Against Abstain Broker Non-Votes --- ------- ------- ---------------- 14,879,953 110,900 8,175 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 Credit and Security Agreement dated as of June 6, 2001 and entered into by and between Simon Worldwide, Inc. and City National Bank 99.1 Amended Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 (b) Reports on Form 8-K The Company filed a Report on Form 8-K dated June 15, 2001 with respect to the resignation of certain executive officers. 16 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: August 9, 2001 SIMON WORLDWIDE, INC. /s/Paul J. Meade -------------------------------------- Paul J. Meade Chief Accounting Officer (duly authorized officer and principal accounting officer) 17 EX-10.1 3 b40102swex10-1.txt CREDIT AND SECURITY AGREEMENT 1 Exhibit 10.1 CREDIT AND SECURITY AGREEMENT This Credit and Security Agreement ("Agreement") is entered into as of June 6, 2001, by and between SIMON WORLDWIDE, INC., a Delaware corporation ("BORROWER"), and CITY NATIONAL BANK, a national banking association ("CNB"). 1. DEFINITIONS. As used in this Agreement, these terms have the following meanings: 1.1 "ACCOUNT" or "ACCOUNTS" means any right to payment for goods sold or leased or for services rendered which is not evidenced by an instrument or chattel paper from any Person, whether now existing or hereafter arising or acquired, whether or not it has been earned by performance. 1.2 "ACCOUNT DEBTOR" means the Person obligated on an Account. 1.3 "BANKER'S ACCEPTANCE" shall mean a time draft accepted by CNB upon the drawing of a Letter of Credit issued under this Agreement. 1.4 "BORROWER'S DEMAND DEPOSIT ACCOUNT" shall mean account number 101 779 068 maintained by Borrower with CNB. 1.5 "BUSINESS DAY" means a day that CNB's Head Office is open and conducts a substantial portion of its business. 1.6 "CODE" means the Uniform Commercial Code of California as it may be amended from time to time, except where the Uniform Commercial Code of another state governs the perfection of a security interest in Collateral located in that state. 1.7 "COLLATERAL" means all property securing the Obligations, as described in Section 7. 1.8 "COMMERCIAL LETTERS OF CREDIT" means letters of credit issued pursuant to this Agreement and in response to Borrower's submission of the CNB form entitled Irrevocable Letter of Credit Application and Security Agreement. 1.9 "COMMITMENT" means CNB's commitment to issue or consider issuing the Letters of Credit in the aggregate principal amount outstanding at any one time of up to Twenty One Million Dollars ($21,000,000). 1.10 "DEBT" means, at any date, the aggregate amount of, without duplication, (a) all obligations of Borrower for borrowed money, or reimbursement for open letters of credit and banker's acceptances, (b) all obligations of Borrower evidenced by bonds, debentures, notes or other similar instruments, (c) all obligations of Borrower to pay the deferred purchase price of property or services, (d) all capitalized lease obligations of Borrower, (e) all obligations or liabilities of others secured by a lien on any asset of Borrower, whether or not such obligation or liability is assumed, (f) all obligations guaranteed by Borrower, (g) all obligations, direct or indirect, for letters of credit, and (h) any other obligations or liabilities which are required by GAAP to be shown as liabilities on the balance sheet of Borrower. 1.11 "EVENT OF DEFAULT" is an event described in Section 8.1 after any applicable cure period. 1.12 "GAAP" means generally accepted accounting principles, consistently applied. 1 2 1.13 "GUARANTOR" shall mean Simon Marketing, Inc. 1.14 "GUARANTY" shall be in the form attached hereto as Exhibit A. 1.15 "GUIDANCE LINE FACILITY" is Fifteen Million Dollars ($15,000,000). 1.16 "INVENTORY" means goods owned by Borrower and held for sale or lease in the ordinary course of business, work in process and any and all raw materials used in connection with the foregoing. 1.17 "LETTERS OF CREDIT" means Commercial Letters of Credit and Standby Letters of Credit. 1.18 "LIQUID ASSETS" shall mean the sum of cash, cash equivalents and Marketable Securities held in Guarantor's name upon which there is no security interest, lien or other encumbrance, other than in favor of CNB. 1.19 "LOAN DOCUMENTS" means, individually and collectively, this Agreement, any note, guaranty, security or pledge agreement, financing statement and all other contracts, instruments, and documents executed in connection with or related to extensions of credit under this Agreement. 1.20 "MARKETABLE SECURITIES" shall mean "margin stock" as defined in Regulation U of the Federal Reserve Board; mutual funds; and bonds and other debt securities of United States corporations not falling within the definition of "margin stock" with a credit quality rating of at least A by Standard & Poors or A-2 by Moody's; commercial paper with a credit quality rating of at least A-2 by Standard & Poors or P-2 by Moody's; obligations issued by or guaranteed by the United States government or agencies thereof; and obligations of any state, territory, municipality or other local governmental subdivision or entity of the United States, with a credit quality rating of at least A by Standard & Poors or A-2 by Moody's. 1.21 "OBLIGATIONS" means all present and future liabilities and obligations of Borrower to CNB hereunder, including any extensions and renewals thereof and substitutions therefor. 1.22 "PERSON" means any individual or entity. 1.23 "PRIME RATE" means the rate most recently announced by CNB at its principal office in Beverly Hills, California as its "Prime Rate." Any change in the interest rate with respect to Prime Loans resulting from a change in the Prime Rate will become effective on the day on which each change in the Prime Rate is announced by CNB. 1.24 "STANDBY LETTERS OF CREDIT" means standby letters of credit issued pursuant to this Agreement and in response to Borrower's submission of an Irrevocable Standby Letter of Credit Application and Letter of Credit Agreement. 1.25 "STANDBY LETTER OF CREDIT COMMITMENT" is Six Million Dollars ($6,000,000.00). 1.26 "TERMINATING EVENT" is an event set forth in Section 8.2 after any applicable cure period. 1.27 "TERMINATION DATE" means May 15, 2002, unless the term of this Agreement is renewed by CNB for an additional period under Section 3, or such earlier termination date under 2 3 Section 8.3 upon the occurrence of an Event of Default. Upon any renewal, the Termination Date will be the renewed maturity date determined by CNB. Provided, however, this Agreement may be terminated at any time by Borrower when there are no Obligations outstanding and, upon such termination by Borrower, CNB shall promptly comply with the requirements of Code Section 9404(1), or any successor statute, with respect to termination of any UCC-1 Financing Statement on file. 2. THE CREDIT. 2.1 STANDBY LETTER OF CREDIT FACILITY. CNB will, at the request of Borrower any time up to the Termination Date, issue Standby Letters of Credit for the account of Borrower. The aggregate face amount of outstanding Standby Letters of Credit at any time will not exceed the Standby Letter of Credit Commitment. 2.1.1 ISSUANCE OF STANDBY LETTERS OF CREDIT. (a) Standby Letters of Credit will be issued in accordance with an Irrevocable Standby Letter of Credit Application and Letter of Credit Agreement submitted by Borrower and incorporated herein by this reference, subject to the terms of this Agreement in the event of any conflict herewith. The reimbursement obligation with respect to each Standby Letter of Credit will be secured by cash held in the form of a CNB Certificate of Deposit prior to issuance of the Standby Letter of Credit. Standby Letters of Credit will be issued on the normal documentation used by CNB from time to time in accord with the International Standby Practices 1998. Published CNB fees and charges, as delivered to Borrower from time to time, will apply to the issuance of Standby Letters of Credit, provided, however, each Standby Letter of Credit shall be subject to a fee of one percent (1%) per annum of the amount of the Standby Letter of Credit, prorated over the term of the Standby Letter of Credit, but in no event less than $250.00 for each Standby Letter of Credit. (b) For Borrower's convenience and pursuant to its request, Borrower may submit the Irrevocable Standby Letter of Credit Application by telephone facsimile ("FAX") which will include FAX signatures. CNB is authorized to accept faxed documents without any need, requirement or responsibility to verify in any way the genuineness or authenticity of the faxed documents or signatures. Borrower will deliver to CNB an originally executed Irrevocable Standby Letter of Credit Application within fifteen (15) days of each faxing. CNB's failure to receive an original set of documents shall not be deemed or construed in any way to affect the propriety of issuing the Letters of Credit or Borrower's liability to reimburse CNB for the amount of any drawings under the issued Letter of Credit. (c) Borrower hereby authorizes the following persons, or others designated in writing by two of the three following persons, to request the issuance of Letters of Credit under this Agreement: Dominic F. Mammola, Richard Lamishaw, and Richard David. Provided, however, CNB may, in its sole discretion, obtain telephonic clarification, guidance, instruction or confirmation concerning the issuance or other aspects of any Letter of Credit issued hereunder from any one of the following persons on behalf of the Borrower: Dominic F. Mammola, Richard Lamishaw, and Richard David, or any other person designated by Dominic F. Mammola, Richard Lamishaw, and Richard David in writing. 2.1.2 REIMBURSEMENT FOR FUNDING A STANDBY LETTER OF CREDIT. Borrower's obligation to reimburse CNB shall be satisfied by charging Borrower's certificate of deposit given to secure the reimbursement obligation pursuant to Section 7.1.9 3 4 2.2 GUIDANCE LINE FACILITY. CNB shall, at the request of Borrower, consider requests for issuance of Commercial Letters of Credit ("Guidance Line Letters of Credit") and Banker's Acceptances arising from the drawing of such Letters of Credit, from time to time, to, but not including, the Termination Date, which, in the aggregate, including Guidance Line Letters of Credit made, committed and requested, do not exceed the amount of the Guidance Line Facility. 2.2.1 NO COMMITMENT. This Agreement shall not evidence an agreement to issue Letters of Credit by CNB under this Section 2.2 Borrower acknowledges that CNB, by entering into this Agreement agrees to consider, in good faith, requests for issuance of Letters of Credit made by Borrower pursuant to the Guidance Line Facility. CNB shall have the sole and exclusive option to accept or decline requests for issuance of Letters of Credit made by Borrower; however, provided there is no Terminating Event or Event of Default hereunder, CNB agrees to consider requests for Guidance Line Letters of Credit in good faith. Provided, however, CNB's declination of a request to issue a Guidance Line Letter of Credit will not affect Borrower's right to have a Letter of Credit issued under the Standby Letter of Credit Facility, or Borrower's ability to prepay a Letter of Credit. 2.2.2 ISSUANCE OF LETTERS OF CREDIT. (a) Commercial Letters of Credit will be issued to finance the purchase of merchandise, for resale to Phillip Morris, Inc. or Ty, Inc., in accordance with an Irrevocable Letter of Credit Application and Security Agreement submitted by Borrower and incorporated herein by this reference, subject to the terms of this Agreement in the event of any conflict herewith. Letters of Credit will be issued on the normal documentation used by CNB from time to time in accord with the Uniform Customs and Practices for Documentary Credits (1993 Revision) International Chamber of Commerce Publication No. 500. Commercial Letters of Credit will expire no more than one hundred and eighty (180) days after the Termination Date. Published CNB fees and charges, as delivered to Borrower from time to time, will apply to the issuance of Letters of Credit, provided, however, the issuance of each Commercial Letter of Credit shall be subject to a minimum fee of $115.00. (b) For Borrower's convenience and pursuant to its request, Borrower may submit the Irrevocable Letter of Credit Application by telephone facsimile ("FAX") which will include FAX signatures. CNB is authorized to accept faxed documents without any need, requirement or responsibility to verify in any way the genuineness of authenticity of the faxed documents or signatures. Borrower will deliver to CNB an originally executed Irrevocable Letter of Credit Application with fifteen (15) days of each faxing. CNB's failure to receive an original set of documents shall not be deemed or construed in any way to affect the propriety of issuing the Letters of Credit or Borrower's liability to reimburse CNB for the amount of any drawings under the issued Letter of Credit. (c) Borrower hereby authorizes the following persons, or others designated in writing by two of the three following persons, to request the issuance of Letters of Credit under this Agreement: Dominic F. Mammola, Richard Lamishaw, and Richard David. Provided, however, CNB may, in its sole discretion, obtain telephonic clarification, guidance, instruction or confirmation concerning the issuance or other aspects of any Letter of Credit issued hereunder from any one of the following persons on behalf of the Borrower: Dominic F. Mammola, Richard Lamishaw, and Richard David, or any other person designated by Dominic F. Mammola, Richard Lamishaw, and Richard David in writing. 2.2.3 PROCEDURE FOR GUIDANCE LINE LETTERS OF CREDIT. Borrower shall give CNB at least five (5) Business Days advanced written notice of its request for a Guidance Line Letter of 4 5 Credit ("Notice of Request"), which Notice of Request shall specify (a) the amount of the Guidance Line Letter of Credit; (b) the proposed issuance date; (c) the proposed termination date; (d) the proposed drawing language, (e) the written consent of Guarantor, in its sole discretion, to the issuance of the Letter of Credit and (f) the purpose of the Guidance Line Letter of Credit. 2.2.4 CNB'S REVIEW OF SUBMISSIONS. CNB agrees to review the Notice of Request in good faith and respond thereto within three (3) Business Days from CNB's receipt of the Notice of Request unless Borrower is notified within said time that more information is required. CNB's failure to respond shall be deemed a denial of the requested Guidance Line Letter of Credit. CNB shall not be obligated to grant or accept any Notice of Request and may, in its sole discretion, reject any Notice of Request. 2.2.5 ACCEPTANCE OF REQUEST. Only CNB's written notice to Borrower of its unconditional acceptance of a Notice of Request shall constitute a commitment on the part of CNB to issue a Guidance Line Letter of Credit; and provided further that prior to there being any obligation to issue a Letter of Credit on the part of CNB, the conditions precedent set forth in Section 4 below must also be satisfied. 2.2.6 REIMBURSEMENT FOR FUNDING A COMMERCIAL LETTER OF CREDIT. Any sight drawing under a Letter of Credit shall be satisfied by (a) charging Borrower's Demand Deposit Account, (b) immediate wire transfer of funds following demand therefor, or (c) creation of a Banker's Acceptance. All drawings under Letters of Credit which are not payable at sight will be deemed to be requests for the creation of Banker's Acceptances hereunder. 2.2.7 CREATION OF BANKER'S ACCEPTANCES. Banker's Acceptances will be created in response to Borrower's request or the acceptance by CNB of a draft drawn against a Letter of Credit not payable at sight, on the normal documentation used by CNB, and will mature within 120 days. Creation of Banker's Acceptances will be subject to standard CNB fees and charges plus, if applicable, a payment equal to the published CNB Banker's Acceptance discount rate plus one percent (1%). There will be no obligation to accept drafts which would: (a) not be eligible for discount by a Federal Reserve Bank; (b) become a liability subject to reserve requirements under any regulation of the Board of Governors of the Federal Reserve System; or (c) cause CNB to violate any lending limit imposed upon CNB by any law, regulation or administrative order. 2.2.8 REIMBURSEMENT FOR PAYMENT OF BANKER'S ACCEPTANCES. Borrower's obligation to reimburse CNB for payment under any Banker's Acceptance shall be satisfied by charging Borrower's Demand Deposit Account or by immediate wire transfer of funds, following demand therefor, in the event insufficient collected funds are in Borrower's Demand Deposit Account. 2.3 DEFAULT INTEREST RATE. In the event Borrower does not reimburse CNB for payment of any Letter of Credit or Banker's Acceptance, when due hereunder, and, from and after written notice by CNB to Borrower of the occurrence of an Event of Default (and without constituting a waiver of such Event of Default), any amounts due CNB hereunder (and interest to the extent permitted by law) will bear interest at a fluctuating rate equal to the Prime Rate of CNB plus five 5 6 percent (5.0%) per year, until the Event of Default has been cured. All interest provided for in this Section will be compounded monthly and payable on demand. 2.4 PAYMENTS. All payments will be in United States Dollars and in immediately available funds. Interest will accrue daily and will be computed on the basis of a 360-day year, actual days elapsed. 3. TERM AND TERMINATION 3.1 ESTABLISHMENT OF TERMINATION DATE. The term of this Agreement will begin as of the date hereof and continue until the Termination Date, unless the term is renewed upon mutual agreement for an additional period by CNB giving Borrower prior written notice, in which event the Termination Date will mean the renewed maturity date set forth in such notice. Notwithstanding the foregoing, CNB may, at its option, terminate this Agreement pursuant to Section 8.3; the date of any such termination will become the Termination Date as that term is used in this Agreement. 3.2 OBLIGATIONS UPON THE TERMINATION DATE. Borrower will, upon the Termination Date: 3.2.1 Pay the amount of the balance due for reimbursement of the funding of a Letter of Credit or Banker's Acceptance plus any accrued interest, fees and charges; and 3.2.2 Pay CNB cash in the aggregate face amount of the Letters of Credit or Banker's Acceptances outstanding to be held as cash collateral for Borrower's obligation to reimburse CNB upon the funding of such Letters of Credit; and 3.2.3 Pay the amounts due on all other Obligations owing to CNB. In this connection and notwithstanding anything to the contrary contained in the instruments evidencing such Obligations, the Termination Date hereunder will constitute the maturity date of such other Obligations. 3.3 SURVIVAL OF RIGHTS. Any termination of this Agreement will not affect the rights, liabilities and obligations of the parties with respect to any Obligations outstanding on the date of such termination. Until all Obligations have been fully repaid, CNB will retain its security interest in all existing Collateral and Collateral arising thereafter, and Borrower will continue to assign all Accounts to CNB and to immediately turn over to CNB, in kind, all collections received on the Accounts. 4. CONDITIONS PRECEDENT. 4.1 EXTENSION OF CREDIT. The obligation of CNB to issue any Letter of Credit hereunder is subject to CNB's receipt of each of the following, in form and substance reasonably satisfactory to CNB, and duly executed as required by CNB: 4.1.1 All Loan Documents required by CNB, including but not limited to this Agreement and any guaranties required hereunder; 4.1.2 (a) a copy of Borrower's Articles of Incorporation; (b) a Resolution of Borrower's Board of Directors approving and authorizing the execution, delivery and performance of this Agreement and any other documents required pursuant to this Agreement, certified by 6 7 Borrower's corporate secretary; and, (c) a copy of the last certificate filed on behalf of Borrower in the state of its incorporation containing the information with respect to officer, directors agent for service of process, as required by the laws of the state of incorporation; 4.1.3 (a) executed copies (and acknowledgement copies to the extent reasonably available) of financing statements (Form UCC-1) duly filed under the Code in all such jurisdictions as may be necessary or, in CNB's reasonable opinion, desirable to perfect CNB's security interests created under this Agreement; and (b) evidence that all filings, recordings and other actions that are necessary or advisable, in CNB's reasonable opinion, to establish, preserve and perfect CNB's security interests and liens as legal, valid and enforceable first security interests and liens in the Collateral have been effected; and 4.1.4 The Guaranty executed by the Guarantor. 4.2 CONDITIONS TO EACH EXTENSION OF CREDIT. The obligation of CNB to issue any Letter of Credit hereunder will be subject to the fulfillment of each of the following conditions to CNB's reasonable satisfaction: 4.2.1 The representations and warranties of Borrower set forth in Section 5 will be true and correct on the date of the making of each Loan or other extension of credit with the same effect as though such representations and warranties had been made on and as of such date; 4.2.2 There will be in full force and effect in favor of CNB a legal, valid and enforceable first security interest in, and a valid and binding first lien on the Collateral; and CNB will have received evidence, in form and substance acceptable to CNB, that all filings, recordings and other actions that are necessary or advisable, in the reasonable opinion of CNB, in order to establish, protect, preserve and perfect CNB's security interests and liens as legal, valid and enforceable first security interests and liens in the Collateral have been effected; 4.2.3 There will have occurred no Event of Default or Terminating Event; and 4.2.4 All other documents and legal matters in connection with the transactions described in this Agreement will be reasonably satisfactory in form and substance to CNB. 5. REPRESENTATIONS AND WARRANTIES. Borrower makes the following representations and warranties, which will survive the making and repayment of the reimbursement obligation under any Letter of Credit or Banker's Acceptance. 5.1 FINANCIAL CONDITION. The most recent financial statements of Borrower, copies of which have been delivered to CNB, have been prepared in accordance with GAAP and are true, complete and correct and fairly present the financial condition of Borrower, including operating results, as of the accounting period referenced therein. There has been no material adverse change in the financial condition or business of Borrower since the date of such financial statements. Borrower has no material liabilities for taxes or long-term leases or commitments, except as disclosed in the financial statements. 5.2 NO VIOLATIONS. Borrower is not in violation of any law, ordinance, rule or regulation to which it or any of its properties is subject, which would have a material adverse affect on the property or operations of Borrower. 7 8 5.3 COLLATERAL. Borrower owns and has possession of and has the right and power to grant a security interest in the Collateral, and the Collateral is genuine and free from material liens, adverse claims, set-offs, defaults, prepayments, defenses and encumbrances except those in favor of CNB. No bills of lading, warehouse receipts or other documents or instruments of title are outstanding with respect to the Collateral or any portion of the Collateral, in favor of a Person other than Borrower. The office where Borrower keeps its records concerning all Accounts is set forth in Section 9.6. 5.4 ERISA. Borrower is in compliance in all material respects with all applicable provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"). No "Reportable Event" (as defined in ERISA and the regulations issued thereunder [other than a "Reportable Event" not subject to the provision for thirty (30) day notice to the Pension Benefit Guaranty Corporation ("PBGC") under such regulations]) has occurred with respect to any benefit plan of Borrower nor are there any unfunded vested liabilities under any benefit plan of Borrower. Borrower has met its minimum funding requirements under ERISA with respect to each of its plans and has not incurred any material liability to the PBGC in connection with any such plan. 6. AFFIRMATIVE COVENANTS. Borrower agrees that until payment in full of all Obligations, Borrower will comply with the following covenants: 6.1 COLLATERAL. Borrower shall execute and deliver to CNB any instrument, document, financing statement, assignment or other writing which CNB may reasonably deem necessary or desirable to carry out the terms of this Agreement, to perfect CNB's security interest in any Collateral for the Obligations, or to enable CNB to enforce its security interest in any of the foregoing. 6.2 FINANCIAL STATEMENTS. Borrower will furnish to CNB on a continuing basis; 6.2.1 Within sixty (60) days after the end of each of the first three quarterly accounting periods of each fiscal year, a financial statement consisting of not less than a balance sheet and income statement, prepared in accordance with GAAP, which financial statement may be internally prepared; 6.2.2 Within one hundred and twenty (120) days after the close of Borrower's fiscal year, a copy of the annual audit report for Borrower including therein a balance sheet, income statement, reconciliation of net worth and statement of cash flows, with notes thereto, the balance sheet, income statement and statement of cash flows to be audited by a certified public accountant reasonably acceptable to CNB, certified by such accountant to have been prepared in accordance with GAAP and accompanied by Borrower's certification as to whether any event has occurred which constitutes an Event of Default or Terminating Event, and if so, stating the facts with respect thereto; 6.3 TAXES AND PREMIUMS. Borrower will, pay and discharge all taxes, assessments, governmental charges, and real and personal taxes including, but not limited to, federal and state income taxes, employee withholding taxes and payroll taxes, and all premiums for insurance required hereunder, prior to the date upon which penalties are attached thereto, except those being contested in good faith. 6.4 NOTICE. Borrower will promptly advise CNB in writing of (a) the opening of any new, or the closing of any existing, principal place of business, each location at which Inventory or equipment is or will be kept, and any change of Borrower's name, trade name or other name under which it does business or of any such new or additional name; (b) the occurrence of any Event of Default or Terminating Event; (c) any litigation pending or threatened where the non-insured amount 8 9 or amounts in controversy exceed $500,000 other than those matters described in Schedule 1, attached hereto; (d) any unpaid taxes in excess of $100,000 which are more than fifteen (15) days delinquent and not being contested in good faith; and (e) any other matter which, in Borrower's reasonable opinion, might materially or adversely affect Borrower's financial condition, property or business. 6.5 FAIR LABOR STANDARDS ACT. Borrower will comply with the requirements of, and all regulations promulgated under, the Fair Labor Standards Act. 6.6 CORPORATE EXISTENCE. Borrower will maintain its corporate existence and all of its rights, privileges and franchises necessary or desirable in the normal course of its business. 6.7 COMPLIANCE WITH LAW. Borrower will comply in all material respects with all requirements of all applicable laws, rules, regulations (including, but not limited to, ERISA with respect to each of their benefit plans, and all environmental and hazardous materials laws), orders and all material agreements with any governmental agency to which they are a party. 6.8 EVENT OF DEFAULT. Borrower and Guarantor will not permit a default to occur under any document or instrument evidencing Debt incurred under any indenture, agreement or other instrument under which such Debt may be issued, including but not limited to those in favor of CNB, or any event to occur under any of the foregoing which would permit any holder of the Debt outstanding thereunder to declare the same due and payable before its stated maturity, whether or not such acceleration occurs or such default be waived. 6.9 MINIMUM LIQUIDITY. Guarantor shall maintain Liquid Assets of at least the greater of (a) $20,000,000.00, or (b) the face amount of outstanding Letters of Credit, Banker's Acceptances and Revolving Credit Loans, outstanding pursuant to (and as each is defined in) the Amended and Restated Credit and Security Agreement dated as of December 15, 1999, between Guarantor and CNB, as amended, excluding therefrom such obligations which are secured by cash or a deposit account. Compliance with this provision shall be tested quarterly, or at such other time as CNB may determine upon reasonable notice to Borrower. 7. SECURITY AGREEMENT. 7.1 GRANT OF SECURITY INTEREST. To secure all Obligations hereunder arising under the Guidance Line Facility, Borrower hereby grants and transfers to CNB a continuing security interest in the following property whether now owned or hereafter acquired, which security interest shall remain in existence until this Agreement has been terminated when there are no Obligations outstanding and, upon such termination, CNB shall promptly comply with the requirements of Code Section 9404(1), or any successor statute, with respect to termination of any UCC-1 Financing Statement on file.: 7.1.1 All of Borrower's Inventory; 7.1.2 All of Borrower's Accounts; 7.1.3 All of Borrower's general intangibles as that term is defined in the Code; 7.1.4 All of Borrower's equipment, as that term is defined in the Code; 9 10 7.1.5 All of Borrower's interest in any patents (now existing or pending), copyrights, trade names, trademarks and service marks useful to the operation of Borrower's business; 7.1.6 All notes, drafts, acceptances, instruments, documents of title, policies and certificates of insurance, chattel paper, guaranties and securities now or hereafter received by Borrower or in which Borrower has or acquires an interest; 7.1.7 All cash and noncash proceeds of the foregoing property, including, without limitation, proceeds of policies of fire, credit or other insurance; 7.1.8 All of Borrower's books and records pertaining to any of the Collateral described in this Section 7.1; and 7.1.9 Any other Collateral which CNB and Borrower may designate as additional security from time to time by separate instruments. 7.2 NOTIFICATION OF ACCOUNT DEBTORS. CNB will have the right to notify any Account Debtor to make payments directly to CNB, take control of the cash and noncash proceeds of any Account, and settle any Account, which right CNB may exercise at any time an Event of Default has occurred regardless of whether Borrower was theretofore making collections thereon. Until CNB elects to exercise such right, Borrower is authorized on behalf of CNB to collect and enforce the Accounts. 7.3 ATTORNEY-IN-FACT. Upon the occurrence of an Event of Default, CNB or any of its officers is hereby irrevocably made the true and lawful attorney for Borrower with full power of substitution to do the following: (a) endorse the name of Borrower upon any and all checks, drafts, money orders and other instruments for the payment of moneys which are payable to Borrower and constitute collections on Accounts; (b) execute in the name of Borrower any schedules, assignments, instruments, documents and statements which Borrower is obligated to give CNB hereunder; (c) receive, open and dispose of all mail addressed to Borrower; (d) notify the Post Office authorities to change the address for delivery of mail addressed to Borrower to such address as CNB will designate; and (e) do such other acts in the name of Borrower which CNB may deem necessary or desirable to enforce any Account or other Collateral. The powers granted CNB hereunder are solely to protect its interests in the Collateral and will not impose any duty upon CNB to exercise any such powers. 8. EVENTS OF DEFAULT AND PROCEEDINGS UPON DEFAULT. 8.1 EVENTS OF DEFAULT. Borrower's fails to pay when due any reimbursement obligation arising under this Agreement or any other amount payable under this Agreement, subject to the provisions of Section 8.4, CNB will give Borrower at least ten (10) days' written notice of any event which constitutes an Event of Default, during which time Borrower will be entitled to cure same. 8.2 TERMINATING EVENTS. Borrower's right to request the issuance of Letters of Credit shall be suspended during the existence of any the following Terminating Events, and shall be permanently terminated if such Terminating Event is not cured within thirty (30) Business Days after Borrower's receipt of written notice from CNB specifying the Terminating Event which has occurred: 8.2.1 Any Person, which is a party to any Loan Document fails to perform or observe any of the terms, provisions, covenants, agreements or obligations; 10 11 8.2.2 Any financial statement, representation or warranty made or furnished by Borrower in connection with the Loan Documents proves to be in any material respect incorrect; 8.2.3 The entry of an order for relief or the filing of an involuntary petition, which remains undismissed after sixty (60) days, with respect to Borrower under the United States Bankruptcy Code; the appointment of a receiver, trustee, custodian or liquidator of or for any part of the assets or property of Borrower or Borrower makes a general assignment for the benefit of creditors; 8.2.4 CNB's security interest in or lien on any portion of the Collateral becomes impaired or otherwise unenforceable; 8.2.5 Any Person obtains an order or decree in any court of competent jurisdiction enjoining or prohibiting Borrower or CNB from performing any material term of this Agreement, and such proceedings are not dismissed or such decree is not vacated within ten (10) days after the granting thereof; 8.2.6 Borrower neglects, fails or refuses to keep in full force and effect any governmental permit, license or approval which is necessary to the operation of its business and such failure has a material impact on the ability of Borrower to operate its business; 8.2.7 All or substantially all of the property of Borrower is condemned, seized or otherwise appropriated; 8.2.8 The occurrence of (a) a Reportable Event (as defined in ERISA) which CNB determines in good faith constitutes grounds for the institution of proceedings to terminate any pension plan by the PBGC, (b) an appointment of a trustee to administer any pension plan of Borrower, or (c) any other event or condition which might constitute grounds under ERISA for the involuntary termination of any pension plan of Borrower, where such event set forth in (a), (b) or (c) results in a significant monetary liability to Borrower; or 8.2.9 The Termination Date is not extended. 8.3 CNB's REMEDIES. Upon the occurrence of an Event of Default, at the sole and exclusive option of CNB, and upon written notice to Borrower, CNB may (a) demand amounts set forth in Section 3.2 immediately due and payable in full, whereupon the same will immediately become due and payable; (b) terminate this Agreement as to any future liability or obligation of CNB, but without affecting CNB's rights and security interest in the Collateral and without affecting the Obligations owing by Borrower to CNB; and/or (c) exercise its rights and remedies under the Loan Documents and all rights and remedies of a secured party under the Code and other applicable laws with respect to the Collateral. 8.4 ADDITIONAL REMEDIES. Notwithstanding any other provision of this Agreement, upon the occurrence of any event, action or inaction by Borrower, or if any action or inaction is threatened which CNB reasonably believes will materially affect the value of the Collateral, CNB may take such legal actions as it deems necessary to protect the Collateral, including, but not limited to, seeking injunctive relief and the appointment of a receiver, whether an Event of Default or Terminating Event has occurred under this Agreement. 11 12 9. MISCELLANEOUS 9.1 REIMBURSEMENT OF COSTS AND EXPENSES. Borrower will reimburse CNB for all costs and expenses relating to this Agreement including, but not limited to, filing, recording or search fees, audit or verification fees, appraisals of the Collateral and other out-of-pocket expenses, and reasonable attorney's fees and expenses expended or incurred by CNB in collecting any sum which becomes due CNB under the Loan Documents, irrespective of whether suit is filed, or in the protection, perfection, preservation or enforcement of any and all rights of CNB in connection with the Loan Documents, including, without limitation, the fees and costs incurred in any out-of-court workout or a bankruptcy or reorganization proceeding. 9.2 DISPUTE RESOLUTION 9.2.1 MANDATORY ARBITRATION. At the request of CNB or Borrower, any dispute, claim or controversy of any kind (whether in contract or tort, statutory or common law, legal or equitable) now existing or hereafter arising between CNB and Borrower and in any way arising out of, pertaining to or in connection with: (1) this Agreement, and/or any renewals, extensions, or amendments thereto; (2) any of the Loan Documents; (3) any violation of this Agreement or the Loan Documents; (4) all past, present and future loans; (5) any incidents, omissions, acts, practices or occurrences arising out of or related to this Agreement or the Loan Documents causing injury to either party whereby the other party or its agents, employees or representatives may be liable, in whole or in part, or (6) any aspect of the present or future relationships of the parties, will be resolved through final and binding arbitration conducted at a location determined by the arbitrator in Los Angeles County, California, and administered by the American Arbitration Association ("AAA") in accordance with the California Arbitration Act (Title 9, California Code of Civil Procedure Section 1280 et. seq.) and the then existing Commercial Rules of the AAA. Judgement upon any award rendered by the arbitrator(s) may be entered in any state or federal court having jurisdiction thereof. 9.2.2 PROVISIONAL REMEDIES, SELF HELP AND FORECLOSURE. No provision of this Agreement will limit the right of any party to: (1) exercise any rights or remedies as a secured party against any personal property collateral pursuant to the terms of a security agreement or pledge agreement, or applicable law, (2) exercise self help remedies such as setoff, or (3) obtain provisional or ancillary remedies such as injunctive relief or the appointment of a receiver from a court having jurisdiction before, during or after the pendency of any arbitration or referral. The institution and maintenance of an action for judicial relief or pursuit of provisional or ancillary remedies, or exercise of self help remedies will not constitute a waiver of the right of any party, including the plaintiff, to submit any dispute to arbitration or judicial reference. 9.2.3 POWERS AND QUALIFICATIONS OF ARBITRATORS. The arbitrator(s) will give effect to statutes of limitation, waiver and estoppel and other affirmative defenses in determining any claim. Any controversy concerning whether an issue is arbitratable will be determined by the arbitrator(s). The laws of the State of California will govern. The arbitration award may include equitable and declaratory relief. All arbitrator(s) selected will be required to be a practicing attorney or retired judge licensed to practice law in the State of California and will be required to be experienced and knowledgeable in the substantive laws applicable to the subject matter of the controversy or claim at issue. 9.2.4 DISCOVERY. The provisions of California Code of Civil Procedure Section 1283.05 or its successor section(s) are incorporated herein and made a part of this Agreement. 12 13 Depositions may be taken and discovery may be obtained in any arbitration under this Agreement in accordance with said section(s). 9.2.5 MISCELLANEOUS. The arbitrator(s) will determine which is the prevailing party and will include in the award that party's reasonable attorneys' fees and costs (including allocated costs of in-house legal counsel). Each party agrees to keep all controversies and claims and the arbitration proceedings strictly confidential, except for disclosures of information required in the ordinary course of business of the parties or by applicable law or regulation. 9.3 CUMULATIVE RIGHTS AND NO WAIVER. All rights and remedies granted to CNB under the Loan Documents are cumulative and no one such right or remedy is exclusive of any other. No failure or delay on the part of CNB in exercising any right or remedy will operate as a waiver thereof, and no single or partial exercise or waiver by CNB of any such right or remedy will preclude any further exercise thereof or the exercise of any other right or remedy. 9.4 APPLICABLE LAW. This Agreement will be governed by California law. 9.5 LIEN AND RIGHT OF SET-OFF. Subject to Section 7.1, Borrower grants to CNB a continuing lien for all Obligations of Borrower to CNB, arising under the Guidance Line Facility, upon any and all moneys, securities and other property of Borrower and the proceeds thereof, now or hereafter held or received by or in transit to CNB from or for Borrower, whether for safekeeping, custody, pledge, transmission, collection or otherwise, and also upon any and all deposits (general or special) and credits of Borrower with, and any and all claims of Borrower against, CNB at any time existing. Upon the occurrence of any Event of Default, CNB is hereby authorized at any time and from time to time, without notice to Borrower or any other Person to setoff, appropriate and apply any or all items hereinabove referred to against all Obligations of Borrower, arising under the Guidance Line Facility, and whether now existing or hereafter arising. 9.6 NOTICES. Any notice required or permitted under any Loan Document will be given in writing and will be deemed to have been given when personally delivered or when sent by the U.S. mail, postage prepaid, certified, return receipt requested, properly addressed. For the purposes hereof, the addresses of the parties will, until further notice given as herein provided, be as follows: CNB: City National Bank Westside Commercial Banking Center 400 N. Roxbury Drive, Second Floor Beverly Hills, CA 90210 Attention: May Poole, Vice President with copy to: City National Bank, Legal Department 400 North Roxbury Drive Beverly Hills, California 90210-5021 Attention: Managing Counsel, Credit Unit Borrower: Simon Worldwide, Inc. 101 Edgewater Drive Wakefield, MA 01880 Attention: Nick Mammola 13 14 with copies to: Simon Marketing, Inc. 1900 Avenue of the Stars, Suite 550, Los Angeles, CA 90067-4301 Attention: Chief Financial Officer Attention: General Counsel 9.7 ASSIGNMENTS. The provisions of this Agreement are hereby made applicable to and will inure to the benefit of CNB's successor and assigns and Borrower's successors and assigns; provided, however, that Borrower may not assign or transfer its rights or obligations under this Agreement without the prior written consent of CNB. 9.8 INDEMNIFICATION. Borrower will, at all times, defend and indemnify and hold CNB harmless from and against any and all claims arising out of or resulting from (a) any breach of the representations, warranties, agreements or covenants made by Borrower herein; (b) any suit or proceeding of any kind or nature whatsoever against CNB arising from or connected with the transactions contemplated by this Agreement, the Loan Documents or any of the rights and properties assigned to CNB hereunder, other than to the extent arising from CNB's gross negligence or willful misconduct; and/or (c) any suit or proceeding that CNB reasonably may deem necessary or advisable to institute, in the name of CNB, Borrower or both, against any other Person, for any reason whatsoever to protect the substantive rights of CNB hereunder or under any of the documents, instruments or agreements executed or to be executed pursuant hereto, including reasonable attorneys' fees and court costs and all other costs and expenses incurred by CNB (or allocable to CNB's in-house counsel), all of which will be charged to and paid by Borrower and will be secured by the Collateral. Any obligation or liability of Borrower to CNB under this Section will survive the Termination Date and the repayment of all Loans and other extensions of credit and the payment or performance of all other Obligations of Borrower to CNB. 9.9 COMPLETE AGREEMENT. This Agreement, together with other Loan Documents, constitutes the entire agreement of the parties and supersedes any prior or contemporaneous oral or written agreements or understandings, if any, which are merged into this Agreement. This Agreement may be amended only in a writing signed by Borrower and CNB. 9.10 HEADINGS. Section headings in this Agreement are included for convenience of reference only and do not constitute a part of the Agreement for any purpose. 9.11 ACCOUNTING TERMS. Except as otherwise stated in this Agreement, all accounting terms and financial covenants and information will be construed in conformity with, and all financial data required to be submitted will be prepared in conformity with, GAAP as in effect on the date hereof. 9.12 SEVERABILITY. Any provision of the Loan Documents which is prohibited or unenforceable in any jurisdiction, will be, only as to such jurisdiction, ineffective to the extent of 14 15 such prohibition or unenforceability, but all the remaining provisions of the Loan Documents will remain valid. 9.13 COUNTERPARTS. This Agreement may be signed in any number of counterparts which, when taken together, will constitute but one agreement. IN WITNESS WHEREOF, CNB and Borrower have caused this Agreement to be executed as of the date first specified at the beginning of this Agreement. BORROWER SIMON WORLDWIDE, INC., a Delaware corporation By: ___________________________________ Dominic F. Mammola, Executive Vice President/Chief Financial Officer CNB CITY NATIONAL BANK, a national banking association By: ___________________________________ May Poole, Vice President ACKNOWLEDGED AND AGREED: SIMON MARKETING, INC., a Delaware corporation By: ___________________________________ Richard Lamishaw, Executive Vice President/Chief Financial Officer 15 EX-99.1 4 b40102swex99-1.txt AMENDED CAUTIONARY STATEMENT 1 EXHIBIT 99.1 AMENDED CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 From time to time, Simon Worldwide, Inc ("Simon Worldwide") may provide forward-looking information such as forecasts of expected future performance or statements about Simon Worldwide'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 Simon Worldwide. Simon Worldwide desires to take advantage of the "Safe Harbor" provisions of the Private Securities Litigation Reform Act of 1995 and is including this Exhibit 99.1 in this Form 10-Q in order to do so. Simon Worldwide wishes to caution readers that the following important factors, among others, in some cases have affected, and in the future could affect, Simon Worldwide's actual results and could cause Simon Worldwide's actual consolidated results for Simon Worldwide's current quarter and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of, Simon Worldwide. DEPENDENCE ON PRINCIPAL CUSTOMERS In recent years, our business has been heavily dependent on purchases of promotional products by our key customers including Philip Morris Incorporated ("Philip Morris"). Additionally, the business of our subsidiary, Simon Marketing, Inc., is heavily dependent on purchases of promotional products and services by McDonald's Corporation ("McDonalds") or its franchisees for which it receives an annual fee. Our business, sales and results of operations will be materially adversely affected by a loss of Philip Morris or McDonald's or a significant reduction in their level of purchases from us without an offsetting increase in purchases by new or other existing customers. LIMITED CUSTOMER COMMITMENTS As is generally the case with our other promotional product customers, our agreements with Philip Morris and McDonald's do not require them to make a certain level of purchases. Instead, purchase commitments are represented by purchase orders placed by the customers from time to time during the course of a promotion. The actual level of purchases by Philip Morris, McDonald's and other promotional products customers depends on a number of factors, including the duration of the promotion and consumer redemption rates. Purchase orders are generally subject to cancellation with limited penalty. Consequently, our level of net sales is difficult to predict accurately and can fluctuate greatly from quarter to quarter. 2 PROMOTIONAL PRODUCT AND MARKETING SPEND Our business is driven by the spending of companies to promote and market their corporate identities and brand name products. If the demand for brand name products diminishes or if our customers decrease their use of promotional product programs or reduce their marketing spend to promote their corporate identities and brands, our business will be materially adversely affected. In addition, our relationship with certain of our promotional products customers has been limited to the sourcing of products being offered or sold by the customer in connection with a single promotional program. There can be no assurance that such customers will continue to use us to source products for future promotional programs. COMPETITION The promotional products industry is highly fragmented and competitive, and some of our competitors have substantially greater financial and other resources than we do. We also compete with the services of in-house advertising, promotional products and purchasing departments and with designers and vendors of single or multiple product lines. Philip Morris and certain of our other customers seek competitive bids for their promotional programs. Our profit margin depends, to a great extent, on our competitive position when bidding and our ability to continually decrease product costs after being awarded bids. Competition is not expected to abate and thus will continue to exert pressure on our profit margin in the future. ASIAN ECONOMIC PROBLEMS The majority of our net sales in recent years have been attributable to products manufactured by subcontractors located in Asia. We have no long-term contracts with these manufacturing sources and often compete with other companies for production facilities and import quota capacity. In addition, many Asian manufacturers require that a letter of credit be posted at the time a purchase order is placed. There can be no assurance that we will continue to have the necessary credit facilities in order to post such letters of credit. Our business is subject to the risks normally associated with conducting business abroad, such as: - foreign government regulations; - political unrest; - disruptions or delays in shipments; - fluctuations in foreign currency exchange rates; and - changes in economic conditions in countries in which our manufacturing sources are located. 3 If any such factors were to render the conduct of our business in a particular country undesirable or impractical, or if our current foreign manufacturing sources were to cease doing business with us for any reason, our business, sales and operating results could be materially adversely affected. IMPORTS AND IMPORT RESTRICTIONS The importation of products manufactured in Asia is subject to the constraints imposed by bilateral agreements between the United States and substantially all of the countries from which we import goods. These agreements impose quotas that limit the quantity of certain types of goods, including textile products imported by us, which can be imported into the United States from those countries. These agreements also allow the United States to impose, under certain conditions, restraints on the importation of categories of merchandise that, under the terms of the agreements, are not subject to specified limits. Our continued ability to source products through imports may be harmed by: - additional bilateral and multilateral agreements; - unilateral trade restrictions; - significant decreases in import quotas; - the disruption of trade from exporting countries as a result of political instability; or - the imposition of additional duties, taxes and other charges or restrictions on imports. Products imported by us from China currently receive the same preferential tariff treatment accorded goods from countries granted permanent "normal trade relations". However, the annual renewal by Congress of normal trade relations with China has been a contentious political issue for several years and there can be no assurance that such relations will be continued. If China were to lose its grant of normal trade relations with the U.S., goods imported from China would be subject to significantly higher duty rates which would increase the cost of goods from China and could materially harm our business. 4 EFFECT OF INDUSTRY CONDITIONS FACING SIMON WORLDWIDE'S CUSTOMERS Our business is heavily dependent on the promotional budgets of our customers, which in turn are influenced by industry conditions and other factors. Accordingly, industry conditions faced by Philip Morris in particular and conditions in the tobacco industry in general are expected to impact our business. There can be no assurance that these conditions will not lead to a reduction in advertising and promotional spending by Philip Morris, or that Philip Morris will not change its advertising and promotional strategy in a manner that reduces the use of promotional programs such as the Marlboro Adventure Team, Country Store and Unlimited promotions. A significant reduction in spending by Philip Morris on promotional product programs without an offsetting increase in purchases by existing or new customers could materially adversely affect our business, sales and results of operations. For example, on November 23, 1998, certain tobacco companies, including Philip Morris, entered into a settlement agreement with 46 states and five United States territories that effectively ended the lawsuits brought by the states against the tobacco industry over public-health costs connected with smoking. Beginning on July 1, 1999, this settlement prohibits the use of brand names by tobacco companies in connection with promotional programs relating to tobacco products. The settlement agreement, however, does not prohibit the use of Philip Morris's corporate name in promotional programs. Due to the restrictions on the use of tobacco brand names and the other limitations imposed by the settlement agreement on the tobacco industry, the settlement agreement could materially and adversely affect our sales to Philip Morris which in turn could materially harm our business and results of operations. The settlement agreement does not affect the ability of private litigants to sue the tobacco industry, and several private lawsuits and class actions are currently pending in state and federal courts. Adverse judgments in these or other actions could result in a reduction or change in spending by Philip Morris on promotional product programs which in turn could materially harm our business and results of operations. For instance, on July 14, 2000, a Florida jury awarded a record $145 billion judgment against the world's leading tobacco companies in favor of sick smokers in that state, nearly $74 billion of which is to be paid by Philip Morris. The United States Food and Drug Administration, or the FDA, had issued final regulations with respect to promotional programs relating to tobacco products. These regulations had, among other things, banned: - gifts based on proof of purchase of tobacco products or redeemable coupons; - the use of tobacco brand names or any other indices of tobacco brand identification on non-tobacco products (e.g. T-shirts, hats, other clothing, gym bags and trinkets); and - brand-name sponsorship of sporting events, concerts and other events. 5 On March 22, 2000, the Supreme Court ruled that the FDA does not have jurisdiction to regulate tobacco products due to a lack of a clear Congressional mandate. If Congress acts either (1) to delegate to the FDA the power to regulate tobacco products, or (2) to regulate tobacco products through another vehicle, such action may result in a reduction or change in spending by Philip Morris on promotional product programs which in turn could materially harm our business and results of operations. DEPENDENCE ON KEY PERSONNEL We are dependent on several key personnel, including Allan I. Brown, our Chief Executive Officer and President. The loss of the services of Mr. Brown or other key personnel could harm our business. In addition, our continued success also depends upon our ability to retain and attract skilled design, marketing and management personnel. The loss of one or several members of such personnel could have a material adverse effect on our business. SALE OF CPG AND NEW CORPORATE STRUCTURE In December 2000, we decided to sell our CPG division and, in February 2001, we announced that we had sold our CPG division, which was comprised principally of two of our subsidiaries, Tonkin, Inc., or Tonkin, and Cyrk Acquisition Corp., or CAC. The sale is described in our report filed on Form 8-K dated February 15, 2001 which is incorporated herein by reference. In connection with the sale, we agreed not to compete in the CPG business in the United States for a period of five years after the closing of the sale. There can be no assurance that the sale of the CPG division will result in long term benefits. We are effecting a new corporate structure enabled by the sale of the CPG division that will operate globally. This corporate structure is primarily comprised of the operations of our Simon Marketing subsidiary and certain significant legacy custom product clients. In connection with this new structure, certain of our executive officers resigned in June 2001 as described in our report filed on Form 8-K dated June 15, 2001. There is no assurance that this new structure will be successfully effected in a manner that will have a positive impact on our business, sales or operating results. ACQUISITIONS, INVESTMENTS, STRATEGIC ALLIANCES OR OTHER ALTERNATIVES We may acquire or invest in other businesses which are complementary to our business or enter into strategic alliances with such businesses, or explore other strategic alternatives for Simon Worldwide. In addition, we have made and may continue to make venture investments. There can be no assurance that any current or future acquisition, strategic or venture investment or strategic alliance or strategic alternative will result in long-term benefits. If we are not successful in our acquisitions, investments or alliances or any other financial or strategic alternatives, our business and operating results in the future may be harmed. Our Internet venture investments are subject to all the risks inherent in the Internet marketplace including the growth of the number of users, concerns about systems and transaction security, continued development of technological infrastructure, increasing government regulation of the Internet, rapid technology changes rendering existing technology obsolete, the possibility of system downtime and/or failure due to technological or other factors beyond our control, and the fact that legal standards relating to intellectual property rights in Internet-related business are uncertain and evolving, and are further subject to valuation volatility of this sector within the investment 6 community. In addition, the early stage Internet companies have a high degree of dependence on ready access to the capital markets and, as such, are highly vulnerable to the pace and scale of change in the capital markets. -----END PRIVACY-ENHANCED MESSAGE-----