10-Q 1 b52116swe10vq.txt SIMON WORLDWIDE, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended SEPTEMBER 30, 2004 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.) 5200 WEST CENTURY BOULEVARD, LOS ANGELES, CALIFORNIA 90045 (Address of principal executive offices) (Zip code) (310) 417-4660 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by a check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). [ ] At October 31, 2004, 16,653,193 shares of the registrant's common stock were outstanding. SIMON WORLDWIDE, INC. FORM 10-Q TABLE OF CONTENTS
PAGE NUMBER PART I FINANCIAL INFORMATION Item 1. Condensed Financial Statements (Unaudited) Consolidated Balance Sheets - September 30, 2004, and December 31, 2003 3 Consolidated Statements of Operations - For the three and nine months ended September 30, 2004 and 2003 4 Consolidated Statements of Cash Flows - For the nine months ended September 30, 2004 and 2003 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 14 Item 4. Controls and Procedures 14 PART II OTHER INFORMATION Item 1. Legal Proceedings 15 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 15 Item 3. Defaults Upon Senior Securities 15 Item 4. Submission of Matters to a Vote of Security Holders 15 Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 15 SIGNATURE 16
2 PART I - FINANCIAL INFORMATION ITEM 1. CONDENSED FINANCIAL STATEMENTS SIMON WORLDWIDE, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
September 30, December 31, 2004 2003 ------------- ------------ (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 16,337 $ - Restricted cash 5,873 334 Prepaid expenses and other current assets 110 740 Assets from discontinued operations to be disposed of - current (see Note 4) 5,562 16,827 --------- --------- Total current assets 27,882 17,901 Property and equipment, net 13 33 Investments 500 500 Other assets 197 276 --------- --------- 28,592 18,710 Assets from discontinued operations to be disposed of - non-current (see Note 4) 246 1,128 --------- --------- $ 28,838 $ 19,838 ========= ========= LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable: Trade $ 84 $ 75 Affiliates 164 161 Accrued expenses and other current liabilities 48 123 Liabilities from discontinued operations - current (see Note 4) 5,808 17,955 --------- --------- Total current liabilities 6,104 18,314 Commitments and contingencies Redeemable preferred stock, Series A1 senior cumulative participating convertible, $.01 par value, 29,608 shares issued and outstanding at September 30, 2004, and 28,737 shares issued and outstanding at December 31, 2003, stated at redemption value of $1,000 per share 29,608 28,737 Stockholders' deficit: Common stock, $.01 par value, 50,000,000 shares authorized, 16,653,193 shares issued and outstanding at September 30, 2004, and December 31, 2003 167 167 Additional paid-in capital 138,500 138,500 Retained deficit (145,541) (165,880) --------- --------- Total stockholders' deficit (6,874) (27,213) --------- --------- $ 28,838 $ 19,838 ========= =========
See the accompanying Notes to Condensed Consolidated Financial Statements. 3 SIMON WORLDWIDE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except per share data)
For the three months For the nine months ended September 30, ended September 30, ---------------------- ---------------------- 2004 2003 2004 2003 -------- -------- -------- -------- Revenue $ - $ - $ - $ - General and administrative expenses 618 1,228 2,278 4,102 -------- -------- -------- -------- Loss from continuing operations before income taxes (618) (1,228) (2,278) (4,102) Income tax benefit - - - - -------- -------- -------- -------- Net loss from continuing operations (618) (1,228) (2,278) (4,102) Income (loss) from discontinued operations, net of tax (see Note 4) 24,520 (311) 23,491 (330) -------- -------- -------- -------- Net income (loss) 23,902 (1,539) 21,213 (4,432) Preferred stock dividends 292 282 874 840 -------- -------- -------- -------- Net income (loss) available to common stockholders $ 23,610 $ (1,821) $ 20,339 $ (5,272) ======== ======== ======== ======== Loss per share from continuing operations available to common stockholders: Loss per common share - basic and diluted $ (0.05) $ (0.09) $ (0.19) $ (0.30) ======== ======== ======== ======== Weighted average shares outstanding - basic and diluted 16,653 16,653 16,653 16,653 ======== ======== ======== ======== Income (loss) per share from discontinued operations: Income (loss) per common share - basic and diluted $ 1.47 $ (0.02) $ 1.41 $ (0.02) ======== ======== ======== ======== Weighted average shares outstanding - basic and diluted 16,653 16,653 16,653 16,653 ======== ======== ======== ======== Net income (loss) available to common stockholders: Net income (loss) per common share - basic and diluted $ 1.42 $ (0.11) $ 1.22 $ (0.32) ======== ======== ======== ======== Weighted average shares outstanding - basic and diluted 16,653 16,653 16,653 16,653 ======== ======== ======== ========
See the accompanying Notes to Condensed Consolidated Financial Statements. 4 SIMON WORLDWIDE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
For the nine months ended September 30, 2004 2003 -------- -------- Cash flows from operating activities: Net income (loss) $ 21,213 $ (4,432) Income (loss) from discontinued operations 23,491 (330) -------- -------- Loss from continuing operations (2,278) (4,102) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation 20 46 Increase (decrease) in cash from changes in working capital items: Prepaid expenses and other current assets 630 1,046 Accounts payable 12 27 Accrued expenses and other current liabilities (75) (446) -------- -------- Net cash used in operating activities (1,691) (3,429) -------- -------- Cash flows from investing activities: Purchase of property and equipment - (27) Decrease (increase) in restricted cash (5,539) 2,608 Other, net 79 - -------- -------- Net cash provided by (used in) investing activities (5,460) 2,581 -------- -------- Net cash provided by financing activities - - -------- -------- Net cash used in continuing operations (7,151) (848) Net cash provided by (used in) discontinued operations 23,488 (333) -------- -------- Net increase (decrease) in cash and cash equivalents 16,337 (1,181) Cash and cash equivalents, beginning of period - 1,181 -------- -------- Cash and cash equivalents, end of period $ 16,337 $ - ======== ======== Supplemental disclosure of cash flow information: Cash paid during the period for: Income taxes $ 14 $ 9 ======== ======== Supplemental non-cash investing activities: Dividends paid in kind on redeemable preferred stock $ 871 $ 837 ======== ========
See the accompanying Notes to Condensed Consolidated Financial Statements. 5 SIMON WORLDWIDE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared by Simon Worldwide, Inc. (the "Company") pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes in accordance with generally accepted accounting principles for complete financial statements and should be read in conjunction with the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2003. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of those considered necessary for fair presentation of the Company's financial position, results of operations and cash flows at the dates and for the periods presented. Prior to August 2001, the Company was a multi-national, full service promotional marketing company. In August 2001, McDonald's Corporation ("McDonald's"), the Company's principal customer, terminated its 25-year relationship with the Company as a result of the embezzlement by a former Company employee of winning game pieces from McDonald's promotional games administered by the Company. Other customers also terminated their relationships with the Company, resulting in the Company no longer having a business. By April 2002, the Company had effectively eliminated a majority of its ongoing promotions business operations and was in the process of disposing of its assets and settling its liabilities related to the promotions business and defending and pursuing related litigation. Although the settlement of litigation between the Company and McDonald's was completed in August 2004 (see Item 1. Legal Proceedings in Part II - Other Information), this process is ongoing and will continue throughout 2004 and into 2005. During the second quarter of 2002, the discontinued activities of the Company, consisting of revenues, operating costs, general and administrative costs and certain assets and liabilities associated with the Company's promotions business, were classified as discontinued operations for financial reporting purposes. At September 30, 2004, the Company had one stock-based compensation plan. The Company adopted the disclosure provisions of FASB Statement No. 123, "Accounting for Stock -- Based Compensation," as amended by FASB Statement No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure -- An Amendment of FASB Statement No. 123," and has applied APB No. 25 and related Interpretations in accounting for its plan. Accordingly, no compensation cost has been recognized related to such plan during the three and nine months ended September 30, 2004 and 2003. Since there were no employee stock option grants during the three and nine months ended September 30, 2004 and 2003, there is no impact on net income as reported in the accompanying condensed consolidated financial statements. At September 30, 2004, and December 31, 2003, the Company had a passive investment in a limited liability company controlled by an affiliate. See Note 5. The operating results for the three and nine months ended September 30, 2004, are not necessarily indicative of the results to be expected for the full year. 2. ABSENCE OF OPERATING BUSINESS; GOING CONCERN As a result of the loss of its customers, the Company no longer has any operating business. Since August 2001, the Company has concentrated its efforts on reducing its costs and settling numerous claims, contractual obligations and pending litigation. As a result of these efforts, the Company has been able to resolve a significant number of outstanding liabilities that existed at December 31, 2001, or arose subsequent to that date. At September 30, 2004, the Company had reduced its workforce to 5 employees from 136 employees at December 31, 2001. The Company is currently managed by an Executive Committee consisting of two members of the Company's Board of Directors, together with a principal financial officer and an acting general counsel. At September 30, 2004, and December 31, 2003, the Company had a stockholders' deficit of $6.9 million and $27.2 million, respectively. For the nine months ended September 30, 2004 and 2003, the Company had net income (losses) of $21.2 million and $(4.4) million, respectively. The Company continues to incur losses in 2004 within its continuing operations for the general and administrative expenses being incurred to manage the affairs of the Company and resolve outstanding legal matters. By utilizing cash received pursuant to the settlement with McDonald's in 2004 (see Item 1. Legal Proceedings in Part II - Other Information), management believes it has sufficient capital resources and liquidity to operate the Company for the foreseeable future. However, as a result of the stockholders' deficit, loss of customers and pending legal matters at December 31, 2003, the Company's 6 registered public accounting firm has expressed substantial doubt about the Company's ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. The Board of Directors of the Company continues to consider various alternative courses of action for the Company going forward, including possibly acquiring one or more operating businesses, selling the Company or distributing its net assets, if any, to shareholders. The decision on which course to take will depend upon a number of factors. To date, the Board of Directors has made no decision on which course of action to take. 3. RECENTLY ISSUED ACCOUNTING STANDARDS In December 2003, the FASB issued a revision to FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities." FIN 46, as amended by FIN 46(R), requires an investor with a majority of the variable interest in a variable interest entity to consolidate the entity and also requires majority and significant variable interest investors to provide certain disclosures. A variable interest entity is an entity in which the equity investors do not have a controlling financial interest or the equity investment at risk is insufficient to finance the entity's activities without receiving additional subordinated financial support from other parties. The provisions of FIN 46(R) are applicable for fiscal years ending after December 31, 2003, and with adoption no later than March 15, 2004. The Company does not have any variable interest entities that must be consolidated. 4. DISCONTINUED OPERATIONS By April 2002, the Company had effectively eliminated a majority of its ongoing promotions business operations and was in the process of disposing of its assets and settling its liabilities related to its promotions business and defending and pursuing related litigation. Accordingly, the discontinued activities of the Company have been classified as discontinued operations in the accompanying condensed consolidated financial statements. The Company typically includes sufficient cash within discontinued operations to ensure assets from discontinued operations to be disposed of cover liabilities from discontinued operations. Assets and liabilities from discontinued operations as of September 30, 2004, and December 31, 2003, as disclosed in the accompanying condensed consolidated financial statements, consist of the following (in thousands):
September 30, December 31, 2004 2003 ------------- ------------ Assets: Cash and cash equivalents $ 5,561 $10,065 Restricted cash - 6,547 Accounts receivable: Trade, less allowance for doubtful accounts of $13,852 at December 31, 2003 - 41 Prepaid expenses and other current assets 1 174 ------- ------- Total current assets 5,562 16,827 Other assets 246 1,128 ------- ------- Assets from discontinued operations to be disposed of $ 5,808 $17,955 ======= ======= Liabilities: Accounts payable - trade $ 243 $ 5,170 Accrued expenses and other current liabilities 5,565 12,785 ------- ------- Total current liabilities 5,808 17,955 ------- ------- Liabilities from discontinued operations $ 5,808 $17,955 ======= =======
7 Net income (loss) from discontinued operations for the three and nine months ended September 30, 2004 and 2003, as disclosed in the accompanying condensed consolidated financial statements, consists of the following (in thousands):
For the three months For the nine months ended September 30, ended September 30, ---------------------- ---------------------- 2004 2003 2004 2003 -------- -------- -------- -------- Net sales $ - - - $ - Cost of sales - - - - -------- -------- -------- -------- Gross profit - - - - General and administrative expenses 488 227 1,070 502 Gain on settlement of obligations (see Note 9) (24,480) (17) (24,500) (23) Impairment of asset (see Note 10) - - 1,029 - -------- -------- -------- -------- Operating income (loss) 23,992 (210) 22,401 (479) Interest income (64) (37) (173) (211) Other (income) expense (see Note 11) (464) 138 (917) 62 -------- -------- -------- -------- Net income (loss) from discontinued operations $ 24,520 $ (311) $ 23,491 $ (330) ======== ======== ======== ========
5. LONG-TERM INVESTMENTS The Company has made strategic and venture investments in a portfolio of privately held companies. These investments were in technology and Internet-related companies that were at varying stages of development, and were intended to provide the Company with an expanded technology and Internet presence, to enhance the Company's position at the leading edge of e-business and to provide venture investment returns. The companies in which the Company has invested are subject to all the risks inherent in technology and the Internet. In addition, these companies are subject to the valuation volatility associated with the investment community and the capital markets. The carrying value of the Company's investments in these companies is subject to the aforementioned risks. Periodically, the Company performs a review of the carrying value of all its investments in these companies, and considers such factors as current results, trends and future prospects, capital market conditions and other economic factors. The carrying value of the Company's investment portfolio totaled $500,000 as of September 30, 2004, and December 31, 2003, and was accounted for under the cost method. While the Company will continue to periodically evaluate its investments, there can be no assurance that its investment strategy will be successful, and thus the Company might not ever realize any benefits from its portfolio of investments. 6. SHORT-TERM BORROWINGS The Company no longer has the ability to borrow under any of its existing credit facilities without it being fully cash collateralized. Restricted cash at September 30, 2004, and December 31, 2003, primarily consisted of amounts deposited with lenders to satisfy the Company's obligations pursuant to its outstanding standby letters of credit and $2.7 million deposited into an irrevocable trust during 2002. See Note 7. 7. INDEMNIFICATION TRUST AGREEMENT In March 2002, the Company and a Trustee entered into an Indemnification Trust Agreement (the "Agreement" or the "Trust"), which requires the Company to fund an irrevocable trust in the amount of $2.7 million. The Trust was set up and will be used to augment the Company's existing insurance coverage for indemnifying directors, officers and certain described consultants, who are entitled to indemnification against liabilities arising out of their status as directors, officers and/or consultants (individually, "Indemnitee" or collectively, "Indemnitees"). The Trust will pay Indemnitees for amounts to which the Indemnitees are legally and properly entitled under the Company's indemnity obligation and which amounts are not paid to the Indemnitees by another party. During the term of the Trust, which continues until the earlier to occur of: (i) the later of: (a) four years from the date of the Agreement; or (b) as soon thereafter as no claim is pending against any Indemnitee which is indemnifiable under the Company's indemnity obligations; or (ii) March 1, 2022, the Company is required to replenish the Trust (up to $2.7 million) for funds paid out to an Indemnitee. Upon termination of the Trust, if, after payment of all outstanding claims against the Trust have been satisfied, there are funds remaining in the Trust, such funds and all other assets of the Trust shall be distributed to the Company. At September 30, 2004, these funds are included in restricted cash within continuing operations. 8 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 FASB Statement No. 128, "Earnings per Share," (in thousands, except share data):
For the Three Months Ended September 30, 2004 2003 --------------------------------------- -------------------------------------- Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------- ------------- --------- ----------- ------------- ---------- Basic and diluted EPS: Loss from continuing operations $ (618) $ (1,228) Preferred stock dividends 292 282 ------------ --------- Loss from continuing operations available to common stockholders $ (910) 16,653,193 $(0.05) $ (1,510) 16,653,193 $(0.09) ============ ========== ====== ========= ========== ====== Income (loss) from discontinued operations $ 24,520 16,653,193 $ 1.47 $ (311) 16,653,193 $(0.02) ============ ========== ====== ========= ========== ====== Net income (loss) $ 23,902 $ (1,539) Preferred stock dividends 292 282 ------------ --------- Net income (loss) available to common stockholders $ 23,610 16,653,193 $ 1.42 $ (1,821) 16,653,193 $(0.11) ============ ========== ====== ========= ========== ======
For the three months ended September 30, 2004 and 2003, 3,573,352 and 3,433,921 shares, respectively, of convertible preferred stock, 1,666,667 shares related to an outstanding warrant, and 225,000 shares related to outstanding options, were not included in the computation of diluted EPS because to do so would have been antidilutive.
For the Nine Months Ended September 30, 2004 2003 --------------------------------------- -------------------------------------- Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------- ------------- --------- ----------- ------------- ---------- Basic and diluted EPS: Loss from continuing operations $ (2,278) $ (4,102) Preferred stock dividends 874 840 ------------ --------- Loss from continuing operations available to common stockholders $ (3,152) 16,653,193 $(0.19) $ (4,942) 16,653,193 $(0.30) ============ ========== ====== ========= ========== ====== Income (loss) from discontinued operations $ 23,491 16,653,193 $ 1.41 $ (330) 16,653,193 $(0.02) ============ ========== ====== ========= ========== ====== Net income (loss) $ 21,213 $ (4,432) Preferred stock dividends 874 840 ------------ --------- Net income (loss) available to common stockholders $ 20,339 16,653,193 $ 1.22 $ (5,272) 16,653,193 $(0.32) ============ ========== ====== ========= ========== ======
For the nine months ended September 30, 2004 and 2003, 3,538,180 and 3,400,121 shares, respectively, of convertible preferred stock, 1,666,667 shares related to an outstanding warrant, and 225,000 shares related to outstanding options, were not included in the computation of diluted EPS because to do so would have been antidilutive. 9 9. GAIN ON SETTLEMENT OF OBLIGATIONS During the three months ended September 30, 2004, and in connection with the Company's settlement of its litigation with McDonald's and related entities, the Company received net cash proceeds, after attorney's fees, of approximately $13 million and due to the elimination of liabilities associated with the settlement of $12 million, the Company recorded a gain of $25 million. This gain was partially offset by a contingent settlement loss of $.5 million. During the three and nine months ended September 30, 2003, the Company recorded nominal gains related to the settlement of outstanding liabilities with some of its vendors on terms more favorable to the Company than required by the existing terms of the liabilities. 10. IMPAIRMENT OF ASSET During the nine months ended September 30, 2004, certain events occurred that indicated the Company would not realize amounts related to an insurance policy on which the Company is the beneficiary of the cash surrender value. As such, the Company recorded an asset impairment charge of $1.0 million which is included in Impairment of Asset within discontinued operations disclosed in Note 4 of the Notes to Condensed Consolidated Financial Statements. 11. OTHER (INCOME) EXPENSE During the three months ended September 30, 2004, the Company reduced its contingent loss liability related to its guarantee of an equipment lease by $.4 million to reflect the reduced potential loss. In addition, during the nine months ended September 30, 2004, the Company recorded a gain of $.3 million related to the wind-down of one of the Company's foreign subsidiaries and resulting from the settlement of general accruals for less than amounts carried on the Company's books. Also during the nine months ended September 30, 2004, the Company received various refunds totaling $.1 million related to the wind-down of the Company's promotions business. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion of the financial condition and results of operations of Simon Worldwide, Inc. (the "Company") for the three and nine months ended September 30, 2004, as compared to the same periods in the previous year. This discussion should be read in conjunction with the condensed consolidated financial statements of the Company and related Notes included elsewhere in this Form 10-Q. FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS From time to time, the Company may provide forward-looking information such as forecasts of expected future performance or statements about the Company's plans and objectives, including certain information provided below. These forward-looking statements are based largely on the Company's expectations and are subject to a number of risks and uncertainties, certain of which are beyond the Company's control. The Company wishes to caution readers that actual results may differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company including, without limitation, as a result of factors described in the Company's Amended Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995, filed as Exhibit 99.1 to this Form 10-Q. GENERAL Prior to August 2001, the Company was a multi-national, full service promotional marketing company. In August 2001, McDonald's Corporation ("McDonald's"), the Company's principal customer, terminated its 25-year relationship with the Company as a result of the embezzlement by a former Company employee of winning game pieces from McDonald's promotional games administered by the Company. Other customers also terminated their relationships with the Company, resulting in the Company no longer having a business. By April 2002, the Company had effectively eliminated a majority of its ongoing promotions business operations and was in the process of disposing of its assets and settling its liabilities related to the promotions business and defending and pursuing related litigation. Although the settlement of litigation between the Company and McDonald's was completed in August 2004 (see Item 1. Legal Proceedings in Part II - Other Information), this process is ongoing and will continue throughout 2004 and into 2005. During the second quarter of 2002, the discontinued activities of the Company, consisting of revenues, operating costs, general and administrative costs and certain assets and liabilities associated with the Company's promotions business, were classified as discontinued operations for financial reporting purposes. As a result of the loss if its customers, the Company no longer has any operating business. Since August 2001, the Company has concentrated its efforts on reducing its costs and settling numerous claims, contractual obligations and pending litigation. As a result of these efforts, the Company has been able to resolve a significant number of outstanding liabilities that existed at December 31, 2001, or arose subsequent to that date. At September 30, 2004, the Company had reduced its workforce to 5 employees from 136 employees at December 31, 2001. The Company is currently managed by an Executive Committee consisting of two members of the Company's Board of Directors, together with a principal financial officer and an acting general counsel. OUTLOOK As a result of the stockholders' deficit, loss of customers and the pending legal matters at December 31, 2003, the Company's registered public accounting firm has expressed substantial doubt about the Company's ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. The Company has taken significant actions and will continue to take further action to reduce its cost structure. The Board of Directors of the Company continues to consider various alternative courses of action for the Company going forward, including possibly acquiring one or more operating businesses, selling the Company or distributing its net assets, if any, to shareholders. The decision on which course to take will depend upon a number of factors. To date, the Board of Directors has made no decision on which course of action to take. By utilizing cash received pursuant to the settlement with McDonald's in 2004, management believes it has sufficient capital resources and liquidity to operate the Company for the foreseeable future. 11 RESULTS OF CONTINUING AND DISCONTINUED OPERATIONS The discontinued activities of the Company have been classified as discontinued operations in the accompanying condensed consolidated financial statements. Continuing operations represent the direct costs required to maintain the Company's current corporate infrastructure that will enable the Board of Directors to pursue various alternative courses of action going forward. These costs primarily consist of the salaries and benefits of executive management and corporate finance staff, professional fees, Board of Director fees, and space and facility costs. The Company's continuing operations and discontinued operations will be discussed separately, based on the respective financial results contained in the accompanying condensed consolidated financial statements and related notes. RESULTS OF CONTINUING OPERATIONS THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004, COMPARED TO THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 General and administrative expenses decreased to $.6 million and $2.3 million for the three and nine months, respectively, ended September 30, 2004, from $1.2 million and $4.1 million for the three and nine months, respectively, ended September 30, 2003, primarily due to reduced labor, insurance, and professional services costs. RESULTS OF DISCONTINUED OPERATIONS THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004, COMPARED TO THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 The Company generated no sales or gross profits during the three and nine months ended September 30, 2004 and 2003, due to the loss of its McDonald's business and subsequent loss of its other customers. General and administrative expenses totaled $.5 million and $1.1 million for the three and nine months, respectively, ended September 30, 2004, as compared to $.2 million and $.5 million for the three and nine months, respectively, ended September 30, 2003, primarily due to exchange losses and an increase in the valuation allowance of the deferred tax accounts of the Company's foreign subsidiaries. During the three and nine months ended September 30, 2004, and in connection with the Company's settlement of its litigation with McDonald's and related entities, the Company received net cash proceeds, after attorney's fees, of approximately $13 million and due to the elimination of liabilities associated with the settlement of $12 million, the Company recorded a gain of $25 million included in Gain on Settlement of Obligations disclosed in Note 4 of the Notes to Condensed Consolidated Financial Statements. During the three and nine months ended September 30, 2003, the Company recorded nominal gains related to the settlement of outstanding liabilities with some of its vendors on terms more favorable to the Company than required by the existing terms of the liabilities which are included in Gain on Settlement of Obligations disclosed in Note 4 of the Notes to Condensed Consolidated Financial Statements. During the three months ended September 30, 2004, the Company reduced its contingent loss liability related to its guarantee of an equipment lease by $.4 million to reflect the reduced potential loss. During the nine months ended September 30, 2003, the Company dissolved two foreign subsidiaries which had been part of its promotions business resulting in a net gain of approximately $.4 million included as Other Income within discontinued operations. This gain resulted from the settlement of obligations and general accruals for amounts less than the amounts carried on the Company's books. During the nine months ended September 30, 2004, the Company recorded a similar gain of $.3 million related to the wind-down of another of the Company's foreign subsidiaries and resulting from the settlement of general accruals for less than amounts carried on the Company's books. In addition, during the nine months ended September 30, 2004, the Company received various refunds totaling $.1 million related to the wind-down of the Company's promotions business. These amounts are included in Other Income within discontinued operations disclosed in Note 4 of the Notes to Condensed Consolidated Financial Statements. 12 During the nine months ended September 30, 2004, certain events occurred that indicated the Company would not realize amounts related to an insurance policy on which the Company is the beneficiary of the cash surrender value. As such, the Company recorded an asset impairment charge of $1.0 million which is included in Impairment of Asset within discontinued operations disclosed in Note 4 of the Notes to Condensed Consolidated Financial Statements. LIQUIDITY AND CAPITAL RESOURCES The matters discussed in the Absence of Operating Business; Going Concern in Note 2 of the Notes to Condensed Consolidated Financial Statements have had and will continue to have a substantial adverse impact on the Company's cash position. As a result of the stockholders' deficit, loss of customers and the pending legal matters at December 31, 2003, the Company's registered public accounting firm has expressed substantial doubt about the Company's ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. The Company continues to incur operating losses in 2004 within its continuing operations for the general and administrative expenses incurred to manage the affairs of the Company and resolve outstanding legal matters. Inasmuch as the Company no longer generates operating income and is unable to borrow funds, the source of current and future working capital is expected to be cash on hand, the recovery of certain long-term investments and any future proceeds from litigation. By utilizing cash received pursuant to the settlement with McDonald's in 2004, management believes it has sufficient capital resources and liquidity to operate the Company for the foreseeable future. The Board of Directors of the Company continues to consider various alternative courses of action for the Company going forward, including possibly acquiring one or more operating businesses, selling the Company, or distributing its net assets, if any, to shareholders. The decision on which course to take will depend upon a number of factors. See Note 2 of the Notes to Condensed Consolidated Financial Statements. To date, the Board of Directors has made no decision on which course of action to take. CONTINUING OPERATIONS Working capital from continuing operations at September 30, 2004, was $22.0 million compared to $.7 million at December 31, 2003. The increase is primarily due to the cash received and elimination of liabilities in connection with the Company's settlement of its litigation with McDonald's and related entities. Net cash used in operating activities from continuing operations during the nine months ended September 30, 2004, totaled $1.7 million primarily due to a net loss of $2.3 million partially offset by net change in working capital items of $.6 million. Net cash used in operating activities from continuing operations during the nine months ended September 30, 2003, totaled $3.4 million, primarily due to a net loss from continuing operations of $4.1 million partially offset by a net change in working capital items of $.6 million. Net cash used in investing activities from continuing operations during the nine months ended September 30, 2004, totaled $5.5 million primarily due to an increase in restricted cash. Net cash provided by investing activities during the nine months ended September 30, 2003, totaled $2.6 million, primarily due to a decrease in restricted cash. There were no cash flows from financing activities during the nine months ended September 30, 2004 and 2003. Restricted cash included within continuing operations at September 30, 2004, and December 31, 2003, totaled $5.9 million and $.3 million, respectively, and primarily consisted of amounts deposited with lenders to satisfy the Company's obligations pursuant to its outstanding standby letters of credit and, at September 30, 2004, included $2.7 million deposited into an irrevocable trust. DISCONTINUED OPERATIONS Working capital from discontinued operations at September 30, 2004, was a deficit of $.2 million compared to a deficit of $1.1 million at December 31, 2003. Net cash provided by discontinued operations during the nine months ended September 30, 2004, totaled $23.5 million and primarily related to cash received and the elimination of liabilities in connection with the settlement with McDonald's totaling $25.0 million partially offset by non-cash impairment and other charges of $1.2 million and other items of $.3 million. Net cash used in discontinued operations during the nine months ended September 30, 2003, totaled $.3 million and primarily related to net cash used in operating activities of $.6 million and net cash used in investing activities of $1.8 million partially offset by a reallocation of funds, totaling $2.1 million, between continuing and discontinued operations due to changes in minimum working capital requirements. Net cash provided by investing activities within discontinued operations during the nine months ended September 30, 2004, totaled $6.4 million and primarily consisted of a decrease in restricted cash. Net cash used by investing activities within discontinued operations during the nine months ended September 30, 2003, of $1.8 million, primarily consisted of an increase in restricted cash. There were no financing activities within discontinued operations during the nine months ended September 30, 2004 and 2003. 13 Restricted cash included within discontinued operations at September 30, 2004, and December 31, 2003, totaled $0 and $6.5 million, respectively, and at December 31, 2003, primarily consisted of amounts deposited with lenders to satisfy the Company's obligations pursuant to its outstanding standby letters of credit and amounts deposited into an irrevocable trust totaling $2.7 million. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The disclosure required by this Item is not material to the Company because the Company does not currently have any exposure to market rate sensitive instruments, as defined in this Item. Part of the Company's discontinued operations consists of certain consolidated subsidiaries that are denominated in foreign currencies. As the assets of these subsidiaries are largely offset by liabilities, the Company is not materially exposed to foreign currency exchange risk. ITEM 4. CONTROLS AND PROCEDURES DISCLOSURE CONTROLS AND PROCEDURES: As of September 30, 2004, the Company evaluated the effectiveness and design and operation of its disclosure controls and procedures. The Company's disclosure controls and procedures are the controls and other procedures that the Company designed to ensure that it records, processes, summarizes and reports in a timely manner the information that it must disclose in reports that the Company files with or submits to the Securities and Exchange Commission. Anthony Kouba and George Golleher, the members of the Executive Committee, which has the responsibility for the role of chief executive officer of the Company, and Greg Mays, the chief financial officer of the Company, reviewed and participated in this evaluation. Based on this evaluation, the principal executive and financial officers of the Company concluded that the Company's disclosure controls and procedures were effective. INTERNAL CONTROLS: Since the date of the evaluation described above, there have not been any significant changes in the Company's internal controls or in other factors that could significantly affect those controls. 14 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS McDonald's Litigation. McDonald's termination of its contractual relationship with the Company led to various lawsuits between the Company and its subsidiary Simon Marketing on one hand and McDonald's and certain of its agents and suppliers on the other which were commenced between October 2001 and March 2002. In July 2003, all parties to these lawsuits entered into a settlement agreement and, in August 2004, the settlement was completed. Under the settlement, all causes of action between the parties have been dismissed and mutual releases have been exchanged. In addition, McDonald's has paid $6.9 million to the Company and assigned to the Company all rights to insurance proceeds agreed to be paid by the Company's errors and omissions insurance carriers after payment of expenses relating to the Boland Settlement. The amount of insurance proceeds paid to the Company was $8.7 million which resulted in total net proceeds to the Company of approximately $13 million after payment of attornies' fees relating to the settlement. The mutual releases cover all obligations between the parties, including all related trade payables and accrued expenses which were recorded within discontinued operations. As a result of this settlement, in consideration for paying an amount in the settlement equal to the remaining limits of the Company's policies, the errors and omissions insurance carriers of the Company have been released from any further obligations to defend the Company, Simon Marketing or any additional insureds under the policies from any related claims, including the previously reported cases pending in Canada. Stone Street Litigation. The previously-reported Stone Street case pending in Maryland was settled in September 2004. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS (a) Exhibits filed herewith: 31.1 Certification of George G. Golleher pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 31.2 Certification of J. Anthony Kouba pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 31.3 Certification of Greg Mays pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 32 Certification of George G. Golleher, J. Anthony Kouba and Greg Mays pursuant to Section 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 99.1 Amended Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 15 SIGNATURE 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: November 12, 2004 SIMON WORLDWIDE, INC. /s/ J. ANTHONY KOUBA --------------------------- J. Anthony Kouba Executive Committee Member (duly authorized signatory) 16