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