10-Q 1 b57617swe10vq.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, 2005 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). [ ] Indicate by a check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] At October 31, 2005, 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, 2005 and December 31, 2004 3 Consolidated Statements of Operations - For the three and nine months ended September 30, 2005 and 2004 4 Consolidated Statements of Comprehensive Income (Loss) - For the three and nine months ended September 30, 2005 and 2004 5 Consolidated Statements of Cash Flows - For the nine months ended September 30, 2005 and 2004 6 Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk 17 Item 4. Controls and Procedures 18 PART II OTHER INFORMATION Item 1. Legal Proceedings 19 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 19 Item 3. Defaults Upon Senior Securities 19 Item 4. Submission of Matters to a Vote of Security Holders 19 Item 5. Other Information 19 Item 6. Exhibits 19 SIGNATURE 20
2 PART I - FINANCIAL INFORMATION ITEM 1. CONDENSED FINANCIAL STATEMENTS (UNAUDITED) SIMON WORLDWIDE, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share data) (Unaudited)
September 30, December 31, 2005 2004 ------------- ------------ ASSETS Current assets: Cash and cash equivalents $ 17,800 $ 18,892 Restricted cash 2,148 2,973 Prepaid expenses and other current assets 58 483 Assets from discontinued operations to be disposed of - current (Note 4) 2,765 2,815 --------- --------- Total current assets 22,771 25,163 Property and equipment, net 6 13 Other assets 363 198 Investments 11,631 500 Assets from discontinued operations to be disposed of - non -current (Note 4) 263 249 --------- --------- Total non-current assets 12,263 960 --------- --------- $ 35,034 $ 26,123 ========= ========= LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable: Trade $ 119 $ 226 Affiliates 174 166 Accrued expenses and other current liabilities 377 512 Liabilities from discontinued operations - current (Note 4) 3,028 3,064 --------- --------- Total current liabilities 3,698 3,968 Deferred income taxes - non-current 599 -- --------- --------- Total liabilities 4,297 3,968 Commitments and contingencies Redeemable preferred stock, Series A1 senior cumulative participating convertible, $.01 par value, 30,810 shares issued and outstanding at September 30, 2005, and 29,904 shares issued and outstanding at December 31, 2004, stated at redemption value of $1,000 per share (Note 11) 30,810 29,904 Stockholders' deficit: Common stock, $.01 par value; 50,000,000 shares authorized; 16,653,193 shares issued and outstanding at September 30, 2005 and December 31, 2004 167 167 Additional paid-in capital 138,500 138,500 Retained deficit (149,640) (146,416) Unrealized gain on investments 10,900 -- --------- --------- Total stockholders' deficit (73) (7,749) --------- --------- $ 35,034 $ 26,123 ========= =========
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, -------------------- ------------------- 2005 2004 2005 2004 ------- ------- ------- ------- Revenue $ -- $ -- $ -- $ -- General and administrative expenses 776 618 2,255 2,278 ------- ------- ------- ------- Operating loss from continuing operations (776) (618) (2,255) (2,278) Interest income 189 -- 438 -- ------- ------- ------- ------- Loss from continuing operations before income taxes (587) (618) (1,817) (2,278) Income tax benefit -- -- -- -- ------- ------- ------- ------- Net loss from continuing operations (587) (618) (1,817) (2,278) Income (loss) from discontinued operations, net of tax (Note 4) (661) 24,520 (493) 23,491 ------- ------- ------- ------- Net income (loss) (1,248) 23,902 (2,310) 21,213 Preferred stock dividends (307) (292) (914) (874) ------- ------- ------- ------- Net income (loss) available to common stockholders $(1,555) $23,610 $(3,224) $20,339 ======= ======= ======= ======= Loss per share from continuing operations available to common stockholders: Loss per common share - basic and diluted $ (0.05) $ (0.05) $ (0.16) $ (0.19) ======= ======= ======= ======= 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 $ (0.04) $ 1.47 $ (0.03) $ 1.41 ======= ======= ======= ======= 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 $ (0.09) $ 1.42 $ (0.19) $ 1.22 ======= ======= ======= ======= 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 COMPREHENSIVE INCOME (LOSS) (Unaudited) (in thousands)
For the three months For the nine months ended September 30, ended September 30, -------------------- ------------------- 2005 2004 2005 2004 ------- ------- ------- ------- Net income (loss) $(1,248) $23,902 $(2,310) $21,213 Other comprehensive income: Unrealized gain (loss) on investments, net of tax (13) -- 10,900 -- ------- ------- ------- ------- Comprehensive income (loss) $(1,261) $23,902 $ 8,590 $21,213 ======= ======= ======= =======
See the accompanying Notes to Condensed Consolidated Financial Statements. 5 SIMON WORLDWIDE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
For the nine months ended September 30, ------------------- 2005 2004 ------- ------- Cash flows from operating activities: Net income (loss) $(2,310) $21,213 Income (loss) from discontinued operations (493) 23,491 ------- ------- Loss from continuing operations (1,817) (2,278) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation 7 20 Deferred income taxes 599 -- Cash used in discontinued operations (877) (416) Cash transferred to (from) continuing operations (96) 17,504 Increase (decrease) in cash from changes in working capital items: Prepaid expenses and other current assets 425 630 Accounts payable (99) 12 Accrued expenses and other current liabilities (135) (75) ------- ------- Net cash provided by (used in) operating activities (1,993) 15,397 ------- ------- Cash flows from investing activities: Decrease (increase) in restricted cash 825 (5,539) Cash provided by discontinued operations 36 6,400 Other, net 40 79 ------- ------- Net cash provided by investing activities 901 940 ------- ------- Net increase (decrease) in cash and cash equivalents (1,092) 16,337 Cash and cash equivalents, beginning of period 18,892 -- ------- ------- Cash and cash equivalents, end of period $17,800 $16,337 ======= ======= Supplemental disclosure of cash flow information: Cash paid during the period for: Income taxes $ 6 $ 14 ======= ======= Supplemental non-cash investing activities: Dividends paid in kind on redeemable preferred stock $ 906 $ 871 ======= =======
See the accompanying Notes to Condensed Consolidated Financial Statements. 6 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 accounting principles generally accepted in the United States 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, 2004. 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, this process is ongoing and will continue for some indefinite period primarily dependent upon on-going litigation. 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, 2005, the Company had one stock-based compensation plan. The Company adopted the disclosure provisions of Financial Accounting Standards Board ("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 Accounting Principles Board ("APB") Opinion 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, 2005 and 2004. In December 2004, the FASB issued a revision to Statement No. 123. See Note 3. At September 30, 2005, and December 31, 2004, 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, 2005 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, 2005, 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, 2005, and December 31, 2004, the Company had stockholders' deficit of $(.1) million and $(7.7) million, respectively. For the nine months ended September 30, 2005 and 2004, the Company had net income (loss) of $(2.3) million and $21.2 million, respectively. The Company continues to incur losses in 2005 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, 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 at December 31, 2004, and loss of customers, the Company's independent registered public accounting firm has expressed substantial doubt about 7 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 or combining with one or more operating businesses. The Board of Directors has reviewed and analyzed a number of proposed transactions and will continue to do so until it can determine a course of action going forward to best benefit all shareholders, including the holder of the Company's outstanding preferred stock described below. The Company cannot predict when the Directors will have developed a proposed course of action or whether any such course of action will be successful. Management believes it has sufficient capital resources and liquidity to operate the Company for the foreseeable future. 3. RECENTLY ISSUED ACCOUNTING STANDARDS In December 2004, the FASB issued a revision entitled, "Share-Based Payment," to Statement No. 123, "Accounting for Stock-Based Compensation." This revision ("Statement No. 123(R)") supersedes APB Opinion No. 25 and its related implementation guidance. As such, Statement No. 123(R) eliminates the alternative to use the intrinsic value method of accounting under APB Opinion No. 25 that was available under Statement No. 123 as originally issued. Under APB Opinion No. 25, issuing stock options to employees generally resulted in recognition of no compensation cost. Statement No. 123(R) requires entities to recognize in the financial statements the cost of employee services received in exchange for awards of equity instruments based on the fair value at grant-date of those awards (with limited exceptions). The Company currently applies APB Opinion No. 25 and related interpretations in accounting for its stock-based compensation plan. In March 2005, the Securities and Exchange Commission (the "SEC") issued Staff Accounting Bulletin No. 107, "Share-Based Payment", which summarizes the views of the SEC staff regarding the interaction between Statement No. 123(R) and certain SEC rules and regulations, and is intended to assist in the initial implementation. Statement No. 123(R) is effective for the first annual reporting period that begins after June 15, 2005. However, in April 2005, the SEC announced that it would permit companies to implement this statement at the beginning of their next fiscal year. The Company does not expect the adoption of Statement No. 123 to have a material effect on its consolidated statements of financial position or results of operations. Had compensation cost for the Company's grants for stock-based compensation plans been determined consistent with Statement No. 123, the Company's net loss available to common stockholders and loss per common share would have been adjusted to the pro forma amounts indicated below:
For the three months For the nine months ended September 30, ended September 30, -------------------- -------------------- 2005 2004 2005 2004 ------- ------- ------- ------- Net income (loss) available to common stockholders $(1,555) $23,610 $(3,224) $20,339 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of income taxes -- -- (11) (6) ------- ------- ------- ------- Net income (loss) available to common stockholders - pro forma $(1,555) $23,610 $(3,235) $20,333 ======= ======= ======= ======= Income (loss) per common share - basic and diluted - as reported $ (0.09) $ 1.42 $ (0.19) $ 1.22 ======= ======= ======= ======= Income (loss) per common share - basic and diluted - pro forma $ (0.09) $ 1.42 $ (0.19) $ 1.22 ======= ======= ======= =======
In December 2004, the FASB issued Statement No. 153, "Exchanges of Nonmonetary Assets--an amendment of APB Opinion No. 29." APB Opinion No. 29 relates to accounting for nonmonetary transactions. The amendments of Statement No. 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, Statement No. 153 eliminates the narrow exception for nonmonetary exchanges of similar productive assets and replaces it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. Provisions of this statement are effective for fiscal periods beginning after June 15, 2005. The Company does not expect the adoption of Statement No. 153 to have a material effect on its consolidated statements of financial position or results of operations. In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations--an interpretation of FASB Statement No. 143" ("FIN 47"). FASB Statement No. 143 relates to accounting for asset retirement obligations. FIN 47 clarifies terminology within Statement No. 143 and requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability's fair value can be reasonably estimated. FIN 47 is effective for fiscal years ending after December 15, 2005. The Company does not expect the adoption of FIN 47 to have a material effect on its consolidated statements of financial position or results of operations. 8 In May 2005, the FASB issued Statement No. 154, "Accounting Changes and Error Corrections--a replacement of APB Opinion No. 20 and FASB Statement No. 3." APB Opinion No. 20 relates to accounting changes and FASB Statement No. 3 relates to reporting accounting changes in interim financial statements and establishes retrospective application as the required method for reporting a change in accounting principle. Statement No. 154 provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. The reporting of a correction of an error by restating previously issued financial statements is also addressed. Statement No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not expect the adoption of Statement No. 154 to have a material effect on its consolidated statements of financial position or results of operations. 4. DISCONTINUED OPERATIONS By April 2002, the Company had effectively eliminated a majority of its on-going promotions business operations. Accordingly, the discontinued activities of the Company have been classified as discontinued operations in the accompanying condensed consolidated financial statements. The Company includes sufficient cash within its discontinued operations to ensure assets from discontinued operations to be disposed of cover liabilities from discontinued operations. Management believes it has sufficient capital resources and liquidity to operate the Company for the foreseeable future. Assets and liabilities related to discontinued operations at September 30, 2005, and December 31, 2004, as disclosed in the accompanying condensed consolidated financial statements, consist of the following (in thousands):
September 30, December 31, 2005 2004 ------------- ------------ Assets: Restricted cash $2,765 $2,815 ------ ------ Total current assets 2,765 2,815 Other assets 263 249 ------ ------ Assets from discontinued operations to be disposed of $3,028 $3,064 ====== ====== Liabilities: Accounts payable $ 3 $ 58 Accrued expenses and other current liabilities 3,025 3,006 ------ ------ Total current liabilities 3,028 3,064 ------ ------ Liabilities from discontinued operations $3,028 $3,064 ====== ======
9 Net income (loss) from discontinued operations for the three and nine months ended September 30, 2005 and 2004, 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, -------------------- ------------------- 2005 2004 2005 2004 ----- -------- ----- -------- Net sales $ -- -- -- $ -- Cost of sales -- -- -- -- ----- -------- ----- -------- Gross profit -- -- -- -- General and administrative expenses 57 488 193 2,099 Loss (gain) on settlement of obligations (Note 10) 555 (24,480) 555 (24,500) ----- -------- ----- -------- Operating income (loss) (612) 23,992 (748) 22,401 Interest income -- 64 -- 173 Other income (loss) (Note 9) (49) 464 255 917 ----- -------- ----- -------- Net income (loss) from discontinued operations $(661) $ 24,520 $(493) $ 23,491 ===== ======== ===== ========
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 at December 31, 2004 and $11.6 million at September 30, 2005. At September 30, 2005, the Company held an investment in Yucaipa AEC Associates, LLC ("Yucaipa AEC Associates"), a limited liability company that is controlled by Yucaipa, which also controls the holder of the Company's outstanding preferred stock. Yucaipa AEC Associates in turn held an investment in Alliance Entertainment Corp. ("Alliance") which is a home entertainment product distribution, fulfillment, and infrastructure company providing both brick-and-mortar and e-commerce home entertainment retailers with complete business-to-business solutions. At December 31, 2001, the Company's investment in Yucaipa AEC Associates had a carrying value of $10.0 million. In June 2002, certain events occurred which indicated an impairment and the Company recorded a pre-tax non-cash charge of $10.0 million to write down this investment. On February 28, 2005, Alliance, whose stock was privately held, merged with Source Interlink Companies, Inc. ("Source"), a direct-to-retail magazine distribution and fulfillment company in North America and a provider of magazine information and front-end management services for retailers, whose stock is publicly traded on the NASDAQ National Market. As a result of this merger, the former equity holders of Alliance hold 50% of the fully diluted capitalization of Source. Inasmuch as Source is a publicly traded company, the Company's pro-rata investment in Yucaipa AEC Associates, which holds the shares in Source, on the date of closing of the merger is equal to the number of Source shares indirectly held by the Company multiplied by the stock price of Source. Accordingly, on February 28, 2005, the date of closing of the merger, and to reflect the change in the value of its investment in Yucaipa AEC Associates, the Company recorded an unrealized gain to Other Comprehensive Income of $11.3 million ($10.8 million net of tax), which does not reflect any discount for illiquidity. The Company's investment in Yucaipa AEC Associates is accounted for under the equity method and, as such, the Company will adjust its investment based in its pro rata share of the earnings and losses of Yucaipa AEC Associates. The Company has no power to dispose of or liquidate its shares in Yucaipa AEC Associates or its indirect interest in Source which power is held by Yucaipa AEC Associates. Furthermore, in the event of a sale or liquidation of the Source shares by Yucaipa AEC Associates, the amount and timing of any distribution of the proceeds of such sale or liquidation to the Company is discretionary with Yucaipa AEC Associates. 10 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 included within discontinued operations at September 30, 2005 and December 31, 2004 totaled $2.8 million. In addition, restricted cash included within continuing operations at September 30, 2005 and December 31, 2004 totaled $2.1 million and $3.0 million, respectively. The Company's restricted cash primarily consisted of amounts deposited with lenders to satisfy the Company's obligations pursuant to its standby letters of credit and amounts deposited into an irrevocable trust, totaling $2.7 million. 7. INDEMNIFICATION TRUST AGREEMENT In March 2002, the Company, Simon Marketing (a subsidiary of the Company) and a Trustee entered into an Indemnification Trust Agreement (the "Agreement" or the "Trust"), which requires the Company and Simon Marketing to fund an irrevocable trust in the amount of $2.7 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 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 Simon Marketing. These funds are included in restricted cash in the accompanying Consolidated Balance Sheets. As of September 30, 2005, there have not been any claims made against the Trust. 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 and per share data):
For the Three Months Ended September 30, --------------------------------------------------------------------------------- 2005 2004 --------------------------------------- --------------------------------------- Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------- ------------- --------- ----------- ------------- --------- Basic and diluted EPS: Loss from continuing operations $ (587) $ (618) Preferred stock dividends (307) (292) ------- ------- Loss from continuing operations available to common stockholders $ (894) 16,653,193 $(0.05) $ (910) 16,653,193 $(0.05) ======= ========== ====== ======= ========== ====== Income from discontinued operations $ (661) 16,653,193 $(0.04) $24,520 16,653,193 $ 1.47 ======= ========== ====== ======= ========== ====== Net income (loss) $(1,248) $23,902 Preferred stock dividends (307) (292) ------- ------- Net income (loss) available to common stockholders $(1,555) 16,653,193 $(0.09) $23,610 16,653,193 $ 1.42 ======= ========== ====== ======= ========== ======
For the three months ended September 30, 2005 and 2004, 3,718,444 and 3,573,352 shares on a converted basis, respectively, of convertible preferred stock (see Note 11) were not included in the computation of diluted EPS, and 215,000 and 172,500 shares, respectively, related to stock options exercisable were not included in the computation of diluted EPS as the average market price of the Company's common stock did not exceed the weighted average exercise price of such options, because to do so would have been antidilutive. 11
For the Nine Months Ended September 30, --------------------------------------------------------------------------------- 2005 2004 --------------------------------------- --------------------------------------- Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------- ------------- --------- ----------- ------------- --------- Basic and diluted EPS: Loss from continuing operations $(1,817) $(2,278) Preferred stock dividends (914) (874) ------- ------- Loss from continuing operations available to common stockholders $(2,731) 16,653,193 $(0.16) $(3,152) 16,653,193 $(0.19) ======= ========== ====== ======= ========== ====== Income from discontinued operations $ (493) 16,653,193 $(0.03) $23,491 16,653,193 $ 1.41 ======= ========== ====== ======= ========== ====== Net income (loss) $(2,310) $21,213 Preferred stock dividends (914) (874) ------- ------- Net income (loss) available to common stockholders $(3,224) 16,653,193 $(0.19) $20,339 16,653,193 $ 1.22 ======= ========== ====== ======= ========== ======
For the nine months ended September 30, 2005 and 2004, 3,681,978 and 3,538,180 shares on a converted basis, respectively, of convertible preferred stock (see Note 11) were not included in the computation of diluted EPS, and 194,203 and 151,624 shares, respectively, related to stock options exercisable were not included in the computation of diluted EPS as the average market price of the Company's common stock did not exceed the weighted average exercise price of such options, because to do so would have been antidilutive. 9. OTHER (INCOME) EXPENSE In February 2001, the Company sold its Corporate Promotions Group ("CPG") business to Cyrk, Inc. ("Cyrk"), formerly known as Rockridge Partners, Inc., for $8 million cash and a note in the amount of $2.3 million. Cyrk also assumed certain liabilities of the CPG business. One of the obligations assumed by Cyrk was to Winthrop Resources Corporation ("Winthrop"). As a condition to Cyrk assuming this obligation, however, the Company was required to provide a $4.2 million letter of credit as collateral for Winthrop in case Cyrk did not perform the assumed obligation. The available amount under this letter of credit reduces over time as the underlying obligation to Winthrop reduces. The letter of credit has semi-annual expirations through August 2007 when the underlying obligation is satisfied. Because the Company remained secondarily liable under the Winthrop lease restructuring, recognizing a liability at inception for the fair value of the obligation is not required under the provisions of FASB Interpretation 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others--an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34." However, in the fourth quarter of 2003, Cyrk informed the Company that it was continuing to suffer substantial financial difficulties and that it might not be able to continue to discharge its obligations to Winthrop which are secured by the Company's letter of credit. As a result of the foregoing, and in accordance with the provisions of FASB Statement No. 5, "Accounting for Contingencies," the Company recorded a charge in 2003 of $2.8 million with respect to the liability arising from the Winthrop lease. During the three and nine months ended September 30, 2005 and 2004, the Company reduced its contingent loss liability related to the Winthrop lease by $.4 million and $.4 million, respectively, and $.8 million and $.7 million, respectively, to reflect the reduction in the Winthrop liability. On October 19, 2005 the Company received notice of a lawsuit against in the Bankruptcy Court for the Northern District of Illinois by the Committee representing the unsecured creditors of H A 2003 Inc., formerly known as HA-LO Industries, Inc.( "HA-LO" ), seeking to recover as a voidable preference a certain payment made by HA-LO to the Company in the amount of $459,852 plus interest. Based on an assessment by management and during the three months ended September 30, 2005, the Company recorded a contingent loss liability of $.5 million related to this matter. 10. LOSS (GAIN) ON SETTLEMENT OF OBLIGATIONS As previously reported, an action has been pending against the Company in Ontario Provincial Court in Canada seeking restitution and damages on a class-wide basis for the diversion from seeding in Canada of high-level winning prizes in certain McDonald's promotional games administered by Simon Marketing. The Company has entered into a settlement agreement with plaintiff in the case on behalf of the class pursuant to which the Company will pay $650,000 Canadian ($554,512 US) to be used for costs, fees and expenses relating to the settlement with excess proceeds to be distributed to two charities. The settlement is subject to 12 certification of the class with respect to the Company and approval of the terms of settlement by the Canadian court. Hearing on the settlement is scheduled for the end of November. 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. 11. REDEEMABLE PREFERRED STOCK In November 1999, Overseas Toys, L.P., an affiliate of Yucaipa, a Los Angeles, California based investment firm, invested $25 million in the Company in exchange for preferred stock and a warrant to purchase additional preferred stock. Under the terms of the investment, the Company issued 25,000 shares of a newly authorized senior cumulative participating convertible preferred stock ("preferred stock") to Yucaipa for $25 million. Yucaipa is entitled, at their option, to convert each share of preferred stock into common stock equal to the sum of $1,000 per share plus all accrued and unpaid dividends, divided by $8.25 (3,755,629 and 3,644,848 shares as of September 30, 2005, and December 31, 2004, respectively). In connection with the issuance of the preferred stock, the Company also issued a warrant to purchase 15,000 shares of a newly authorized series of preferred stock at a purchase price of $15 million. Each share of this series of preferred stock issued upon exercise of the warrant was convertible, at Yucaipa's option, into common stock equal to the sum of $1,000 per share plus all accrued and unpaid dividends, divided by $9.00 (1,666,667 shares). The warrant expired on November 10, 2004. Yucaipa has voting rights equivalent to the number of shares of common stock into which their preferred stock is convertible on the relevant record date. Also, Yucaipa is entitled to receive an annual dividend equal to 4%, paid quarterly, of the base liquidation preference of $1,000 per share outstanding, payable in cash or in-kind at the Company's option. In the event of liquidation, dissolution or winding up of the affairs of the Company, Yucaipa, as holder of the preferred stock, will be entitled to receive the redemption price of $1,000 per share plus all accrued dividends plus: (1) (a) 7.5% of the amount that the Company's retained earnings exceeds $75 million less (b) the aggregate amount of any cash dividends paid on common stock which are not in excess of the amount of dividends paid on the preferred stock, divided by (2) the total number of preferred shares outstanding as of such date (the "adjusted liquidation preference"), before any payment is made to other stockholders. The Company may redeem all or a portion of the preferred stock at a price equal to the adjusted liquidation preference of each share, if the average closing price of the Company's common stock has exceeded $12.00 for sixty consecutive trading days on or after November 10, 2002, or, any time on or after November 10, 2004. The preferred stock is subject to mandatory redemption if a change in control of the Company occurs. In connection with this transaction, the managing partner of Yucaipa was appointed chairman of the Company's Board of Directors and Yucaipa was entitled to nominate two additional individuals to a seven-person Board. In August 2001, the managing partner of Yucaipa, along with another Yucaipa representative, resigned from the Company's Board of Directors. Yucaipa retains the right to appoint a total of three directors to the Company's Board of Directors and to designate the chairman of the Board. 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, 2005, 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 13 of factors described in the Company's Amended Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995, filed as Exhibit 99.1 to the Company's December 31, 2004, Form 10-K. 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, this process is ongoing and will continue for some indefinite period primarily dependent upon on-going litigation. 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, 2005, 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 at December 31, 2004, and loss of customers, the Company's independent 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 or combining with one or more operating businesses. The Board of Directors has reviewed and analyzed a number of proposed transactions and will continue to do so until it can determine a course of action going forward to best benefit all shareholders, including the holder of the Company's outstanding preferred stock. The Company cannot predict when the Directors will have developed a proposed course of action or whether any such course of action will be successful. Management believes it has sufficient capital resources and liquidity to operate the Company for the foreseeable future. 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 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. 14 RESULTS OF CONTINUING OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2005, COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2004 General and administrative expenses totaled $.8 million during the three months ended September 2005, compared to $.6 million during the same period in the prior year. The increase was primarily due to increased professional fees and labor costs including related insurance and tax costs, when compared to the same quarter of the prior year. NINE MONTHS ENDED SEPTEMBER 30, 2005, COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2004 General and administrative expenses totaled $2.3 million during the nine months ended September 30, 2005, compared to $2.3 million during the same period in the prior year. The consistency was primarily due to increased professional fees offset by decreased facilities costs. RESULTS OF DISCONTINUED OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2005, COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2004 The Company generated no sales or gross profits during the three months ended September 30, 2005 and 2004, due to the loss of its McDonald's and Philip Morris business and subsequent loss of its other customers. General and administrative expenses totaled $.1 million during the three months ended September 30, 2005, compared to $.5 million during the same period in the prior year. The decrease was primarily due to the wind-down of all but two of the Company's foreign subsidiaries. In connection with a settlement reached in an action pending against the Company in Ontario Provincial Court in Canada seeking restitution and damages on a class-wide basis, the Company recorded, at September 30, 2005, a liability of $.6 million for the expected settlement amount and a related settlement loss which is included in Loss (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, 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 Loss (Gain) on Settlement of Obligations disclosed in Note 4 of the Notes to Condensed Consolidated Financial Statements. During the three months ended September 30, 2005 and 2004, the Company reduced its contingent loss liability related to the Winthrop lease by $.4 million and $.4 million, respectively, to reflect the reduction in the Winthrop liability. Also, on October 19, 2005 the Company received notice of a lawsuit against in the Bankruptcy Court for the Northern District of Illinois by the Committee representing the unsecured creditors of H A 2003 Inc., formerly known as HA-LO Industries, Inc.( "HA-LO" ), seeking to recover as a voidable preference a certain payment made by HA-LO to the Company in the amount of $459,852 plus interest. Based on an assessment by management and during the three months ended September 30, 2005, the Company recorded a contingent loss liability of $.5 million related to this matter. These amounts are included in Other Income (Loss) within discontinued operations disclosed in Note 4 of the Notes to Condensed Consolidated Financial Statements. NINE MONTHS ENDED SEPTEMBER 30, 2005, COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2004 The Company generated no sales or gross profits during the nine months ended September 30, 2005 and 2004, due to the loss of its McDonald's and Philip Morris business and subsequent loss of its other customers. General and administrative expenses totaled $.2 million during the nine months ended September 30, 2005, compared to $2.1 million during the same period in the prior year. The decrease was primarily due to the wind-down of all but two of the Company's foreign subsidiaries. At September 30, 2005, and in connection with a settlement reached in an action pending against the Company in Ontario Provincial Court in Canada seeking restitution and damages on a class-wide basis, the Company recorded a liability of $.6 million for the expected settlement amount, and a related settlement loss which is included in Loss (Gain) on Settlement of Obligations disclosed in Note 4 of the Notes to Condensed Consolidated Financial Statements. 15 During the 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 Loss (Gain) on Settlement of Obligations disclosed in Note 4 of the Notes to Condensed Consolidated Financial Statements. During the nine months ended September 30, 2005 and 2004, the Company reduced its contingent loss liability related to the Winthrop lease by $.8 million and $.7 million, respectively, to reflect the reduction in the Winthrop liability. 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. Further, on October 19, 2005 the Company received notice of a lawsuit against in the Bankruptcy Court for the Northern District of Illinois by the Committee representing the unsecured creditors of H A 2003 Inc., formerly known as HA-LO Industries, Inc.( "HA-LO" ), seeking to recover as a voidable preference a certain payment made by HA-LO to the Company in the amount of $459,852 plus interest. Based on an assessment by management and during the nine months ended September 30, 2005, the Company recorded a contingent loss liability of $.5 million related to this matter. These amounts are included in Other Income (Loss) within discontinued operations disclosed in Note 4 of the Notes to Condensed Consolidated Financial Statements. LIQUIDITY AND CAPITAL RESOURCES The matters discussed in Note 2. Absence of Operating Business; Going Concern 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 at December 31, 2004, and loss of customers, the Company's independent 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 2005 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 or combining with one or more operating businesses. The Board of Directors has reviewed and analyzed a number of proposed transactions and will continue to do so until it can determine a course of action going forward to best benefit all shareholders, including the holder of the Company's outstanding preferred stock. The Company cannot predict when the Directors will have developed a proposed course of action or whether any such course of action will be successful. Management believes it has sufficient capital resources and liquidity to operate the Company for the foreseeable future. CONTINUING OPERATIONS Working capital from continuing operations at September 30, 2005, was $19.3 million compared to $21.4 million at December 31, 2004. Net cash used in operating activities from continuing operations during the nine months ended September 30, 2005, totaled $1.0 million primarily due to a net loss from continuing operation of $1.8 million partially offset by a net change in working capital items of $.2 million and deferred taxes of $.6 million. 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 provided by investing activities from continuing operations during the nine months ended September, 2005, totaled $.9 million due to a decrease in restricted cash. Net cash used in investing activities from continuing operations during the nine months ended September, 2004, totaled $5.5 million primarily due to an increase in restricted cash which was transferred from discontinued operations as discontinued operations already had sufficient assets from discontinued operations to be disposed of to cover liabilities from discontinued operations. There were no cash flows from financing activities during the nine months ended September 30, 2005 and 2004. In March 2002, the Company, Simon Marketing and a Trustee entered into an Indemnification Trust Agreement (the "Trust"), which requires the Company and Simon Marketing to fund an irrevocable trust in the amount of $2.7 million. The Trust was set up and will be used to augment the Company's existing insurance coverage for indemnifying directors, officers and certain 16 described consultants, who are entitled to indemnification against liabilities arising out of their status as directors, officers and/or consultants. Restricted cash included within continuing operations at September 30, 2005, and December 31, 2004, totaled $2.1 million and $3.0 million, respectively, and primarily consisted of amounts deposited with lenders to satisfy the Company's obligations pursuant to its standby letters of credit. DISCONTINUED OPERATIONS Working capital from discontinued operations was a deficit of $(.3) million at September 30, 2005 compared to $(.2) million December 31, 2004. Net cash used in discontinued operations during the nine months ended September 30, 2005 totaled $.9 million, primarily due to cash used in operating activities of discontinued operations of $.9 million and cash transferred from continuing operations of $.1 million, partially offset by cash provided by investing activities of discontinued operations of $36,000. The $.9 million of cash used in operating activities of discontinued operations primarily consisted of a net loss of $.5 million and non-cash recoveries of $.8 million related to the reduction in the Winthrop contingent liability partially offset by a non-cash contingent liability accrual of $.5 million related to the HA-LO matter. Net cash provided by discontinued operations during the nine months ended September 30, 2004, totaled $23.5 million and primarily consisted of cash transferred to continuing operations of $17.5 million and cash provided by investing activities of discontinued operations of $6.4 million resulting from a decrease in restricted cash, partially offset by cash used in operating activities discontinued operations of $.4 million. The total of $23.5 million of cash provided by discontinued operations was primarily the result of cash received and the elimination of liabilities in connection with the settlement with McDonald's totaling $25.0 million, partially offset by a non-cash charge of $1.0 million against an asset related to an insurance policy for the benefit of a former Company executive and on which the company was the beneficiary of the cash surrender value, and a net change in working capital items of $.6 million. There were no financing activities within discontinued operations during the nine months ended September 30, 2005 and 2004. Restricted cash included within discontinued operations at September 30, 2005 and December 31, 2004, totaled $2.8 million and primarily consisted of amounts deposited with lenders to satisfy the Company's obligations pursuant to its outstanding standby letters of credit. These amounts are in addition to the restricted cash amounts included within continuing operations noted above. 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. 17 ITEM 4. CONTROLS AND PROCEDURES DISCLOSURE CONTROLS AND PROCEDURES: At September 30, 2005, 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. 18 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Canadian Litigation. As previously reported, an action has been pending against the Company in Ontario Provincial Court in Canada seeking restitution and damages on a class-wide basis for the diversion from seeding in Canada of high-level winning prizes in certain McDonald's promotional games administered by Simon Marketing. The Company has entered into a settlement agreement with plaintiff in the case on behalf of the class pursuant to which the Company will pay $650,000 Canadian ($554,512 US) to be used for costs, fees and expenses relating to the settlement with excess proceeds to be distributed to two charities. The settlement is subject to certification of the class with respect to the Company and approval of the terms of settlement by the Canadian court. Hearing on the settlement is scheduled for the end of November. On October 19, 2005 the Company received notice of a lawsuit against in the Bankruptcy Court for the Northern District of Illinois by the Committee representing the unsecured creditors of H A 2003 Inc., formerly known as HA-LO Industries, Inc.( "HA-LO" ), seeking to recover as a voidable preference a certain payment made by HA-LO to the Company in the amount of $459,852 plus interest. The Company has retained bankruptcy counsel to represent it in the matter and is investigating facts surrounding the alleged payment. 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 19 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 14, 2005 SIMON WORLDWIDE, INC. /s/ J. ANTHONY KOUBA ---------------------------------------- J. Anthony Kouba Executive Committee Member (duly authorized signatory) 20