-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NBmhctZbbsESMRSOjlrjm3eyHgBRzk6ZFKOW6ASVKmj1TtLZnij52Y2RyA0e7PYh rs12ulyb5yvXK/Krdosj/g== 0000950135-06-002013.txt : 20060331 0000950135-06-002013.hdr.sgml : 20060331 20060331135748 ACCESSION NUMBER: 0000950135-06-002013 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060331 DATE AS OF CHANGE: 20060331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIMON WORLDWIDE INC CENTRAL INDEX KEY: 0000864264 STANDARD INDUSTRIAL CLASSIFICATION: APPAREL & OTHER FINISHED PRODS OF FABRICS & SIMILAR MATERIAL [2300] IRS NUMBER: 043081657 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-21878 FILM NUMBER: 06727500 BUSINESS ADDRESS: STREET 1: 1900 AVENUE OF THE STARS CITY: LOS ANGELES STATE: CA ZIP: 90067 BUSINESS PHONE: 310-553-4460 MAIL ADDRESS: STREET 1: 1900 AVENUE OF THE STARS CITY: LOS ANGELES STATE: CA ZIP: 90067 FORMER COMPANY: FORMER CONFORMED NAME: CYRK INC DATE OF NAME CHANGE: 19940214 FORMER COMPANY: FORMER CONFORMED NAME: CYRK INTERNATIONAL INC DATE OF NAME CHANGE: 19930521 10-K 1 b58486swe10vk.txt SIMON WORLDWIDE, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 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 W. CENTURY BOULEVARD, LOS ANGELES, CALIFORNIA 90045 (Address of principal executive office) (310) 417-4660 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Name of each exchange Title of each class on which registered ------------------- --------------------- COMMON STOCK, $0.01 PAR VALUE PER SHARE NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X] 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 check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X] At June 30, 2005, the aggregate market value of voting stock held by non-affiliates of the registrant was $4,657,551. At February 28, 2006, 16,653,193 shares of the registrant's common stock were outstanding. 2 SIMON WORLDWIDE, INC. FORK 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005 INDEX
PAGE ---- PART I Item 1. Business 4 Item 1A. Risk Factors 7 Item 1B. Unresolved Staff Comments 8 Item 2. Properties 8 Item 3. Legal Proceedings 8 Item 4. Submission of Matters to a Vote of Security Holders 9 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 10 Item 6. Selected Financial Data 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 19 Item 8. Financial Statements and Supplementary Data 20 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 20 Item 9A. Controls and Procedures 20 Item 9B. Other Information 20 PART III Item 10. Directors and Executive Officers of the Registrant 21 Item 11. Executive Compensation 23 Item 12. Security Ownership of Certain Beneficial Owners and Management 27 Item 13. Certain Relationships and Related Transactions 30 Item 14. Principal Accountant Fees and Services 31 PART IV Item 15. Exhibits and Financial Statement Schedules 32
3 PART I ITEM 1. BUSINESS GENERAL Prior to August 2001, the Company, incorporated in Delaware and founded in 1976, had been operating as a multi-national full-service promotional marketing company, specializing in the design and development of high-impact promotional products and sales promotions. The major client of the Company in recent years had been McDonald's Corporation ("McDonald's"), for whom the Company's Simon Marketing subsidiary designed and implemented marketing promotions, which included premiums, games, sweepstakes, events, contests, coupon offers, sports marketing, licensing and promotional retail items. Net sales to McDonald's and Philip Morris, another significant client, accounted for 78% and 8%, respectively, of total net sales in 2001. On August 21, 2001, the Company was notified by McDonald's that they were terminating their approximately 25-year relationship with Simon Marketing as a result of the arrest of Jerome P. Jacobson ("Mr. Jacobson"), a former employee of Simon Marketing who subsequently pled guilty to embezzling winning game pieces from McDonald's promotional games administered by Simon Marketing. No other Company employee was found to have any knowledge of or complicity in his illegal scheme. Simon Marketing was identified in the criminal indictment of Mr. Jacobson, along with McDonald's, as an innocent victim of Mr. Jacobson's fraudulent scheme. Further, on August 23, 2001, the Company was notified that its second largest customer, Philip Morris, was also ending its approximately nine-year relationship with the Company. As a result of the above events, the Company no longer has an on-going promotions business. Since August 2001, the Company has concentrated its efforts on reducing its costs and settling numerous claims, contractual obligations and pending litigation. By April 2002, the Company had effectively eliminated a majority of its on-going promotions business operations and was in the process of disposing of its assets and settling its liabilities related to the promotions business and defending and pursuing litigation with respect thereto. The process is on-going and will continue for some indefinite period primarily dependent upon on-going litigation. See Item 3. Legal Proceedings. As a result of these efforts, the Company has been able to resolve a significant number of outstanding liabilities that existed in August 2001 or arose subsequent to that date. As of December 31, 2005, the Company had reduced its workforce to 4 employees from 136 employees as of December 31, 2001. During the second quarter of 2002, the discontinued activities of the Company, consisting of revenues, operating costs, certain general and administrative costs and certain assets and liabilities associated with the Company's promotions business, were classified as discontinued operations for financial reporting purposes. At December 31, 2005, the Company had a stockholders' deficit of $.8 million. For the year ended December 31, 2005, the Company had a net loss of $3.2 million. The Company incurred losses within its continuing operations in 2005 and continues to incur losses in 2006 for the general and administrative expenses incurred to manage the affairs of the Company and resolve outstanding legal matters. By utilizing cash which had been received pursuant to the settlement of the Company's litigation 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, 2005, the Company's significant loss from operations and the pending legal matters, 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 financial statements do not include any adjustments that might result from the outcome of this uncertainty. At December 31, 2005, the Company held an investment in Yucaipa AEC Associates, LLC ("Yucaipa AEC Associates"), a limited liability company that is controlled by the Yucaipa Companies, a Los Angeles, California based investment firm, which also controls the holder of the Company's outstanding preferred stock. Yucaipa AEC Associates in turn principally holds an investment in the common stock of Source Interlink Companies. Prior to 2005, this investment was 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 which was accounted for under the cost method. 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 in June 2002. 4 In March 2004, the Emerging Issues Task Force ("EITF") of the FASB, issued EITF 03-16, "Accounting for Investments in Limited Liability Companies," which required the Company to change its method of accounting for its investment in Yucaipa AEC Associates from the cost method to the equity method for periods ending after July 1, 2004. On February 28, 2005, Alliance 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. Inasmuch as Source is a publicly traded company, the Company's pro-rata investment in Yucaipa AEC Associates, which holds the shares in Source, is equal to the number of Source shares indirectly held by the Company multiplied by the stock price of Source on the date of closing of the merger. Accordingly, on February 28, 2005, the date of closing of the merger, and to reflect its share of the gain upon receipt of the Source equity by 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. As the Company's investment in Yucaipa AEC Associates is accounted for under the equity method, the Company will adjust its investment based on its pro rata share of the earnings and losses of Yucaipa AEC Associates. There were no such adjustments during 2005. The Company has no power to dispose of or liquidate its holding 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. The Company is currently managed by Messrs. George Golleher and J. Anthony Kouba, members of the Board of Directors who jointly act as Chief Executive Officers, in consultation with a principal financial officer and acting general counsel. In connection with such responsibilities, Messrs. Golleher and Kouba entered into Executive Services Agreements dated May 30, 2003, which were subsequently amended in May 2004. See Item 11. Executive Compensation. The Board of Directors continues to consider various alternative courses of action for the Company, including possibly acquiring or combining with one or more operating businesses. The Board of Directors has reviewed and analyzed a number of proposed transactions 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. 1999 EQUITY INVESTMENT In November 1999, Overseas Toys L.P., an affiliate of Yucaipa, invested $25 million into the Company in exchange for 25,000 shares of a new series A convertible preferred stock (initially convertible into 3,030,303 shares of Company common stock) and a warrant, which expired in November 2004, to purchase an additional 15,000 shares of series A convertible preferred stock (initially convertible into 1,666,667 shares of Company common stock). The net proceeds of $20.6 million from this transaction, which was approved by the Company's stockholders, were used for general corporate purposes. Under its terms, the preferred stock has a preference upon liquidation and must be redeemed under certain circumstances, including a sale of the Company or change of control as defined therein. As of December 31, 2005, the amount of the liquidation preference, which is equal to the sum of the preferred stock outstanding plus accrued dividends, was $31.3 million, and the redemption value, which is equal to the sum of the preferred stock outstanding plus accrued dividends multiplied by 101%, was $31.6 million. As of December 31, 2005, assuming conversion of all of the convertible preferred stock and accrued dividends, Overseas Toys L.P. would own approximately 18.6% of the then outstanding common stock. In connection with the investment, the Company's Board of Directors was increased to seven members and three designees of Yucaipa, including Yucaipa's managing partner, Ronald W. Burkle, were elected to the Board of Directors and Mr. Burkle was elected Chairman. Pursuant to a Voting Agreement, dated September 1, 1999, among Yucaipa, Patrick Brady, Allan Brown, Gregory Shlopak, the Shlopak Foundation, Cyrk International Foundation and the Eric Stanton Self-Declaration of Revocable Trust, each of Messrs. Brady, Brown, Shlopak and Stanton agreed to vote all of the shares beneficially held by them to elect the three members nominated by Yucaipa. Mr. Burkle and Erika Paulson, a Yucaipa representative on the Board of Directors, subsequently resigned from the Board of Directors in August 2001. On March 20, 2006, Yucaipa notified the Company that it was designating Ira Tochner and Erika Paulson to fill the vacancies which had been created by the August 2001 resignations and that it was further designating that Mr. Tochner be appointed Chairman of the Board, as it was entitled to do under the terms of its investment. As of March 31, 2006, the Company's Board had not yet effectuated the designated appointments but expects to do so in the very near future. 5 2001 SALE OF BUSINESS In February 2001, the Company sold its Corporate Promotions Group ("CPG") business to Cyrk, Inc. ("Cyrk"), formerly known as Rockridge Partners, Inc., for approximately $14 million, which included the assumption of approximately $3.7 million of Company debt. Two million three hundred thousand dollars ($2,300,000) of the purchase price was paid with a 10% per annum five-year subordinated note from Cyrk, with the balance being paid in cash. CPG had been engaged in the corporate catalog and specialty advertising segment of the promotions industry. Cyrk assumed certain liabilities of the CPG business as specified in the Purchase Agreement, and the Company agreed to transfer its former name, Cyrk, to the buyer. There is no material relationship between Cyrk 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. Subsequently, in connection with the settlement of a controversy between the parties, Cyrk supplied a $500,000 letter of credit to secure partial performance of assumed liabilities and the balance due on the note was forgiven, subject to a reinstatement thereof in the event of default by Cyrk under such assumed liabilities. 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 reduced over time as the underlying obligation to Winthrop reduces. As of September 30, 2005, the available amount under the letter of credit was $2.1 million which was secured, in part, by $1.6 million of restricted cash of the Company. The Company's letter of credit was also secured, in part, by the aforesaid $500,000 letter of credit provided by Cyrk for the benefit of the Company. Cyrk agreed to indemnify the Company if Winthrop made any draw under the letter of credit. 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 were secured by the Company's letter of credit. As a result of the foregoing, the Company recorded a charge in 2003 of $2.8 million with respect to the liability arising from the Winthrop lease. Such charge was revised downward to $2.5 million during 2004 and to $1.6 million during 2005 based on the reduction in the Winthrop liability. During the fourth quarter of 2005, Winthrop drew down the $1.6 million balance of the Company's letter of credit due to Cyrk's default on its obligations to Winthrop. An equal amount of the Company's restricted cash was drawn down by the Company's bank which had issued the letter of credit. Due to this default, Cyrk's $2.3 million subordinated note payable to the Company, which forgiven by the Company in 2003, was reinstated. On January 31, 2006, the Company and Cyrk entered into a Settlement Agreement and Mutual General Release pursuant to which: (1) Cyrk agreed to pay $1.6 million to the Company, of which $435,000 was paid on or before March 1, 2006 and the balance is payable, pursuant to a subordinated note (the "New Subordinated Note"), in forty-one (41) approximately equal consecutive monthly installments beginning April 1, 2006; (ii) Cyrk entered into a Confession of Judgment in Washington State Court for all amounts owing to the Company under the New Subordinated Note and the $2.3 million note (the "Old Subordinated Note"); (iii) Cyrk's parent company agreed to subordinate approximately $4.3 million of Cyrk debt to the debt owed to the Company by Cyrk; and (iv) Cyrk and the Company entered into mutual releases of all claims except those arising under the Settlement Agreement, the New Subordinated Note or the Confession Judgment. So long as Cyrk does not default on the New Subordinated Note, the Company has agreed not to enter the Confession of Judgment in court. Cyrk's obligations under the New Subordinated Note and the Old Subordinated Note are subordinated to Cyrk's obligations to the financial institution which is Cyrk's senior lender, which obligations are secured by, among other things, substantially all of Cyrk's assets. In the event of a default by Cyrk of its obligations under the New Subordinated Note, there is no assurance that the Company will be successful in enforcing the Confession of Judgment. 6 ITEM 1A. RISK FACTORS The following important factors, among others, in some cases have affected, and in the future could affect, the Company's actual results and could cause the Company's actual consolidated results for the Company's current year and beyond to differ materially from those expressed in any forward-looking statements made by or on behalf of the Company. UNCERTAIN OUTLOOK The Company no longer has any operating business. As a result of this fact, together with the stockholders' deficit, the Company's significant loss from operations and the pending legal matters, the Company's independent registered public accounting firm has expressed substantial doubt about the Company's ability to continue as a going concern. The Board of Directors continues to consider various alternative courses of action for the Company, including possibly acquiring or combining with one or more operating businesses. The Board of Directors has reviewed and analyzed a number of proposed transactions 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. No assurances can be made that the holders of our capital stock will receive any distributions if the Company is wound up and liquidated or sold. The outstanding preferred stock has a liquidation preference over the common stock of approximately $31.3 million, which includes accrued dividends. Also, upon a change of control of the Company, the holder of the outstanding preferred stock can cause the Company to redeem the preferred stock for 101% of the liquidation preference. PENDING LITIGATION Although significant litigation, including the litigation with McDonald's and related entities, was settled during the third quarter of 2004, other material litigation against the Company is still pending, specifically, a case in Canada which arose out of the same events which resulted in the McDonald's litigation. In addition to the on-going legal costs associated with the defense of this case and any future cases which may be brought against the Company by persons who opted out of the McDonald's settlement or others, any significant adverse judgment would have a material adverse effect on the Company. DEPENDENCE ON KEY PERSONNEL We are dependent on several key personnel, including our Directors. In light of our uncertain outlook, there is no assurance that our key personnel can be retained. The loss of the services of our key personnel would harm the Company. In addition, the Company has a limited number personnel. As such, this presents a challenge in implementing Section 404 of the Sarbanes-Oxley Act of 2002 with which the Company must comply in fiscal 2007. If Section 404 is not properly implemented, the Company's internal control over financial reporting may be adversely affected. 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. These 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 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 $11.5 million as of December 31, 2005. 7 From time to time, the Company may provide forward looking information such as forecasts of expected future performance or statements about the Company's plans and objectives. This information may be contained in filings with the Securities and Exchange Commission, press releases or oral statements by the officers of the Company. The Company desires to take advantage of the "Safe Harbor" provisions of the Private Securities Litigation Reform Act of 1995 and these risk factors are intended to do so. 1B. UNRESOLVED STAFF COMMENTS Inapplicable. ITEM 2. PROPERTIES As a result of the loss of its two major customers in 2001, the Company took actions to significantly reduce its infrastructure and its global property commitments. During 2002, the Company negotiated early terminations of all its domestic, Asian and European office, warehouse and distribution facility leases and settled its outstanding remaining real estate lease obligations. During 2002, the Company made aggregate payments totaling approximately $2.9 million related to the early termination of these leases. In September 2005, the Company renewed a 12-month lease agreement for 2,600 square feet of office space in Los Angeles, California, with a monthly rent of approximately $3,600, into which it has located its remaining scaled-down operations. For a summary of the Company's minimum rental commitments under all non-cancelable operating leases as of December 31, 2005, see Notes to Consolidated Financial Statements. ITEM 3. LEGAL PROCEEDINGS As a result of the Jacobson embezzlement described above in Item 1, numerous consumer class action and representative action lawsuits were filed in Illinois and multiple other jurisdictions nationwide and in Canada. All actions brought in the United States were eventually consolidated and settled (the "Boland Settlement"), except for any plaintiff who opted out of such settlement. On or about September 13, 2002, an action was filed against Simon Marketing and McDonald's in Canada in Ontario Provincial Court alleging substantially the same facts as in the United States class action lawsuits and adding an allegation that Simon Marketing and McDonald's deliberately diverted from seeding in Canada game pieces with high-level winning prizes in certain McDonald's promotional games. The plaintiffs were Canadian citizens seeking restitution and damages on a class-wide basis. On October 28, 2002, a second action was filed against Simon Marketing and McDonald's in Ontario Provincial Court containing similar allegations. The plaintiffs in the aforesaid actions seek an aggregate of $110 million in damages. Simon Marketing has retained Canadian local counsel to represent it in these actions. The Company believes that the plaintiffs in these actions did not opt out of the Boland Settlement. The Company and McDonald's have filed motions to dismiss or stay these cases on the basis of the Boland Settlement. The Canadian Court has dismissed the case filed in September 2002, but has allowed the October 2002 case to move forward. An appeal of that decision by McDonald's and the Company has been denied by the Court of Appeal. During the third quarter of 2005, the Company entered into a settlement agreement with plaintiff in the case on behalf of the class pursuant to which the Company agreed to 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. On March 29, 2002, Simon Marketing filed a lawsuit against PricewaterhouseCoopers LLP ("PWC") and two other accounting firms, citing the accountants' failure to oversee, on behalf of Simon Marketing, various steps in the distribution of high-value game pieces for certain McDonald's promotional games. The complaint alleged that this failure allowed the misappropriation of certain of these high-value game pieces by Mr. Jacobson. The lawsuit, filed in Los Angeles Superior Court, sought unspecified actual and punitive damages resulting from economic injury, loss of income and profit, loss of goodwill, loss of reputation, lost interest, and other general and special damages. Defendants' demurrers to the first and a second amended complaint were sustained in part, including the dismissal of all claims for punitive damages with no leave to amend. A third amended complaint was filed, and defendants' demurrer to all causes of action was sustained without leave to amend. The Company appealed this ruling with respect to PWC only, and the California Court of Appeal subsequently reversed the lower court and reinstated the case against PWC. The case is now proceeding in the discovery stage. 8 On October 19, 2005, the Company received notice of a lawsuit against it 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 in May 2001 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. It has recorded a contingent loss liability of $.5 million related to this matter. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 9 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Until May 3, 2002, the Company's stock traded on The Nasdaq Stock Market under the symbol SWWI. On May 3, 2002, the Company's stock was delisted by Nasdaq due to the fact that the Company's stock was trading at a price below the minimum Nasdaq requirement. The following table presents, for the periods indicated, the high and low sales prices of the Company's common stock as reported on the over-the-counter market as reported in the Pink Sheets. Such over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
2005 2004 ------------- ------------- High Low High Low ----- ----- ----- ----- First Quarter $0.17 $0.12 $0.41 $0.05 Second Quarter 0.32 0.17 0.31 0.16 Third Quarter 0.30 0.20 0.22 0.10 Fourth Quarter 0.40 0.22 0.18 0.12
As of February 28, 2006, the Company had approximately 416 holders of record of its common stock. The last reported sale price of the Company's common stock on February 28, 2006, was $.25. The Company has never paid cash dividends, other than series A preferred stock distributions in 2000 and stockholder distributions of Subchapter S earnings during 1993 and 1992. During 2005, the Company did not repurchase any of its common stock. ITEM 6. SELECTED FINANCIAL DATA 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. The selected financial data for prior periods has been reclassified to conform to current period presentation. The following selected financial data had been derived from our audited financial statements and should be read in conjunction with Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Item 8. Financial Statements and Supplementary Data:
For the Years Ended December 31, ------------------------------------------------------ Selected income statement data: 2005 2004 2003 2002 2001 - ------------------------------- ------- ------- ------- -------- --------- (in thousands, except per share data) Continuing operations: Net sales $ -- $ -- $ -- $ -- $ -- Net loss (2,684) (3,625) (5,270) (15,406) (7,916) Loss per common share available to common shareholders - basic and diluted (0.23) (0.29) (0.38) (0.99) (0.54) Discontinued operations: Net sales -- -- -- -- 324,040 Net income (loss) (478) 24,261(1) (3,591) 6,120(2) (114,429)(3) Earnings (loss) per common share - basic and diluted (0.03) 1.46(1) (0.22) 0.37(2) (6.95)(3)
10
December 31, -------------------------------------------------- Selected balance sheet data: 2005 2004 2003 2002 2001 - ---------------------------- ------- ------- -------- -------- -------- (in thousands) Cash and cash equivalents (4) $16,473 $18,892 $ 10,065 $ 14,417 $ 40,851 Total assets 31,822 26,123 19,838 26,440 77,936 Long-term obligations -- -- -- -- 6,785 Redeemable preferred stock 31,118 29,904 28,737 27,616 26,538 Stockholders' deficit (841) (7,749) (27,213) (17,225) (11,497)
(1) 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 $13,000 and due to the elimination of liabilities associated with the settlement of approximately $12,000, the Company recorded a gain of approximately $25,000. (2) Includes $4,574 of pre-tax charges attributable to loss of significant customers, $12,023 of pre-tax net gain on settlement of vendor payables and $4,432 on settlement of lease and other obligations. (3) Includes $46,671 of pre-tax impairment of intangible asset, $33,644 of pre-tax charges attributable to loss of significant customers and $20,212 of pre-tax restructuring and nonrecurring charges. (4) Includes only non-restricted cash. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS From time to time, the Company may provide forward-looking information such as forecasts of expected future performance or statements about the Company's plans and objectives, including certain information provided below. These forward-looking statements are based largely on the Company's expectations and are subject to a number of risks and uncertainties, certain of which are beyond the Company's control. The Company wishes to caution readers that actual results may differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company including, without limitation, as a result of factors described in Item 1A. Risk Factors. BUSINESS CONDITIONS Prior to August 2001, the Company, incorporated in Delaware and founded in 1976, had been operating as a multi-national full-service promotional marketing company, specializing in the design and development of high-impact promotional products and sales promotions. The majority of the Company's revenue was derived from the sale of products to consumer products and services companies seeking to promote their brand names and corporate identities and build brand loyalty. The major client of the Company was McDonald's Corporation ("McDonald's"), for whom the Company's Simon Marketing subsidiary designed and implemented marketing promotions, which included premiums, games, sweepstakes, events, contests, coupon offers, sports marketing, licensing and promotional retail items. Net sales to McDonald's and Philip Morris, another significant client, accounted for 78% and 8%, respectively, of total net sales in 2001. On August 21, 2001, the Company was notified by McDonald's that it was terminating its approximately 25-year relationship with Simon Marketing as a result of the arrest of Jerome P. Jacobson ("Mr. Jacobson"), a former employee of Simon Marketing who subsequently pled guilty to embezzling winning game pieces from McDonald's promotional games administered by Simon Marketing. No other Company employee was found to have any knowledge of or complicity in his illegal scheme. Simon Marketing was identified in the criminal indictment of Mr. Jacobson, along with McDonald's, as an innocent victim of Mr. Jacobson's fraudulent scheme. Further, on August 23, 2001, the Company was notified that its second largest customer, Philip Morris, was also ending its approximately nine-year relationship with the Company. As a result of the above events, the Company no longer has an on-going promotions business. 11 Since August 2001, the Company has concentrated its efforts on reducing its costs and settling numerous claims, contractual obligations and pending litigation. By April 2002, the Company had effectively eliminated a majority of its on-going promotions business operations and was in the process of disposing of its assets and settling its liabilities related to the promotions business and defending and pursuing litigation with respect thereto. The process is on-going and will continue for some indefinite period primarily dependent upon on-going litigation. See Item 3. Legal Proceedings. As a result of these efforts, the Company has been able to resolve a significant number of outstanding liabilities that existed in August 2001 or arose subsequent to that date. As of December 31, 2005, the Company had reduced its workforce to 4 employees from 136 employees as of December 31, 2001. During the second quarter of 2002, the discontinued activities of the Company, consisting of revenues, operating costs, certain general and administrative costs and certain assets and liabilities associated with the Company's promotions business, were classified as discontinued operations for financial reporting purposes. At December 31, 2005, the Company had a stockholders' deficit of $.8 million. For the year ended December 31, 2005, the Company had a net loss of $3.2 million. The Company incurred losses within its continuing operations in 2005 and continues to incur losses in 2006 for the general and administrative expenses incurred to manage the affairs of the Company and resolve outstanding legal matters. By utilizing cash which had been received pursuant to the settlement of the Company's litigation 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, 2005, the Company's significant loss from operations and the pending legal matters, 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 financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company is currently managed by Messrs. George Golleher and J. Anthony Kouba, members of the Board of Directors who jointly act as Chief Executive Officers, in consultation with a principal financial officer and acting general counsel. In connection with such responsibilities, Messrs. Golleher and Kouba entered into Executive Services Agreements dated May 30, 2003, which were subsequently amended in May 2004. See Item 11. Executive Compensation. The Board of Directors continues to consider various alternative courses of action for the Company, including possibly acquiring or combining with one or more operating businesses. The Board of Directors has reviewed and analyzed a number of proposed transactions 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. CRITICAL ACCOUNTING POLICIES Management's discussion and analysis of financial condition and results of operations is based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, management evaluates its estimates and bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. Management applies the following critical accounting policies in the preparation of the Company's consolidated financial statements: LONG-TERM INVESTMENTS In the past, with its excess cash, the Company had 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. These 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 capital markets. The carrying value of the 12 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 $11.5 million as of December 31, 2005. At December 31, 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 principally holds an investment in the common stock of Source Interlink Companies. Prior to 2005, this investment was 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 which was accounted for under the cost method. 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 in June 2002. In March 2004, the Emerging Issues Task Force ("EITF") of the FASB, issued EITF 03-16, "Accounting for Investments in Limited Liability Companies," which required the Company to change its method of accounting for its investment in Yucaipa AEC Associates from the cost method to the equity method for periods ending after July 1, 2004. On February 28, 2005, Alliance 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. As such, the primary asset of Yucaipa AEC is its investment in 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, is equal to the number of Source shares indirectly held by the Company multiplied by the stock price of Source on the date of closing of the merger. Accordingly, on February 28, 2005, the date of closing of the merger, and to reflect the change in its underlying investment within 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. As the Company's investment in Yucaipa AEC Associates is accounted for under the equity method, the Company will adjust its investment based in its pro rata share of the earnings and losses of Yucaipa AEC Associates. Other than the merger of Alliance with Source, there were no such adjustments during 2005. The Company has no power to dispose of or liquidate its holding 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. 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. During 2005, the Company recorded an investment impairment of $.2 million, net of related amounts recorded in unrealized gain on the balance sheet, to adjust the recorded value of its other investments that are accounted for under the cost method to the estimated future undiscounted cash flows the Company expects from such investments. CONTINGENCIES The Company records an accrued liability and related charge for an estimated loss from a loss contingency if two conditions are met: (i) information is available prior to the issuance of the financial statements that indicates it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and (ii) the amount of loss can be reasonably estimated. Accruals for general or unspecified business risks are not recorded. Gain contingencies are recognized when realized. On October 19, 2005, the Company received notice of a lawsuit against it 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 in May 2001 by HA-LO to the Company in the amount of $459,852 plus interest. Based on an assessment by management, during the three months ended September 30, 2005, the Company recorded a contingent loss liability of $.5 million related to this matter. 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 was secured by a letter of credit of the Company. As a result of the foregoing, the Company recorded a charge in 2003 of $2.8 million with respect to the liability 13 arising from the Winthrop lease. Such charge was revised downward to $2.5 million during 2004 and to $1.6 million during 2005 based on the reduction in the Winthrop liability. During the fourth quarter of 2005, Winthrop drew down the $1.6 million balance of the Company's letter of credit due to Cyrk's default on its obligations to Winthrop. An equal amount of the Company's restricted cash was drawn down by the Company's bank which had issued the letter of credit. Due to this default, Cyrk's $2.3 million subordinated note payable to the Company, which forgiven by the Company in 2003, was reinstated. On January 31, 2006, the Company and Cyrk entered into a Settlement Agreement and Mutual General Release pursuant to which: (1) Cyrk agreed to pay $1.6 million to the Company, of which $435,000 was paid on or before March 1, 2006 and the balance is payable, pursuant to a subordinated note (the "New Subordinated Note"), in forty-one (41) approximately equal consecutive monthly installments beginning April 1, 2006; (ii) Cyrk entered into a Confession of Judgment in Washington State Court for all amounts owing to the Company under the New Subordinated Note and the $2.3 million note (the "Old Subordinated Note"); (iii) Cyrk's parent company agreed to subordinate approximately $4.3 million of Cyrk debt to the debt owed to the Company by Cyrk; and (iv) Cyrk and the Company entered into mutual releases of all claims except those arising under the Settlement Agreement, the New Subordinated Note or the Confession Judgment. So long as Cyrk does not default on the New Subordinated Note, the Company has agreed not to enter the Confession of Judgment in court. Cyrk's obligations under the New Subordinated Note and the Old Subordinated Note are subordinated to Cyrk's obligations to the financial institution which is Cyrk's senior lender, which obligations are secured by, among other things, substantially all of Cyrk's assets. In the event of a default by Cyrk of its obligations under the New Subordinated Note, there is no assurance that the Company will be successful in enforcing the Confession of Judgment. RECENTLY ISSUED ACCOUNTING STANDARDS In December 2004, the Financial Accounting Standards Board ("FASB") issued a revision entitled, "Share Based Payment," to Statement of Financial Accounting Standard ("SFAS") No. 123, "Accounting for Stock Based Compensation." This revision supersedes Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and its related implementation guidance. As such, this revision eliminates the alternative to use the intrinsic value method of accounting under APB Opinion No. 25 that was available under SFAS No. 123 as originally issued. Under APB Opinion No. 25, issuing stock options to employees generally resulted in recognition of no compensation cost. This revision requires entities to recognize 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 annual reporting period beginning January 1, 2006. The Company does not expect the adoption of Statement No. 123(R) to have a material effect on its consolidated statements of financial position or results of operations, due to the small number of outstanding options. 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. 14 SIGNIFICANT CONTRACTUAL OBLIGATIONS The following table includes certain significant contractual obligations of the Company at December 31, 2005. See Notes to Consolidated Financial Statements for additional information related to these and other obligations.
Payments Due by Period ------------------------------------------- Less Than 1-3 4-5 After 5 Total 1 Year Years Years Years ----- --------- ----- ----- ------- (in thousands) Operating leases (1) $ 33 $ 33 $ -- $ -- $-- Contingent payment obligations 53 53 -- -- -- Other long-term obligations (2) 400 80 160 160 -- ---- ---- ---- ---- --- Total contractual cash obligations $486 $166 $160 $160 $-- ==== ==== ==== ==== ===
(1) Payments for operating leases are recognized as an expense in the Consolidated Statement of Operations on a straight-line basis over the term of the lease. (2) Relates to life insurance premiums for the benefit of a former Company executive and for which the Company is obligated. OTHER COMMERCIAL COMMITMENTS The following table includes certain commercial commitments of the Company at December 31, 2005. See Notes to Consolidated Financial Statements for additional information related to these and other commitments.
Total Committed at Total Committed at end of December 31, ----------------------------------------------------------- 2005 1 Year 2 Years 3 Years 4 Years 5 Years Thereafter ------------ ------ ------- ------- ------- ------- ---------- (in thousands) Standby letters of credit $372 $168 $-- $-- $-- $-- $-- ==== ==== === === === === ===
The amount committed at December 31, 2005, relates to a letter of credit provided by the Company to support the Company's obligation to Winthrop Resources Corporation. RESULTS OF CONTINUING AND DISCONTINUED OPERATIONS By April 2002, the Company had effectively eliminated a majority of its on-going promotions business operations and was in the process of disposing of its assets and settling its liabilities related to the promotions business. Accordingly, the discontinued activities of the Company have been classified as discontinued operations in the accompanying consolidated financial statements. Continuing operations represent the direct costs required to maintain the Company's current corporate infrastructure that will enable the Board of Directors to pursue various alternative courses of action going forward. These costs primarily consist of the salaries and benefits of executive management and corporate finance staff, professional fees, Board of Director fees, and space and facility costs. The Company's continuing operations and discontinued operations will be discussed separately, based on the respective financial results contained in the accompanying consolidated financial statements and related notes. 15 CONTINUING OPERATIONS 2005 COMPARED TO 2004 There were no net sales during 2005 or 2004. General and administrative expenses totaled $3.1 million in 2005 compared to $3.6 million in 2004. The decrease was primarily due to reductions in insurance expense ($.3 million), labor costs ($.1 million) and facilities costs ($.1 million) with no material offsetting increases. Changes in general and administrative expenses going forward are dependent on the outcome of the various alternative courses of action for the Company being considered by the Board of Directors, which include possibly acquiring or combining with one or more operating businesses. The Board 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. Accordingly, the Company cannot predict changes in general and administrative expenses going forward. The Company recorded an investment impairment during 2005 of $.2 million, net of related amounts recorded in unrealized gain on the balance sheet, to adjust the recorded value of its investments accounted for under the cost method to the estimated future undiscounted cash flows the Company expects from such investments. 2004 COMPARED TO 2003 There were no net sales during 2004 or 2003. General and administrative expenses totaled $3.6 million in 2004 compared to $5.3 million in 2003. The decrease was primarily due to reductions in professional fees ($.7 million), insurance expense ($.5 million), labor costs ($.4 million) and facilities costs ($.1 million). DISCONTINUED OPERATIONS 2005 COMPARED TO 2004 There were no net sales or gross profit during 2005 or 2004. General and administrative expenses totaled $.2 million in 2005 compared to $2.0 million in 2004. The decrease was primarily due to a charge in 2004 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 ($1.0 million) and a reduction in expenses and other items related to the wind-down of the Company's Europe and Hong Kong entities ($.8 million). During 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 settlement loss of $.5 million resulting in a net gain on settlement of obligations of $24.5 million 2004 COMPARED TO 2003 There were no net sales or gross profit during 2004 or 2003. General and administrative expenses totaled $2.0 million in 2004 compared to $1.4 million in 2003. The increase was primarily due to a 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 partially offset by reductions in professional fees, labor costs, facilities costs, and other items related to the wind-down of the Company's Europe, Hong Kong and United States entities. Gain on settlement of obligations totaled $24.5 million in 2004 compared to $.02 million during 2003. During 2004, and in connection with the Company's settlement of its litigation with McDonald's and related entities, the Company received net 16 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 settlement loss of $.5 million. During 2003, the Company's gains related to the settlement of outstanding liabilities with some of its vendors on terms more favorable to the Company than required by the existing terms of the liabilities. LIQUIDITY AND CAPITAL RESOURCES The lack of any operating revenue has had and will continue to have a substantial adverse impact on the Company's cash position. As a result of the stockholders' deficit at December 31, 2005, the Company's significant loss from operations and the pending legal matters, 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 financial statements do not include any adjustments that might result from the outcome of this uncertainty. Since inception, the Company had financed its working capital and capital expenditure requirements through cash generated from operations, and investing and financing activities such as public and private sales of common and preferred stock, bank borrowings, asset sales and capital equipment leases. The Company incurred losses within its continuing operations in 2005 and continues to incur losses in 2006 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 within its continuing operations, 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. Management believes it has sufficient capital resources and liquidity to operate the Company for the foreseeable future. The Board of Directors continues to consider various alternative courses of action for the Company, including possibly acquiring or combining with one or more operating businesses. The Board of Directors has reviewed and analyzed a number of proposed transactions 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. CONTINUING OPERATIONS Working capital attributable to continuing operations at December 31, 2005, was $18.7 million compared to $21.4 million at December 31, 2004. Net cash used in operating activities from continuing operations during 2005 totaled $2.5 million, primarily due to a loss from continuing operations of $2.7 million, resulting from the general and administrative expenses incurred to manage the affairs of the Company and resolve outstanding legal matters, partially offset by a investment impairment charge of $.2 million. By utilizing cash which had been received pursuant to the settlement of the Company's litigation with McDonald's in 2004 of $13 million, after attorney's fees, management believes it has sufficient capital resources and liquidity to operate the Company for the foreseeable future. In addition, the Company does not expect any significant capital expenditures in the foreseeable future. Net cash used in operating activities from continuing operations during 2004 totaled $2.8 million, primarily due to a loss from continuing operations of $3.6 million, resulting from the general and administrative expenses incurred to manage the affairs of the Company and resolve outstanding legal matters, partially offset by changes in working capital items of $.8 million. Net cash used in operating activities from continuing operations during 2003 totaled $4.9 million, primarily due to a loss from continuing operations of $5.3 million, resulting from the general and administrative expenses incurred to manage the affairs of the Company and resolve outstanding legal matters, partially offset by a net increase in working capital items of $.4 million. Net cash provided by investing activities during 2005 totaled $.2 million, primarily due to a decrease in restricted cash. Net cash used in investing activities during 2004 totaled $2.6 million, primarily due to an increase in restricted cash as such restricted cash was transferred from discontinued operations on the basis that discontinued operations already had sufficient assets from discontinued operations to be disposed of to cover liabilities from discontinued operations. 17 Net cash provided by investing activities during 2003 totaled $7.3 million, primarily due to a decrease in restricted cash as such restricted cash was transferred to discontinued operations on the basis that discontinued operations required additional assets from discontinued operations to be disposed of to cover liabilities from discontinued operations. There were no financing cash flows from continuing operations during 2005, 2004 or 2003. 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 described consultants, who are entitled to indemnification against liabilities arising out of their status as directors, officers and/or consultants. As of December 31, 2005, there have not been any claims made against the trust. On March 1, 2006, the trust expired by its own terms without any claims having been made and all funds held by the trust plus accrued interest, less trustee fees, totaling approximately $2.8 million were returned to the Company. In addition to the legal matters discussed in Item 3. Legal Proceedings, the Company is also involved in other litigation and legal matters which have arisen in the ordinary course of business. The Company does not believe that the ultimate resolution of these other litigation and legal matters will have a material adverse effect on its financial condition, results of operations or net cash flows. Restricted cash included within continuing operations at December 31, 2005 and 2004, totaled $2.8 million and $3.0 million, respectively, and primarily consisted of amounts deposited into an irrevocable trust, totaling $2.7 million and, at December 31, 2004, amounts deposited with lenders to satisfy the Company's obligations pursuant to its standby letter of credit. DISCONTINUED OPERATIONS Working capital (deficit) attributable to discontinued operations at December 31, 2005, was $(.3) million compared to $(.2) million at December 31, 2004. Net cash used in discontinued operations during 2005 totaled $.4 million primarily due to cash used in operating activities of discontinued operations of $2.7 million, cash transferred from continuing operations of $.1 million, partially offset by cash provided by investing activities of discontinued operations of $2.4 million. The $2.7 million cash used in operating activities of discontinued operations is primarily due to a net loss of $.5 million, a reduction in working capital items of $1.9 million, and other items of $.3 million. The $2.4 million cash provided by investing activities of discontinued operations was primarily due to a decrease in restricted cash with $1.6 million of such reduction due to the default by Cyrk on the Winthrop lease. See "2001 Sale of Business" in Item 1. Business. Net cash provided by discontinued operations during 2004 totaled $24.3 million, primarily due to cash received and the elimination of liabilities related to the McDonald's settlement totaling $25.0 million and cash provided by investing activities of $3.6 million primarily related to a reduction in restricted cash, partially offset by a settlement loss of $.5 million, a net change in working capital items of $2.8 million and other charges of $1.0 million. Net cash used in discontinued operations during 2003 totaled $3.6 million, primarily due to net cash used in operating activities of $.2 million, net cash used in investing activities of $6.6 million and a reallocation of funds, totaling approximately $3.2 million, from continuing to discontinued operations on the basis that discontinued operations required additional assets from discontinued operations to be disposed of to cover liabilities from discontinued operations. Net cash used in operating activities of discontinued operations during 2003 of $.2 million primarily consisted of a net loss of $3.6 million partially offset by a non-cash charge for a contingent loss of $2.8 million and a provision for doubtful accounts and other items of $.6 million. Net cash used in investing activities of discontinued operations during 2003 of $6.6 million primarily consisted of an increase in restricted cash. There were no financing activities of discontinued operations during 2005, 2004 and 2003. 18 In 2004, the Company recorded a net settlement gain of $24.5 million primarily due to cash received and the elimination of liabilities related to the McDonald's settlement totaling $25.0 million partially offset by a settlement loss of $.5 million related to a life insurance policy for a former Company executive and on which the Company was obligated to make premium payments. The Company recorded nominal settlement gains during 2003. At December 31, 2004, the Company had various pre-existing letters of credit outstanding, which were cash collateralized and had various expiration dates through August 2007. As of December 31, 2004, the Company had approximately $3.0 million in outstanding letters of credit, which primarily consisted of letters of credit provided by the Company to support Cyrk's and the Company's obligations to Winthrop Resources Corporation. These letters of credit were secured, in part, by $2.5 million of restricted cash of the Company. The Company's letter of credit which supported Cyrk's obligations to Winthrop was also secured, in part, by a $500,000 letter of credit provided by Cyrk for the benefit of the Company. Cyrk has agreed to indemnify the Company if Winthrop makes any draw under the letter of credit which supported Cyrk's obligations to Winthrop. In the fourth quarter of 2003, Cyrk informed the Company that it was continuing to suffer substantial financial difficulties, and that it could not continue to discharge its obligations to Winthrop which were secured by the Company's letter of credit. In the event of default, Winthrop had the right to draw upon the Company's letter of credit. As a result of the foregoing facts, the Company recorded a charge in 2003 of $2.8 million with respect to the liability arising from the Winthrop lease. Such charge was revised downward to $2.5 million during 2004 and to $1.6 million during 2005 based on the reduction in the Winthrop liability. During the fourth quarter of 2005, Winthrop drew down the $1.6 million balance of the Company's letter of credit due to Cyrk's default on its obligations to Winthrop. See "2001 Sale of Business" in Item 1. Business. On October 19, 2005, the Company received notice of a lawsuit against it 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 in May 2001 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. It has recorded a contingent loss liability of $.5 million related to this matter. Restricted cash included within discontinued operations at December 31, 2005 and 2004 totaled $.4 million and $2.8 million, respectively, 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 at December 31, 2005 and 2004, totaling $2.8 million and $3.0 million, respectively, which primarily consisted of amounts deposited into an irrevocable trust, totaling $2.7 million and, at December 31, 2004, amounts deposited with lenders to satisfy the Company's obligations pursuant to its standby letter of credit. ITEM 7A. 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. However, because the close down of these subsidiaries is substantially complete, there are no material assets or liabilities remaining at these subsidiaries. As such, the Company is not materially exposed to foreign currency exchange risk. All of the Company's cash equivalents consist of short-term, highly liquid investments, with original maturities at the date of purchase of three-months or less. 19 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page ---- Report of Independent Registered Public Accounting Firm F-1 Consolidated Balance Sheets as of December 31, 2005 and 2004 F-2 Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003 F-3 Consolidated Statements of Stockholders' Deficit for the years ended December 31, 2005, 2004 and 2003 F-4 Consolidated Statements of Cash Flows for the years ended F-5 December 31, 2005, 2004 and 2003 Notes to Consolidated Financial Statements F-6 Schedule II: Valuation and Qualifying Accounts F-21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES DISCLOSURE CONTROLS AND PROCEDURES: As of December 31, 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 Board of Directors, who have responsibility for the role of Chief Executive Officer of the Company, and Greg Mays, the Principal Financial Officer, reviewed and participated in this evaluation. Based on this evaluation, the Company's disclosure controls 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. ITEM 9B. OTHER INFORMATION None. 20 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Company's certificate of incorporation provides that the number of directors shall be determined from time to time by the Board of Directors (but shall be no less than three and no more than fifteen) and that the Board of Directors shall be divided into three classes. On September 1, 1999, the Company entered into a Securities Purchase Agreement with Overseas Toys, L.P., an affiliate of Yucaipa, the holder of all of the Company's outstanding series A senior cumulative participating convertible preferred stock, pursuant to which the Company agreed to fix the size of the Board of Directors at seven members. Yucaipa has the right to designate three individuals to the Board of Directors and to designate the Chairman of the Board. Pursuant to a Voting Agreement, dated September 1, 1999, among Yucaipa, Patrick D. Brady, Allan I. Brown, Gregory Shlopak, the Shlopak Foundation, Cyrk International Foundation and the Eric Stanton Self-Declaration of Revocable Trust, each of Messrs. Brady, Brown, Shlopak and Stanton agreed to vote all of the shares beneficially held by them to elect the three Directors nominated by Yucaipa. On November 10, 1999, Ronald W. Burkle, George G. Golleher and Richard Wolpert were the three Yucaipa nominees elected to the Company's Board of Directors, of which Mr. Burkle became Chairman. Mr. Wolpert resigned from the Board of Directors on February 7, 2000. Thereafter, Yucaipa requested that Erika Paulson be named as its third designee to the Board of Directors and on May 25, 2000, Ms. Paulson was elected to fill the vacancy created by Mr. Wolpert's resignation. On June 15, 2001, Patrick D. Brady resigned from the Board of Directors. On August 24, 2001, Mr. Burkle and Ms. Paulson resigned from the Board of Directors. On May 25,2004 Greg Mays was elected to the Board to fill the vacancy which had been created by Mr. Brady's resignation. In a letter dated March 20, 2006, Yucaipa notified the Company that it was designating Ira Tochner and Erika Paulson to fill the vacancies which had been created by the August 2001 resignations and that it was further designating that Mr. Tochner be appointed Chairman of the Board, as it was entitled to do under the terms of its investment. As of March 31, 2006, the Company's Board had not yet effectuated the designated appointments but expects to do so in the very near future. As a result of the notification from Yucaipa, the Board re-examined its membership composition to ensure that Directors unaffiliated with Yucaipa constituted a majority of its members going forward, as was provided in the Securities Purchase Agreement. As a result of that analysis, the Board and Mr. Mays concluded that his continued participation on the Board might give the appearance that Yucaipa had designated more than the three (of seven) seats to which it was entitled since in the past year Mr. Mays had been designated by Yucaipa to join the boards of directors of two companies in which it had significant investments. Consequently, on March 27, 2006, Mr. Mays agreed to resign from the Board and the Company terminated his Executive Services Agreement (see Item 11. Executive Compensation below) and pursuant thereto the parties exchanged mutual releases and Mr. Mays was paid severance under the Agreement of $210,000. The Company and Mr. Mays subsequently entered into a new agreement which is terminable by either party upon 90 days written notice which requires Mr. Mays to continue to provide accounting services and act as Chief Financial Officer of the Company under his existing salary and employment conditions until either party terminates the arrangement. On March 27,2006, Terrence Wallock, the Company's acting general counsel, was elected to the Board of Directors to fill the vacancy created by Mr. Mays' resignation. For further information, see "Business History of Directors and Executive Officers" below. The following table sets forth the names and ages of the Directors, the year in which each individual was first elected a director and the year his term expires:
Name Age Class Year Term Expires (a) Director Since ---- --- ----- --------------------- -------------- Joseph W. Bartlett 72 I 2003 1993 Allan I. Brown 65 I 2003 1999 Joseph Anthony Kouba 58 III 2002 1997 George G. Golleher 57 II 2004 1999 Terrence J. Wallock 61 III 2006 2006
21 (a) No stockholders meeting to elect directors was held in 2005 or 2004. In accordance with Delaware law and the Company's by-laws, Mr. Bartlett's, Mr. Brown's, Mr. Kouba's, Mr. Golleher's, and Mr. Wallock's terms as directors continue until their successors are elected and qualified. BUSINESS HISTORY OF DIRECTORS AND EXECUTIVE OFFICERS MR. BARTLETT is engaged in the private practice of law as of counsel to the law firm of Fish & Richardson. From 1996 through 2002, he was a partner in the law firm of Morrison & Foerster LLP. He was a partner in the law firm of Mayer, Brown & Platt from July 1991 until March 1996. From 1969 until November 1990, Mr. Bartlett was a partner of, and from November 1990 until June 1991 he was of counsel to, the law firm of Gaston & Snow. Mr. Bartlett served as Under Secretary of the United States Department of Commerce from 1967 to 1968 and as law clerk to the Chief Justice of the United States in 1960. MR. BROWN was the Company's Chief Executive Officer and president from July 2001 until March 2002 when his employment with the Company terminated. From November 1999 to July 2001, Mr. Brown served as the Company's Co-Chief Executive Officer and Co-President. From November 1975 until March 2002, Mr. Brown served as the Chief Executive Officer of Simon Marketing. MR. GOLLEHER is a consultant and private investor. Mr. Golleher's career includes numerous positions in senior financial capacities, including Chief Financial Officer. More recently, Mr. Golleher served as President and Chief Operating Officer of Fred Meyer, Inc. from March 1998 to June 1999, and also served as a member of its Board of Directors. Mr. Golleher served as Chief Executive Officer of Ralphs Grocery Company from January 1996 to March 1998 and was Vice Chairman from June 1995 to January 1996. Mr. Golleher serves on the Board of Directors of Rite-Aid Corporation and General Nutrition Centers, Inc. MR. KOUBA is a private investor and is engaged in the business of real estate, hospitality and outdoor advertising. He has been an attorney and a member of the Bar in California since 1972. MR. WALLOCK is an attorney, consultant and private investor. He also serves as the Company's Assistant Secretary and Legal Counsel. Prior to engaging in a consulting and private legal practice in 2000, he served a number of public companies as senior executive and general counsel, including Denny's Inc., The Vons Companies, Inc. and Ralphs Grocery Company. MR. MAYS, age 59, is a consultant and private investor. He has served as the Company's Chief Financial Officer since May 2003. Through his career, Mr. Mays has held numerous executive and financial positions, most recently as Executive Vice President-Finance and Administration of Ralphs Grocery Company from 1995 to 1999. Mr. Mays also serves on the Board of Directors of Source Interlink Companies, Inc. and Pathmark Stores, Inc. The Company's on-going operations are managed by Messrs. Golleher and Kouba, who have served as Co-Chief Executive Officers since May 2003, in consultation with Mr. Mays as Principal Financial Officer and Mr. Wallock, the Company's acting general counsel. CODE OF ETHICS The Company has adopted a code of ethics applicable to all directors, officers and employees which is designed to deter wrongdoing and to promote honest and ethical conduct and compliance with applicable laws and regulations. The Company undertakes to provide a copy to any person without charge upon written request. AUDIT COMMITTEE FINANCIAL EXPERT The members of the Audit Committee of the Board of Directors are Messrs. Bartlett (Chairman), Golleher, and Kouba. The Board of Directors has determined that Mr. Golleher is an "audit committee financial expert," as defined in the rules of the Securities and Exchange Commission, by reason of his experience described under "Business History of Directors and Executive Officers." Mr. Golleher may be deemed not to be an "independent director" under the rules applicable to national stock exchanges in the event the Company should ever qualify and seek relisting. 22 ITEM 11. EXECUTIVE COMPENSATION The following table sets forth the compensation the Company paid or accrued for services rendered in 2005, 2004 and 2003, for the individuals who have the responsibility for the roles of the executive officers of the Company: Summary Compensation Table
Long-Term Annual Compensation (1) Compensation -------------------------------------- Securities Name and Other Annual Underlying All Other Principal Position Year Salary Bonus Compensation Options Compensation ------------------ ---- -------- ----- ------------ ------------ ------------ J. Anthony Kouba 2005 $350,000 $-- $-- -- $ 84,720(2) Co-Chief Executive Officer 2004 350,000 -- -- -- 112,192(2)(3) and Director 2003 425,669 -- -- 20,000 161,500(2) George Golleher 2005 $350,000 $-- $-- -- $ 87,939(2) Co-Chief Executive Officer 2004 350,000 -- -- -- 110,192(2)(3) and Director 2003 433,544 -- -- 20,000 165,405(2) Greg Mays 2005 $210,000 $-- $-- -- $ 80,002(2) Chief Financial Officer and Director 2004 210,000 -- -- -- 41,551(2) 2003 254,009 -- -- 10,000 101,168
1. In accordance with the rules of the Securities and Exchange Commission, other compensation in the form of perquisites and other personal benefits have been omitted for all of the individuals in the table because the aggregate amount of such perquisites and other personal benefits constituted less than the lesser of $50,000 or 10% of the total annual salary and bonuses for such individuals for 2005, 2004 and 2003. 2. Includes Board of Directors retainer and meeting fees. See Directors' Compensation below. 3. Includes $22,192 for services that related to 2003 but were paid in 2004. OPTION GRANTS IN THE LAST FISCAL YEAR There were no option grants during the last fiscal year. AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES There were no exercises of stock options during the last fiscal year. The following table sets forth for each of our executive officers certain information regarding exercises of stock options during 2005 and stock options held at the end of 2005:
(in thousands) Number of Securities Value of Unexercised Shares Underlying In-the-Money Acquired Unexercised Options Options at On Value at Fiscal Year-End Fiscal Year End (1) Name Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable ---- -------- -------- ------------------------- ------------------------- J. Anthony Kouba -- $-- 60,000 / -- $2 / $-- George Golleher -- -- 30,000 / -- 2 / -- Greg Mays -- -- 10,000 / -- 1 / --
23 (1) This value is the difference between the market price of our common stock subject to the options on December 31, 2005 ($0.22 per share) and the option exercise (purchase) price, assuming the options were exercised and the shares sold on that date. EXECUTIVE SERVICES AGREEMENTS In May 2003, the Company entered into Executive Services Agreements with Messrs. Bartlett, Brown, Golleher, Kouba, Mays and Wallock. The purpose of the Agreements was to substantially lower the administrative costs of the Company going forward while at the same time retaining the availability of experienced executives knowledgeable about the Company for on-going administration as well as future opportunities. The Agreements provide for compensation at the rate of $1,000 per month to Messrs. Bartlett and Brown, $6,731 per week to Messrs. Golleher and Kouba, $4,040 per week to Mr. Mays and $3,365 per week to Mr. Wallock. Additional hourly compensation is provided after termination of the Agreements and, in some circumstances during the term, for extensive commitments of time related to any legal or administrative proceedings and merger and acquisition activities in which the Company may be involved. As of December 31, 2005, no such additional payments have been made. The Agreements call for the payment of health insurance benefits and provide for mutual releases upon termination. By amendments dated May 3, 2004, and, in the case of Mr. Wallock, May 27, 2006, the Agreements were amended to allow termination at any time by the Company by the lump sum payment of one year's compensation and by the executive upon one year's notice, except in certain circumstances wherein the executive can resign immediately and receive a lump sum payment of one year's salary. Under the amendments health benefits are to be provided during any notice period or for the time with respect to which an equivalent payment is made. As described under "Directors and Executive Officers of the Registrant," the Company entered into a new Executive Services Agreement with Mr. Mays on March 27, 2006, upon termination of his prior agreement. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Decisions concerning the 2005 compensation of Messrs. Kouba and Golleher, who serve as the Principal Executive Officers of the Company, were made by the Compensation, Governance, and Nominating Committee of the Board of Directors. The 2005 compensation of Mr. Mays, who serves, as the Company's Principal Financial Officer, was also determined by the Compensation, Governance, and Nominating Committee of the Board of Directors. In 2005, none of Messrs. Kouba, Golleher or Mays served as an executive officer, or on the Board of Directors, of any entity of which any of the other members of the Board of Directors served as an executive officer or as a member of its Board of Directors. DIRECTORS' COMPENSATION Directors are paid an annual retainer of $50,000. Directors also receive a fee of $2,000 for each Board of Directors, Audit and Compensation, Governance and Nominating Committees meeting attended. The Chairmen of the Audit and the Compensation, Governance and Nominating Committees also receive annual retainers of $7,500 and $5,000, respectively, plus an additional $500 for each committee meeting they chair. As an inducement to the Company's Directors to continue their services to the Company in the wake of the events of August 21, 2001, and to provide assurances that the Company will be able to fulfill its obligations to indemnify directors, officers and agents of the Company and its subsidiaries (individually "Indemnitee" and collectively "Indemnitees") under Delaware law and pursuant to various contractual arrangements, in March 2002 the Company entered into an Indemnification Trust Agreement ("Agreement") for the benefit of the Indemnitees. Pursuant to this Agreement, the Company deposited a total of $2.7 million with an independent trustee to fund any indemnification amounts owed to an Indemnitee which the Company is unable to pay. These arrangements, and the Executive Services Agreements, were negotiated by the Company on an arms-length basis with the advice of the Company's counsel and other advisors. As of December 31, 2005, there have not been any claims made against the trust. On March 1, 2006, the trust expired by its own terms without any claims having been made and all funds held by the trust plus accrued interest, less trustee fees, totaling approximately $2.8 million were returned to the Company. 24 STOCK PERFORMANCE GRAPH The following graph assumes an investment of $100 on December 31, 2000 and compares changes thereafter through December 31, 2005 in the market price of the Company's common stock with (1) the Nasdaq Composite Index (a broad market index) and (2) the Russell 2000 Index. The Russell 2000 Index was used in place of a published industry or line-of-business index because although the Company formerly had marketing services operations, the Company currently has no operating business. As such, a published industry or line-of-business index would not provide a meaningful comparison and the Company cannot reasonably identify a peer group. As an alternative, the Company used the Russell 2000 Index which represents a capitalization-weighted index designed to measure the performance of the 2,000 smallest publicly traded U.S. companies, in terms of market capitalization, that are included in the Russell 3000 Index. The Nasdaq Composite Index measures all Nasdaq domestic and international based common type stocks listed on The Nasdaq Stock Market and includes over 3,000 companies. The performance of the indices is shown on a total return (dividend reinvestment) basis; however, the Company paid no dividends on its common stock during the period shown. The graph lines merely connect the beginning and ending of the measuring periods and do not reflect fluctuations between those dates. COMPARISON OF COMULATIVE TOTAL RETURN (PERFORMANCE GRAPH)
FISCAL YEAR ENDED --------------------------------------- 2000 2001 2002 2003 2004 2005 ---- ---- ---- ---- ---- ---- SWWI $100 $ 5 $ 3 $ 2 $ 4 $ 7 NASDAQ 100 79 54 81 88 89 Russell 2000 100 86 67 85 93 97
25 REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION This report has been prepared by the Company's Compensation, Governance and Nominating Committee of the Board of Directors (the "Compensation Committee") and addresses the Company's compensation policies with respect to its Co-Chief Executive Officers and its Chief Financial Officer. The current compensation of the Company's Co-Chief Executive Officers and its Chief Financial Officer was set originally in May 2003 (i) in the case of Mr. Golleher, by the Compensation Committee (which then consisted of Messrs. Kouba and Bartlett) and (ii) in the case of Messrs. Kouba and Mays, by the Board of Directors, with Mr. Kouba abstaining as to his compensation (Mr. Mays was not on the Board at that time) pursuant to Executive Services Agreements entered into with those executives and others at that time. See Executive Services Agreements above. Inasmuch as the Company had not yet resolved significant liability exposure which it was facing at that time and had no operating business, the Committee and the Board determined that it would not then be feasible or economical to conduct an executive search or offer a customary compensation package to executive officer candidates. Rather, the Board appointed the two members of the Executive Committee of the Board to the role of Co-Chief Executive Officers, and appointed a Chief Financial Officer, at compensation lower than their customary consulting fees. In so doing, the Board was able to reduce overhead to the Company while retaining the services and availability of these experienced executives who were intimately familiar with the affairs of the Company. After reviewing the salaries of the Co-Chief Executive Officers and Chief Financial Officer in 2005, the Compensation Committee chose to make no adjustments to the arrangements then in place. The Compensation Committee's policies for executive office compensation in 2005 were unchanged from 2003, as described above, and were not based on corporate performance since the Company had no operating business. The Compensation Committee: Allan I. Brown Joseph W. Bartlett 26 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following tables set forth certain information regarding beneficial ownership of the Company's common stock at February 28, 2006. Except as otherwise indicated in the footnotes, the Company believes that the beneficial owners of its common stock listed below, based on information furnished by such owners, have sole investment and voting power with respect to the shares of the Company's common stock shown as beneficially owned by them. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS The following table sets forth each person known by the Company (other than Directors and Executive Officers) to own beneficially more than 5% of the outstanding common stock:
Number of Shares Name and Address Of Common Stock Percentage Of Of Beneficial Owner Beneficially Owned (1) Class - ---------------------------------------- ---------------------- ------------- Yucaipa and affiliates (2)(3) Overseas Toys, L.P. OA3, LLC Multi-Accounts, LLC Ronald W. Burkle 3,793,185 18.6% Everest Special Situations Fund L.P. (4) Maoz Everest Fund Management Ltd. Elchanan Maoz Platinum House 21 H' arba' a Street Tel Aviv 64739 Israel 1,507,000 9.0% Hazelton Capital Limited (4)(5) 28 Hazelton Avenue Toronto, Ontario Canada M5R 2E2 1,130,537 6.8% Eric Stanton (4)(6) 39 Gloucester Road 6th Floor Wanchai Hong Kong 1,123,023 6.7% Gregory P. Shlopak (4)(7) 63 Main Street Gloucester, MA 01930 1,064,900 6.4% H. Ty Warner (4) P.O. Box 5377 Oak Brook, IL 60522 975,610 5.9%
1. The number of shares beneficially owned by each stockholder is determined in accordance with the rules of the Securities and Exchange Commission and is not necessarily indicative of beneficial ownership for any other purpose. Under these rules, beneficial ownership includes those shares of common stock that the stockholder has sole or shared voting or investment power and any shares of common stock that the stockholder has a right to acquire within sixty (60) days after December 31, 2005, through the exercise of any option, warrant or other right including the conversion of the series A preferred stock. The percentage ownership of the outstanding common stock, however, is based on the assumption, expressly required by the rules of the Securities and Exchange Commission, that only the person or entity whose ownership is being 27 reported has converted options, warrants or other rights into shares of common stock including the conversion of the series A preferred stock. 2. Represents shares of common stock issuable upon conversion of 31,118 shares of outstanding series A preferred stock and accrued dividends. Percentage based on common stock outstanding, plus all such convertible shares. Overseas Toys, L.P. is an affiliate of Yucaipa and is the holder of record of all the outstanding shares of series A preferred stock. Multi-Accounts, LLC is the sole general partner of Overseas Toys, L.P., and OA3, LLC is the sole managing member of Multi-Accounts, LLC. Ronald W. Burkle is the sole managing member of OA3, LLC. The address of each of Overseas Toys, L.P., Multi-Accounts, LLC, OA3, LLC, and Ronald W. Burkle is 9130 West Sunset Boulevard, Los Angeles, California 90069. Overseas Toys, L.P. is party to a Voting Agreement, dated September 1, 1999, with Patrick D. Brady, Allan I. Brown, Gregory P. Shlopak, the Shlopak Foundation, Cyrk International Foundation and the Eric Stanton Self-Declaration of Revocable Trust, pursuant to which Overseas Toys, L.P., Multi-Accounts, LLC, OA3, LLC, and Ronald W. Burkle may be deemed to have shared voting power over 8,233,616 shares for the purpose of election of certain nominees of Yucaipa to the Company's Board of Directors, and may be deemed to be members of a "group" for the purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended. Overseas Toys, L.P., Multi-Accounts, LLC, OA3, LLC and Ronald W. Burkle disclaim beneficial ownership of any shares, except for the shares as to which they possess sole dispositive and voting power. 3. Based on 20,446,378 shares of common stock outstanding and issuable upon conversion of 31,118 shares of outstanding series A preferred stock and accrued dividends as of December 31, 2005. 4. Based on 16,653,193 shares of common stock outstanding as of December 31, 2005. 5. The information concerning these holders is based solely on information contained in filings pursuant to the Securities Exchange Act of 1934. 6. Eric Stanton, as trustee of the Eric Stanton Self-Declaration of Revocable Trust, has the sole power to vote, or to direct the vote of, and the sole power to dispose, or to direct the disposition of, 1,123,023 shares. Mr. Stanton, as trustee of the Eric Stanton Self-Declaration of Revocable Trust, is a party to a Voting Agreement, dated September 1, 1999, with Yucaipa and Patrick D. Brady, Allan I. Brown, Gregory P. Shlopak, the Shlopak Foundation Trust and the Cyrk International Foundation Trust pursuant to which Messrs. Brady, Brown, Shlopak and Stanton and the trusts have agreed to vote in favor of certain nominees of Yucaipa to the Company's Board of Directors. Mr. Stanton expressly disclaims beneficial ownership of any shares except for the 1,123,023 shares as to which he possesses sole voting and dispositive power. 7. The information concerning this holder is based solely on information contained in filings Mr. Shlopak has made with the Securities and Exchange Commission pursuant to Sections 13(d) and 13(g) of the Securities Exchange Act of 1934, as amended. Includes 84,401 shares held by a private charitable foundation as to which Mr. Shlopak, as trustee, has sole voting and dispositive power. Mr. Shlopak is a party to a Voting Agreement, dated September 1, 1999, with Yucaipa, Patrick D. Brady, Allan I. Brown, the Shlopak Foundation, Cyrk International Foundation and the Eric Stanton Self-Declaration of Revocable Trust, pursuant to which Messrs. Brady, Brown, Shlopak and Stanton and the trusts have agreed to vote in favor of certain nominees of Yucaipa to the Company's Board of Directors. Mr. Shlopak expressly disclaims beneficial ownership of any shares except for the 1,064,900 shares as to which he possesses sole voting and dispositive power. 28 SECURITY OWNERSHIP OF MANAGEMENT The following table sets forth information at December 31, 2005, regarding the beneficial ownership of the Company's common stock (including common stock issuable upon the exercise of stock options exercisable within 60 days of December 31, 2005) by each director and each executive officer named in the Summary Compensation Table, and by all of the Company's directors and persons performing the roles of executive officers as a group:
Number of Shares Name and Address Of Common Stock Percentage Of Of Beneficial Owner (1) Beneficially Owned Class (2) - --------------------------------------- ------------------ ------------- Allan I. Brown (3) 1,133,023 6.8% Joseph W. Bartlett (4) 90,000 * Joseph Anthony Kouba (5) 60,000 * George G. Golleher (6) 45,000 * Terrence Wallock (7) 5,000 * Greg Mays (8) 10,000 * All directors and executive officers as a group (6 persons) 1,343,023 8.1%
* Represents less than 1% (1) The address of each of the directors and executive officers is c/o Simon Worldwide, Inc., 5200 W. Century Boulevard, Suite 420, Los Angeles, California, 90045. The number of shares beneficially owned by each stockholder is determined in accordance with the rules of the Securities and Exchange Commission and is not necessarily indicative of beneficial ownership for any other purpose. Under these rules, beneficial ownership includes those shares of common stock that the stockholder has sole or shared voting or investment power and any shares of common stock that the stockholder has a right to acquire within sixty (60) days after December 31, 2005, through the exercise of any option, warrant or other right including the conversion of the series A preferred stock. The percentage ownership of the outstanding common stock, however, is based on the assumption, expressly required by the rules of the Securities and Exchange Commission, that only the person or entity whose ownership is being reported has converted options, warrants or other rights including the conversion of the series A preferred stock into shares of common stock. (2) Based on 16,653,193 shares of common stock outstanding as of December 31, 2005. (3) Includes 20,000 shares issuable pursuant to stock options exercisable within 60 days of December 31, 2005. Mr. Brown has the sole power to vote, or to direct the vote of, and the sole power to dispose, or to direct the disposition of, 1,113,023 shares of common stock. Mr. Brown is party to a Voting Agreement, dated September 1, 1999, with Yucaipa, Patrick D. Brady, Gregory P. Shlopak, the Shlopak Foundation, Cyrk International Foundation and the Eric Stanton Self-Declaration of Revocable Trust, pursuant to which Messrs. Brady, Brown, Shlopak and Stanton and the trusts have agreed to vote in favor of certain nominees of Yucaipa to the Company's Board of Directors. Mr. Brown expressly disclaims beneficial ownership of any shares except for the 1,133,023 shares as to which he possesses sole voting and dispositive power. (4) The 90,000 shares are issuable pursuant to stock options exercisable within 60 days of December 31, 2005. (5) The 60,000 shares are issuable pursuant to stock options exercisable within 60 days of December 31, 2005. (6) Includes 30,000 shares issuable pursuant to stock options exercisable within 60 days of December 31, 2005. (7) The 5,000 shares are issuable pursuant to stock options exercisable within 60 days of December 31, 2005. (8) The 10,000 shares are issuable pursuant to stock options exercisable within 60 days of December 31, 2005. 29 SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS The following table sets forth information as of December 31, 2005, regarding the Company's 1993 Omnibus Stock Plan (the "1993 Plan") and 1997 Acquisition Stock Plan (the "1997 Plan"). The Company's stockholders previously approved the 1993 Plan and the 1997 Plan and all amendments that were subject to stockholder approval. As of December 31, 2005, options to purchase 215,000 shares of common stock were outstanding under the 1993 Plan and no options were outstanding under the 1997 Plan. The Company's 1993 Employee Stock Purchase Plan was terminated effective December 31, 2001, and no shares of the Company's common stock are issuable under that plan. The 1993 Plan expired in May 2003, except as to options outstanding under the 1993 Plan.
Number of Shares of Common Stock Number of Shares Available for of Common Stock Weighted- Future Issuance to be Issued Upon Average (excluding those Exercise of Exercise Price in column (a)) Outstanding Stock of Outstanding Under the Stock Options Stock Options Option Plans ----------------- --------------- ---------------- Plans Approved by Stockholders 215,000 $4.51 per share 1,000,000 (1) Plans Not Approved by Stockholders Not applicable Not applicable Not applicable Total 215,000 $4.51 per share 1,000,000 (1)
(1) Available for issuance under the 1997 Plan. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. 30 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The following table presents fees, including reimbursement for expenses, for professional services rendered by the Company's independent registered public accounting firm for the fiscal years ended December 31, 2005 and 2004:
Fiscal Year ----------- 2005 2004 ---- ---- (in thousands) Audit fees (1) $100 $ 89 Audit-related fees (2) 12 12 Tax fees (3) 42 45 All other fees (4) -- -- ---- ---- Total $154 $146 ==== ====
(1) Audit fees are related to the audit of the Company's consolidated annual financial statements, review of the interim consolidated financial statements and services normally provided by the Company's independent registered public accounting firm in connection with statutory and regulatory filings and engagements. (2) Audit-related fees are for assurance and related services that are reasonably related to the performance of the audit or review of the Company's consolidated financial statements and are not reported under Audit fees. This category includes fees billed related to employee benefit plan audits. (3) Tax fees are related to tax compliance, planning, and consulting. (4) All other fees are for services other than those reported in the other categories. POLICY ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND NON-AUDIT SERVICES OF INDEPENDENT AUDITOR Pre-approval is provided by the Audit Committee for up to one year of all audit and permissible non-audit services provided by the Company's independent auditor. Any pre-approval is detailed as to the particular service or category of service and is generally subject to a specific fee. 31 PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) DOCUMENTS FILED AS PART OF THIS REPORT 1. FINANCIAL STATEMENTS: Consolidated Balance Sheets as of December 31, 2005 and 2004 Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003 Consolidated Statements of Stockholders' Deficit for the years ended December 31, 2005, 2004 and 2003 Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003 Notes to Consolidated Financial Statements 2. FINANCIAL STATEMENT SCHEDULES FOR THE FISCAL YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003: Schedule II: Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. (b) EXHIBITS Reference is made to the Exhibit Index, which follows. 32 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Messrs. Golleher and Kouba of the Board of Directors have the responsibility for the role of the Principal Executive Officer of the registrant. Date: March 31, 2006 SIMON WORLDWIDE, INC. /s/ George G. Golleher /s/ J. Anthony Kouba -------------------------- -------------------------- GEORGE G. GOLLEHER J. ANTHONY KOUBA Co-Chief Executive Officer Co-Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Joseph W. Bartlett Director March 31, 2006 - ------------------------------------- JOSEPH W. BARTLETT /s/ Allan I. Brown Director March 31, 2006 - ------------------------------------- ALLAN I. BROWN /s/ Terrence Wallock Director March 31, 2006 - ------------------------------------- TERRENCE WALLOCK /s/ George G. Golleher Director and March 31, 2006 - ------------------------------------- Co-Chief Executive Officer GEORGE G. GOLLEHER /s/ J. Anthony Kouba Director and March 31, 2006 - ------------------------------------- Co-Chief Executive Officer J. ANTHONY KOUBA /s/ Greg Mays Principal Financial Officer March 31, 2006 - ------------------------------------- GREG MAYS
33 EXHIBITS
EXHIBIT NO. DESCRIPTION - ----------- ----------- 2.1 (6) Securities Purchase Agreement dated September 1, 1999, between the Registrant and Overseas Toys, L.P. 2.2 (8) Purchase Agreement between the Company and Rockridge Partners, Inc., dated January 20, 2001, as amended by Amendment No. 1 to the Purchase Agreement, dated February 15, 2001 2.3 (9) March 12, 2002, Letter Agreement between Cyrk and Simon, as amended by Letter Agreement dated as of March 22, 2002 2.4 (9) Mutual Release Agreement between Cyrk and Simon 2.5 (10) Letter Agreement Between Cyrk and Simon, dated December 20, 2002 2.6 Settlement Agreement and Mutual General Release between Cyrk and Simon dated January 31, 2006, filed herewith 2.7 Subordinated Promissory Note in the principal amount of $1,410,000 from Cyrk to Simon dated January 31, 2006, filed herewith 3.1 (3) Restated Certificate of Incorporation of the Registrant 3.2 Amended and Restated By-laws of the Registrant, effective March 27, 2006, filed herewith 3.3 (7) Certificate of Designation for Series A Senior Cumulative Participating Convertible Preferred Stock 4.1 (1) Specimen certificate representing Common Stock 10.1 (2)(3) 1993 Omnibus Stock Plan, as amended 10.5 (2)(5) 1997 Acquisition Stock Plan 10.6 (5) Securities Purchase Agreement dated February 12, 1998, by and between the Company and Ty Warner 10.10 (7) Registration Rights Agreement between the Company and Overseas Toys, L.P. 10.18 (8) Subordinated Promissory Note by Rockridge Partners, Inc. in favor of the Company dated February 15, 2001 10.25 (9) Indemnification Trust Agreement between the Company and Development Specialists, Inc. as Trustee, dated March 1, 2002 10.28 (11) February 7, 2003, letter agreements with George Golleher, J. Anthony Kouba and Greg Mays regarding 2002 and 2003 compensation 10.29 (11) May 30, 2003, Executive Services Agreements with Joseph Bartlett, Allan Brown, George Golleher, J. Anthony Kouba, Gregory Mays, and Terrence Wallock 10.30 May 3, 2004, Amendment No. 1 to Executive Services Agreements with Messrs. Bartlett, Brown, Golleher and Kouba, filed herewith (replaces previously filed copies of these amendments) 10.31 March 27, 2006, Amendment No. 2 to Wallock Executive Services Agreement, filed herewith 10.32 March 27, 2006, New Executive Services Agreement with Mr. Mays, filed herewith 21.1 (10) List of Subsidiaries 31 Certifications pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 (the "Exchange Act"), filed herewith
34 32 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes- Oxley Act of 2002, filed herewith
- ---------- (1) Filed as an exhibit to the Registrant's Registration Statement on Form S-1 (Registration No. 33-63118) or an amendment thereto and incorporated herein by reference. (2) Management contract or compensatory plan or arrangement. (3) Filed as an exhibit to the Annual Report on Form 10-K for the year ended December 31, 1994, and incorporated herein by reference. (4) Filed as an exhibit to the Registrant's Registration Statement on Form 10-Q dated March 31, 1995, and incorporated herein by reference. (5) Filed as an exhibit to the Annual Report on Form 10-K for the year ended December 31, 1997, and incorporated herein by reference. (6) Filed as an exhibit to the Registrant's Report on Form 8-K dated September 1, 1999, and incorporated herein by reference. (7) Filed as an exhibit to the Annual Report on Form 10-K for the year ended December 31, 1999, and incorporated herein by reference. (8) Filed as an exhibit to the Registrant's Report on Form 8-K dated February 15, 2001, and incorporated herein by reference. (9) Filed as an exhibit to the Registrant's original Report on Form 10-K for the year ended December 31, 2001, filed on March 29, 2002, and incorporated herein by reference. (10) Filed as an exhibit to the Registrant's Report on Form 10-K/A for the year ended December 31, 2001, filed on April 18, 2003, and incorporated herein by reference. (11) Filed as an exhibit to the Registrant's Report on Form 10-K for the year ended December 31, 2002, filed on July 29, 2003, and incorporated herein by reference. (12) Filed as an exhibit to the Registrant's Report on Form 10-Q for the quarter ended March 31, 2004, filed on May 10, 2004, and incorporated herein by reference. 35 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders of Simon Worldwide, Inc.: We have audited the accompanying consolidated balance sheets of Simon Worldwide, Inc. and its subsidiaries as of December 31, 2005 and 2004 and the related consolidated statements of operations, stockholders' deficit and cash flows for each of the three years in the period ended December 31, 2005. We have also audited the financial statement schedule listed in the accompanying index. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and financial statement schedule. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Simon Worldwide Inc. and its subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has a stockholders' deficit, has suffered significant losses from operations, has no operating revenue and faces significant legal actions that raise substantial doubt about its ability to continue as a going concern. Management's plans in regards to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Also, in our opinion, the financial statement schedule presents fairly, in all material respects, the information set forth therein. /s/ BDO Seidman, LLP Los Angeles, California March 3, 2006 F-1 PART I - FINANCIAL INFORMATION SIMON WORLDWIDE, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
December 31, December 31, 2005 2004 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 16,310 $ 18,892 Restricted cash 2,818 2,973 Prepaid expenses and other current assets 316 483 Assets from discontinued operations to be disposed of - current (Note 4) 541 2,815 --------- --------- Total current assets 19,985 25,163 Non-current assets: Property and equipment, net 4 13 Other assets 109 198 Investments 11,456 500 Assets from discontinued operations to be disposed of - non-current (Note 4) 268 249 --------- --------- Total non-current assets 11,837 960 --------- --------- $ 31,822 $ 26,123 ========= ========= LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable: Trade $ 187 $ 226 Affiliates 176 166 Accrued expenses and other current liabilities 373 512 Liabilities from discontinued operations - current (Note 4) 809 3,064 --------- --------- Total current liabilities 1,545 3,968 Commitments and contingencies Redeemable preferred stock, Series A1 senior cumulative participating convertible, $.01 par value, 31,118 shares issued and outstanding at December 31, 2005, and 29,904 shares issued and outstanding at December 31, 2004, stated at redemption value of $1,000 per share 31,118 29,904 Stockholders' deficit: Common stock, $.01 par value; 50,000,000 shares authorized; 16,653,193 shares issued and outstanding at December 31, 2005 and 2004 167 167 Additional paid-in capital 138,500 138,500 Retained deficit (150,802) (146,416) Unrealized gain on investments 11,294 -- --------- --------- Total stockholders' deficit (841) (7,749) --------- --------- $ 31,822 $ 26,123 ========= =========
See the accompanying Notes to Consolidated Financial Statements. F-2 SIMON WORLDWIDE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
2005 2004 2003 ------- ------- ------- Revenues $ -- $ -- $ -- General and administrative expenses 3,086 3,625 5,270 ------- ------- ------- Operating loss from continuing operations (3,086) (3,625) (5,270) Interest income 623 -- -- Investment impairments (221) -- -- ------- ------- ------- Loss from continuing operations before income taxes (2,684) (3,625) (5,270) Income tax -- -- -- ------- ------- ------- Net loss from continuing operations (2,684) (3,625) (5,270) Income (loss) from discontinued operations, net of tax (Note 4) (478) 24,261 (3,591) ------- ------- ------- Net income (loss) (3,162) 20,636 (8,861) Preferred stock dividends (1,224) (1,172) (1,127) ------- ------- ------- Net income (loss) available to common stockholders $(4,386) $19,464 $(9,988) ======= ======= ======= Loss per share from continuing operations available to common stockholders: Loss per common share - basic and diluted $ (0.23) $ (0.29) $ (0.38) ======= ======= ======= Weighted average shares outstanding - basic and diluted 16,653 16,653 16,653 ======= ======= ======= Income (loss) per share from discontinued operations: Income (loss) per common share - basic and diluted $ (0.03) $ 1.46 $ (0.22) ======= ======= ======= Weighted average shares outstanding - basic and diluted 16,653 16,653 16,653 ======= ======= ======= Net income (loss) available to common stockholders: Net income (loss) per common share - basic and diluted $ (0.26) $ 1.17 $ (0.60) ======= ======= ======= Weighted average shares outstanding - basic and diluted 16,653 16,653 16,653 ======= ======= =======
See the accompanying Notes to Consolidated Financial Statements. F-3 SIMON WORLDWIDE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT For the years ended December 31, 2005, 2004 and 2003 (in thousands)
Accumulated Common Additional Retained Other Total Stock Paid-in (Deficit) Comprehensive Comprehensive Stockholders' ($.01 Par Value) Capital Earnings Income (Loss) Income Deficit ---------------- ---------- --------- ------------- ------------- ------------- Balance, December 31, 2002 $167 $138,500 $(155,892) $ -- $(17,225) Comprehensive loss: Net loss (8,861) $(8,861) (8,861) Other comprehensive loss -- -- ------- Comprehensive loss $(8,861) ======= Dividends on preferred stock (1,127) (1,127) ---- -------- --------- ------- -------- Balance, December 31, 2003 167 138,500 (165,880) (27,213) -- Comprehensive income: Net income 20,636 $20,636 20,636 Other comprehensive income -- -- ------- Comprehensive income $20,636 ======= Dividends on preferred stock (1,172) (1,172) ---- -------- --------- ------- -------- Balance, December 31, 2004 167 138,500 (146,416) -- (7,749) Comprehensive income: Net loss (3,162) $(3,162) (3,162) Other comprehensive income: Unrealized gain on investments 11,294 11,294 ------- Other comprehensive income 11,294 11,294 ------- Comprehensive income $ 8,132 ======= Dividends on preferred stock (1,224) (1,224) ---- -------- --------- ------- -------- Balance, December 31, 2005 $167 $138,500 $(150,802) $11,294 $ (841) ==== ======== ========= ======= ========
See the accompanying Notes to Consolidated Financial Statements. F-4 SIMON WORLDWIDE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
2005 2004 2003 ------- -------- ------- Cash flows from operating activities: Net income (loss) $(3,162) $ 20,636 $(8,861) Income (loss) from discontinued operations (478) 24,261 (3,591) ------- -------- ------- Loss from continuing operations (2,684) (3,625) (5,270) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation 9 20 64 Charge for impaired investments 221 -- -- Gain on settlement of obligations -- (11,500) (23) Cash received from settlement -- 13,000 -- Cash provided by (used in) discontinued operations (2,731) 9,108 (127) Cash transferred to (from) continuing operations (58) 10,066 3,119 Increase (decrease) in cash from changes in working capital items: Prepaid expenses and other current assets 167 257 654 Accounts payable (29) 156 29 Accrued expenses and other current liabilities (139) 389 (355) ------- -------- ------- Net cash provided by (used in) operating activities (5,244) 17,871 (1,909) ------- -------- ------- Cash flows from investing activities: Purchase of property and equipment -- -- (30) Decrease (increase) in restricted cash 155 (2,639) 7,306 Cash provided by (used in) discontinued operations 2,418 3,582 (6,565) Other, net 89 78 17 ------- -------- ------- Net cash provided by investing activities 2,662 1,021 728 ------- -------- ------- Cash flows from financing activities -- -- -- ------- -------- ------- Net increase (decrease) in cash and cash equivalents (2,582) 18,892 (1,181) Cash and cash equivalents, beginning of period 18,892 -- 1,181 ------- -------- ------- Cash and cash equivalents, end of period $16,310 $ 18,892 $ -- ======= ======== ======= Supplemental disclosure of cash flow information: Cash paid during the period for: Income taxes $ 6 $ 23 $ 11 ======= ======== ======= Supplemental non-cash investing activities: Dividends paid in kind on redeemable preferred stock $ 1,214 $ 1,167 $ 1,121 ======= ======== =======
See the accompanying Notes to Condensed Consolidated Financial Statements. F-5 SIMON WORLDWIDE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF BUSINESS, LOSS OF CUSTOMERS, RESULTING EVENTS AND GOING CONCERN Prior to August 2001, the Company, incorporated in Delaware and founded in 1976, had been operating as a multi-national full-service promotional marketing company, specializing in the design and development of high-impact promotional products and sales promotions. The majority of the Company's revenue was derived from the sale of products to consumer products and services companies seeking to promote their brand names and corporate identities and build brand loyalty. The major client of the Company was McDonald's Corporation ("McDonald's"), for whom the Company's Simon Marketing subsidiary designed and implemented marketing promotions, which included premiums, games, sweepstakes, events, contests, coupon offers, sports marketing, licensing and promotional retail items. Net sales to McDonald's and Philip Morris, another significant client, accounted for 78% and 8%, respectively, of total net sales in 2001. On August 21, 2001, the Company was notified by McDonald's that they were terminating their approximately 25-year relationship with Simon Marketing as a result of the arrest of Jerome P. Jacobson ("Mr. Jacobson"), a former employee of Simon Marketing who subsequently pled guilty to embezzling winning game pieces from McDonald's promotional games administered by Simon Marketing. No other Company employee was found to have any knowledge of or complicity in his illegal scheme. Simon Marketing was identified in the criminal indictment of Mr. Jacobson, along with McDonald's, as an innocent victim of Mr. Jacobson's fraudulent scheme. Further, on August 23, 2001, the Company was notified that its second largest customer, Philip Morris, was also ending its approximately nine-year relationship with the Company. As a result of the above events, the Company no longer has an on-going promotions business. Since August 2001, the Company has concentrated its efforts on reducing its costs and settling numerous claims, contractual obligations and pending litigation. By April 2002, the Company had effectively eliminated a majority of its ongoing promotions business operations and was in the process of disposing of its assets and settling its liabilities related to the promotions business and defending and pursuing litigation with respect thereto. The process is ongoing and will continue for some indefinite period primarily dependent upon ongoing litigation. As a result of these efforts, the Company has been able to resolve a significant number of outstanding liabilities that existed in August 2001 or arose subsequent to that date. As of December 31, 2005, the Company had reduced its workforce to 4 employees from 136 employees as of December 31, 2001. During the second quarter of 2002, the discontinued activities of the Company, consisting of revenues, operating costs, certain general and administrative costs and certain assets and liabilities associated with the Company's promotions business, were classified as discontinued operations for financial reporting purposes. At December 31, 2005, the Company had a stockholders' deficit of $.8 million. For the year ended December 31, 2005, the Company had a net loss of $3.2 million. The Company incurred losses within its continuing operations in 2005 and continues to incur losses in 2006 for the general and administrative expenses incurred to manage the affairs of the Company and resolve outstanding legal matters. By utilizing cash which had been received pursuant to the settlement of the Company's litigation with McDonald's in 2004 (see Note 4), 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, 2005, the Company's significant loss from operations and the pending legal matters, 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 financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company is currently managed by members of the Board of Directors, consisting of Messrs. George Golleher and J. Anthony Kouba, who jointly act as Chief Executive Officers, in consultation with a principal financial officer and acting general counsel. In connection with such responsibilities, Messrs. Golleher and Kouba entered into Executive Services Agreements dated May 30, 2003, which were subsequently amended in May 2004. The Board of Directors continues to consider various alternative courses of action for the Company, including possibly acquiring or combining with one or more operating businesses. The Board of Directors has reviewed and analyzed a number of proposed transactions 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 (see Note 12). 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. As a result of the Jacobson embezzlement, numerous consumer class action and representative action lawsuits were filed in Illinois and multiple jurisdictions nationwide and in Canada. All actions brought in the United States were eventually consolidated and settled (the "Boland Settlement"), except for any plaintiff who opted out of such settlement. One such opt- F-6 out plaintiff, seeking to redeem a purported $1 million winning game ticket, had brought a lawsuit in Kentucky, which was transferred to Illinois and ordered to arbitration. The plaintiff has appealed the arbitration order. On or about September 13, 2002, an action was filed against Simon Marketing and McDonald's in Canada in Ontario Provincial Court alleging substantially the same facts as in the United States class action lawsuits and adding an allegation that Simon Marketing and McDonald's deliberately diverted from seeding in Canada game pieces with high-level winning prizes in certain McDonald's promotional games. The plaintiffs were Canadian citizens seeking restitution and damages on a class-wide basis. On October 28, 2002, a second action was filed against Simon Marketing and McDonald's in Ontario Provincial Court containing similar allegations. The plaintiffs in the aforesaid actions seek an aggregate of $110 million in damages. Simon Marketing has retained Canadian local counsel to represent it in these actions. The Company believes that the plaintiffs in these actions did not opt out of the Boland Settlement. The Company and McDonald's have filed motions to dismiss or stay these cases on the basis of the Boland Settlement. The Canadian Court has dismissed the case filed in September 2002, but has allowed the October 2002 case to move forward. An appeal of that decision by McDonald's and the Company has been denied by the Court of Appeal. During the third quarter of 2005, the Company entered into a settlement agreement with plaintiff in the case on behalf of the class pursuant to which the Company agreed to 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. On March 29, 2002, Simon Marketing filed a lawsuit against PricewaterhouseCoopers LLP ("PWC") and two other accounting firms, citing the accountants' failure to oversee, on behalf of Simon Marketing, various steps in the distribution of high-value game pieces for certain McDonald's promotional games. The complaint alleged that this failure allowed the misappropriation of certain of these high-value game pieces by Mr. Jacobson. The lawsuit, filed in Los Angeles Superior Court, sought unspecified actual and punitive damages resulting from economic injury, loss of income and profit, loss of goodwill, loss of reputation, lost interest, and other general and special damages. Defendants' demurrers to the first and a second amended complaint were sustained in part, including the dismissal of all claims for punitive damages with no leave to amend. A third amended complaint was filed, and defendants' demurrer to all causes of action was sustained without leave to amend. A dismissal of the case has resulted. The Company has appealed this ruling with respect to PWC only. On October 19, 2005 the Company received notice of a lawsuit against it 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 in May 2001 by HA-LO to the Company for the sale of inventory 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. 2. SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company. All intercompany accounts and transactions have been eliminated in consolidation. STOCK-BASED COMPENSATION PLANS AND PRO FORMA STOCK-BASED COMPENSATION EXPENSE At December 31, 2005, the Company had one stock-based compensation plan, which is described below. 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 annual reporting period beginning January 1, 2006. The Company does not expect the adoption of Statement No. 123(R) to have a material effect on its consolidated statements of financial position or results of operations, due to the small number of outstanding options. F-7 Had compensation cost for the Company's grants for stock-based compensation plans been determined consistent with Statement No. 123, the Company's net income (loss) available to common stockholders and income (loss) per common share would have been adjusted to the pro forma amounts indicated below:
2005 2004 2003 ------- ------- ------- (in thousands) Net income (loss) available to common stockholders - as reported $(4,386) $19,464 $(9,988) Add: Stock-based compensation expense included in reported net income (loss), net of income tax -- -- -- Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of income taxes (11) -- -- ------- ------- ------- Net income (loss) available to common stockholders - pro forma $(4,397) $19,464 $(9,988) ======= ======= ======= Income (loss) per common share - basic and diluted - as reported $ (0.26) $ 1.17 $ (0.60) Income (loss) per common share - basic and diluted - pro forma $ (0.26) $ 1.17 $ (0.60)
USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CONCENTRATION OF CREDIT RISK The Company places its cash in what it believes to be credit-worthy financial institutions. However, cash balances exceed FDIC insured levels at various times during the year. FINANCIAL INSTRUMENTS The carrying amounts of cash equivalents, investments, short-term borrowings and long-term obligations, if any, approximate their fair values. CASH EQUIVALENTS Cash equivalents consist of short-term, highly liquid investments, which have original maturities at the date of purchase of three-months or less. INVESTMENTS Investments are stated at fair value. Current investments are designated as available-for-sale in accordance with the provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and as such, unrealized gains and losses are reported in a separate component of stockholders' deficit. Long-term investments, for which there are no readily available market values, were originally accounted for under the cost method and were carried at the lower of cost or estimated fair value. In March 2004, the Emerging Issues Task Force ("EITF") of the FASB, issued EITF 03-16, "Accounting Investments in Limited Liability Companies," which required the Company to change its method of accounting for its investment in Yucaipa AEC Associates from the cost method to the equity method for periods ending after July 1, 2004. The Company recorded an investment impairment during 2005 of $.2 million, net of related amounts recorded in unrealized gain on the balance sheet, to adjust the recorded value of its investments accounted for under the cost method to the estimated future undiscounted cash flows the Company expects from such investments. F-8 PROPERTY AND EQUIPMENT Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets or over the terms of the related leases, if such periods are shorter. The cost and accumulated depreciation for property and equipment sold, retired or otherwise disposed of are relieved from the accounts, and the resulting gains or losses are reflected in income. IMPAIRMENT OF LONG-LIVED ASSETS Periodically, the Company assesses, based on undiscounted cash flows, if there has been an other-than-temporary impairment in the carrying value of its long-lived assets and, if so, the amount of any such impairment by comparing anticipated undiscounted future cash flows with the carrying value of the related long-lived assets. In performing this analysis, management considers such factors as current results, trends and future prospects, in addition to other economic factors. INCOME TAXES The Company determines deferred taxes in accordance with SFAS No. 109, "Accounting for Income Taxes," which requires that deferred tax assets and liabilities be computed based on the difference between the financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate. Deferred income tax expenses or credits are based on the changes in the asset or liability from period to period. FOREIGN CURRENCY TRANSLATION At December 31, 2005, the Company had subsidiaries in Europe and Hong Kong, with the wind-down of such subsidiaries being substantially complete. The Company translates these subsidiaries' financial statements, which are denominated in foreign currency, by translating balance sheet accounts at the balance sheet date exchange rate and income statement accounts at the average rates of exchange during the period. Translation gains and losses are recorded in a separate component of stockholders' deficit and transaction gains and losses are reflected in income. EARNINGS (LOSS) PER COMMON SHARE Earnings (loss) per common share have been determined in accordance with the provisions of SFAS No. 128, "Earnings per Share," which requires dual presentation of basic and diluted earnings per share on the face of the income statement and a reconciliation of the numerator and denominator of the basic earnings per share computation to the numerator and denominator of the diluted earnings per share computation (see Note 16). 3. COMMITMENTS AND CONTINGENCIES In addition to the legal matters discussed in Note 1, the Company is also involved in other litigation and legal matters which have arisen in the ordinary course of business. The Company does not believe that the ultimate resolution of these other litigation and legal matters will have a material adverse effect on its financial condition, results of operations or net cash flows. On October 19, 2005 the Company received notice of a lawsuit against it 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 in May 2001 by HA-LO to the Company in the amount of $459,852 plus interest. Based on an assessment by management during the three months ended September 30, 2005, the Company recorded a contingent loss liability of $.5 million related to this matter. 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. Subsequently, in connection with the settlement of a controversy between the parties, Cyrk supplied a $500,000 letter of credit to secure partial performance of certain assumed liabilities and the balance due on the note was forgiven, subject to a reinstatement thereof in the event of default by Cyrk under such assumed liabilities. 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. As of September 30, 2005, the available amount under the letter of F-9 credit was $2.1 million which was secured, in part, by $1.6 million of restricted cash of the Company. The Company's letter of credit was also secured, in part, by the aforesaid $500,000 letter of credit provided by Cyrk for the benefit of the Company. 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 were 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 to Other Expense with respect to the liability arising from the Winthrop lease. Such liability was revised downward to $2.5 million during 2004 and to $1.6 million during 2005 based on the reduction in the Winthrop liability. During the fourth quarter of 2005, the Company received notification that Winthrop has drawn upon the letter of credit due to a default by Cyrk. Cyrk has agreed to indemnify the Company if Winthrop made any draw under this letter of credit. No assurances can be made that the Company will be successful in enforcing those rights or, if successful, collecting damages from Cyrk. See Note 18. Subsequent Events. 4. DISCONTINUED OPERATIONS As discussed in Note 1, the Company had effectively eliminated a majority of its on-going promotions business operations by April 2002. Accordingly, the discontinued activities of the Company have been classified as discontinued operations in the accompanying 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. At December 31, 2005, the Company's elimination of its on-going promotions business operations is substantially complete. Assets and liabilities related to discontinued operations at December 31, 2005 and 2004, as disclosed in the accompanying consolidated financial statements, consist of the following:
December 31, December 31, 2005 2004 ------------ ------------ (in thousands) Assets: Cash and cash equivalents $163 $ -- Restricted cash 378 2,815 ---- ------ Total current assets 541 2,815 Other assets 268 249 ---- ------ Assets from discontinued operations to be disposed of $809 $3,064 ==== ====== Liabilities: Accounts payable - trade $ 19 $ 58 Accrued expenses and other current liabilities 790 3,006 ---- ------ Total current liabilities 809 3,064 ---- ------ Liabilities from discontinued operations $809 $3,064 ==== ======
F-10 Net income (loss) from discontinued operations for the years ended December 31, 2005, 2004 and 2003, as disclosed in the accompanying consolidated financial statements, consists of the following:
2005 2004 2003 ----- -------- ------- (in thousands) Net sales $ -- $ -- $ -- Cost of sales -- -- -- ----- -------- ------- Gross profit -- -- -- General and administrative expenses 175 1,990 1,359 Loss (gain) on settlement of obligations and litigation 555 (24,500) (23) ----- -------- ------- Operating income (loss) (730) 22,510 (1,336) Interest income -- 283 246 Other income (expense) 252 1,468 (2,501) ----- -------- ------- Income (loss) before income taxes (478) 24,261 (3,591) Income tax expense (benefit) -- -- -- ----- -------- ------- Net income (loss) $(478) $ 24,261 $(3,591) ===== ======== =======
GENERAL AND ADMINISTRATIVE EXPENSES During 2004, certain events occurred that indicated the Company would not realize amounts related to an insurance policy for the benefit of a former company executive and on which the Company is the beneficiary of the cash surrender value. As such, the Company recorded a charge against such asset of $1.0 million. 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. During 2005, the Company entered into a settlement agreement with plaintiff in the case on behalf of the class pursuant to which the Company agreed to 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. During 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 settlement loss of $.5 million, resulting in a 2004 net gain on settlement of obligations of $24.5 million. OTHER INCOME (EXPENSE) 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 was secured by the Company's letter of credit. As a result of the foregoing, and in accordance with 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. The liability component of such charge was recorded to Accrued Expenses and Other Current Liabilities. Such liability was revised downward to $2.5 million during 2004 and to $1.6 million during 2005 based on the reduction in the Winthrop liability. The other income for 2005 was partially offset by a contingent loss accrual of $.5 million related to the HA-LO matter. See Note 3. F-11 5. RESTRICTED CASH Restricted cash included within discontinued operations at December 31, 2005 and 2004, totaled $.4 million and $2.8 million, respectively, and primarily consisted of amounts deposited with lenders to satisfy the Company's obligations pursuant to its outstanding standby letters of credit. Restricted cash included within continuing operations at December 31, 2005 and 2004, totaled $2.8 million and $3.0 million, respectively, and primarily consisted of amounts deposited into an irrevocable trust, totaling $2.7 million and, at December 31, 2004, amounts deposited with lenders to satisfy the Company's obligations pursuant to its standby letter of credit. On March 1, 2006, the trust expired by its own terms without any claims having been made and all funds held by the trust plus accrued interest, less trustee fees, totaling approximately $2.8 million were returned to the Company. 6. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
Discontinued Continuing Operations Operations Total ------------ ----------- ----------- As of December 31, ---------------------------------------- 2005 2004 2005 2004 2005 2004 ---- ---- ---- ---- ---- ---- (in thousands) Machinery and equipment $-- $-- $ 27 $ 27 $ 27 $ 27 Less: Accumulated depreciation and amortization -- -- (23) (14) (23) (14) ---- --- ---- ---- ---- ---- $-- $-- $ 4 $ 13 $ 4 $ 13 ==== === ==== ==== ==== ====
Depreciation and amortization expense on property and equipment totaled approximately $9,000, $20,000, and $64,000 during 2005, 2004 and 2003, respectively. 7. INVESTMENTS In the past, with its excess cash, the Company had 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. These 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 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 $11.5 million as of December 31, 2005. At December 31, 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, primarily held an equity investment in the Source Interlink Companies ("Source"), received upon the merger of Alliance Entertainment Companies ("Alliance") with Source. Alliance 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 which was accounted for under the cost method. 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 in June 2002. In March 2004, the Emerging Issues Task Force ("EITF") of the FASB, issued EITF 03-16, "Accounting for Investments in Limited Liability Companies," which required the Company to change its method of accounting for its investment in Yucaipa AEC Associates from the cost method to the equity method for periods ending after July 1, 2004. On February 28, 2005, Alliance 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 principally for retailers. Inasmuch as Source is a publicly traded company, the Company's pro-rata investment in Yucaipa AEC Associates, which holds the shares in Source, is equal to the number of Source shares indirectly held by the F-12 Company multiplied by the stock price of Source on the date of closing of the merger. Accordingly, on February 28, 2005, the date of closing of the merger, and to reflect the value of the new marketable securities constituting the primary asset of 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. As the Company's investment in Yucaipa AEC Associates is accounted for under the equity method, the Company will adjust its investment based in its pro rata share of the earnings and losses of Yucaipa AEC Associates. Other than the merger of Alliance with Source, there were no such adjustments during 2005. The Company has no power to dispose of or liquidate its holding 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. 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. During 2005, the Company recorded an investment impairment of $.2 million, net of related amounts recorded in unrealized gain on the balance sheet, to adjust the recorded value of its other investments that are accounted for under the cost method to the estimated future undiscounted cash flows the Company expects from such investments. 8. LEASE OBLIGATIONS The approximate minimum rental commitments under all noncancelable leases at December 31, 2005, totaled approximately $33,000, which are due in 2006. For the years ended December 31, 2005, 2004, and 2003, rental expense for all operating leases included within continuing operations was approximately $44,000, $117,000, and $165,000, respectively, and rental expense for all operating leases included within discontinued operations was $0, $0, and $180,000, respectively. Rent is charged to operations on a straight-line basis. 9. INCOME TAXES The Company had no provision or benefit for income taxes for 2005, 2004 and 2003. As required by SFAS No. 109 "Accounting for Income Taxes," the Company periodically evaluates the positive and negative evidence bearing upon the realizability of its deferred tax assets. The Company, however, has considered recent events (see Note 1) and results of operations and concluded, in accordance with the applicable accounting methods, that it is more likely than not that the deferred tax assets will not be realizable. As a result, the Company has determined that a valuation allowance of approximately $39.7 million is required at December 31, 2005. The tax effects of temporary differences that gave rise to deferred tax assets as of December 31, 2005 and 2004, were as follows (in thousands):
2005 2004 -------- -------- Deferred tax assets: Receivable reserves $ -- $ 83 Other asset reserves 2,959 4,007 Deferred compensation 38 40 Capital Losses 7,137 7,137 Foreign tax credits 82 82 AMT credit 649 649 Net operating losses 28,792 26,440 Depreciation -- 18 Valuation Allowance (39,657) (38,456) -------- -------- $ -- $ -- ======== ========
As of December 31, 2005, the Company had federal and state net operating loss carryforwards of approximately $72.4 million and $47.4 million, respectively. The federal net operating loss carryforward will begin to expire in 2020 and the state net operating loss carryforwards began to expire in 2005. As of December 31, 2005, the Company also had foreign tax credit carryforwards of $.1 million that expire in 2009. As of December 31, 2005, the Company had federal and state capital loss carryforwards of $16.7 million which begin to expire in 2006 through 2008. F-13 The following is a reconciliation of the statutory federal income tax rate to the actual effective income tax rate:
2005 2004 2003 ---- ---- ---- Federal Tax (benefit) rate -34% -34% -34% Increase (decrease) in taxes resulting from State income taxes (6) (6) (6) Effect of foreign income or loss 2 (8) 23 Change in valuation allowance 37 48 51 Effect of non-utilization of state losses -- -- 2 Life insurance 1 -- 3 Adjustment to state tax liability -- -- (9) Foreign tax credits -- -- 27 Post-tax return filing Net Operating Loss adjustments -- -- (50) Other, net -- -- (7) --- --- --- 0% 0% 0% === === ===
An audit by the Internal Revenue Service covering the tax years 1996 through 2000 was concluded during 2003. The Company incurred no additional income tax upon conclusion of the IRS audit. 10. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES At December 31, 2005 and 2004, accrued expenses and other current liabilities consisted of the following:
Discontinued Continuing Operations Operations Total ------------- ----------- --------------- As of December 31, --------------------------------------------- 2005 2004 2005 2004 2005 2004 ---- ------ ---- ---- ------ ------ (in thousands) Accrued payroll and related items and deferred compensation $ -- $ -- $ 35 $ 42 $ 35 $ 42 Contingent loss 460 2,455 -- -- 460 2,455 Professional fees -- -- 282 295 282 295 Insurance premiums 280 200 -- -- 280 200 Other 50 351 56 175 106 526 ---- ------ ---- ---- ------ ------ $790 $3,006 $373 $512 $1,163 $3,518 ==== ====== ==== ==== ====== ======
11. INDEMNIFICATION TRUST AGREEMENT In March 2002, the Company, Simon Marketing 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 December 31, 2005, there have not been any claims made against the trust. See Note 18. Subsequent Events. F-14 12. 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, which was approved at a Special Meeting of Stockholders on November 10, 1999, 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 (3,793,185 shares as of December 31, 2005, and 3,644,848 shares as of December 31, 2004). 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 is 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 as of December 31, 2003). The warrant expired on November 10, 2004. Assuming conversion of all of the convertible preferred stock, Yucaipa would own approximately 18.6% and 18.0% of the then outstanding common shares at December 31, 2005 and 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 a quarterly dividend equal to 4% 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 prices of the Company's common stock have 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. 13. STOCK PLAN 1993 OMNIBUS STOCK PLAN Under its 1993 Omnibus Stock Plan, as amended (the "Omnibus Plan"), which terminated in May 2003 except as to options outstanding at that time, the Company reserved up to 3,000,000 shares of its common stock for issuance pursuant to the grant of incentive stock options, nonqualified stock options or restricted stock. The Omnibus Plan is administered by the Compensation Committee of the Board of Directors. Subject to the provisions of the Omnibus Plan, the Compensation Committee had the authority to select the optionees or restricted stock recipients and determine the terms of the options or restricted stock granted, including: (i) the number of shares; (ii) the exercise period (which may not exceed ten years); (iii) the exercise or purchase price (which in the case of an incentive stock option cannot be less than the market price of the common stock on the date of grant); (iv) the type and duration of options or restrictions, limitations on transfer and other restrictions; and (v) the time, manner and form of payment. Generally, an option is not transferable by the option holder except by will or by the laws of descent and distribution. Also, generally, no incentive stock option may be exercised more than 60 days following termination of employment. However, in the event that termination is due to death or disability, the option is exercisable for a maximum of 180 days after such termination. F-15 Options granted under this plan generally become exercisable in three equal installments commencing on the first anniversary of the date of grant. Options granted during 2003 become exercisable in two equal installments commencing on the first anniversary of the date of grant. No further options may be granted under the Omnibus Plan. 1997 ACQUISITION STOCK PLAN The 1997 Acquisition Stock Plan (the "1997 Plan") is intended to provide incentives in connection with the acquisitions of other businesses by the Company. The 1997 Plan is identical in all material respects to the Omnibus Plan, except that the number of shares available for issuance under the 1997 Plan is 1,000,000 shares. The fair value of each option grant under the above plans was estimated using the Black-Scholes option pricing model with the following assumptions for 2003 grants: expected dividend yield of 0%; expected life of 9.4 years; expected volatility of 40%; and, a risk-free interest rate of 2.0%. There were no stock options granted under the plans during 2005 and 2004. The following summarizes the status of the Company's stock options as of December 31, 2005, 2004 and 2003, and changes for the years then ended:
2005 2004 2003 Weighted Weighted Weighted Exercise Exercise Exercise Shares Price Shares Price Shares Price -------------- -------- -------------- -------- ---------- -------- Outstanding at the beginning of year 220,000 $ 4.80 225,000 $ 5.33 130,000 $9.16 Granted -- -- -- -- 95,000 0.10 Exercised -- -- -- -- -- -- Expired/Forfeited 5,000 17.25 5,000 28.75 -- -- --------- --------- ---------- Outstanding at end of year 215,000 4.51 220,000 4.80 225,000 5.33 ========= ========= ========== Options exercisable at year-end 215,000 4.51 172,500 6.09 130,000 9.16 ========= ========= ========== Options available for future grant 1,000,000(1) 1,000,000(1) 1,000,000(1) ========= ========= ========== Weighted average fair value of options granted during the year Not applicable Not applicable $ 0.02
(1) Available for issuance under the 1997 Plan. The following table summarizes information about stock options outstanding at December 31, 2005:
Options Outstanding Options Exercisable ------------------------------ --------------------------------- Weighted Range of Average Weighted Weighted Exercise Number Remaining Average Number Average Prices Outstanding Contractual Life Price Exercisable Price - --------------- ----------- ---------------- -------- ----------- -------- $ 0.10 - $ 1.99 95,000 7.35 $ 0.10 95,000 $ 0.10 $ 2.00 - $ 5.38 65,000 3.63 4.60 65,000 4.60 $ 7.56 - $ 8.81 25,000 3.84 8.31 25,000 8.31 $12.25 - $15.50 25,000 2.04 14.85 25,000 14.85 $16.50 - $17.25 5,000 0.24 16.50 5,000 16.50 ------- ------- $ 0.10 - $17.25 215,000 5.03 $ 4.51 215,000 $ 4.51 ======= ==== ====== ======= ======
F-16 14. RELATED PARTY TRANSACTIONS As an inducement to the Company's Directors to continue their services to the Company, in the wake of the events of August 21, 2001, and to provide assurances that the Company will be able to fulfill its obligations to indemnify directors, officers and agents of the Company and its subsidiaries (individually, "Indemnitee" and collectively, "Indemnitees") under Delaware law and pursuant to various contractual arrangements, in March 2002 the Company entered into an Indemnification Trust Agreement ("Agreement") for the benefit of the Indemnitees. Pursuant to this Agreement, the Company has deposited a total of $2.7 million with an independent trustee in order to fund any indemnification amounts owed to an Indemnitee, which the Company is unable to pay. These arrangements, and all other arrangements, were negotiated by the Company on an arms-length basis with the advice of the Company's counsel and other advisors. As of December 31, 2005, there have not been any claims made against the trust. See Note 18. Subsequent Events. On February 7, 2003, the Company entered into agreements with Messrs. Golleher and Kouba in order to induce them to continue to serve as members of the Executive Committee of the Board of Directors and to compensate them for the additional obligations, responsibilities and potential liabilities of such service, including responsibilities imposed under the federal securities laws by virtue of the fact that, as members of the Executive Committee, they served, in effect, as the Chief Executive Officers of the Company since the Company had no Executive Officers. The agreements provided for a fee of $100,000 to each of Messrs. Golleher and Kouba for each of 2003 and 2002. Also on that date, the Company entered into a similar agreement with Greg Mays who provided financial and accounting services to the Company as a consultant but, in effect, served as the Company's Chief Financial Officer. The agreement provided for a fee of $50,000 to Mr. Mays for each of 2003 and 2002. In May 2003 the Company entered into Executive Services Agreements with Messrs. Bartlett, Brown, Golleher, Kouba, Mays and Terrence Wallock, acting general counsel of the Company. The purpose of the Agreements was to substantially lower the administrative costs of the Company going forward while at the same time retaining the availability of experienced executives knowledgeable about the Company for ongoing administration as well as future opportunities. The Agreements replace the letter agreements with Messrs. Bartlett, Golleher and Kouba dated August 28, 2001. The Agreements provide for compensation at the rate of $1,000 per month to Messrs. Bartlett and Brown, $6,731 per week to Messrs. Golleher and Kouba, $4,040 per week to Mr. Mays and $3,365 per week to Mr. Wallock. Additional hourly compensation is provided for time spent in litigation after termination of the Agreements and, in some circumstances during the term, for extensive commitments of time for litigation and merger and acquisition activities. As of December 31, 2005, no such additional payments have been made. The Agreements call for the payment of health insurance benefits and provide for a mutual release upon termination. By amendments dated May 3, 2004, the Agreements were amended to allow termination at any time by the Company by the lump sum payment of one year's compensation and by the Executive upon one year's notice, except in certain circumstances wherein the Executive can resign immediately and receive a lump sum payment of one year's salary. Under the amendment, health benefits are to be provided during any notice period or for the time with respect to which an equivalent payment is made. 15. SEGMENTS AND RELATED INFORMATION Until the events of August 2001 occurred (see Note 1), the Company operated in one industry--the promotional marketing industry. The Company's business in this industry encompassed the design, development and marketing of high-impact promotional products and programs. There were no sales during 2005, 2004, and 2003. The Company had no accounts receivable at December 31, 2005. Substantially all the Company's long-lived assets as of December 31, 2005, 2004 and 2003, were in the United States. Long-lived assets include property and equipment, and other non-current assets. F-17 16. EARNINGS PER SHARE DISCLOSURE The following is a reconciliation of the numerators and denominators of the basic and diluted Earnings Per Share ("EPS") computation for income (loss) available to common stockholders and other related disclosures required by SFAS No.128 "Earnings Per Share":
For the Twelve Months Ended December 31, ---------------------------------------------------------------------------------------------------------- 2005 2004 2003 ---------------------------------- ---------------------------------- ---------------------------------- Per Per Per Income Shares Share Income Shares Share Income Shares Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------- ------------- ------ ----------- ------------- ------ ----------- ------------- ------ (in thousands, except share data) Basic and diluted EPS: Loss from continuing operations $(2,684) $ (3,625) $(5,270) Preferred stock dividends (1,224) (1,172) (1,127) ------- -------- ------- Loss from continuing operations available to common stockholders $(3,908) 16,653,193 $(0.23) $ (4,797) 16,653,193 $(0.29) $(6,397) 16,653,193 $(0.38) ======= ========== ====== ======== ========== ====== ======= ========== ====== Income (loss) from discontinued operations $ (478) 16,653,193 $(0.03) $ 24,261 16,653,193 $ 1.46 $(3,591) 16,653,193 $(0.22) ======= ========== ====== ======== ========== ====== ======= ========== ====== Net income (loss) $(3,162) $ 20,636 $(8,861) Preferred stock dividends (1,224) (1,172) (1,127) ------- -------- ------- Net income (loss) available to common stockholders $(4,386) 16,653,193 $(0.26) $ 19,464 16,653,193 $ 1.17 $(9,988) 16,653,193 $(0.60) ======= ========== ====== ======== ========== ====== ======= ========== ======
For the years ended December 31, 2005, 2004, and 2003, 3,793,185, 3,644,848, and 3,547,296, respectively, shares of convertible preferred stock were not included in the computation of diluted EPS because to do so would have been antidilutive. In addition, for the years ended December 31, 2005, 2004, and 2003, 215,000, 172,500, and 130,000 shares 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 during such periods of $.23, $.17, and $.07, respectively, did not exceed the weighted average exercise price of such options of $4.51, $6.09, and $9.16, respectively. F-18 17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a tabulation of the quarterly results of operations for the years ended December 31, 2005 and 2004, respectively:
First Second Third Fourth 2005 Quarter Quarter Quarter Quarter ---- ------- ------- ------- ------- (in thousands, except per share data) Continuing operations: Net sales $ -- $ -- $ -- $ -- Gross profit -- -- -- -- Net loss (660) (580) (587) (857) Loss per common share available to common - basic and diluted (0.06) (0.05) (0.05) (0.07) Discontinued operations: Net sales $ -- $ -- $ -- $ -- Gross profit -- -- -- -- Net income (loss) 300 (122) (661) 5 Income (loss) per common share - basic and diluted 0.02 (0.01) (0.04) --
First Second Third Fourth 2004 Quarter Quarter Quarter (a) Quarter ---- ------- ------- ----------- ------- (in thousands, except per share data) Continuing operations: Net sales $ -- $ -- $ -- $ -- Gross profit -- -- -- -- Net loss (1,028) (633) (618) (1,346) Loss per common share available to common - basic and diluted (0.08) (0.05) (0.05) (0.11) Discontinued operations: Net sales $ -- $ -- $ -- $ -- Gross profit -- -- -- -- Net income (loss) (210) (818) 24,520 769 Income (loss) per common share - basic and diluted (0.01) (0.05) 1.47 0.05
(a) See Note 4. F-19 18. SUBSEQUENT EVENTS During the fourth quarter of 2005, Winthrop drew down the $1.6 million balance of the Company's letter of credit due to Cyrk's default on its obligations to Winthrop. An equal amount of the Company's restricted cash was drawn down by the Company's bank which had issued the letter of credit. Due to this default, Cyrk's $2.3 million subordinated note payable to the Company, which forgiven by the Company in 2003, was reinstated in the first quarter of 2006. On January 31, 2006, the Company and Cyrk entered into a Settlement Agreement and Mutual General Release pursuant to which: (1) Cyrk agreed to pay $1.6 million to the Company, of which $435,000 was paid on or before March 1, 2006 and the balance is payable, pursuant to a subordinated note (the "New Subordinated Note"), in forty-one (41) approximately equal consecutive monthly installments beginning April 1, 2006; (ii) Cyrk entered into a Confession of Judgment in Washington State Court for all amounts owing to the Company under the New Subordinated Note and the $2.3 million note (the "Old Subordinated Note"); (iii) Cyrk's parent company agreed to subordinate approximately $4.3 million of Cyrk debt to the debt owed to the Company by Cyrk; and (iv) Cyrk and the Company entered into mutual releases of all claims except those arising under the Settlement Agreement, the New Subordinated Note or the Confession Judgment. So long as Cyrk does not default on the New Subordinated Note, the Company has agreed not to enter the Confession of Judgment in court. Cyrk's obligations under the New Subordinated Note and the Old Subordinated Note are subordinated to Cyrk's obligations to the financial institution which is Cyrk's senior lender, which obligations are secured by, among other things, substantially all of Cyrk's assets. In the event of a default by Cyrk of its obligations under the New Subordinated Note, there is no assurance that the Company will be successful in enforcing the Confession of Judgment. On March 1, 2006, the Company's Indemnification Trust Agreement (see Note 11) expired by its own terms without any claims having been made and all funds held by the trust plus accrued interest, less trustee fees, totaling approximately $2.8 million were returned to the Company. F-20 Schedule II Simon Worldwide, Inc. Valuation and Qualifying Accounts For the Years Ended December 31, 2005, 2004 and 2003 (in thousands)
Additions Accounts Receivable, Balance At Charged To Balance At Allowance For Beginning Costs And End Doubtful Accounts Of Period Expenses Recoveries Deductions Of Period - -------------------- ---------- ---------- ---------- ---------- ---------- 2005 $ -- $ -- $-- $ -- $ -- 2004 13,852 -- -- 13,852(a) -- 2003 13,416 523 -- 87 13,852
(a) As a result of the loss of business from McDonald's in 2001, the Company recorded a 100% allowance against its accounts receivable to reduce them to their net realizable value. In 2004, the Company completed its settlement with McDonald's and, as such, removed any accounts receivable and related allowance for doubtful accounts from its books. F-21 EX-2.6 2 b58486swexv2w6.txt SETTLEMENT AGREEMENT AND MUTUAL GENERAL RELEASE Exhibit 2.6 SETTLEMENT AGREEMENT AND MUTUAL GENERAL RELEASE CYRK, INC. 14224 167th Avenue SE Monroe, WA 98272-2810 January 31, 2006 Simon Worldwide, Inc. 5200 West Century Boulevard Los Angeles, CA 90045 Ladies and Gentlemen: The undersigned ("CYRK") has issued to you ("SIMON") a Subordinated Promissory Note dated as of February 15, 2001 in the original principal amount of $2,300,000 (the "OLD SUBORDINATED NOTE"). Simon also previously arranged for its lender, City National Bank, to issue a standby letter of credit (the "L/C") in favor of Winthrop Resources Corporation ("WINTHROP"). Cyrk arranged for its lender to issue a so-called "back-stop" letter of credit (the "BACK-STOP L/C") of up to $500,000 in favor of City National Bank. Winthrop was permitted to draw on the L/C in the event that Cyrk defaulted under the lease agreement dated as of November 20, 2001 between Cyrk and Winthrop. During November 2005, Winthrop drew $2,145,000 under the L/C and, subsequent to that date, City National Bank drew $500,000 under the Back-Stop L/C. Since 2001, there have been several disputes between Cyrk and Simon relating to, among other things, the Old Subordinated Note, the L/C and the Back-Stop L/C. Cyrk and Simon desire to resolve such disputes on the following terms and subject to the following conditions: 1. Payments to Simon, Etc. (a) Concurrently herewith: (i) Cyrk is causing Simon to be paid $235,000 in cash, the receipt of which is hereby acknowledged by Simon; and (ii) Cyrk is issuing to Simon a Subordinated Promissory Note dated as of the date of this letter in the original principal amount of $1,410,000 (the "NEW SUBORDINATED NOTE"). (b) Concurrently herewith, Cyrk Holdings, LLC, the holder of all the outstanding capital stock of Cyrk, and Simon are entering into a subordination agreement. 2. Confession of Judgment. Concurrently herewith, Cyrk is executing a Confession of Judgment and a related Statement in support thereof (together, the "CONFESSION") for (the following is referred to as the "STIPULATED AMOUNT"): (a) $1,410,000 which represents the amount owed by Cyrk to Simon under the New Subordinated Note; (b) $2,300,000, which represents the amount owed by Cyrk to Simon under the Old Subordinated Note; and (c) $25,000 for the reasonable attorneys' fees and expenses and other out-of-pocket costs incurred by Simon to draft and enforce the Confession. Simon shall hold the Confession as security for the performance by Cyrk of its obligation to make payments under the New Subordinated Note. In the event of a default of any such obligation, Cyrk shall have 10 business days within which to cure same after its receipt of written notice thereof from Simon. In the event Cyrk fails to cure such default within 10 business days after receipt of such notice, Simon may proceed to enter the Confession and obtain a judgment for the Stipulated Amount. Except as set forth in the prior sentence, Simon may not enter the Confession at any time for any reason. If Simon elects to enter the Confession, it shall simultaneously enter a partial satisfaction of judgment in the amount of any amounts paid to Simon under the New Subordinated Note. 3. Mutual General Release. 3.1 Release by Simon. For the payment of the amount referred to in Section 1(a), the issuance of the New Subordinated Note pursuant to Section 1(b) and other good and valuable consideration, the receipt and legal sufficiency of which is acknowledged by Simon, Simon, on its own behalf and on behalf of its direct and indirect subsidiaries, knowingly and voluntarily releases and forever discharges Cyrk and its direct and indirect affiliates and their respective officers, directors, employees, agents and representatives and the successors and assigns of all of the foregoing (collectively, the "CYRK RELEASED PARTIES") from any and all claims, controversies, actions, causes of action, cross-claims, counter-claims, rights, demands, debts, compensatory damages, liquidated damages, punitive or exemplary damages, other damages, claims for costs and attorneys' fees, or liabilities of any nature whatsoever in law and in equity, both past and present (through the date of this agreement) and whether known or unknown, suspected, or claimed against any of the Cyrk Released Parties that Simon or any of its direct or indirect subsidiaries or any of their respective successors or assigns may have, relating in any way to or in connection with any matter or thing from the beginning of the world to the date hereof, including, without limitation, all obligations of Cyrk to Simon under the Old Subordinated Note or in connection with the L/C and all other obligations of any Cyrk Released Party to Simon or any of its direct or indirect subsidiaries (collectively, "SIMON CLAIMS"); provided that the foregoing shall not release, alter or amend the obligations of Cyrk under (i) this agreement, (ii) the New Subordinated Note or (iii) the Confession (it is understood and agreed that Cyrk shall have obligations with respect to the Confession only in the event that Simon is permitted to enter the same pursuant to Section 2 above). 3.2 Release by Cyrk. For Simon's agreement to enter into this agreement and other good and valuable consideration, the receipt and legal sufficiency of which is acknowledged by Cyrk, Cyrk, on its own behalf and on behalf of its direct and indirect subsidiaries, knowingly and voluntarily releases and forever discharges Simon and its direct and indirect affiliates and their respective officers, directors, employees, agents and representatives -2- and the successors and assigns of all of the foregoing (collectively, the "SIMON RELEASED PARTIES" and, together with the Cyrk Released Parties, the "RELEASED PARTIES") from any and all claims, controversies, actions, causes of action, cross-claims, counter-claims, rights, demands, debts, compensatory damages, liquidated damages, punitive or exemplary damages, other damages, claims for costs and attorneys' fees, or liabilities of any nature whatsoever in law and in equity, both past and present (through the date of this agreement) and whether known or unknown, suspected, or claimed against any of the Simon Released Parties that Cyrk or any of its direct or indirect subsidiaries or any of their respective successors or assigns may have, relating in any way to or in connection with any matter or thing from the beginning of the world to the date hereof, including, without limitation, all obligations of any Simon Released Party to Cyrk or any of its direct or indirect subsidiaries (collectively, "CYRK CLAIMS" and, together with the Simon Claims, the "CLAIMS"); provided that the foregoing shall not release, alter or amend the obligations of Simon under this (i) agreement, (ii) the New Subordinated Note or (iii) the Confession. 3.3 No Assignment of Claims. Each party represents to the other that neither it nor any of its direct or indirect subsidiaries has made any assignment or transfer of any of the Claims herein above mentioned or implied. 3.4 Bar to Claims, Etc. In signing this agreement, Simon and Cyrk (each, a "RELEASOR"), on their own behalf and on behalf of their respective direct and indirect subsidiaries, acknowledge and intend that this agreement it shall be effective as a bar to each and every one of the Simon Claims (in the case of Simon) or the Cyrk Claims (in the case of Cyrk) herein above mentioned or implied. Each Releasor expressly consents that this Section 3 shall be given full force and effect according to each and all of its express terms and provisions, including those relating to unknown and unsuspected Claims (notwithstanding any state statute that expressly limits the effectiveness of a general release of unknown, unsuspected or unanticipated Claims), if any, as well as those relating to any other Claims herein above mentioned or implied. Each Releasor further agrees on its own behalf and on behalf of its direct and indirect subsidiaries that in the event it or any of its direct or indirect subsidiaries should assert any Claim seeking damages or other relief against any of the Cyrk Released Parties (in the case of Simon) or any of the Simon Released Parties (in the case of Cyrk), this Section 3 shall serve as a complete defense to any such Claim. Each Releasor on its own behalf and on behalf of its direct and indirect subsidiaries further agrees that there does not exist any Claim of the type described in or implied by Section 3.1 or 3.2 (as the case may be) hereof and it is not aware of any pending or threatened Claims of the type described in or implied by Section 3.1 or 3.2 (as the case may be) hereof. 3.5 No Admission of Improper or Unlawful Conduct. Each Releasor on its own behalf and on behalf of its direct and indirect subsidiaries agrees that this Section 3 shall not be deemed or construed at any time to be an admission by any Released Party or either Releasor (or any direct or indirect subsidiaries of either Releasor) of any improper or unlawful conduct. 3.6 Certain Costs. Each Releasor also agrees that if it or any of its direct or indirect subsidiaries violates this Section 3 by suing any Released Parties (either any of the Cyrk Released Parties, in the case of Simon, or any of the Simon Released Parties, in the case of -3- Cyrk), such Releasor will pay all costs and expenses of defending against the suit incurred by such Released Parties, including reasonable attorneys' fees. 3.7 Discovery of Different Facts. Each Releasor on its own behalf and on behalf of its direct and indirect subsidiaries acknowledges and agrees that such Releasor (or its direct or indirect affiliates) may hereafter discover facts different from or in addition to those now known, or believed to be true, regarding the subject matter of this Section 3 and further acknowledges and agrees that this Section 3 shall remain in full force and effect, notwithstanding the existence of any different or additional facts. 3.8 Section 1542 of the California Civil Code. It is the intent of each Releasor that this Section 3 shall be effective as a general release of all claims. In furtherance of this intention, each Releasor acknowledges that it is familiar with and expressly waives any and all rights that might be claimed by the undersigned by reason of Section 1542 of the California Civil Code, which provides: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THIS RELEASE, WHICH IF KNOWN BY HIM MIGHT HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." 4. Representations and Warranties. 4.1 Representations and Warranties of Simon. Simon represents and warrants to Cyrk as follows: (a) Organization; Good Standing; Foreign Qualification. Simon is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of organization and has the power and authority to execute and deliver this agreement and the other agreements, certificates and documents contemplated by this agreement (together with this agreement, the "TRANSACTION DOCUMENTS") to which it is a party and to perform its obligations hereunder and thereunder. Simon is duly qualified or licensed to transact business, and is in good standing as a foreign corporation authorized to transact business, in each jurisdiction where such qualification or license is required. (b) Power and Authority; Authorization; Enforceability; No Conflicts; Etc. (i) The execution, delivery and performance by Simon of this agreement and the other Transaction Documents to which it is a party and the consummation by Simon of the transactions contemplated hereby and thereby has been duly authorized by all requisite corporate action of Simon. (ii) This agreement and the other Transaction Documents to which Simon is a party have been duly and validly executed and delivered by Simon and constitute the legal, valid and binding obligations of Simon, enforceable against it in accordance with their respective terms. -4- (iii) The execution and delivery by Simon of this agreement and each of the other Transaction Documents to which it is a party, the performance by Simon of its obligations hereunder and thereunder and the consummation by Simon of the transactions contemplated hereby and thereby do not and will not: (A) violate any provision of its certificate of incorporation or bylaws; (B) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, amendment, cancellation or acceleration) under any of the terms, conditions or provisions of any contract to which Simon is a party or by which any of the properties or assets of Simon may be bound or otherwise subject; or (C) contravene or violate any law applicable to Simon or any of its properties or assets. (iv) No consent or other approval of any person, including, without limitation, any governmental authority, is required to be made or obtained by Simon in connection with the execution, delivery and performance by Simon of this agreement or any of the other Transaction Documents to which Simon is a party or the consummation by Simon of the transactions contemplated hereby or thereby. 4.2 Representations and Warranties of Cyrk. Cyrk represents and warrants to Simon as follows: (a) Organization; Good Standing; Foreign Qualification. Cyrk is a corporation duly organized, validly existing and in good standing under the laws of its jurisdictions of organization and has the power and authority to execute and deliver this agreement and the other Transaction Documents to which it is a party and to perform its obligations hereunder and thereunder. Cyrk is duly qualified or licensed to transact business, and is in good standing as a foreign corporation authorized to transact business, in each jurisdiction where such qualification or license is required. (b) Power and Authority; Authorization; Enforceability; No Conflicts; Etc. (i) The execution, delivery and performance by Cyrk of this agreement and the other Transaction Documents to which it is a party and the consummation by Cyrk of the transactions contemplated hereby and thereby has been duly authorized by all requisite corporate action of Cyrk. (ii) This agreement and the other Transaction Documents to which Cyrk is a party have been duly and validly executed and delivered by Cyrk and constitute the legal, valid and binding obligations of Cyrk, enforceable against it in accordance with their respective terms. (iii) The execution and delivery by Cyrk of this agreement and each of the other Transaction Documents to which it is a party, the performance by Cyrk of its obligations hereunder and thereunder and the consummation by Cyrk of the transactions contemplated hereby and thereby do not and will not: (A) violate any provision of its certificate of incorporation or bylaws; (B) result in a violation or breach of, or constitute -5- (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, amendment, cancellation or acceleration) under any of the terms, conditions or provisions of any contract to which Cyrk is a party or by which any of its properties or assets may be bound or otherwise subject; or (C) contravene or violate any law applicable to Cyrk or any of its properties or assets. (iv) No consent or other approval of any person, including, without limitation, any governmental authority, is required to be made or obtained by Cyrk in connection with the execution, delivery and performance by Cyrk of this agreement or any of the other Transaction Documents to which Cyrk is a party or the consummation by Cyrk of the transactions contemplated hereby or thereby. 4.3 Survival. Notwithstanding any right of the parties (Simon, on the one hand, and Cyrk, on the other hand) to investigate the affairs of the other and notwithstanding any knowledge of facts determined or determinable by either such party pursuant to such investigation or right of investigation, the parties to this agreement have the right to rely fully upon the representations and warranties of the other contained in this agreement. The representations and warranties of the parties set forth herein shall survive the execution and delivery hereof indefinitely. 5. Miscellaneous. 5.1 Notices. All notices, consents, demands, instructions, requests and other communications required or permitted hereunder or (except as expressly set forth therein) any other Transaction Document shall be in writing and shall be deemed to have been duly given only if delivered personally, by facsimile transmission, by first-class mail (postage prepaid, return receipt requested), or by overnight delivery by a recognized overnight courier service (all costs prepaid) to the parties at the following addresses and facsimile numbers: (a) If to Cyrk, to: 14224 167th Avenue SE Monroe, WA 98272-2810 Attention: President Telecopier No.: (360) 805-2671 with copies to: Sun Capital Partners, Inc. 5200 Town Center Circle, Suite 470 Boca Raton, FL 33486 Attention: Marc J. Leder, Rodger R. Krouse and C. Deryl Couch Telecopier No.: (561) 394-0540 and -6- Hughes Hubbard & Reed LLP One Battery Park Plaza New York, NY 10004 Attention: Michael Weinsier Telecopier No.: (212) 422-4726 (b) If to Simon, to: 5200 West Century Boulevard Los Angeles, CA 90045 Attention: Terry Wallock Telecopier No.: (310) 417-4671 with copies to: Choate, Hall & Stewart LLP Two International Place Boston, MA 02110 Attention: Cameron Read Telecopier No.: (617) 248-4000 All such notices, requests and other communications will be deemed given upon delivery. Any party from time to time may change its address, facsimile number or other information for the purpose of notices to that party by giving like notice specifying such change to the other party hereto. 5.2 No Waiver. No failure or delay by any party in exercising any right, power or privilege hereunder or (except as expressly set forth therein) any other Transaction Document shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies provided herein and (except as expressly set forth therein) each of the other Transaction Documents shall be cumulative and not exclusive of any rights or remedies provided by law. 5.3 Entire Agreement. This agreement and the other Transaction Documents supersede all prior and/or contemporaneous negotiations, understandings, discussions and agreements (written or oral) between the parties with respect to the subject matter hereof (all of which are merged herein and therein) and contains the sole and entire agreement among the parties hereto with respect to the subject matter hereof and thereof. 5.4 Governing Law. This agreement and (except as expressly set forth therein) the other Transaction Documents shall be governed by, and construed and enforced in accordance with, the laws of the State of New York applicable to contracts made and to be performed therein. -7- 5.5 Consent to Jurisdiction; Waiver of Jury Trial. Each of the parties hereto hereby irrevocably consents and submits to the exclusive jurisdiction of the Superior Court of the State of Washington in and for the County of Snohomish in connection with any action, suit or other proceeding (hereinafter a "PROCEEDING") arising out of or relating to this agreement or (except as expressly set forth therein, if at all) any other Transaction Document or the transactions contemplated hereby or thereby, waives any objection to venue in such County (unless such court lacks jurisdiction with respect to such proceeding, in which case, each of the parties hereto irrevocably consents to the jurisdiction of the courts of the Commonwealth of Massachusetts in connection with such proceeding and waives any objection to venue in the Commonwealth of Massachusetts), and agrees that service of any summons, complaint, notice or other process relating to such dispute may be effected in the manner provided by Section 5.1. 5.6 Waiver of Jury Trial. EACH PARTY HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT OR IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT HEREOF OR THEREOF. 5.7 Construction. The parties acknowledge and agree that each party and its counsel have reviewed and negotiated the terms and provisions of this agreement and the other Transaction Documents and have contributed to their revision; the normal rule of construction, to the effect that any ambiguities are resolved against the drafting party shall not be employed in the interpretation of it; and its terms and provisions shall be construed fairly as to all parties hereto and not in favor of or against any party, regardless of which party was generally responsible for the preparation of this agreement and the other Transaction Documents. 5.8 No Third Party Beneficiaries. Nothing contained in this agreement or (except as expressly set forth therein) any other Transaction Document, whether express or implied, is intended, or shall be deemed, to create or confer any right, interest or remedy for the benefit of any person. 5.9 Severability. It is the desire and intent of the parties to this agreement that the provisions of this agreement and (except as expressly set forth therein, if at all) the other Transaction Documents shall be enforced to the fullest extent permitted under the laws and public policies of each jurisdiction in which enforcement is sought. If any court determines that any provision of this agreement or (except as expressly set forth therein, if at all) any other Transaction Document is unenforceable, such court will have the power to reduce the duration or scope of such provision, as the case may be, or terminate such provision and, in reduced form, such provision shall be enforceable. It is the intention of the parties hereto that any such provision shall not be terminated, unless so terminated by a court, but shall be deemed amended to the extent required to render it valid and enforceable, such amendment to apply only with respect to such provision in the jurisdiction of the court that has made such determination. 5.10 Binding Effect. This agreement and (except as expressly set forth therein, if at all) the other Transaction Documents shall be binding upon and inure to the benefit of the -8- parties hereto and their respective successors and permitted assigns; provided, however, that no party may delegate its obligations hereunder without the prior written consent of the others. 5.11 Amendment and Waiver. No amendment, supplement or waiver of any provision of this agreement or (except as expressly set forth therein, if at all) any other Transaction Document shall be effective unless the same shall be in writing and signed by each of the parties hereto or thereto (in the case of an amendment or supplement) or by the waiving party (in the case of a waiver). 5.12 Further Assurances. From and after the date hereof, the parties hereto will, without further consideration, execute and deliver such further documents and instruments and take such other actions as may be necessary or desirable to perfect the transactions contemplated hereby and by the other Transaction Documents to which they are a party. 5.13 Headings. The headings contained in this agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this agreement. 5.14 Absence of Presumption. The parties understand and agree that this agreement and the other Transaction Documents have been mutually negotiated, prepared and drafted, and if at any time either party desires or is required to interpret or construe any term or provision of this agreement or any other Transaction Document, no consideration will be given to the issue of which party actually prepared, drafted or requested such term or provision. 5.15 Subordination Agreements. Simon acknowledges and agrees that the terms of this agreement are subject to the subordination provisions set forth in the Old Subordinated Note and the New Subordinated Note. 5.16 Counterparts; Effectiveness. This agreement may be executed simultaneously in one or more counterparts, each of which shall be deemed an original. This agreement shall become effective when each party hereto shall have received counterparts hereof signed by all of the other parties hereto. [The next page is the signature page] -9- Please confirm our understanding below. Very truly yours, CYRK, INC. By: /s/ Lynn Skillen ------------------------------------ Name: Lynn Skillen Title: Vice President Agreed: SIMON WORLDWIDE, INC. By: /s/ Terrence J. Wallock --------------------------------- Name: Terrence J. Wallock Title: Gen. Counsel & Asst. Sec. [Signature Page to Settlement Agreement and Mutual General Release] EX-2.7 3 b58486swexv2w7.txt SUBORDINATED PROMISSORY NOTE Exhibit 2.7 SUBORDINATED PROMISSORY NOTE $1,410,000 January 31, 2006 New York, New York FOR VALUE RECEIVED, Cyrk, Inc., a Massachusetts corporation (together with its successors and assigns, "MAKER"), hereby promises to pay to Simon Worldwide, Inc., a Delaware corporation (together with its successors and assigns, "HOLDER"), the principal sum of ONE MILLION, FOUR HUNDRED TEN THOUSAND DOLLARS ($1,410,000), as provided in this Subordinated Promissory Note (this "NOTE"). Maker is delivering this Note to Holder under that certain Settlement Agreement and Mutual General Release dated as of the date of this Note between Maker and Holder (the "Settlement Agreement"). 1. Principal. The outstanding principal under this Note shall be due and payable by Maker in 43 installments on the first day of each month that this Note is outstanding as follows: (a) $100,000 shall be paid on February 1, 2006; (b) $100,000 shall be paid on March 1, 2006; (c) $29,889 shall be paid on the first day of each of the 40 months ending immediately after March 31, 2006; and (d) $14,440 shall be paid on the first day of the month ending after the month in which the last payment is made pursuant to the preceding clause (c). 2. No Interest. In no event shall any interest be paid under this Note. 3. Prepayment. Maker may prepay this Note at any time, without premium or penalty. 4. Payments. All payments on this Note are to be made in lawful money of the United States of America by cash or good check, at the address of Holder at its address as set forth on the books and records of Maker, or such other place as Holder shall designate to Maker in writing. If any payment hereunder becomes due on a Saturday, Sunday or any other day which is not a business day in New York City, such payment shall be deferred to, and shall be payable on, the next business day. 5. Subordination. Notwithstanding anything to the contrary contained in this Note, Maker and Holder agree that the payment of principal and all other amounts due under this Note shall be subordinate to all of the Senior Debt (as defined in Annex A attached hereto) on the terms and conditions set forth in Annex A attached hereto, which is incorporated herein by reference and made a part hereof as if set forth herein in its entirety. 6. Miscellaneous. 6.1 Assignment. Holder may not assign its rights under this Note without the prior written consent of Maker. 6.2 Headings. The headings contained in this Note are for reference purposes only and shall not affect in any way the meaning or interpretation of this Note. 6.3 Counterparts; Effectiveness. This Note may be executed simultaneously in one or more counterparts, each of which shall be deemed an original. This Note shall become effective when each party hereto shall have received counterparts hereof signed by all of the other. [The next page is the signature page] -2- Maker and Holder have duly executed this Subordinated Promissory Note on the date first above written. CYRK, INC. By: /s/ Nikki Andrews ------------------------------------ Name: Nikki Andrews Title: Vice President - Finance Agreed: SIMON WORLDWIDE, INC. By: /s/ Terrence J. Wallock ------------------------------------ Name: Terrence J. Wallock Title: Gen. Counsel & Asst. Sec. S-1 ANNEX A TO SUBORDINATED PROMISSORY NOTE 1. Definitions. As used in this Annex A, the following terms shall have the meanings ascribed to them below: 1.1 "Creditors" shall mean, collectively, Senior Creditor and Holder and their respective successors and assigns. 1.2 " Holder" shall mean Simon Worldwide, Inc., a Delaware corporation, and its successors and assigns. 1.3 "Maker" shall mean Cyrk, Inc., a Massachusetts corporation, and its successors and assigns. 1.4 "Note" shall mean the Subordinated Promissory Note to which this Annex A is attached, dated January __, 2006, by Maker in favor of Holder, as supplemented by this Annex A, as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.5 "Person" or "person" shall mean any individual, sole proprietorship, partnership, corporation (including, without limitation, any corporation which elects subchapter S status under the Internal Revenue Code of 1986, as amended), limited liability company, limited liability partnership, business trust, unincorporated association, joint stock company, trust, joint venture, or other entity or any government or any agency or instrumentality or political subdivision thereof. 1.6 "Senior Creditor" shall mean Wachovia Capital Finance Corporation (New England), formerly known as Congress Financial Corporation (New England), having an office at One Post Office Square, Boston, Massachusetts 02109 and its successors and assigns (and including any other lender or group of lenders that at any time refinances, replaces or succeeds to all or any portion of the Senior Debt or is otherwise party to the Senior Creditor Agreements). 1.7 "Senior Creditor Agreements" shall mean, collectively, the Loan and Security Agreement, dated January 31, 2003, by and among Senior Creditor, Maker and certain affiliates of Maker, and all agreements, documents and instruments at any time executed and/or delivered by Maker or any other Person to, with or in favor of Senior Creditor in connection therewith or related thereto, as all of the foregoing now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated, refinanced, replaced or restructured (in whole or in part and including any agreements A-1 with, to or in favor of any other lender or group of lenders that at any time refinances, replaces or succeeds to all or any portion of the Senior Debt). 1.8 "Senior Debt" shall mean all obligations, liabilities and indebtedness of every kind, nature and description owing by Maker to Senior Creditor and/or its affiliates or participants, including principal, interest, charges, fees, premiums, indemnities and expenses, however evidenced, whether as principal, surety, endorser, guarantor or otherwise, arising under or in connection with the Senior Creditor Agreements, whether now existing or hereafter arising, whether arising before, during or after the initial or any renewal term of the Senior Creditor Agreements or after the commencement of any case with respect to Maker under the United States Bankruptcy Code or any similar statute (and including, without limitation, any principal, interest, fees, costs, expenses and other amounts, whether or not such amounts are allowable either in whole or in part, in any such case or similar proceeding), whether direct or indirect, absolute or contingent, joint or several, due or not due, primary or secondary, liquidated or unliquidated, secured or unsecured, and whether arising directly or howsoever acquired by Senior Creditor. The Senior Debt is secured by, among other things, substantially all of the assets of Cyrk, Inc. 1.9 "Subordinated Debt" shall mean all principal, interest, charges, fees, premiums, indemnities and expenses, however evidenced, arising under or evidenced by the Note, whether now existing or hereafter arising, whether arising before, during or after the initial or any renewal term of the Note or after the commencement of any case with respect to Maker under the United States Bankruptcy Code or any similar statute (and including, without limitation, any principal, interest, fees, costs, expenses and other amounts, whether or not such amounts are allowable in whole or in part, in any such case or similar proceeding). 1.10 All terms used in this Annex A that are defined in the Uniform Commercial Code as in effect in the Commonwealth of Massachusetts shall have the meanings set forth therein, unless otherwise defined in this Annex A. All references to any term in the plural shall include the singular and all references to any term in the singular shall include the plural. 2. Subordination of Subordinated Debt. 2.1 Subordination. (a) Except as specifically set forth in Section 2.1(b) below, Holder hereby subordinates its right to payment and satisfaction of the Subordinated Debt and the payment thereof, directly or indirectly, by any means whatsoever, is deferred, to the indefeasible payment and satisfaction in full of all Senior Debt. (b) Notwithstanding anything to the contrary contained in Section 2.1(a) above, so long as Holder has not received written notice from Senior Creditor that an event of default under the Senior Creditor Agreements has occurred and is continuing A-2 (which notice is stated to be a "Payment Blocking Notice"), Maker may make and Holder may receive and retain regularly scheduled payments of principal in respect of the Note in accordance with the terms of the Note (as in effect on the date of this Annex A) and, upon any default under the Note, Holder may enter the Confession in accordance with Section 2 of the Settlement Agreement and execute on the judgment entered in the Confession. 2.2 Distributions. (a) In the event of any distribution, division or application, partial or complete, voluntary or involuntary, by operation of law or otherwise, of all or any part of the assets of Maker or the proceeds thereof to the creditors of Maker or readjustment of the obligations and indebtedness of Maker, whether by reason of liquidation, bankruptcy, arrangement, receivership, assignment for the benefit of creditors, marshalling of assets of Maker or any other action or proceeding involving the readjustment of all or any part of indebtedness of Maker or the application of the assets of Maker to the payment or liquidation thereof, or upon the dissolution or other winding up of Maker's business, or upon the sale of all or substantially all of Maker's assets, then, and in any such event, (i) Senior Creditor shall first receive indefeasible payment in full in cash of all of the Senior Debt prior to the payment of all or any part of the Subordinated Debt, and (ii) until all of the Senior Debt is indefeasibly paid and satisfied in full, Senior Creditor shall be entitled to receive any payment or distribution of any kind or character, whether in cash, securities or other property, which shall be payable or deliverable in respect of any or all of the Subordinated Debt. (b) In order to enable Senior Creditor to enforce its rights under Section 2.2(a) of this Annex A, Senior Creditor is hereby irrevocably authorized and empowered (in its own name or in the name of Holder or otherwise), but shall have no obligation, to enforce claims comprising any of the Subordinated Debt by proof of debt, proof of claim, suit or otherwise and take generally any action which Holder might otherwise be entitled to take, as Senior Creditor may deem necessary or advisable for the enforcement of its rights or interests hereunder. 2.3 Payments Received by Holder. Should any payment or distribution or security or instrument or proceeds thereof be received by Holder in respect of the Subordinated Debt in contravention of the terms of this Annex A, Holder shall receive and hold the same in trust, as trustee, for the benefit of Senior Creditor, segregated from other funds and property of Holder and shall forthwith deliver the same to Senior Creditor (together with any endorsement or assignment of Holder where necessary), for application to any of the Senior Debt. In the event of the failure of Holder to make any such endorsement or assignment to Senior Creditor, Senior Creditor, or any of its officers or employees, are hereby irrevocably authorized on behalf of Holder to make the same. A-3 3. Covenants, Representations and Warranties. 3.1 Additional Covenants. Holder and Maker agree in favor of Senior Creditor that until all of the Senior Debt is indefeasibly paid and satisfied in full and the commitment of Senior Creditor to extend credit to Maker is terminated: (a) Holder and Maker shall not amend, modify, alter or change in any material respect the Note, without the prior written consent of Senior Creditor; and (b) Holder shall not subordinate any of the Subordinated Debt to any indebtedness of Maker other than the Senior Debt. 3.2 Waivers. Notice of acceptance of this Annex A, the making of loans, advances and extensions of credit or other financial accommodations to, and the incurring of any expenses by or in respect of, Maker by Senior Creditor, and presentment, demand, protest, notice of protest, notice of nonpayment or default and all other notices to which Holder and Maker are or may be entitled are hereby waived (except as expressly provided for in this Annex A or as to Maker, in the Senior Creditor Agreements). Holder also waives notice of, and hereby consents to, (a) any amendment, modification, supplement, renewal, restatement or extensions of time of payment of or increase or decrease in the amount of any of the Senior Debt or to the Senior Creditor Agreements or any collateral at any time granted to or held by Senior Creditor, (b) the taking, exchange, surrender and releasing of collateral at any time granted to or held by Senior Creditor or guarantees now or at any time held by or available to Senior Creditor for the Senior Debt or any other person at any time liable for or in respect of the Senior Debt, (c) the exercise of, or refraining from the exercise of any rights against Maker or any other obligor or any collateral at any time granted to or held by Senior Creditor and/or (d) the settlement, compromise or release of, or the waiver of any default with respect to, any of the Senior Debt. Any of the foregoing shall not, in any manner, affect the terms of this Annex A or impair the obligations of Holder hereunder. All of the Senior Debt shall be deemed to have been made or incurred in reliance upon this Annex A. 3.3 Subrogation; Marshalling. Holder shall not be subrogated to, or be entitled to any assignment of any Senior Debt or Subordinated Debt or of any collateral for or guarantees or evidence of any thereof until all of the Senior Debt is indefeasibly paid and satisfied in full. Holder hereby waives any and all rights to have any collateral or any part thereof granted to or held by Senior Creditor marshalled upon any foreclosure or other disposition of such collateral by Senior Creditor or Maker with the consent of Senior Creditor. 3.4 No Offset. In the event Holder at any time incurs any obligation to pay money to Maker, Holder hereby irrevocably agrees that it shall pay such obligation in cash or cash equivalents in accordance with the terms of the contract governing such obligation and shall not deduct from or setoff against any amounts owed by the Holder to Maker in connection with any such transaction any amounts the Holder claims are due to it with respect to the Subordinated Debt. A-4 4. Miscellaneous. 4.1 Amendments. Any amendment, waiver or other modification of this Annex A must be in writing and shall be effective only if it is signed by Senior Creditor. 4.2 Successors and Assigns. This Annex A shall be binding upon the Creditors and Maker and their respective successors and assigns and shall inure to the benefit of Senior Creditor and its successors, participants and assigns. 4.3 Insolvency. This Annex A shall be applicable both before and after the filing of any petition by or against Maker under the United States Bankruptcy Code and all converted or succeeding cases in respect thereof, and all references in the Note to Maker shall be deemed to apply to a trustee for Maker and Maker as debtor-in-possession. The relative rights of Senior Creditor and Holder to repayment of the Senior Debt and the Subordinated Debt, respectively, and in or to any distributions from or in respect of Maker or any proceeds of Maker's property and assets, shall continue after the filing thereof on the same basis as prior to the date of the petition, subject to any court order approving the financing of, or use of cash collateral by, Maker as debtor-in-possession. 4.4 Bankruptcy Financing. If Maker shall become subject to a proceeding under the United States Bankruptcy Code and if Senior Creditor desires to permit the use of cash collateral or to provide financing to Maker under either Section 363 or Section 364 of the United States Bankruptcy Code, Holder agrees as follows: (a) adequate notice to Holder shall have been provided for such financing or use of cash collateral if Holder receives notice two (2) business days prior to the entry of the order approving such financing or use of cash collateral and (b) no objection will be raised by Holder to any such use of cash collateral or financing. 4.5 Consent to Jurisdiction; Waiver of Jury Trial. The Creditors hereby irrevocably consent to the non-exclusive jurisdiction of the Superior Court of Suffolk County of the Commonwealth of Massachusetts and the United States District Court for the District of Massachusetts, whichever Senior Creditor may elect, and waive trial by jury in any action or proceeding with respect to this Annex A. 4.6 No Third Parties Benefitted. Except as expressly provided in Section 4.2 of this Annex A, this Annex A is solely for the benefit of the Creditors and their respective successors, participants and assigns, and no other person shall have any right, benefit, priority or interest under, or because of the existence of, this Annex A. 4.7 Notices. All notices, requests and demands to or upon the respective parties hereto shall be in writing and shall be deemed duly given, made or received: if delivered in person, immediately upon delivery; if by telex, telegram or facsimile transmission, immediately upon sending and upon confirmation of receipt; if by A-5 nationally recognized overnight courier service with instructions to deliver the next business day, one (1) business day after sending; and if mailed by certified mail, return receipt requested, five (5) days after mailing to the parties at their addresses set forth below (or to such other addresses as the parties may designate in accordance with the provisions of this Section): To Senior Creditor: Wachovia Capital Finance (New England) c/o Wachovia Bank, National Association 110 East Broward Boulevard Fort Lauderdale, Florida 33301 Attention: Portfolio Manager Telephone No.: 954-467-2262 Telecopy No.: 954-467-5520 To Holder: Simon Worldwide, Inc. 5200 West Century Boulevard Los Angeles, California 90045 Attention: Terry Wallock Telephone No.: (310) 417-4669 Telecopy No.: (310) 417-4671 Any Creditor may change the address(es) to which all notices, requests and other communications are to be sent by giving written notice of such address change to the other Creditors in conformity with this Section 4.7, but such change shall not be effective until notice of such change has been received by the other Creditors. A-6 EX-3.2 4 b58486swexv3w2.txt AMENDED AND RESTATED BY-LAWS OF THE REGISTRANT Exhibit 3.2 SIMON WORLDWIDE, INC. AMENDED AND RESTATED BY-LAWS EFFECTIVE MARCH 27, 2006 SIMON WORLDWIDE, INC. AMENDED AND RESTATED BY-LAWS EFFECTIVE MARCH 27, 2006 TABLE OF CONTENTS ARTICLE I CERTIFICATE OF INCORPORATION................................3 ARTICLE II ANNUAL MEETING..............................................3 ARTICLE III SPECIAL MEETINGS OF STOCKHOLDERS............................4 ARTICLE IV NOTICE OF STOCKHOLDERS' MEETINGS............................4 ARTICLE V QUORUM OF STOCKHOLDERS; STOCKHOLDER LIST....................4 ARTICLE VI PROXIES AND VOTING..........................................5 ARTICLE VII STOCKHOLDERS' RECORD DATE...................................6 ARTICLE VIII BOARD OF DIRECTORS..........................................6 ARTICLE IX COMMITTEES..................................................7 ARTICLE X MEETINGS OF THE BOARD OF DIRECTORS AND OF COMMITTEES........8 ARTICLE XI QUORUM OF THE BOARD OF DIRECTORS............................8 ARTICLE XII WAIVER OF NOTICE OF MEETINGS................................9 ARTICLE XIII OFFICERS AND AGENTS.........................................9 ARTICLE XIV CHAIRMAN OF THE BOARD.......................................9 ARTICLE XV SECRETARY...................................................9 ARTICLE XVI TREASURER..................................................10 ARTICLE XVII REMOVALS...................................................10 ARTICLE XVIII VACANCIES..................................................10 ARTICLE XIX CERTIFICATE OF STOCK.......................................10 ARTICLE XX LOSS OF CERTIFICATE........................................11 ARTICLE XXI SEAL.......................................................11 ARTICLE XXII EXECUTION OF PAPERS........................................11 ARTICLE XXIII FISCAL YEAR................................................12 ARTICLE XXIV AMENDMENTS.................................................12 SIMON WORLDWIDE, INC. AMENDED AND RESTATED BY-LAWS EFFECTIVE MARCH 27, 2006 ARTICLE I CERTIFICATE OF INCORPORATION These by-laws, the powers of the corporation and of its directors and stockholders, and all matters concerning the conduct and regulation of the business of the corporation shall be subject to such provisions in regard thereto as are set forth in the certificate of incorporation filed pursuant to the General Corporation Law of Delaware which is hereby made a part of these by-laws. The term "certificate of incorporation" in these by-laws, unless the context requires otherwise, includes not only the original certificate of incorporation filed to create the corporation but also all other certificates, agreements of merger or consolidation, plans of reorganization, or other instruments, howsoever designated, filed pursuant to the General Corporation Law of Delaware which have the effect of amending or supplementing in some respect the corporation's original certificate of incorporation. ARTICLE II ANNUAL MEETING The annual meeting of stockholders shall be held on the date fixed, from time to time, by the directors, within or without the State of Delaware, on such date, and at such time as shall be fixed by the board of directors and specified in the notice of the meeting. Purposes for which an annual meeting is to be held, in addition to those prescribed by law, by the certificate of incorporation or by these by-laws, may be specified by the directors or the president and shall be included in the notice of the meeting. If the board of directors determines that, in the interest of an informed stockholder vote on any matter, it is appropriate to adjourn the annual meeting of stockholders to a later date in order to make available information materially relevant to consideration of such matter, the president or other officer presiding at such meeting may defer any action on such matter and, without a stockholder vote on the matter of adjournment, adjourn the meeting for the purpose of considering and acting on such matter at a session to be convened at a later date. When the annual meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. ARTICLE III SPECIAL MEETINGS OF STOCKHOLDERS Special meetings of the stockholders may be held either within or without the State of Delaware, at such time and place and for such purposes as shall be specified in a call for such meeting and, subject to the rights of the holders of any and all series of Preferred Stock, may be called only by the chairman of the board of directors, the chief executive officer or the president of the corporation or by the secretary within 10 days after receipt of the written request of a majority of the directors. This Article III may only be amended by the board of directors or by the vote of the holders of at least two-thirds of the outstanding shares of capital stock of the corporation entitled to vote in the election of directors. ARTICLE IV NOTICE OF STOCKHOLDERS' MEETINGS Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given which shall state the place, date and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called, which notice shall be given not less than ten nor more than sixty days before the date of the meeting, except where longer notice is required by law, to each stockholder entitled to vote at such meeting, by leaving such notice with him or by mailing it, postage prepaid, directed to him at his address as is appears upon the records of the corporation. In case of the death, absence, incapacity or refusal of the secretary, such notice may be given by a person designated either by the secretary or by the person or persons calling the meeting or by the board of directors. When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. An affidavit of the secretary or an assistant secretary or of the transfer agent of the corporation that the notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. ARTICLE V QUORUM OF STOCKHOLDERS; STOCKHOLDER LIST At any meeting of the stockholders, holders of a majority in interest of all shares issued and outstanding and entitled to vote at the meeting who are present in person or represented by proxy at the commencement of the meeting shall constitute a quorum. Holders of a lesser interest may adjourn any meeting from time to time, and the meeting may be held as adjourned without further notice. The holder of shares that are voted on one or more matters by a proxy holder who has no voting power as to one or more other matters to be voted upon (such as 4 brokers and nominees) shall be deemed present throughout the entire meeting for purposes of establishing a quorum for the meeting and all actions taken thereat. When a quorum is present at any meeting, the holders of a majority of the stock present in person or represented by proxy and voting for or against a matter shall, except where a larger vote is required by law, by the certificate of incorporation or by these by-laws, decide any question brought before such meeting, except that the election of directors shall be by a plurality vote. The secretary or other officer having charge of the stock ledger shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours for a period of at least ten days prior to the meeting, either at a place within the city or town where the meeting is to be held, which place shall have been specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. Said list shall also be produced and kept at the time and place of the meeting during the whole time thereof and may be inspected by any stockholder who is present. The stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list of stockholders required by this Article or the books of the corporation, or the stockholders entitled to vote in person or by proxy at any meeting of stockholders. ARTICLE VI PROXIES AND VOTING Except as otherwise provided in the certificate of incorporation, each stockholder shall at every meeting of the stockholders be entitled to one vote for each share of the capital stock held by such stockholder. Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him by proxy but (except as otherwise expressly permitted by law) no proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period or the proxy (a) states that it is irrevocable and (b) is coupled with an interest sufficient in law to support an irrevocable power. Unless otherwise provided in the certificate of incorporation, any action required by law to, or which may, be taken at any annual or special meeting of stockholders may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote therein were present and voted. Prompt notice of the taking of such action without a meeting by less than unanimous written consent shall be given to those stockholders, who have not consented in writing. 5 ARTICLE VII STOCKHOLDERS' RECORD DATE In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the board of directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. If no record date is fixed: (1) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. (2) The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the board of directors is necessary, shall be the day on which the first written consent is expressed. (3) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the board of directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply, to any adjournment of the meeting, provided, however, that the board of directors may fix a new record date for the adjourned meeting. ARTICLE VIII BOARD OF DIRECTORS Except as otherwise provided by law or by the certificate of incorporation, the business and affairs of the corporation shall be managed by the board of directors. Subject to the rights of holders of preferred stock, nominations for the election of directors may be made by the board of directors or a committee appointed by the board of directors or by any stockholder entitled to vote in the election of directors generally. However, any stockholder entitled to vote in the election of directors generally may nominate one or more persons for election as directors at a meeting only if written notice of such stockholder's intent to make such nomination or nominations has been given, either by personal delivery or by United Starts mail, postage prepaid, to the secretary of the corporation not later than 80 days prior to the date of any annual or special meeting. In the event that the date of such annual or special meeting was not publicly announced by the corporation by mail, press release or otherwise more than 90 days prior to the meeting, notice by the stockholder to be timely must be delivered to the secretary of the 6 corporation not later than the close of business on the tenth day following the day on which such announcement of the date of the meeting was communicated to the stockholders. Each such notice shall set forth: (a) the name and address of the stockholder who intends to make the nomination and of the person or persons to be nominated; (b) a representation that the stockholder is a holder of record of stock of the corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder: (d) such other information regarding each nominee proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had the nominee been nominated, or intended to be nominated, by the board of directors; and (e) the consent of each nominee to serve as a director of the corporation if so elected. The classification of the board of directors, the term of each class of directors and the manner of election and removal of directors shall be as set forth in the certificate of incorporation. Each director shall hold office until his successor is elected and qualified or until his earlier resignation or removal. Any director may resign at any time upon written notice to the corporation. No director need be a stockholder. ARTICLE IX COMMITTEES The board of directors may, by resolution passed by a majority of the whole board, designate one or more committees, each committee to consist of one or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee who may replace any absent or disqualified member at any meeting of the committee and may define the number and qualifications which shall constitute a quorum of such committee. Except as otherwise limited by law, any such committee, to the extent provided in the resolution appointing such committee, shall have and may exercise the powers of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. 7 ARTICLE X MEETINGS OF THE BOARD OF DIRECTORS AND OF COMMITTEES Regular meetings of the board of directors may be held without call or formal notice at such places either within or without the State of Delaware and at such times as the board may by vote from time to time determine. Special meetings of the board of directors may be held at any place either within or without the State of Delaware at any time when called by the president, treasurer, secretary or two or more directors, reasonable notice of the time and place thereof being given to each director. A waiver of such notice in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent to such notice. In any case it shall be deemed sufficient notice to a director to send notice by mail at least forty-eight hours, or to deliver personally or to send notice by telegram at least twenty-four hours, before the meeting addressed to him at his usual or last known business or residence address. Unless otherwise restricted by the certificate of incorporation or by other provisions of these by-laws, (a) any action required or permitted to be taken at any meeting of the board of directors or of any committee thereof may be taken without a meeting if all members of the board or of such committee, as the case may be, consent thereto in writing and such writing or writings are filed with the minutes of proceedings of the board or committee; and (b) members of the board of directors or of any committee designated by the board may participate in a meeting thereof by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation shall constitute presence in person at such meeting. ARTICLE XI QUORUM OF THE BOARD OF DIRECTORS Except as otherwise expressly provided in the certificate of incorporation or in these by-laws, a majority of the total number of directors at the time in office shall constitute a quorum for the transaction of business, but a smaller number of directors may adjourn any meeting from time to time. Except as otherwise so expressly provided, the vote of a majority of the directors present at any meeting at which a quorum is present shall be the act of the board of directors, provided, that the affirmative vote in good faith of a majority of the disinterested directors, even though the disinterested directors shall be fewer than a quorum, shall be sufficient to authorize a contract or transaction in which one or more directors have interest if the material facts as to such interest and the relation of the interested directors to the contract or transaction have been disclosed or are known to the directors. 8 ARTICLE XII WAIVER OF NOTICE OF MEETINGS Whenever notice is required to be given under any provision of law of the certificate of incorporation or these by-laws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors or regular members of a committee of directors need be specified in any written waiver of notice unless so required by the certificate of incorporation or the by-laws. ARTICLE XIII OFFICERS AND AGENTS The corporation shall have such officers and agents with such titles and duties as the directors shall determine, each of whom shall be chosen by the directors and shall hold his office until his successor has been chosen and qualified or until his earlier resignation or removal. The board of directors may secure the fidelity of any or all of such officers or agents by bond or otherwise. Any number of offices may be held by the same person. Each officer shall, subject to these by-laws, have such duties and powers as the board of directors shall from time to time designate. Any officer may resign at any time upon written notice to the corporation. ARTICLE XIV CHAIRMAN OF THE BOARD The chairman of the board, if any, shall preside at all meetings of the stockholders and at all meetings of the board of directors. PRESIDENT The president, if any, shall, subject to the authority of the chairman of the board and the direction and under the supervision of the board of directors, have general supervision over the operations of the corporation. In the absence of the chairman of the board, and except as otherwise voted by the board, the president shall preside at all meetings of the stockholders and of the board of directors at which he is present. ARTICLE XV SECRETARY The secretary, if any, shall record all the proceedings of the meetings of the stockholders and directors in a book which shall be the property of the corporation, to be kept for that purpose; and perform such other duties as shall be assigned to him by the board of directors. In 9 the absence of the secretary from any such meeting, a temporary secretary shall be chosen, who shall record the proceedings of such meeting in the aforesaid book. ARTICLE XVI TREASURER The treasurer, if any, shall, subject to the direction and under the supervision of the board of directors, have the care and custody of the funds and valuable papers of the corporation, except his own bond, and he shall, except as the board of directors shall generally or in particular cases authorize the endorsement thereof in some other manner, have power to endorse for deposit or collection all notes, checks, drafts and other obligations for the payment of money to the corporation or its order. He shall keep, or cause to be kept, accurate books of account, which shall be the property of the corporation. ARTICLE XVII REMOVALS The board of directors may, at any meeting called for the purpose, by vote of a majority of their entire number remove from office any officer or agent of the corporation or any member of any committee appointed by the board of directors or by any committee appointed by the board of directors or by any officer or agent of the corporation. ARTICLE XVIII VACANCIES Any vacancy occurring in any office of the corporation by death, resignation, removal or otherwise and newly created directorships resulting from any increase in the authorized number of directors, may be filled by a majority of the directors then in office (though less than a quorum) or by a sole remaining director and each of the incumbents so chosen shall hold office for the unexpired term in respect of which the vacancy occurred and until his successor shall have been duly elected and qualified or for such shorter period as shall be specified in the filling of such vacancy or, if such vacancy shall have occurred in the office of director, until such a successor shall have been chosen by the stockholders. ARTICLE XIX CERTIFICATE OF STOCK Every holder of stock in the corporation shall be entitled to have a certificate signed by, or in the name of the corporation by the chairman or vice-chairman of the board of directors (if one shall be incumbent) or the president or a vice-president and by the treasurer or an assistant treasurer, or the secretary or an assistant secretary, certifying the number of shares owned by him in the corporation. If such certificate is countersigned (1) by a transfer agent other than the corporation or its employee, or (2) by a registrar other than the corporation or its employee, any other signatures on the certificate may be facsimiles. In case any officer who has signed or 10 whose facsimile signature has been placed upon a certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer at the date of issue. If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificates which the corporation shall issue to represent such class or series of stock or there shall be set forth on the face or back of the certificates which the corporation shall issue to represent such class or series of stock, a statement that the corporation will furnish, without charge to each stockholder who so requests, the designations, preferences and relative participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Any restriction imposed upon the transfer of shares or registration of transfer of shares shall be noted conspicuously on the certificate representing the shares subject to such restriction. ARTICLE XX LOSS OF CERTIFICATE The corporation may issue a new certificate of stock in place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the directors may require the owner of the lost, stolen or destroyed certificate, or his legal representative, to give the corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate in its place and upon such other terms or without any such bond as the board of directors shall prescribe. ARTICLE XXI SEAL The corporate seal shall, subject to alteration by the board of directors, consist of a flat-faced circular die with the word "Delaware" together with the name of the corporation and the year of its organization cut or engraved thereon. The corporate seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. ARTICLE XXII EXECUTION OF PAPERS Except as otherwise provided in these by-laws or as the board of directors may generally or in particular cases authorize the execution thereof in some other manner, all deeds, leases, transfers, contracts, bonds, notes, checks, drafts and other obligations made, accepted or endorsed by the corporation, shall be signed by the president or by the treasurer. 11 ARTICLE XXIII FISCAL YEAR Except as from time to time otherwise provided by the board of directors, the fiscal year of the corporation shall begin on January 1 and end on December 31 each year. ARTICLE XXIV AMENDMENTS Except as otherwise provided by law or by the certificate of incorporation, these by-laws, as from time to time altered or amended, may be made, altered or amended at any annual or special meeting of the stockholders called for the purpose, of which the notice shall specify the subject matter of the proposed alteration or amendment or new by-law or the article or articles to be affected thereby. If the certificate of incorporation so provides, these by-laws tray also be made, altered or amended by a majority of the whole number of directors. Such action may be taken at any meeting of the board of directors, of which notice shall have been given as for a meeting of stockholders. 12 EX-10.30 5 b58486swexv10w30.txt AMENDMENT NO. 1 TO EXECUTIVE SERVICES AGREEMENT Exhibit 10.30 AMENDMENT NO. 1 TO EXECUTIVE SERVICES AGREEMENT This Amendment No. 1 to Executive Services Agreement is made as of May 3, 2004 by and between Simon Worldwide, Inc. (the "Company") and Joseph Bartlett (the "Executive"). INTRODUCTION The Company and the Executive have previously entered into an Executive Services Agreement dated May 30, 2003 (the "Agreement"). The Company and the Executive have also previously entered into a letter agreement dated February 7, 2003 whereby the Company agreed to compensate the Executive for, among other things, the additional obligations, responsibilities and potential liabilities of serving as the Company's co-chief executive officer, including those under the Sarbanes-Oxley Act of 2002. The Executive has been instrumental in helping the Company satisfy its liabilities and attain solvency over the preceding years and is being asked to perform a significant role in determining the future course of the business. In order to (i) ensure that the Company might retain his knowledge, expertise and services in such endeavor, (ii) induce the Executive to remain as co-CEO since the aforesaid letter agreement has expired and will not be renewed and (iii) retain the continuing commitment of the Executive to provide the Company with the substantial time and attention necessary to meet the needs of the Company, the Company and the Executive agree that the Agreement shall be amended as follows: I. Section 2 of the Agreement shall be amended in its entirety to read as follows: "2. COMPENSATION. For Services rendered during the term of this Agreement, the Executive shall be entitled to compensation in the amount and on the payment terms set forth on Schedule A. The Executive shall also be entitled to reimbursement of reasonable and necessary out-of-pocket expenses incurred by the Executive in the ordinary course of business on behalf of the Company in accordance with Company policy, subject to the presentation of appropriate documentation. In addition, during the term of this Agreement the Executive and any dependants shall be entitled to participate at no cost to the Executive in a health insurance plan maintained by the Company at substantially the same benefit level as of the date hereof, and along with any dependents shall be eligible to participate in C.O.B.R.A. coverage at the expense of the Company following termination of employment hereunder for as long as then permissible under C.O.B.R.A and at the same benefit level as of the date hereof." II. Section 3 of the Agreement shall be amended in its entirety to read as follows: "3. TERM. The Executive's engagement by the Company hereunder shall commence on the date hereof and continue until terminated by either party in accordance with this Section 3. Such engagement may be terminated by either party without cause as follows: The Company may terminate this Agreement at any time by giving notice of termination to the Executive and making a lump sum payment to the Executive equivalent to one (1) year compensation at the rate set forth on Schedule A, and no further Services will be required. The Executive may terminate this Agreement by giving one (1) year prior written notice to the Company. Following termination of this Agreement, the Company shall pay to the Executive all compensation and benefits that had accrued, and shall reimburse all expenses incurred by the Executive, prior to the date of termination in accordance with Section 2 hereof, and the Company will provide at its sole expense health care insurance to the Executive under C.O.B.R.A as provided in Section 2 above. The provisions of Section 4 through 13 hereof and the C.O.B.R.A. obligations set forth in Section 2 shall survive the termination of the Agreement and shall continue thereafter in full force and effect." III. Section 4 of the Agreement shall be amended in its entirety to read as follows: "4. TERMINATION BY EXECUTIVE UNDER CERTAIN CIRCUMSTANCES. Notwithstanding any other provision hereof, in the event that (i) the Executive is removed, or voluntarily resigns upon the request of the Board or a significant shareholder, from the Company's Board of Directors or is not nominated, appointed or elected to a new term on the Board of Directors following the expiration of the existing term, (ii) the composition of the Company's Board of Directors changes from the date hereof by the addition of a total of two or more Directors, or by two or more existing Directors ceasing to serve as Directors for any reason, (iii) the Company fails to maintain D&O insurance as provided in Section 6 below or (iv) there is a change of control of the Company, defined as (a) the acquisition by any person or group of beneficial ownership, direct or indirect, of securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding equity securities or (b) the merger or consolidation of the Company with or into, or the sale or assignment of all or substantially all the assets of the Company to, another person or entity, provided that following such transaction the holders of voting stock of the Company immediately prior to such transaction do not own more than 50% of the voting stock of the company surviving such transaction or to which such assets are sold or assigned, then, in any of such events, in addition to any other rights of the Executive under this Agreement, the Executive may at any time within six (6) months following such event terminate this Agreement and the Company shall then pay to the Executive a lump sum payment equivalent to one (1) year compensation at the rate set forth on Schedule A, and no further Services will be required. The Executive shall also be entitled to receive C.O.B.R.A. health insurance at the Company's expense and any other payments as provided in Section 2 above." All other terms and provisions of the Agreement shall remain in full force and effect. This Amendment No. 1 to Executive Services Agreement has been executed and delivered as of the date first above written. Simon Worldwide, Inc. By: /s/ George Golleher --------------------------- George Golleher Director By: /s/ Terrence J. Wallock --------------------------- Terrence J. Wallock Assistant Secretary The Executive /s/ Joseph Bartlett --------------------------- Joseph Bartlett AMENDMENT NO. 1 TO EXECUTIVE SERVICES AGREEMENT This Amendment No. 1 to Executive Services Agreement is made as of May 3, 2004 by and between Simon Worldwide, Inc. (the "Company") and Allan Brown (the "Executive"). INTRODUCTION The Company and the Executive have previously entered into an Executive Services Agreement dated May 30, 2003 (the "Agreement"). The Company and the Executive have also previously entered into a letter agreement dated February 7, 2003 whereby the Company agreed to compensate the Executive for, among other things, the additional obligations, responsibilities and potential liabilities of serving as the Company's co-chief executive officer, including those under the Sarbanes-Oxley Act of 2002. The Executive has been instrumental in helping the Company satisfy its liabilities and attain solvency over the preceding years and is being asked to perform a significant role in determining the future course of the business. In order to (i) ensure that the Company might retain his knowledge, expertise and services in such endeavor, (ii) induce the Executive to remain as co-CEO since the aforesaid letter agreement has expired and will not be renewed and (iii) retain the continuing commitment of the Executive to provide the Company with the substantial time and attention necessary to meet the needs of the Company, the Company and the Executive agree that the Agreement shall be amended as follows: I. Section 2 of the Agreement shall be amended in its entirety to read as follows: "2. COMPENSATION. For Services rendered during the term of this Agreement, the Executive shall be entitled to compensation in the amount and on the payment terms set forth on Schedule A. The Executive shall also be entitled to reimbursement of reasonable and necessary out-of-pocket expenses incurred by the Executive in the ordinary course of business on behalf of the Company in accordance with Company policy, subject to the presentation of appropriate documentation. In addition, during the term of this Agreement the Executive and any dependants shall be entitled to participate at no cost to the Executive in a health insurance plan maintained by the Company at substantially the same benefit level as of the date hereof, and along with any dependents shall be eligible to participate in C.O.B.R.A. coverage at the expense of the Company following termination of employment hereunder for as long as then permissible under C.O.B.R.A and at the same benefit level as of the date hereof." IV. Section 3 of the Agreement shall be amended in its entirety to read as follows: "3. TERM. The Executive's engagement by the Company hereunder shall commence on the date hereof and continue until terminated by either party in accordance with this Section 3. Such engagement may be terminated by either party without cause as follows: The Company may terminate this Agreement at any time by giving notice of termination to the Executive and making a lump sum payment to the Executive equivalent to one (1) year compensation at the rate set forth on Schedule A, and no further Services will be required. The Executive may terminate this Agreement by giving one (1) year prior written notice to the Company. Following termination of this Agreement, the Company shall pay to the Executive all compensation and benefits that had accrued, and shall reimburse all expenses incurred by the Executive, prior to the date of termination in accordance with Section 2 hereof, and the Company will provide at its sole expense health care insurance to the Executive under C.O.B.R.A as provided in Section 2 above. The provisions of Section 4 through 13 hereof and the C.O.B.R.A. obligations set forth in Section 2 shall survive the termination of the Agreement and shall continue thereafter in full force and effect." V. Section 4 of the Agreement shall be amended in its entirety to read as follows: "4. TERMINATION BY EXECUTIVE UNDER CERTAIN CIRCUMSTANCES. Notwithstanding any other provision hereof, in the event that (i) the Executive is removed, or voluntarily resigns upon the request of the Board or a significant shareholder, from the Company's Board of Directors or is not nominated, appointed or elected to a new term on the Board of Directors following the expiration of the existing term, (ii) the composition of the Company's Board of Directors changes from the date hereof by the addition of a total of two or more Directors, or by two or more existing Directors ceasing to serve as Directors for any reason, (iii) the Company fails to maintain D&O insurance as provided in Section 6 below or (iv) there is a change of control of the Company, defined as (a) the acquisition by any person or group of beneficial ownership, direct or indirect, of securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding equity securities or (b) the merger or consolidation of the Company with or into, or the sale or assignment of all or substantially all the assets of the Company to, another person or entity, provided that following such transaction the holders of voting stock of the Company immediately prior to such transaction do not own more than 50% of the voting stock of the company surviving such transaction or to which such assets are sold or assigned, then, in any of such events, in addition to any other rights of the Executive under this Agreement, the Executive may at any time within six (6) months following such event terminate this Agreement and the Company shall then pay to the Executive a lump sum payment equivalent to one (1) year compensation at the rate set forth on Schedule A, and no further Services will be required. The Executive shall also be entitled to receive C.O.B.R.A. health insurance at the Company's expense and any other payments as provided in Section 2 above." All other terms and provisions of the Agreement shall remain in full force and effect. This Amendment No. 1 to Executive Services Agreement has been executed and delivered as of the date first above written. Simon Worldwide, Inc. By: /s/ J. Anthony Kouba ------------------------------- J. Anthony Kouba Chairman Compensation Committee By: /s/ Terrence J. Wallock ------------------------------- Terrence J. Wallock Assistant Secretary The Executive /s/ Allan Brown ------------------------------- Allan Brown AMENDMENT NO. 1 TO EXECUTIVE SERVICES AGREEMENT This Amendment No. 1 to Executive Services Agreement is made as of May 3, 2004 by and between Simon Worldwide, Inc. (the "Company") and George Golleher (the "Executive"). INTRODUCTION The Company and the Executive have previously entered into an Executive Services Agreement dated May 30, 2003 (the "Agreement"). The Company and the Executive have also previously entered into a letter agreement dated February 7, 2003 whereby the Company agreed to compensate the Executive for, among other things, the additional obligations, responsibilities and potential liabilities of serving as the Company's co-chief executive officer, including those under the Sarbanes-Oxley Act of 2002. The Executive has been instrumental in helping the Company satisfy its liabilities and attain solvency over the preceding years and is being asked to perform a significant role in determining the future course of the business. In order to (i) ensure that the Company might retain his knowledge, expertise and services in such endeavor, (ii) induce the Executive to remain as co-CEO since the aforesaid letter agreement has expired and will not be renewed and (iii) retain the continuing commitment of the Executive to provide the Company with the substantial time and attention necessary to meet the needs of the Company, the Company and the Executive agree that the Agreement shall be amended as follows: I. Section 2 of the Agreement shall be amended in its entirety to read as follows: "2. COMPENSATION. For Services rendered during the term of this Agreement, the Executive shall be entitled to compensation in the amount and on the payment terms set forth on Schedule A. The Executive shall also be entitled to reimbursement of reasonable and necessary out-of-pocket expenses incurred by the Executive in the ordinary course of business on behalf of the Company in accordance with Company policy, subject to the presentation of appropriate documentation. In addition, during the term of this Agreement the Executive and any dependants shall be entitled to participate at no cost to the Executive in a health insurance plan maintained by the Company at substantially the same benefit level as of the date hereof, and along with any dependents shall be eligible to participate in C.O.B.R.A. coverage at the expense of the Company following termination of employment hereunder for as long as then permissible under C.O.B.R.A and at the same benefit level as of the date hereof." VI. Section 3 of the Agreement shall be amended in its entirety to read as follows: "3. TERM. The Executive's engagement by the Company hereunder shall commence on the date hereof and continue until terminated by either party in accordance with this Section 3. Such engagement may be terminated by either party without cause as follows: The Company may terminate this Agreement at any time by giving notice of termination to the Executive and making a lump sum payment to the Executive equivalent to one (1) year compensation at the rate set forth on Schedule A, and no further Services will be required. The Executive may terminate this Agreement by giving one (1) year prior written notice to the Company. Following termination of this Agreement, the Company shall pay to the Executive all compensation and benefits that had accrued, and shall reimburse all expenses incurred by the Executive, prior to the date of termination in accordance with Section 2 hereof, and the Company will provide at its sole expense health care insurance to the Executive under C.O.B.R.A as provided in Section 2 above. The provisions of Section 4 through 13 hereof and the C.O.B.R.A. obligations set forth in Section 2 shall survive the termination of the Agreement and shall continue thereafter in full force and effect." VII. Section 4 of the Agreement shall be amended in its entirety to read as follows: "4. TERMINATION BY EXECUTIVE UNDER CERTAIN CIRCUMSTANCES. Notwithstanding any other provision hereof, in the event that (i) the Executive is removed, or voluntarily resigns upon the request of the Board or a significant shareholder, from the Company's Board of Directors or is not nominated, appointed or elected to a new term on the Board of Directors following the expiration of the existing term, (ii) the composition of the Company's Board of Directors changes from the date hereof by the addition of a total of two or more Directors, or by two or more existing Directors ceasing to serve as Directors for any reason, (iii) the Company fails to maintain D&O insurance as provided in Section 6 below or (iv) there is a change of control of the Company, defined as (a) the acquisition by any person or group of beneficial ownership, direct or indirect, of securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding equity securities or (b) the merger or consolidation of the Company with or into, or the sale or assignment of all or substantially all the assets of the Company to, another person or entity, provided that following such transaction the holders of voting stock of the Company immediately prior to such transaction do not own more than 50% of the voting stock of the company surviving such transaction or to which such assets are sold or assigned, then, in any of such events, in addition to any other rights of the Executive under this Agreement, the Executive may at any time within six (6) months following such event terminate this Agreement and the Company shall then pay to the Executive a lump sum payment equivalent to one (1) year compensation at the rate set forth on Schedule A, and no further Services will be required. The Executive shall also be entitled to receive C.O.B.R.A. health insurance at the Company's expense and any other payments as provided in Section 2 above." All other terms and provisions of the Agreement shall remain in full force and effect. This Amendment No. 1 to Executive Services Agreement has been executed and delivered as of the date first above written. Simon Worldwide, Inc. By: /s/ J. Anthony Kouba ------------------------------- J. Anthony Kouba Chairman Compensation Committee By: /s/ Terrence J. Wallock ------------------------------- Terrence J. Wallock Assistant Secretary The Executive /s/ George G. Golleher ------------------------------- George G. Golleher AMENDMENT NO. 1 TO EXECUTIVE SERVICES AGREEMENT This Amendment No. 1 to Executive Services Agreement is made as of May 3, 2004 by and between Simon Worldwide, Inc. (the "Company") and J. Anthony Kouba (the "Executive"). INTRODUCTION The Company and the Executive have previously entered into an Executive Services Agreement dated May 30, 2003 (the "Agreement"). The Company and the Executive have also previously entered into a letter agreement dated February 7, 2003 whereby the Company agreed to compensate the Executive for, among other things, the additional obligations, responsibilities and potential liabilities of serving as the Company's co-chief executive officer, including those under the Sarbanes-Oxley Act of 2002. The Executive has been instrumental in helping the Company satisfy its liabilities and attain solvency over the preceding years and is being asked to perform a significant role in determining the future course of the business. In order to (i) ensure that the Company might retain his knowledge, expertise and services in such endeavor, (ii) induce the Executive to remain as co-CEO since the aforesaid letter agreement has expired and will not be renewed and (iii) retain the continuing commitment of the Executive to provide the Company with the substantial time and attention necessary to meet the needs of the Company, the Company and the Executive agree that the Agreement shall be amended as follows: I. Section 2 of the Agreement shall be amended in its entirety to read as follows: "2. COMPENSATION. For Services rendered during the term of this Agreement, the Executive shall be entitled to compensation in the amount and on the payment terms set forth on Schedule A. The Executive shall also be entitled to reimbursement of reasonable and necessary out-of-pocket expenses incurred by the Executive in the ordinary course of business on behalf of the Company in accordance with Company policy, subject to the presentation of appropriate documentation. In addition, during the term of this Agreement the Executive and any dependants shall be entitled to participate at no cost to the Executive in a health insurance plan maintained by the Company at substantially the same benefit level as of the date hereof, and along with any dependents shall be eligible to participate in C.O.B.R.A. coverage at the expense of the Company following termination of employment hereunder for as long as then permissible under C.O.B.R.A and at the same benefit level as of the date hereof." VIII. Section 3 of the Agreement shall be amended in its entirety to read as follows: "3. TERM. The Executive's engagement by the Company hereunder shall commence on the date hereof and continue until terminated by either party in accordance with this Section 3. Such engagement may be terminated by either party without cause as follows: The Company may terminate this Agreement at any time by giving notice of termination to the Executive and making a lump sum payment to the Executive equivalent to one (1) year compensation at the rate set forth on Schedule A, and no further Services will be required. The Executive may terminate this Agreement by giving one (1) year prior written notice to the Company. Following termination of this Agreement, the Company shall pay to the Executive all compensation and benefits that had accrued, and shall reimburse all expenses incurred by the Executive, prior to the date of termination in accordance with Section 2 hereof, and the Company will provide at its sole expense health care insurance to the Executive under C.O.B.R.A as provided in Section 2 above. The provisions of Section 4 through 13 hereof and the C.O.B.R.A. obligations set forth in Section 2 shall survive the termination of the Agreement and shall continue thereafter in full force and effect." IX. Section 4 of the Agreement shall be amended in its entirety to read as follows: "4. TERMINATION BY EXECUTIVE UNDER CERTAIN CIRCUMSTANCES. Notwithstanding any other provision hereof, in the event that (i) the Executive is removed, or voluntarily resigns upon the request of the Board or a significant shareholder, from the Company's Board of Directors or is not nominated, appointed or elected to a new term on the Board of Directors following the expiration of the existing term, (ii) the composition of the Company's Board of Directors changes from the date hereof by the addition of a total of two or more Directors, or by two or more existing Directors ceasing to serve as Directors for any reason, (iii) the Company fails to maintain D&O insurance as provided in Section 6 below or (iv) there is a change of control of the Company, defined as (a) the acquisition by any person or group of beneficial ownership, direct or indirect, of securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding equity securities or (b) the merger or consolidation of the Company with or into, or the sale or assignment of all or substantially all the assets of the Company to, another person or entity, provided that following such transaction the holders of voting stock of the Company immediately prior to such transaction do not own more than 50% of the voting stock of the company surviving such transaction or to which such assets are sold or assigned, then, in any of such events, in addition to any other rights of the Executive under this Agreement, the Executive may at any time within six (6) months following such event terminate this Agreement and the Company shall then pay to the Executive a lump sum payment equivalent to one (1) year compensation at the rate set forth on Schedule A, and no further Services will be required. The Executive shall also be entitled to receive C.O.B.R.A. health insurance at the Company's expense and any other payments as provided in Section 2 above." All other terms and provisions of the Agreement shall remain in full force and effect. This Amendment No. 1 to Executive Services Agreement has been executed and delivered as of the date first above written. Simon Worldwide, Inc. By: /s/ George Golleher ------------------------------- George Golleher Director By: /s/ Terrence J. Wallock ------------------------------- Terrence J. Wallock Assistant Secretary The Executive /s/ J. Anthony Kouba ------------------------------- J. Anthony Kouba EX-10.31 6 b58486swexv10w31.txt AMENDMENT NO. 2 TO WALLOCK EXECUTIVE SERVICES AGREEMENT Exhibit 10.31 AMENDMENT NO. 2 TO EXECUTIVE SERVICES AGREEMENT This Amendment No. 2 to Executive Services Agreement is made as of March 27, 2006 by and between Simon Worldwide, Inc. (the "Company") and Terrence Wallock (the "Executive"). INTRODUCTION The Company and the Executive have previously entered into an Executive Services Agreement dated May 30, 2003, as amended by Amendment No. 1 dated as of May 3, 2004 (the "Agreement"). The Executive has been instrumental in helping the Company satisfy its liabilities and attain solvency over the preceding years and is being asked to perform a significant role in determining the future course of the business. In addition, the Executive has today been elected to the Board of Directors of the Company. In order to (i) ensure that the Company might retain his knowledge, expertise and services in such endeavor, (ii) retain the continuing commitment of the Executive to provide the Company with the substantial time and attention necessary to meet the needs of the Company, and (iii) to conform the terms of this Agreement to those of the similar agreements between the Company and the other members of the Board of Directors, the Company and the Executive agree that the Agreement shall be amended as follows: Section 4 of the Agreement shall be amended in its entirety to read as follows: "4. TERMINATION BY EXECUTIVE UNDER CERTAIN CIRCUMSTANCES. Notwithstanding any other provision hereof, in the event that (i) the Executive is removed, or voluntarily resigns upon the request of the Board or a significant shareholder, from the Company's Board of Directors or is not nominated, appointed or elected to a new term on the Board of Directors following the expiration of the existing term, (ii) the composition of the Company's Board of Directors changes from the date hereof by the addition of a total of two or more Directors, or by two or more existing Directors ceasing to serve as Directors for any reason, (iii) the Company fails to maintain D&O insurance as provided in Section 6 below or (iv) there is a change of control of the Company, defined as (a) the acquisition by any person or group of beneficial ownership, direct or indirect, of securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding equity securities or (b) the merger or consolidation of the Company with or into, or the sale or assignment of all or substantially all the assets of the Company to, another person or entity, provided that following such transaction the holders of voting stock of the Company immediately prior to such transaction do not own more than 50% of the voting stock of the company surviving such transaction or to which such assets are sold or assigned, then, in any of such events, in addition to any other rights of the Executive under this Agreement, the Executive may at any time within six (6) months following such event terminate this Agreement and the Company shall then pay to the Executive a lump sum payment equivalent to one (1) year compensation at the rate set forth on Schedule A, and no further Services will be required. The Executive shall also be entitled to receive C.O.B.R.A. health insurance at the Company's expense and any other payments as provided in Section 2 above." All other terms and provisions of the Agreement shall remain in full force and effect. This Amendment No. 2 to Executive Services Agreement has been executed and delivered as of the date first above written. Simon Worldwide, Inc. By: /s/ J. Anthony Kouba ------------------------------- J. Anthony Kouba Co-Chief Executive Officer By: /s/ George Golleher ------------------------------- George Golleher Co-Chief Executive Officer The Executive /s/ Terrence Wallock ------------------------------- Terrence Wallock EX-10.32 7 b58486swexv10w32.txt NEW EXECUTIVE SERVICES AGREEMENT WITH MR. MAYS Exhibit 10.32 NEW EXECUTIVE SERVICES AGREEMENT This New Executive Services Agreement ("Agreement") is made as of March 27, 2006 by and between Simon Worldwide, Inc. (the "Company") and Greg Mays, (the "Executive"). INTRODUCTION The Company and the Executive are parties to an Executive Services Agreement dated as of May 30, 2003, as amended by Amendment No. 1 dated as of May 3, 2004 (the "Prior Agreement"). The Prior Agreement was terminated on the date hereof in connection with the Executive's resignation, at the Company's request, from the Board of Directors of the Company. The Company desires that the Executive continue to provide to the Company the services provided by the Executive under the Prior Agreement in accordance with the terms of this Agreement, and the Executive wishes to provide such services. Therefore, the Company and the Executive agree as follows: 1. SERVICES. The Executive shall perform the services for the Company, and shall have the duties and responsibilities, described in Schedule A hereto (the "Services") during the term of this Agreement. The Executive shall be available to provide the Services for such time each week as shall be necessary to perform the Services, or as otherwise provided in Schedule A. Executive may engage in activities for other unrelated entities during the term hereof, but shall at all times maintain the ability and availability to perform the Services and shall engage in no activities which would constitute a conflict of interest with the Company. 2. COMPENSATION. For Services rendered during the term of this Agreement, the Executive shall be entitled to compensation in the amount and on the payment terms set forth on Schedule A. The Executive shall also be entitled to reimbursement of reasonable and necessary out-of-pocket expenses incurred by the Executive in the ordinary course of business on behalf of the Company in accordance with Company policy, subject to the presentation of appropriate documentation. In addition, during the term of this Agreement the Executive and any dependents shall be entitled to participate at no cost to the Executive in a health insurance plan maintained by the Company at substantially the same benefit level as of the date hereof, and along with any dependents shall be eligible to participate in C.O.B.R.A. coverage at the expense of the Company following termination of employment hereunder for as long as then permissible under C.O.B.R.A. and at the same benefit level as of the date hereof. 3. TERM. The Executive's engagement by the Company hereunder shall commence on the date hereof and continue until terminated by either party at any time by giving 90 days prior written notice to the other party. Following termination of this Agreement, the Company shall pay to the Executive all compensation that had accrued, and shall reimburse all expenses incurred by the Executive, prior to the date of termination in accordance with Section 2 hereof. The C.O.B.R.A. obligations set forth in Section 2 shall survive the termination of this Agreement and shall continue thereafter in full force and effect. 4. SURVIVAL OF CERTAIN PROVISIONS OF PRIOR AGREEMENT. The Company and the Executive acknowledge and confirm their agreement that the provisions of Sections 5 through 13 of the Prior Agreement survive the termination of the Prior Agreement and continue thereafter in full force and effect. 5. ENFORCEABILITY, ETC. This Agreement shall be interpreted so as to be effective under applicable law, but if any portion hereof is prohibited or invalid, such portion shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement. 6. NOTICES. Any notice, demand or other communication given pursuant to this Agreement shall be in writing and shall be personally delivered, sent by nationally recognized overnight courier, or mailed by first class certified or registered mail, postage prepaid, return receipt requested as follows: (a) If to the Company: 5200 W. Century Boulevard Los Angeles, CA 90045 Attn: Board of Directors with a copy to: Choate, Hall & Stewart LLP Two International Place Boston, MA 02110 Attn: Cameron Read (b) If to the Executive: Greg Mays 71 South Peak Laguna Niguel, CA 92677 with a copy to: --------------------------------- --------------------------------- --------------------------------- Attn: --------------------------- or to such other address as the parties shall have designated by notice to the other party. 2 7. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the internal laws of the State of California, without regard to its choice of law principles. 8. DISPUTE RESOLUTION. Any dispute or claim relating to the enforcement or any alleged breach of this Agreement shall be resolved exclusively through final and binding arbitration before a neutral arbitrator, pursuant to the Employment Arbitration Rules of the American Arbitration Association. Any arbitration proceeding initiated hereunder shall take place in Los Angeles, California. The costs of any arbitration proceeding (including the arbitrator's fees) initiated hereunder shall be borne equally by the parties, and the prevailing party in any proceeding shall be entitled to recover reasonable costs and expenses, including reasonable attorneys' fees and travel costs, incurred in presenting the case in the arbitration proceeding. 9. AMENDMENTS AND WAIVERS. This Agreement may be amended or modified only by a written instrument signed by the Company and the Executive. No waiver of this Agreement or any provision hereof shall be binding upon the party against whom enforcement of such waiver is sought unless it is made in writing and signed by or on behalf of such party. The waiver of a breach of any provision of this Agreement shall not be construed as a waiver or a continuing waiver of the same or any subsequent breach of any provision of this Agreement. No delay or omission in exercising any right under this Agreement shall operate as a waiver of that or any other right. 10. BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding on and inure to the benefit of the parties hereto and their respective heirs, executors and administrators, successors and assigns, except that the rights and obligations of the Executive hereunder are personal and may not be assigned without the Company's prior written consent. 11. NO CONFLICTS. The Executive represents to the Company that the Executive is not a party to or bound by any agreement or commitment that conflicts with the obligations of the Executive under this Agreement. 12. ENTIRE AGREEMENT. This Agreement constitutes the final and entire agreement of the parties with respect to the matters covered hereby, and replaces and supersedes all other agreements and understandings relating thereto other than the Indemnification Agreement, the Letter Agreement and, to the extent provided in Section 4 of this Agreement, the Prior Agreement. 13. CAPTIONS. The captions of the sections of this Agreement are for convenience of reference only and in no way define, limit or affect the scope or substance of any section of this Agreement. 14. COUNTERPARTS. This Agreement may be executed in multiple counterparts, and counterparts by facsimile, each of which shall be deemed an original, but all of which when taken together shall constitute one and the same instrument. 3 This Agreement has been executed and delivered as of the date first above written. SIMON WORLDWIDE, INC. By /s/ George Golleher --------------------------------- George Golleher Co-Chief Executive Officer By /s/ J. Anthony Kouba --------------------------------- J. Anthony Kouba Co-Chief Executive Officer The Executive /s/ Greg Mays --------------------------------- Greg Mays 4 Schedule A ---------- I. SERVICES Manage the finance and financial reporting functions of the Company including performing the duties of the Chief Financial Officer. II. MAXIMUM HOURS PER WEEK In the event that the Executive elects to terminate the Agreement by giving 180 days notice of termination, then during such 180 day period the Executive may be required to provide services for a maximum of 8 hours per week, all served consecutively or as otherwise agreed upon by the Executive with the Company III. COMPENSATION Four thousand forty dollars ($4,040) per week paid bi-weekly. In addition to the extent Services are required beyond twenty (20) hours per week (i) in connection with the analysis and negotiation of mergers, acquisitions or business combinations which the Company might pursue from time to time or (ii) in preparation for and testimony in depositions or other discovery with respect to Legal Proceedings, the Executive shall be compensated at the rate of $250 per hour for hours in excess of twenty (20) per week. IV. LEGAL PROCEEDINGS FOLLOWING TERMINATION (Section 5 Services) $400 per hour for all preparation, deposition and discovery time. The Company shall at the request of the Executive provide independent legal counsel selected by the Executive at the Company's expense. EX-31.1 8 b58486swexv31w1.txt SECTION 302 CERTIFICATION OF GEORGE G. GOLLEHER EXHIBIT 31.1 I, George G. Golleher, a member of the Board of Directors, have co-responsibility for the role of Principal Executive Officer of the Company, certify that: 1. I have reviewed this Annual Report on Form 10-K of Simon Worldwide, Inc. (the "registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's Board of Directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 31, 2006 /s/ George G. Golleher ---------------------------------------- George G. Golleher Co-Chief Executive Officer 36 EX-31.2 9 b58486swexv31w2.txt SECTION 302 CERTIFICATION OF ANTHONY KOUBA EXHIBIT 31.2 I, J. Anthony Kouba, a member of the Board of Directors, have co-responsibility for the role of Principal Executive Officer of the Company, certify that: 1. I have reviewed this Annual Report on Form 10-K of Simon Worldwide, Inc. (the "registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's Board of Directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 31, 2006 /s/ J. Anthony Kouba ---------------------------------------- J. Anthony Kouba Co-Chief Executive Officer 37 EX-31.3 10 b58486swexv31w3.txt SECTION 302 CERTIFICATION OF GREG MAYS EXHIBIT 31.3 I, Greg Mays, Principal Financial Officer of the Company, certify that: 1. I have reviewed this Annual Report on Form 10-K of Simon Worldwide, Inc. (the "registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's Board of Directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 31, 2006 /s/ Greg Mays ---------------------------------------- Greg Mays Principal Financial Officer 38 EX-32 11 b58486swexv32.txt SECTION 906 CERTIFICATION OF THE CO-C.E.O.'S AND P.F.O. EXHIBIT 32 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Simon Worldwide, Inc. (the "Company") on Form 10-K for the period ending December 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned officers of the Company, certify, pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of the officers' knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ George G. Golleher ---------------------------------------- George G. Golleher Co-Chief Executive Officer March 31, 2006 /s/ J. Anthony Kouba ---------------------------------------- J. Anthony Kouba Co-Chief Executive Officer March 31, 2006 /s/ Greg Mays ---------------------------------------- Greg Mays Principal Financial Officer March 31, 2006 39 -----END PRIVACY-ENHANCED MESSAGE-----