Simon Worldwide (SWWI) 10-Q 2009 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

OR

o 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 incorporation or organization)	(I.R.S. Employer Identification No.)

5200 WEST CENTURY BOULEVARD, LOS ANGELES, CALIFORNIA 90045
(Address of principal executive offices)

(310) 417-4660
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes þ  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files): Yes o  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o  Non-accelerated filer o
(Do not check if a smaller reporting company) Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): Yeso Noþ

At November 6, 2009, 54,201,080 shares of the registrant’s common stock were outstanding.

SIMON WORLDWIDE, INC.
FORM 10-Q
TABLE OF CONTENTS

	Page
	Number
PART I — FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Consolidated Balance Sheets—September 30, 2009 (Unaudited) and December 31, 2008	3
Consolidated Statements of Operations—For the three and nine months ended September 30, 2009 and 2008 (Unaudited)	4
Consolidated Statements of Comprehensive Loss—For the three and nine months ended September 30, 2009 and 2008 (Unaudited)	5
Consolidated Statements of Cash Flows—For the nine months ended September 30, 2009 and 2008 (Unaudited)	6
Notes to Condensed Consolidated Financial Statements (Unaudited)	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3. Quantitative and Qualitative Disclosures About Market Risk	22
Item 4. Controls and Procedures	22
Item 4T. Controls and Procedures	22
PART II — OTHER INFORMATION
Item 1. Legal Proceedings	23
Item 1A. Risk Factors	23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 3. Defaults Upon Senior Securities	23
Item 4. Submission of Matters to a Vote of Security Holders	23
Item 5. Other Information	23
Item 6. Exhibits	23
SIGNATURE	24
EX-31 Section 302 Certification of Chief Executive Officer and Chief Financial Officer
EX-32 Section 906 Certification of Chief Executive Officer and Chief Financial Officer

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PART I — FINANCIAL INFORMATION

Item 1. Condensed Financial Statements

SIMON WORLDWIDE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

	September 30,			December 31,
	2009			2008
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	15,290		$	16,576
Prepaid expenses and other current assets		42			180
Other receivable		—			350
Assets from discontinued operations to be disposed of — current (Note 4)		198			84
Total current assets		15,530			17,190
Investments		170			295
Other assets		26			25
Assets from discontinued operations to be disposed of — non-current (Note 4)		362			436
Total non-current assets		558			756
	$	16,088		$	17,946
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	94		$	125
Accrued expenses and other current liabilities		150			379
Liabilities from discontinued operations — current (Note 4)		560			520
Total current liabilities		804			1,024
Stockholders’ equity:
Common stock, $.01 par value; 100,000,000 shares authorized; 54,201,080 shares issued and outstanding net of 412,869 treasury shares at par value at September 30, 2009, and December 31, 2008		542			542
Additional paid-in capital		153,303			153,303
Deficit		(138,564	)		(137,055	)
Accumulated other comprehensive income		3			132
Total stockholders’ equity		15,284			16,922
	$	16,088		$	17,946

See the accompanying Notes to Condensed Consolidated Financial Statements.

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SIMON WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)

	For the three months						For the nine months
	ended September 30,						ended September 30,
	2009			2008			2009			2008
Revenue	$	—		$	—		$	—		$	—
General and administrative expenses		587			1,373			1,558			3,004
Operating loss from continuing operations		(587	)		(1,373	)		(1,558	)		(3,004	)
Interest income		27			73			119			255
Gain (loss) on settlement		—			—			7			(50	)
Investment impairment		(1	)		—			(3	)		(15	)
Equity (loss) in Yucaipa AEC earnings		(1	)		4			7			1,867
Loss from continuing operations before income taxes		(562	)		(1,296	)		(1,428	)		(947	)
Income tax provision		—			—			—			—
Net loss from continuing operations		(562	)		(1,296	)		(1,428	)		(947	)
Income (loss) from discontinued operations, net of tax (Note 4)		—			1,571			(81	)		1,935
Net income (loss)		(562	)		275			(1,509	)		988
Excess of carrying value of preferred stock over fair value of common stock issued		—			19,688			—			19,688
Preferred stock dividends		—			(297	)		—			(979	)
Net income (loss) available to common stockholders	$	(562	)	$	19,666		$	(1,509	)	$	19,697
Income (loss) per share from continuing operations available to common stockholders:
Income (loss) per common share — basic	$	(0.01	)	$	0.85		$	(0.03	)	$	0.99
Income (loss) per common share — diluted	$	(0.01	)	$	0.74		$	(0.03	)	$	0.85
Weighted average shares outstanding — basic		54,201			21,209			54,201			17,922
Weighted average shares outstanding — diluted		54,201			24,868			54,201			21,946
Income per share from discontinued operations:
Income per common share — basic	$	—		$	0.08		$	—		$	0.11
Income per common share — diluted	$	—		$	0.06		$	—		$	0.09
Weighted average shares outstanding — basic		54,201			21,209			54,201			17,922
Weighted average shares outstanding — diluted		54,201			24,868			54,201			21,946
Net income (loss) available to common stockholders:
Income (loss) per common share — basic	$	(0.01	)	$	0.93		$	(0.03	)	$	1.10
Income (loss) per common share — diluted	$	(0.01	)	$	0.80		$	(0.03	)	$	0.94
Weighted average shares outstanding — basic		54,201			21,209			54,201			17,922
Weighted average shares outstanding — diluted		54,201			24,868			54,201			21,946

See the accompanying Notes to Condensed Consolidated Financial Statements.

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SIMON WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(in thousands)

	For the three months						For the nine months
	ended September 30,						ended September 30,
	2009			2008			2009			2008
Net income (loss)	$	(562	)	$	275		$	(1,509	)	$	988
Other comprehensive loss:
Unrealized loss on investments		—			(1,159	)		(129	)		(1,828	)
Comprehensive loss	$	(562	)	$	(884	)	$	(1,638	)	$	(840	)

See the accompanying Notes to Condensed Consolidated Financial Statements.

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SIMON WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

	For the nine months
	ended September 30,
	2009			2008
Cash flows from operating activities:
Net income (loss)	$	(1,509	)	$	988
Income (loss) from discontinued operations		(81	)		1,935
Loss from continuing operations		(1,428	)		(947	)
Adjustments to reconcile net loss to net cash used in operating activities:
Equity in Yucaipa AEC earnings		(7	)		(119	)
Gain on settlement		(7	)		—
Charge for impaired investment		3			15
Cash provided by discontinued operations		32			1,844
Cash transferred from (to) discontinued operations		(114	)		217
Increase (decrease) in cash from changes in working capital items:
Prepaid expenses and other current assets		488			260
Accounts payable		(31	)		375
Accrued expenses and other current liabilities		(222	)		83
Net cash provided by (used in) operating activities		(1,286	)		1,728
Cash flows from investing activities:
Other, net		—			1
Net cash provided by investing activities		—			1
Net increase (decrease) in cash and cash equivalents		(1,286	)		1,729
Cash and cash equivalents, beginning of period		16,576			16,134
Cash and cash equivalents, end of period	$	15,290		$	17,863
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes	$	76		$	5

See the accompanying Notes to Condensed Consolidated Financial Statements.

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SIMON WORLDWIDE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared by Simon Worldwide, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes in accordance with accounting principles generally accepted in the United States of America for complete financial statements and should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of those considered necessary for fair presentation of the Company’s financial position, results of operations, and cash flows at the dates and for the periods presented.

Prior to August 2001, the Company was a multi-national, full service promotional marketing company. In August 2001, McDonald’s Corporation (“McDonald’s”), the Company’s principal customer, terminated its 25-year relationship with the Company as a result of the embezzlement by a former Company employee of winning game pieces from McDonald’s promotional games administered by the Company. Other customers also terminated their relationships with the Company, resulting in the Company no longer having a business. By April 2002, the Company had effectively eliminated a majority of its ongoing promotions business operations and was in the process of disposing of its assets and settling its liabilities related to the promotions business and defending and pursuing litigation with respect thereto. 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. 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.

The Company had one stock-based compensation plan at September 30, 2009, and December 31, 2008. See Note 3.

At September 30, 2009 and December 31, 2008 the Company had a passive investment in a limited liability company controlled by an affiliate. See Note 5.

The operating results for the three and nine months ended September 30, 2009 are not necessarily indicative of the results to be expected for the full year.

RECENTLY ISSUED ACCOUNTING STANDARDS

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2009-01, “Topic 105—Generally Accepted Accounting Principles—amendments based on—Statement of Financial Accounting Standards No. 168—The FASB Accounting Standards Codification^TM and the Hierarchy of Generally Accepted Accounting Principles,” which establishes the FASB Accounting Standards Codification™(“ASC”) as the single source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with Generally Accepted Accounting Principles (“GAAP”). Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) are also sources of authoritative GAAP for SEC registrants. The ASC was effective for the Company on July 1, 2009, and its adoption did not have a material effect on the Company’s consolidated statements of financial position or results of operations.

In May 2009, the FASB issued Statement No. 165, “Subsequent Events.” Under the FASB ASC, this Statement is referred to as ASC 855-10 and requires disclosure of the date through which an entity evaluates subsequent events as well as whether such date is the date the financial statements were issued or the date the financial statements were available to be issued. ASC 855-10 was effective for the Company on April 1, 2009, and its adoption did not have a material effect on the Company’s consolidated statements of financial position or results of operations. Subsequent events have been evaluated through November 13, 2009, the date of issuance of the financial statements.

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In February 2008, the FASB issued Staff Position (“FSP”) FAS 157-2, “Effective Date of FASB Statement No. 157.” Under the FASB ASC, this FSP is referred to as ASC 820-10 and defers the implementation for the non-recurring nonfinancial assets and liabilities from fiscal years beginning after November 15, 2007, to fiscal years beginning after November 15, 2008. The remaining provisions of ASC 820-10 did not have a material effect on the Company’s consolidated statements of financial position or results of operations when they became effective for the Company on January 1, 2009.

In December 2007, the FASB issued Statement No. 141R, “Business Combinations,” which replaces FASB Statement No. 141, “Business Combinations.” Under the FASB ASC, this Statement is referred to as ASC 805-10 and requires the acquiring entity in a business combination to record all assets acquired and liabilities assumed at their acquisition-date fair values, (ii) changes the recognition of assets acquired and liabilities assumed arising from contingencies, (iii) requires contingent consideration to be recognized at its fair value on the acquisition date and, for certain arrangements, requires changes in fair value to be recognized in earnings until settled, (iv) requires companies to revise any previously issued post-acquisition financial information to reflect any adjustments as if they had been recorded on the acquisition date, (v) requires the reversals of valuation allowances related to acquired deferred tax assets and changes to acquired income tax uncertainties to be recognized in earnings, and (vi) requires the expensing of acquisition-related costs as incurred. ASC 805-10 also requires additional disclosure of information surrounding a business combination to enhance financial statement users’ understanding of the nature and financial impact of the business combination. ASC 805-10 applies to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, with the exception of accounting for changes in a valuation allowance for acquired deferred tax assets and the resolution of uncertain tax positions accounted for under FIN 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109,” (now referred to as ASC 740-10 under the FASB ASC) which was effective on January 1, 2009, for all acquisitions. The adoption of ASC 805-10 did not have a material effect on the Company’s consolidated statements of financial position or results of operations.

In December 2007, the FASB issued Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements—An Amendment of ARB [Accounting Research Bulletin] No. 51.” Under the FASB ASC, this Statement is referred to as ASC 810-10-65 and establishes accounting and reporting standards for the non-controlling interest in a subsidiary. ASC 810-10-65 also requires that a retained noncontrolling interest upon the deconsolidation of a subsidiary be initially measured at its fair value. Upon adoption of ASC 810-10-65, the Company will be required to report its noncontrolling interests as a separate component of stockholders’ equity. The Company will also be required to present net income allocable to the noncontrolling interests and net income attributable to the stockholders of the Company separately in its consolidated statements of operations. ASC 810-10-65 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements of ASC 810-10-65 shall be applied prospectively. ASC 810-10-65 became effective for the Company on January 1, 2009, and its adoption did not have a material effect on the Company’s consolidated statements of financial position or results of operations.

2. Absence of Operating Business; Going Concern

As a result of the loss of its customers, the Company no longer has any operating business. Since August 2001, the Company has concentrated its efforts on reducing its costs and settling numerous claims, contractual obligations, and pending litigation. As a result of these efforts, the Company has been able to resolve a significant number of outstanding liabilities that existed at December 31, 2001, or arose subsequent to that date. At September 30, 2009, the Company had reduced its workforce to 4 employees from 136 employees at December 31, 2001. The Company is currently managed by the Chief Executive Officer and principal financial officer, Greg Mays, together with an acting general counsel.

At September 30, 2009 and December 31, 2008, the Company had stockholders’ equity of $15.3 million and $16.9 million, respectively. For the nine months ended September 30, 2009 and 2008 the Company had a net (loss) income from continuing operations of $(1.5) million and $1.0 million, respectively. The Company continues to incur losses in 2009 within its continuing operations for the general and administrative expenses being incurred to manage the affairs of the Company and resolve outstanding legal matters. By utilizing cash received pursuant to the settlement with McDonald’s in 2004, $2.1 million received from Yucaipa AEC in July 2008 and March 2009 (see Note 5), and $1.75 million received in August 2008 in settlement of the Company’s lawsuit against PricewaterhouseCoopers LLC, management believes it has sufficient capital resources and liquidity to operate the Company for the foreseeable future. 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 approximately $12 million, the Company recorded a gain of approximately $25 million in 2004. However, as a result of significant losses

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from operations, a lack of any operating revenue and a potential liquidation in connection with the Recapitalization Agreement described below, the Company’s independent registered public accounting firm has expressed substantial doubt about the Company’s ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

The 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. The Company cannot predict when the Board of 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.

In connection with the Recapitalization Agreement described below, and in the event that the Company does not consummate a business combination by the later of (i) December 31, 2010 or (ii) December 31, 2011 in the event that a letter of intent, an agreement in principle or a definitive agreement to complete a business combination was executed on or prior to December 31, 2010 but the business combination was not consummated prior to such time, and no qualified offer have been previously consummated, the officers of the Company will take all such action necessary to dissolve and liquidate the Company as soon as reasonably practicable.

Notwithstanding the foregoing, the Company will not be required to be dissolved and liquidated if Overseas Toys, L. P. (“Overseas Toys”), the Company’s largest shareholder, and/or any affiliate thereof shall have made a qualified offer no earlier than one hundred and twenty (120) days and at least sixty (60) days prior to the termination date and shall have consummated such qualified offer by having purchased all shares of stock properly and timely tendered and not withdrawn pursuant to the terms of the qualified offer.

On June 11, 2008, the Company entered into an Exchange and Recapitalization Agreement (the “Recapitalization Agreement”) with Overseas Toys, the holder of all the outstanding shares of preferred stock of the Company, pursuant to which all the outstanding preferred stock would be converted into shares of common stock representing 70% of the shares of common stock outstanding immediately following the conversion. The Recapitalization Agreement was negotiated on the Company’s behalf by the Special Committee of disinterested directors which, based in part upon the opinion of the Special Committee’s financial advisor, determined that the transaction was fair to the holders of common stock from a financial point of view. At a special meeting held on September 18, 2008, the stockholders of the Company approved amendments to the Company’s certificate of incorporation proposed in order to effect a recapitalization of the Company pursuant to the terms of the Recapitalization Agreement.

In the exchange, the Company issued 37,940,756 shares of common stock with a fair value of $15.2 million in exchange for 34,717 shares of preferred stock (representing all outstanding preferred shares) with a carrying value of $34.7 million and related accrued dividends of approximately $147,000. The Company recorded $19.7 million to retained earnings in September 2008 representing the excess of carrying value of the preferred stock received over the fair market value of the common shares issued as such difference essentially represented a return to the Company.

The Company has federal net operating loss carryforwards (“NOLs”) of approximately $65.3 million and state NOLs of approximately $35.1 million that may, subject to applicable tax rules, be used to reduce certain income tax obligations in the future. In 2008, California suspended the ability of businesses to use California NOLs to reduce California income tax obligations for tax years 2008 and 2009. Based on a review of the Company’s NOLs by its outside tax advisors and with the exception of the two-year NOL suspension implemented by California in 2008, the Company does not anticipate that the recapitalization will materially or adversely impact the Company’s ability to use its NOLs.

3. Stock Plan

1993 Omnibus Stock Plan

Under its 1993 Omnibus Stock Plan, as amended (the “Omnibus Plan”), which terminated in May 2003 except for 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

9

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, and in general, 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.

Options granted under this plan generally became exercisable in three equal installments commencing on the first anniversary of the date of grant. Options granted during 2003 became 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.

There were no stock options granted during the nine months ended September 30, 2009 or 2008.

The following summarizes the status of the Company’s stock options as of September 30, 2009, and changes for the nine months then ended:

				Weighted
				Exercise
	Shares			Price
Outstanding at the beginning of period		100,000		$	2.59
Granted		—			—
Exercised		—			—
Expired or forfeited		(35,000	)		5.69
Outstanding at end of period		65,000			0.92
Options exercisable at end of period		65,000		$	0.92
Options available for future grant		—
Weighted average fair value of options granted during period	Not applicable

The following table summarizes information about stock options outstanding at September 30, 2009:

	Options Outstanding								Options Exercisable
			Weighted
Range of			Average		Weighted		Aggregate				Weighted		Aggregate
Exercise	Number		Remaining		Average		Intrinsic		Number		Average		Intrinsic
Prices	Outstanding		Contractual Life		Price		Value		Exercisable		Price		Value
$0.10 — $1.99		55,000		3.60	$	0.10	$	13,750		55,000	$	0.10	$	13,750
$2.00 — $5.38		5,000		1.49		2.00		—		5,000		2.00		—
$7.56 — $8.81		5,000		0.49		8.81		—		5,000		8.81		—
$0.10 — $8.81		65,000		3.20	$	0.92				65,000	$	0.92

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the Company’s closing stock price of $.35 on September 30, 2009.

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4. Discontinued Operations

By April 2002, the Company had effectively eliminated a majority of its on-going promotions business operations. Accordingly, the discontinued activities of the Company have been classified as discontinued operations in the accompanying condensed consolidated financial statements. If necessary, the Company includes sufficient cash within its discontinued operations to ensure assets from discontinued operations to be disposed of cover liabilities from discontinued operations. Management believes it has sufficient capital resources and liquidity to operate the Company for the foreseeable future.

Assets and liabilities related to discontinued operations at September 30, 2009, and December 31, 2008, as disclosed in the accompanying condensed consolidated financial statements, consist of the following (in thousands):

	September 30,		December 31,
	2009		2008
Assets:
Cash and cash equivalents	$	198	$	84
Total current assets		198		84
Other non-current assets		362		436
Assets from discontinued operations to be disposed of	$	560	$	520
Liabilities:
Accrued expenses and other current liabilities	$	560	$	520
Total current liabilities		560		520
Liabilities from discontinued operations	$	560	$	520

Net income from discontinued operations for the three and nine months ended September 30, 2009 and 2008, as disclosed in the accompanying condensed consolidated financial statements, consists of the following (in thousands):

	For the three months					For the nine months
	ended September 30,					ended September 30,
	2009		2008			2009			2008
Net sales	$	—	$	—		$	—		$	—
Cost of sales		—		—			—			—
Gross profit		—		—			—			—
General and administrative expenses		—		143			114			368
Gain on settlements		—		(1,806	)		(33	)		(2,380	)
Operating income (loss)		—		1,663			(81	)		2,012
Interest income		—		4			—			19
Net income (loss) from discontinued operations		—		1,667			(81	)		2,031
Income tax provision		—		(96	)		—			(96	)
Net income (loss)	$	—	$	1,571		$	(81	)	$	1,935

5. Long-term Investments

YUCAIPA AEC ASSOCIATES

At September 30, 2009, the Company held an investment in Yucaipa AEC Associates, LLC (“Yucaipa AEC”), a limited liability company that is controlled by Yucaipa, which also controls the largest holder of the Company’s common stock. Yucaipa AEC, in turn, primarily held an equity investment in the Source Interlink Companies (“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, which was received upon the merger of Alliance Entertainment Companies (“Alliance”) with Source. Alliance was 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.

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At December 31, 2001, the Company’s investment in Yucaipa AEC 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 (ASC 272-10), “Accounting for Investments in Limited Liability Companies,” which required the Company to change its method of accounting for its investment in Yucaipa AEC from the cost method to the equity method for periods ending after July 1, 2004.

On February 28, 2005, Alliance merged with Source. Inasmuch as Source was a publicly traded company, the Company’s pro rata investment in Yucaipa AEC, which held the shares in Source, was equal to the number of Source shares indirectly held by the Company multiplied by the stock price of Source, which did not reflect any discount for illiquidity. Accordingly, on February 28, 2005, the date of closing of the merger to reflect its share of the gain upon receipt of the Source shares by Yucaipa AEC, the Company recorded an unrealized gain to accumulated other comprehensive income of $11.3 million, which did not reflect any discount for illiquidity. As the Company’s investment in Yucaipa AEC was accounted for under the equity method, the Company adjusted its investment based in its pro rata share of the earnings and losses of Yucaipa AEC. In addition, the Company recognized its share in the other comprehensive income (loss) of Yucaipa AEC on the basis of changes in the fair value of Source through an adjustment in the unrealized gains and losses in the accumulated other comprehensive income component of stockholders’ equity. There were adjustments totaling $.1 million during the three months ended March 31, 2009, which increased the recorded value of the Company’s investment in Yucaipa AEC to $.2 million. Subsequently, on April 28, 2009, Source filed a pre-packaged Plan of Reorganization under Chapter 11 of the U.S. Bankruptcy Code and the Company lost its equity in Source in connection with the bankruptcy. Accordingly, the Company reduced the value of its Source investment to $0 as of March 31, 2009. The Company has no power to dispose of or liquidate its holding in Yucaipa AEC which power is held by Yucaipa AEC.

During 2008, the Company received $1.75 million from Yucaipa AEC in connection with a December 2007 sale of one of its holdings. The Company received an additional $350,000 in March 2009 as payment for a receivable on its December 31, 2008, balance sheet for additional amounts due related to this transaction. Accordingly, the Company’s total gain related to the sale of this holding was $2.1 million which was included in the Company’s consolidated statement of operations for the year ended December 31, 2008.

The Yucaipa AEC investment, along with a separate investment in a technology related company of approximately $160,000, is included in the investments line item on the balance sheet.

OTHER 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 had 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.

At September 30, 2009, and December 31, 2008, the carrying values of other investments were approximately $20,000 and $21,000, respectively. These are presented as part of other assets in the consolidated balance sheets. During the nine months ended September 30, 2009 and 2008, the Company recorded investment impairments of approximately $3,000 and $15,000, respectively, to adjust the recorded value of its other investments to the estimated future undiscounted cash flows the Company expects from such investments due to management’s determination that the decline in fair value of certain investments below their cost bases were other-than-temporary. Of the approximately $20,000 carrying value of other investments at September 30, 2009, and in accordance with the fair value hierarchy contained in Statement of Financial Accounting Standard No. 157 (ASC 820-10), “Fair Value Measurements,” approximately $14,000 was valued using quoted prices in active markets for identical assets or liabilities (Level 1) and approximately $6,000 was valued using significant unobservable inputs (Level 3) such as current results, trends and future prospects, capital market conditions, and other economic factors.

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While the Company will continue to periodically evaluate its investments, there can be no assurance that its investment strategy will be successful, and thus the Company might not ever realize any benefits from its portfolio of investments.

6. Earnings Per Share Disclosure

The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computation for “loss available to common stockholders” and other related disclosures required by FASB Statement No. 128 (ASC 260-10), “Earnings per Share,” (in thousands, except share and per share data).

The following table presents a reconciliation of basic and diluted weighted average shares outstanding:

	For the three months				For the nine months
	ended September 30,				ended September 30,
	2009		2008		2009		2008
Weighted average shares outstanding — basic		54,201,080		21,209,118		54,201,080		17,921,963
Convertible preferred stock		—		3,659,262		—		4,023,852
Weighted average shares outstanding — diluted		54,201,080		24,868,380		54,201,080		21,945,815

There was no convertible preferred stock outstanding during the three and nine months ended September 30, 2009.

The following disclosures present the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2009 and 2008:

	For the three months ended September 30,
	2009								2008
														Per
	Income			Shares		Per Share			Income			Shares		Share
	(Numerator)			(Denominator)		Amount			(Numerator)			(Denominator)		Amount
Basic EPS:
Loss from continuing operations	$	(562	)						$	(1,296	)
Preferred stock exchanged over common stock received		—								19,688
Preferred stock dividends		—								(297	)
Income (loss) from continuing operations available to common stockholders	$	(562	)		54,201,080	$	(0.01	)	$	18,095			21,209,118	$	0.85
Income from discontinued operations	$	—			54,201,080	$	—		$	1,571			21,209,118	$	0.08
Net income (loss)	$	(562	)						$	275
Preferred stock exchanged over common stock received		—								19,688
Preferred stock dividends		—								(297	)
Net income (loss) available to common stockholders	$	(562	)		54,201,080	$	(0.01	)	$	19,666			21,209,118	$	0.93

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	For the three months ended September 30,
	2009								2008
														Per
	Income			Shares		Per Share			Income			Shares		Share
	(Numerator)			(Denominator)		Amount			(Numerator)			(Denominator)		Amount
Diluted EPS:
Loss from continuing operations	$	(562	)						$	(1,296	)
Preferred stock exchanged over common stock received		—								19,688
Income (loss) from continuing operations available to common stockholders	$	(562	)		54,201,080	$	(0.01	)	$	18,392			24,868,380	$	0.74
Income from discontinued operations	$	—			54,201,080	$	—		$	1,571			24,868,380	$	0.06
Net income (loss)	$	(562	)						$	275
Preferred stock exchanged over common stock received		—								19,688
Net income (loss) available to common stockholders	$	(562	)		54,201,080	$	(0.01	)	$	19,963			24,868,380	$	0.80

During the three months ended September 30, 2009 and 2008, 65,000 and 155,000 shares, respectively, related to stock options exercisable were not included in the computation of diluted EPS, as the average market price of the Company’s common stock did not exceed the weighted average exercise price of such options.

	For the nine months ended September 30,
	2009								2008
														Per
	Income			Shares		Per Share			Income			Shares		Share
	(Numerator)			(Denominator)		Amount			(Numerator)			(Denominator)		Amount
Basic EPS:
Loss from continuing operations	$	(1,428	)						$	(947	)
Preferred stock exchanged over common stock received		—								19,688
Preferred stock dividends		—								(979	)
Income (loss) from continuing operations available to common stockholders	$	(1,428	)		54,201,080	$	(0.03	)	$	17,762			17,921,963	$	0.99
Income (loss) from discontinued operations	$	(81	)		54,201,080	$	—		$	1,935			17,921,963	$	0.11
Net income (loss)	$	(1,509	)						$	988
Preferred stock exchanged over common stock received		—								19,688
Preferred stock dividends		—								(979	)
Net income (loss) available to common stockholders	$	(1,509	)		54,201,080	$	(0.03	)	$	19,697			17,921,963	$	1.10

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	For the nine months ended September 30,
	2009								2008
														Per
	Income			Shares		Per Share			Income			Shares		Share
	(Numerator)			(Denominator)		Amount			(Numerator)			(Denominator)		Amount
Diluted EPS:
Loss from continuing operations	$	(1,428	)						$	(947	)
Preferred stock exchanged over common stock received		—								19,688
Income (loss) from continuing operations available to common stockholders	$	(1,428	)		54,201,080	$	(0.03	)	$	18,741			21,945,815	$	0.85
Income (loss) from discontinued operations	$	(81	)		54,201,080	$	—		$	1,935			21,945,815	$	0.09
Net income (loss)	$	(1,509	)						$	988
Preferred stock exchanged over common stock received		—								19,688
Net income (loss) available to common stockholders	$	(1,509	)		54,201,080	$	(0.03	)	$	20,676			21,945,815	$	0.94

For the nine months ended September 30, 2009 and 2008, 72,582 and 161,642 shares, respectively, related to stock options exercisable were not included in the computation of diluted EPS as the average market price of the Company’s common stock did not exceed the weighted average exercise price of such options, because to do so would have been antidilutive.

7. Note Receivable and Gain on Settlement

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, the assumption of $3.7 million of debt, 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. Because the Company remained secondarily liable under the Winthrop lease restructuring, recognizing a liability at inception for the fair value of the obligation was not required under the provisions of FASB Interpretation 45 (ASC 460-10), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others—an interpretation of FASB Statements No. 5 [ASC 450-20], 57 [ASC 850-10], and 107 [ASC 825-10]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 (ASC 450-20), “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. The available amount under this letter of credit reduced over time as the underlying obligation to Winthrop reduced. 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.

In December 2005, the Company received notification that 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. Upon default by Cyrk and if such default is not cured within 15 days after receipt of written notice of default from the Company, Cyrk’s $2.3 million subordinated note payable to the Company, which was forgiven by the Company in 2003, was subject to reinstatement. After evaluating its alternatives in December 2005 and providing written notice to Cyrk in January 2006, such $2.3 million subordinated note payable was reinstated in January 2006 pursuant to a Settlement Agreement and Mutual General Release with Cyrk as explained in the following paragraph.

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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 did not default on the New Subordinated Note or in the event of payment in full, the Company agreed not to enter the Confession of Judgment relating to the Old Subordinated Note 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. Through August 31, 2008, the Company collected $1.3 million from Cyrk under the New Subordinated Note. Cyrk did not make a timely payment on September 1, 2008, and has made no payments since. As a result, the Company filed the Confession of Judgment in the state of Washington on November 14, 2008, and is in the process of attempting to execute on the judgment. During the three months ended June 30, 2009, the Company collected approximately $33,000 on the judgment which was recorded a gain on settlement within its discontinued operations. There is no assurance that the Company will be successful in further enforcing the Confession of Judgment and collecting any additional payments.

During the nine months ended September 30, 2008, approximately $269,000 in payments were received by the Company pursuant to the New Subordinated Note. Such amounts received, less imputed interest, are included in gain on settlement in Note 4.

At September 30, 2009, an allowance was recorded for the balance of the New Subordinated Note totaling $.3 million as collectibility is not reasonably assured based on the Company’s experience of prior arrangements with Cyrk including the default of the Winthrop obligation and settlement of controversy noted above, and as Cyrk did not make a timely payment on September 1, 2008, and has made no payments since.

8. Redeemable Preferred Stock

In November 1999, Overseas Toys, an affiliate of Yucaipa, a Los Angeles, California based investment firm, invested $25 million into the Company in exchange for preferred stock and a warrant to purchase additional preferred stock. Under the terms of the investment, the Company issued 25,000 shares of a newly authorized senior cumulative participating convertible preferred stock (“preferred stock”) to Yucaipa for $25 million. Yucaipa was 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.

Yucaipa had voting rights equivalent to the number of shares of common stock into which their preferred stock was convertible on the relevant record date and had the right to appoint a total of three directors to the Company’s seven-member Board of Directors and to designate the Chairman of the Board. Also, Yucaipa was entitled to receive an annual dividend equal to 4%, paid quarterly, of the base liquidation preference of $1,000 per share outstanding, payable in cash or in-kind at the Company’s option.

In the event of liquidation, dissolution or winding up of the affairs of the Company, Yucaipa, as holder of the preferred stock, would have been 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 were 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 was made to other stockholders. The preferred stock was subject to a mandatory offer of redemption if a change in control of the Company occurs.

See Note 2 for information regarding the Recapitalization Agreement, which was subsequently approved by shareholders on September 18, 2008, pursuant to which the preferred stock was converted to common stock.

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9. Other Settlements

On May 21, 2008, the Company entered into a settlement agreement with Winthrop dismissing previously disclosed litigation for a payment by the Company of $50,000 and an exchange of mutual releases. Because the underlying obligation was accounted for within continuing operations, the related loss on settlement was also recorded to continuing operations.

On May 15, 2008, the Company settled the lawsuit previously brought against it in the Northern District of Illinois by the Committee representing the unsecured creditors of H A 2003 Inc., formerly known as HA-LO Industries, Inc. by payment of $50,000. The case has been dismissed. The Company had previously recorded a contingent loss liability of $459,852 within its discontinued operations related to this matter. The Company recorded a gain on settlement within its discontinued operations for the difference between the previously recorded contingent loss liability amount and the settlement payment amount.

On November 25, 2008, the law firm of Neville Peterson LLP brought a lawsuit against the Company in the Superior Court of the District of Columbia seeking approximately $260,000 in fees for the performance of legal services in connection with customs laws matters performed in 2001. On December 8, 2008, the Company removed the case to the U.S. District Court for the District of Columbia. On July 2, 2009, the parties agreed to a settlement and dismissal of the case and the payment of $160,000 by the Company which was less than the $167,000 contingent loss liability originally accrued by the Company. A dismissal of the case was filed on July 7, 2009. The Company recorded a gain on settlement within its continuing operations for the difference between the previously recorded contingent loss liability amount and the settlement payment amount.

10. Subsequent Events

The Company performed an evaluation of subsequent events through November13, 2009, the date of issuance of the financial statements, and noted no additional events that required disclosure.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion of the financial condition and results of operations of the Company for the three and nine months ended September 30, 2009, as compared to the same periods in the previous year. This discussion should be read in conjunction with the condensed consolidated financial statements of the Company and related Notes included elsewhere in this Form 10-Q.

Forward-Looking Statements and Associated Risks

From time to time, the Company may provide forward-looking information such as forecasts of expected future performance or statements about the Company’s plans and objectives, including certain information provided below. These forward-looking statements are based largely on the Company’s expectations and are subject to a number of risks and uncertainties, certain of which are beyond the Company’s control. The Company wishes to caution readers that actual results may differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company including, without limitation, as a result of factors described in Item 1A. Risk Factors included in the Company’s December 31, 2008, Form 10-K for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995.

General

Prior to August 2001, the Company was a multi-national, full service promotional marketing company. In August 2001, McDonald’s, the Company’s principal customer, terminated its 25-year relationship with the Company as a result of the embezzlement by a former Company employee of winning game pieces from McDonald’s promotional games administered by the Company. Other customers also terminated their relationships with the Company, resulting in the Company no longer having a business. By April 2002, the Company had effectively eliminated a majority of its ongoing promotions business operations and was in the process of disposing of its assets and settling its liabilities related to the promotions business and defending and pursuing related litigation. During the second quarter of 2002, the discontinued activities of the Company, consisting of revenues, operating costs, general and administrative costs, and certain assets and liabilities associated with the Company’s promotions business, were classified as discontinued operations for financial reporting purposes.

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As a result of the loss of its customers, the Company no longer has any operating business. Since August 2001, the Company has concentrated its efforts on reducing its costs and settling numerous claims, contractual obligations, and pending litigation. As a result of these efforts, the Company has been able to resolve a significant number of outstanding liabilities that existed at December 31, 2001, or arose subsequent to that date. At September 30, 2009, the Company had reduced its workforce to 4 employees from 136 employees at December 31, 2001. The Company is currently managed by the Chief Executive Officer and principal financial officer, Greg Mays, and an acting general counsel.

Outlook

As a result of significant losses from operations, a lack of any operating revenue and a potential liquidation in connection with the Recapitalization Agreement, described under “Liquidity and Capital Resources,” the Company’s independent registered public accounting firm has expressed substantial doubt about the Company’s ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. The Company has taken significant actions and will continue to take further action to reduce its cost structure. The Board of Directors of the Company continues to consider various alternative courses of action for the Company going forward, including possibly acquiring or combining with one or more operating businesses.

The Board of Directors has reviewed and analyzed a number of proposed transactions and will continue to do so until it can determine a course of action going forward to best benefit all shareholders. The Company cannot predict when the Board of 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.

In connection with the Recapitalization Agreement described under “Liquidity and Capital Resources,” and in the event that the Company does not consummate a business combination by the later of (i) December 31, 2010 or (ii) December 31, 2011 in the event that a letter of intent, an agreement in principle or a definitive agreement to complete a business combination was executed on or prior to December 31, 2010 but the business combination was not consummated prior to such time, and no qualified offer have been previously consummated, the officers of the Company will take all such action necessary to dissolve and liquidate the Company as soon as reasonably practicable.

Notwithstanding the foregoing, the Company will not be required to be dissolved and liquidated if Overseas Toys, the Company’s largest shareholder, and/or any affiliate thereof shall have made a qualified offer no earlier than one hundred and twenty (120) days and at least sixty (60) days prior to the termination date and shall have consummated such qualified offer by having purchased all shares of stock properly and timely tendered and not withdrawn pursuant to the terms of the qualified offer.

RESULTS OF CONTINUING AND DISCONTINUED OPERATIONS

The discontinued activities of the Company have been classified as discontinued operations in the accompanying condensed consolidated financial statements. Continuing operations represent the costs required to maintain the Company’s current corporate infrastructure that will enable the Board of Directors to pursue various alternative courses of action going forward. These costs primarily consist of the salaries and benefits of executive management and corporate finance staff, professional fees, Board of Director fees, and space and facility costs. The Company’s continuing operations and discontinued operations will be discussed separately, based on the respective financial results contained in the accompanying condensed consolidated financial statements and related notes.

RESULTS OF CONTINUING OPERATIONS

Three Months Ended September 30, 2009, Compared to Three Months Ended September 30, 2008

The Company generated no sales or gross profits during the three months ended September 30, 2009 and 2008.

General and administrative expenses decreased $.8 million to $.6 million during the three months ended September 30, 2009, from $1.4 million during the same period in the prior year. The decrease is primarily due to advisory and legal costs during the prior period associated with reviewing the possible recapitalization of the Company by the Special Committee of independent directors and reduced labor cost associated with the former Chief Executive Officer’s termination of his services to the Company on September 30, 2008.

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Interest income totaled approximately $27,000 during the three months ended September 30, 2009, compared to $.1 million during the same period in the prior year. The decrease is primarily due to a reduction in interest rates from the three months ended September 30, 2008.

The Company recorded a nominal investment impairment of approximately $1,000 during the three months ended September 30, 2009, to adjust the recorded value of its investments accounted for under the cost method, which does not include the Company’s investment in Yucaipa AEC, to the estimated future undiscounted cash flows the Company expects from such investments.

The Company recorded nominal amounts related to its equity in the earnings (losses) of Yucaipa AEC of approximately $(1,000) and $4,000 during the three months ended September 30, 2009 and 2008, respectively.

Nine Months Ended September 30, 2009, Compared to Nine Months Ended September 30, 2008

The Company generated no sales or gross profits during the nine months ended September 30, 2009 and 2008.

General and administrative expenses decreased $1.4 million to $1.6 million during the nine months ended September 30, 2009, from $3.0 million during the same period in the prior year. The decrease was primarily due to advisory and legal costs during the prior period associated with reviewing the possible recapitalization of the Company by the Special Committee of independent directors and reduced labor cost associated with the former Chief Executive Officer’s termination of his services to the Company on September 30, 2008.

Interest income totaled $.1 million during the nine months ended September 30, 2009, compared to $.3 million during the same period in the prior year. The decrease is primarily due to a reduction in interest rates from the nine months ended September 30, 2008.

During the nine months ended September 30, 2009, the Company recorded a gain on settlement of approximately $7,000 related to the settlement of a contingent loss liability on terms more favorable than the amount that was originally recorded by the Company. On May 21, 2008, the Company entered into a settlement agreement with Winthrop dismissing previously disclosed litigation for a payment by the Company of $50,000 and an exchange of mutual releases. Accordingly, the Company recorded a loss on settlement during the nine months ended September 30, 2008.

The Company also recorded a nominal investment impairment of approximately $3,000 during the nine months ended September 30, 2009, and an investment impairment of approximately $15,000 during the nine months ended September 30, 2008. Such impairments were recorded to adjust the recorded value of its investments accounted for under the cost method, which does not include the Company’s investment in Yucaipa AEC, to the estimated future undiscounted cash flows the Company expects from such investments.

There was approximately $7,000 recorded to the Company’s consolidated statement of operations for equity in the earnings of Yucaipa AEC for the nine months ended September 30, 2009. On July 10, 2008, the Company received $1.75 million from Yucaipa AEC in connection with a December 2007 sale of one of its other holdings. The Company’s total gain related to the sale of this holding was $1.86 million which was included in the Company’s consolidated statement of operations for the nine months ended September 30, 2008. Although the Company should have recorded the gain in its consolidated financial statements included in its Form 10-K for the year ended December 31, 2007, the Company did not consider the event to be material because the Company believes investors base their valuation of the Company not on its historical operations, the amount of residual investments that continue to be held by the Company or the income or loss derived from such investments, but instead on the possibility that the Company may undertake a future acquisition of an operating business, facilitating the use of its net operating loss carryforwards. Further, the Company’s stock price has not changed historically in response to changes in the value of investments.

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RESULTS OF DISCONTINUED OPERATIONS

Three Months Ended September 30, 2009, Compared to Three Months Ended September 30, 2008

The Company generated no sales or gross profits during the three months ended September 30, 2009 and 2008.

The Company recorded general and administrative expenses of $0 during the three months ended September 30, 2009, compared to $.1 million during the same period of the prior year. The amounts for the prior period primarily consisted of adjustments to the recorded value of a cash surrender value related asset. There were no such adjustment required during the three months ended September 30, 2009.

The Company recorded a gain on settlement of approximately $1.8 million during the three months ended September 30, 2008, which is primarily attributable to the settlement of a lawsuit by Company against PricewaterhouseCoopers LLP, which settlement included a payment to the Company of $1.75 million, net of attorney’s fees and expenses.

The Company recorded nominal interest income during the three months ended September 30, 2008.

Nine Months Ended September 30, 2009, Compared to Nine Months Ended September 30, 2008

The Company generated no sales or gross profits during the nine months ended September 30, 2009 and 2008.

The Company recorded general and administrative expenses of approximately $.1 million during the nine months ended September 30, 2009, compared to $.4 million during the same period of the prior year. The amounts for both periods primarily consisted of adjustments to the recorded value of a cash surrender value related asset.

Gain on settlements totaled approximately $33,000 during the nine months ended September 30, 2009, compared to $2.4 million during the same period in the prior year. The amount recorded during the nine months ended September 30, 2009, is due to amounts collected related to the New Subordinated Note with Cyrk. The amount recorded during the nine months ended September 30, 2008, is primarily related to the settlement of a lawsuit by the Company against PricewaterhouseCoopers LLP, which settlement included a payment to the Company of $1.75 million, net of attorney’s fees and expenses, with the remainder attributable to the settlement of a lawsuit against the Company by the Committee representing the unsecured creditors of H A 2003 Inc., formerly known as HA-LO Industries, on terms more favorable than the contingent loss liability that was originally recorded by the Company.

Interest income totaled approximately $19,000 during the nine months ended September 30, 2008, which represents imputed interest income earned on the New Subordinated Note from Cyrk.

LIQUIDITY AND CAPITAL RESOURCES

The matters discussed in the section “Absence of Operating Business; Going Concern” in Note 2 of the “Notes to Condensed Consolidated Financial Statements” have had and will continue to have a substantial adverse impact on the Company’s cash position. As a result of significant losses from operations, a lack of any operating revenue and a potential liquidation in connection with the Recapitalization Agreement described below, the Company’s independent registered public accounting firm has expressed substantial doubt about the Company’s ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

The Company continues to incur operating losses in 2009 within its continuing operations for the general and administrative expenses incurred to manage the affairs of the Company and resolve outstanding legal matters. Inasmuch as the Company no longer generates operating income and is unable to borrow funds, the source of current and future working capital is expected to be cash on hand and the recovery of certain long-term investments. By utilizing cash received pursuant to the settlement with McDonald’s in 2004, $2.1 million received from Yucaipa AEC in July 2008 and March 2009 (see Note 5 of the “Notes to Condensed Consolidated Financial Statements”), and $1.75 million received in August 2008 in settlement of the Company’s lawsuit against PricewaterhouseCoopers LLC, management believes it has sufficient capital resources and liquidity to operate the Company for the foreseeable future. However, as a result of significant losses from operations, a lack of any operating revenue and a potential liquidation in connection with the Recapitalization Agreement described below, the

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Company’s independent registered public accounting firm has expressed substantial doubt about the Company’s ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

The Board of Directors of the Company 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. The Company cannot predict when the Board of Directors will have developed a proposed course of action or whether any such course of action will be successful.

On June 11, 2008, the Company entered into an Exchange and Recapitalization Agreement with Overseas Toys, the holder of all the outstanding shares of preferred stock of the Company, pursuant to which all the outstanding preferred stock would be converted into shares of common stock representing 70% of the shares of common stock outstanding immediately following the conversion. The Recapitalization Agreement was negotiated on the Company’s behalf by the Special Committee of disinterested directors which, based in part upon the opinion of the Special Committee’s financial advisor, determined that the transaction was fair to the holders of common stock from a financial point of view. At a special meeting held on September 18, 2008, the stockholders of the Company approved amendments to the Company’s certificate of incorporation proposed in order to effect a recapitalization of the Company pursuant to the terms of the Recapitalization Agreement.

The Company has federal net operating loss carryforwards (“NOLs”) of approximately $65.3 million and state NOLs of approximately $35.1 million that may, subject to applicable tax rules, be used to reduce certain income tax obligations in the future. In 2008, California suspended the ability of businesses to use California NOLs to reduce California income tax obligations for tax years 2008 and 2009. Based on a review of the Company’s NOLs by its outside tax advisors and with the exception of the two-year NOL suspension implemented by California in 2008, the Company does not anticipate that the recapitalization will materially or adversely impact the Company’s ability to use its NOLs.

Continuing Operations

Working capital from continuing operations was $15.1 million and $16.6 million at September 30, 2009, and December 31, 2008, respectively.

Net cash used in operating activities from continuing operations during the nine months ended September 30, 2009, totaled $1.2 million primarily due to a net loss from continuing operations of $1.4 million and reduction in accounts payable and accrued liabilities of $.3 million, partially offset by the collection of $350,000 from Yucaipa AEC in connection with a December 2007 sale of one of its holdings. Net cash used in operating activities from continuing operations during the nine months ended September 30, 2008, totaled $.3 million primarily due to a loss from continuing operations of $0.9 million partially offset by a change in working capital.

There was nominal cash provided by investing activities from continuing operations during the nine months ended September 30, 2008.

There were no financing activities from continuing operations during the nine months ended September 30, 2009 and 2008.

In addition to the $350,000 received from Yucaipa AEC noted above, the Company received $1.75 million from Yucaipa AEC on July 10, 2008. The gain related to the sale of this holding was included in the Company’s consolidated statement of operations included in the Company’s Form 10-K for the year ended December 31, 2008. The Company’s remaining investment in Yucaipa AEC totals approximately $10,000 at September 30, 2009. This item, along with a separate investment in a technology related company of approximately $160,000, is included in the investments line item on the balance sheet.

Discontinued Operations

Working capital from discontinued operations was a deficit of $.4 million at both September 30, 2009, and December 31, 2008.

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Net cash used by discontinued operations during the nine months ended September 30, 2009, total $.1 million primarily due to a loss from discontinued operations. Net cash provided by discontinued operations during the nine months ended September 30, 2008, totaled $2.1 million primarily due to the settlement of a lawsuit by the Company against PricewaterhouseCoopers LLP, which settlement included a payment to the Company of $1.75 million, net of attorney’s fees and expenses, $.2 million associated with payments received related to the New Subordinated Note from Cyrk, and $.2 million cash transferred from discontinued operations as discontinued operations already had sufficient assets from discontinued operations to be disposed of to cover liabilities from discontinued operations.

There were no net cash used in investing activities from discontinued operations during the nine months ended September 30, 2009 and 2008.

There were no net cash flows from financing activities within discontinued operations during the nine months ended September 30, 2009 and 2008.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The disclosure required by this Item is not material to the Company because the Company does not currently have any exposure to market rate sensitive instruments, as defined in this Item.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of September 30, 2009, 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. Greg Mays, the principal executive and principal financial officer of the Company, reviewed and participated in this evaluation. Based on this evaluation, the principal executive and principal financial officer of the Company concluded that the Company’s disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

Since the date of the evaluation noted 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 4T. CONTROLS AND PROCEDURES

Not applicable.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Not applicable.

Item 1A. Risk Factors

Not applicable.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibits filed herewith:

31	Certification of Greg Mays pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
32	Certification of Greg Mays pursuant to Section 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: November 13, 2009	SIMON WORLDWIDE, INC.
	/s/ Greg Mays
	Greg Mays
	Chief Executive Officer and Chief Financial Officer (duly authorized signatory)

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