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EX-14 - EX-14 - SPECTRUM GROUP INTERNATIONAL, INC. | v57293exv14.htm |
EX-10.4 - EX-10.4 - SPECTRUM GROUP INTERNATIONAL, INC. | v57293exv10w4.htm |
EX-32.1 - EX-32.1 - SPECTRUM GROUP INTERNATIONAL, INC. | v57293exv32w1.htm |
EX-10.5 - EX-10.5 - SPECTRUM GROUP INTERNATIONAL, INC. | v57293exv10w5.htm |
EX-31.2 - EX-31.2 - SPECTRUM GROUP INTERNATIONAL, INC. | v57293exv31w2.htm |
EX-3.1.2 - EX-3.1.2 - SPECTRUM GROUP INTERNATIONAL, INC. | v57293exv3w1w2.htm |
EX-3.1.1 - EX-3.1.1 - SPECTRUM GROUP INTERNATIONAL, INC. | v57293exv3w1w1.htm |
EX-21 - EX-21 - SPECTRUM GROUP INTERNATIONAL, INC. | v57293exv21.htm |
EX-31.1 - EX-31.1 - SPECTRUM GROUP INTERNATIONAL, INC. | v57293exv31w1.htm |
EX-10.3 - EX-10.3 - SPECTRUM GROUP INTERNATIONAL, INC. | v57293exv10w3.htm |
EX-32.2 - EX-32.2 - SPECTRUM GROUP INTERNATIONAL, INC. | v57293exv32w2.htm |
EX-10.7 - EX-10.7 - SPECTRUM GROUP INTERNATIONAL, INC. | v57293exv10w7.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended June 30, 2010
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: 1-11988
SPECTRUM GROUP INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware | 22-2365834 | |
(State or other jurisdiction of | (IRS Employer Identification No.) | |
incorporation or organization) |
18061 Fitch
Irvine, CA 92614
(Address of Principal Executive Offices)
(Zip Code)
Irvine, CA 92614
(Address of Principal Executive Offices)
(Zip Code)
(949) 955-1250
(Registrants telephone number, including area code)
(Former name or former address, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: Common Stock, par value $.01 per share
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Act. Yes o No þ
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrants 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. 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 | Smaller reporting company þ | |||
(Do not check if smaller reporting company) |
Indicate by check mark whether the Company is a shell company (as defined in Rule 12b-2 of the
Act): o Yes þ No
As of December 31, 2009, the aggregate market value of the registrants common stock held by
non-affiliates of the registrant was approximately $21.1 million, based on the closing price of the
registrants common stock of $1.87 per share on December 31, 2009.
As of September 13, 2010 the registrant had 32,247,756 Common Stock outstanding, par value $.01 per
share.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference certain information from the registrants definitive Proxy
Statement relating to the 2010 annual meeting of stockholders, which the registrant expects to file
within 120 days following June 30, 2010.
SPECTRUM GROUP INTERNATIONAL, INC.
FORM 10-K ANNUAL REPORT
For the Fiscal Year Ended June 30, 2010
FORM 10-K ANNUAL REPORT
For the Fiscal Year Ended June 30, 2010
Table of Contents
Page | ||||||||
PART I | ||||||||
Item 1. | 3 | |||||||
Item 1A. | 11 | |||||||
Item 1B. | 18 | |||||||
Item 2. | 18 | |||||||
Item 3. | 19 | |||||||
PART II | ||||||||
Item 5. | 21 | |||||||
Item 6. | 23 | |||||||
Item 7. | 23 | |||||||
Item 7A. | 39 | |||||||
Item 8. | 39 | |||||||
Item 9. | 40 | |||||||
Item 9A. | 40 | |||||||
Item 9B. | 42 | |||||||
PART III | ||||||||
Item 10. | 43 | |||||||
Item 11. | 45 | |||||||
Item 12. | 45 | |||||||
Item 13. | 45 | |||||||
Item 14. | 45 | |||||||
PART IV | ||||||||
Item 15. | 45 | |||||||
46 | ||||||||
EX-3.1.1 | ||||||||
EX-3.1.2 | ||||||||
EX-10.3 | ||||||||
EX-10.4 | ||||||||
EX-10.5 | ||||||||
EX-10.7 | ||||||||
EX-14 | ||||||||
EX-21 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-32.2 |
2
Table of Contents
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements can be
identified by the use of forward-looking terminology such as believe, expect, may, will,
should, seek, on-track, plan, project, forecast, intend or anticipate, or the
negative thereof or comparable terminology, or by discussions of vision, strategy or outlook. You
are cautioned that our business and operations are subject to a variety of risks and uncertainties,
many of which are beyond our control, and, consequently, our actual results may differ materially
from those projected by any forward-looking statements. Factors that could cause our actual results
to differ materially from those projected include, but are not limited to, those discussed under
the heading captioned Risk Factors, and elsewhere in this Annual Report on Form 10-K. We make no
commitment to revise or update any forward-looking statements in order to reflect events or
circumstances after the date any such statement is made.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Company Overview
Spectrum Group International, Inc. (together with its subsidiaries, we, the Company or SGI)
is a global trading and collectibles network. We are a trader of precious metals and an auctioneer
of coins, stamps, wine, and antique arms, armor and historical memorabilia, serving both collectors
and dealers. We are also a merchant/dealer of certain collectibles. Our collectibles offerings span
the price spectrums from modest to ultra-high end. Furthermore, we offer loans to coin dealers,
collectors and investors back by their precious metals, rare coin and other collectibles as
collateral.
We are a Delaware company headquartered in California with 143 employees globally, as of June 30,
2010. Our executive offices are located at 18061 Fitch, Irvine, California 92614. Our telephone
number is (949) 955-1250, and our website is www.spectrumgi.com. Through this website, we make
available free of charge all of our filings with the Securities and Exchange Commission (the
SEC), including those under the Exchange Act of 1934, as amended (the Exchange Act). In
addition, copies of our Code of Business Conduct and Ethics for Employees, Code of Business Conduct
and Ethics for Senior Financial and Other Officers, and Code of Business Conduct and Ethics for
Directors are available through this website, along with other information regarding our corporate
governance policies.
Approximately 58% of the Companys common stock is owned by Afinsa Bienes Tangibles, S.A.
(Afinsa), either directly or through its wholly owned subsidiary, Auctentia, S.L. (Auctentia).
Since September 2003, Afinsa and Auctentia have collectively owned a majority of the Companys
common stock and have had two representatives on the Companys Board of Directors.
We conduct our operations within two business segments: Trading and Collectibles. (Our business
segments are defined in Note 1 of the Notes to Consolidated Financial Statements.)
Our Trading business is conducted through A-Mark Precious Metals, Inc. (A-Mark) and its
subsidiaries. A-Mark is a full-service precious metals trading company, and an official distributor
for many government mints throughout the world. Our products include gold, silver, platinum and
palladium for storage and delivery in the form of coins, bars, wafers and grain, and our services
include financing, leasing, consignment, hedging and various customized financial programs. We own
80% of A-Mark through our 80% ownership interest in Spectrum PMI, Inc., which owns all of the
common stock of A-Mark. The remaining 20% of Spectrum PMI is owned by Auctentia.
Our Collectibles business operates as an integrated network of leading companies concentrating on
numismatic (coins) and philatelic (stamps) materials, rare and fine vintage wine, and antique arms,
armor and historical memorabilia (militaria). We have offices and auction houses in North America,
Europe and Asia. In addition to traditional live auctions, we also conduct Internet and
telephoneauctions.
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Table of Contents
Before May 2009, we were known as Escala Group, Inc. (ESCL), and before September 2005, we were
known as Greg Manning Auctions, Inc. (GMAI). GMAI was incorporated in New York in 1981, and made
its initial public offering in May 1993.
Since 2003, we have been pursuing both an organic and acquisition growth strategy to become a
global leader in rare collectibles. Over this time, SGI has completed numerous business
acquisitions, each of which has fit one or more of three objectives: 1) expand our market position
in a specific core collectibles market; 2) expand our geographic presence in a core market; and 3)
enter a new collectibles market. As a result of this strategy, we now serve several collectibles
channel and a precious metals trading market.
The trading segment looks to grow its business by expanding to new geographies and/or through new
product offerings. We will continue to focus efforts in expanding business outside of the US in
developed and undeveloped countries and look to offer new commodity products. We will continue to
develop our domestic finance business by offering a variety of collectibles and bullion finance
products.
Trading Segment
Overview
A-Mark, founded in 1965, is a full-service precious metals trading company engaged primarily in the
wholesale purchase and sale of gold, silver, platinum and palladium in a variety of fabricated
forms, including coins, bars, wafers and grain. In addition to trading, A-Mark offers its customers
a variety of traditional precious metals merchant services including leasing, consignments and
hedging. As a U.S. Mint-authorized purchaser of gold, silver and platinum Eagle coinage, A-Mark
sources these products directly from the U.S. Mint for sale to its wholesale clientele. In addition
to the U.S. Mint, A-Mark also has distributorships with other national mints, including Canada,
Australia, South Africa, China and Austria. Customers of A-Mark include banks, financial
institutions, coin dealers, jewelers, collectors, investors, investment advisors, manufacturers,
refiners, mints and mines. We acquired A-Mark jointly with Auctentia in July 2005.
A-Mark, through its subsidiary Collateral Finance Corporation (CFC), a licensed California
Finance Lender, offers collateralized loans on precious metals and rare coin and other collectibles
collateral to coin dealers, collectors and investors.
A-Marks business model is consistent with others in its industry, and comprises numerous purchase
and sale transactions daily on which it generally earns gross margins of fractions of one percent.
A-Mark manages the value of certain specific assets and liabilities, including inventories, by
employing a variety of strategies. These strategies include the management of exposure to changes
in the market values of the Companys trading inventories through the purchase and sale of a
variety of derivative products such as metals forwards and futures.
The Companys trading inventories and purchase and sale transactions consist primarily of precious
metal bearing products. The value of these assets and liabilities is linked to the prevailing price
of the underlying precious metals. The Companys precious metals inventories are subject to market
value changes, created by changes in the underlying commodity markets. Inventories purchased or
borrowed by the Company outright are subject to price changes. Inventories borrowed are considered
natural hedges, since changes in value of the metal held are offset by the obligation to return the
metal to the supplier.
Open purchase and sale commitments are subject to changes in value between the date the purchase or
sale price is fixed (the trade date) and the date the metal is received or delivered (the
settlement date). The Company seeks to minimize the effect of price changes of the underlying
commodity through the use of forward and futures contracts.
The Companys policy is to substantially hedge its inventory positions, net of open purchase and
sales commitments that are subject to price risk. The Company regularly enters into metals
commodity forwards and futures contracts with major
financial institutions to hedge price changes that would cause changes in the value of its physical
metals positions and
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purchase commitments and sale commitments. The Company has access to all of
the precious metals markets, allowing it to place hedges. However, the Company also maintains
relationships with major market makers in every major precious metals dealing center.
Because it seeks to substantially eliminate market exposure in the underlying commodities through
the use of hedging instruments, A-Mark believes its business model largely functions independently
of the price movement of the underlying commodities. The financial performance of A-Mark in any
given time period is driven principally by customer activity as they perceive the market
conditions.
Credit and position risk limits are set by A-Marks management. These limits include gross position
limits for counterparties engaged in purchase and sales transactions with A-Mark. They also include
collateral limits for different types of purchase and sale transactions that counterparties may
engage in from time to time.
A-Mark has a borrowing facility (the Trading Credit Facility) with a group of five financial
institutions under an inter-creditor agreement, which provides for lines-of-credit of up to $115.0
million in total, including a facility for letters of credit up to a maximum of $115.0 million.
A-Mark routinely uses the Trading Credit Facility to purchase metals from its suppliers and for
operating cash flow purposes. Amounts under the Trading Credit Facility bear interest based on
London Interbank Offered Rate (LIBOR) (0.35% at June 30, 2010) plus a margin. Amounts borrowed
under the Trading Credit Facility are secured by A-Marks receivables and inventories. Borrowings
are due on demand and totaled $45.2 million for lines of credit and $4.8 million for letters of
credit at June 30, 2010. The Trading Credit Facility is cancelable by written notice from the
financial institutions. Amounts available for borrowing under the Trading Credit Facility at June
30, 2010 was $65.0 million.
A-Marks Trading Credit Facility has certain restrictive financial covenants which require A-Mark
and SGI to maintain a minimum tangible net worth (as defined) of $20.0 million and $50.0 million,
respectively. A-Marks and SGIs tangible net worth at June 30, 2010, was $25.7 million and $70.0
million, respectively.
The Company also borrows metals from several of its suppliers under short-term agreements bearing
interest at a designated rate. Amounts under these agreements are due at maturity and require
repayment either in the form of cash or equivalent metals borrowed.
CFC started doing business in 2005. All loans made by CFC are collateralized by the delivery to us
of precious metals, coins or other collectibles, with loan to value ratios (principal loan amount
divided by the liquidation value, as conservatively estimated by the Companys management, of the
collateral) of 50% to 90%. These loans are both variable and fixed interest rate loans, with
maturities from three to twelve months. These short term loans bear interest at a rate based on the
prevailing rate at the time the loan is made. CFC routinely performs an analysis of the expected
collectability of customer notes receivable based on several factors, including the age and extent
of significant past due amounts, economic conditions or trends that may adversely affect the
ability of customers to pay those notes and the value of the collateral securing the repayment of
the outstanding balances and may establish an allowance for possible losses on those notes based on
those analyses. The Trading Credit Facility provides funding for eligible CFC loans for a portion
of the Trading Credit Facility.
On March 28, 2008, A-Mark entered into a joint venture with a marketing firm and contributed
$450,000 for a 50% ownership in the joint venture. The joint venture, which is consolidated with
the Company for financial reporting purposes, was formed for the purpose of purchasing, marketing,
distributing and selling 2010 Vancouver Winter Olympic Bullion Coins and Olympic Commemorative
Coins and other products. The joint ventures original termination date is June 30, 2011. In May
2010, the parties agreed to a distribution, whereby all remaining funds at the time, except for
$10,000, were distributed to the parties.
Supplier and Customer Concentrations
A-Mark buys a majority of its precious metals from a limited number of suppliers. The top two
customers represented 28.3% and 12.0%, respectively, of trading revenues for the year ended June
30, 2010, and 23.1% and 6.2%, respectively, of trading revenues for the year ended June 30, 2009.
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Table of Contents
Trading Competition
A-Marks activities cover a broad spectrum of the precious metals industry, with a concentration on
the consumer end of the industry. We service public, industrial and private sector consumers of
precious metals which include jewelry manufacturers, industrial consumers, refiners, minting
facilities, banks, brokerage houses and private investors. We face different competitors in each
area and it is not uncommon for a customer and/or a supplier in one market segment to be a
competitor in another. Our competitors may offer more favorable pricing or services considered to
be superior to ours.
Seasonality
While our precious metals trading business is not seasonal, we believe it is directly impacted by
the perception of market trends. Historically, anticipation of increases in the rate of inflation,
as well as anticipated devaluation of the U.S. dollar, has resulted in higher levels of interest in
precious metals as well as higher prices for such metals.
SGIs trading presence on the Internet is through www.amark.com and www.cfccoinloans.com.
Collectibles Segment
Overview
We are a leading auctioneer of rare U.S. and foreign coins, paper currency and stamps, rare and
fine vintage wine, and antique arms, armor and historical memorabilia. We are also a
merchant-dealer of certain collectibles. Our activities are targeted to both collectors and
dealers, and feature offerings ranging from modest to ultra-high end prices. Our collectibles
companies, all of which are wholly-owned subsidiaries, are listed below.
Date | ||||||
Company | Primary Activity | Location | Acquired/Formed | |||
Teletrade
|
Coins and currencies auctions via the Internet and telephone all price points but primarily mid-level | USA | October 1998 | |||
Spectrum Numismatics International
|
Wholesaler of coins, currencies and other collectibles | USA | December 1999 | |||
Corinphila Auktionen
|
Auctions of stamps primarily high-level and rare (collections and single items) | Switzerland | September 2003 | |||
Heinrich Köhler Briefmarkenhandel
|
Wholesaler of stamps primarily high-level | Germany | September 2003 | |||
Heinrich Köhler Auktionshaus
|
Auctions of stamps primarily high-level (collections and single items) | Germany | September 2003 | |||
Bowers and Merena Auctions
|
Auctions of coins primarily high-value and rare; and coin retailer primarily catalogue and Internet | USA | February 2004 | |||
H.R. Harmer Nutmeg Stamps
|
Auctions of stamps entry, mid-level and high-level | USA | July 2004 | |||
John Bull Stamp Auctions
|
Auctions of stamps entry, mid-level and high-level | Hong Kong | January 2005 | |||
Greg Martin Auctions
|
Auctions of arms and armor and historical memorabilia | USA | October 2005 | |||
Spectrum Wine Auctions
|
Auctions of rare and fine vintage wines | USA | February 2009 | |||
Corinphila Veilingen
|
Auctions of stamps primarily high-level and rare (collections and single items) | Netherlands | January 2010 |
During the fiscal year ended June 30, 2009, we also operated the brand Nutmeg Stamp Sales in
our North American stamps division. In May 2009, we merged the Nutmeg Stamp Sales brand into
H.R. Harmer. In early fiscal 2011, we intended to change the name of the company to H.R, Harmer
Global Philatelic Network GmH through a transfer of assets. . In addition, during the fiscal year
ended June 30, 2009, we operated North American Certified Trading (in our coins division) and
Heinrich Köhler Berliner (in our European stamps division). In fiscal 2009, the retail operations
formerly conducted by North
American Certified Trading were assumed by Bowers and Merena, and the operations of Heinrich Köhler
Berliner were discontinued.
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Table of Contents
Teletrade, which the Company bought in 1998, offers certified coins and currencies auctions via the
Internet and telephone.
Spectrum Numismatics, which we have owned since 1999, is engaged in the buying and selling of coins
and currencies on a wholesale basis.
Corinphila, which we also acquired as part of our 2003 transactions with Afinsa, is the oldest
stamp auction house in Switzerland. It specializes in high-end philatelic single items and
specialized collections.
Köhler, founded in 1913, became one of our subsidiaries in our 2003 transactions with Afinsa. It
specializes in post-1945 German and old Communist Eastern Bloc countries philately. Köhler is one
of the largest philatelic auction houses in Germany and, like our other philatelic auction houses,
conducts wholesale transactions of philatelic materials. Bowers and Merena, which we acquired in 2004, is one of the leading rare coin auctioneers in the
U.S. and has recently expanded into retail operations.
The auction house H.R. Harmer, which was originally based in New York and which we acquired in
2004, was founded in 1940. H.R. Harmer is one of the leading philatelic auction houses in the U.S.
John Bull Stamp Auctions is the oldest philatelic auction house in Hong Kong. We acquired John Bull
in 2005.
We acquired Greg Martin Auctions in October 2005. That company was founded in January 2002, by
three principals of Butterfields Auctioneers, one of whom, Greg Martin, has continued as the
President of the company since the acquisition. Greg Martin Auctions is engaged in the sale by
auction of antique arms, armor and historical memorabilia. In 2009, we relocated Greg Martin
Auctions from Northern California to Irvine, California, where our corporate headquarters are
located.
In December 2008, we acquired Ponterio & Associates, which is a 26 years old firm specializing in
ancient and world coins and paper money. It is operated through Bowers and Merena.
We formed Spectrum Wine Auctions in February 2009. Spectrum Wine Auctions conducted its first
auction of rare collectible wines in November 2009.
On January 1, 2010, Heinrich Köhler Auktionshaus Gmbh & Co KG acquired 100% of Postzegelveiling
Wiggers De Vries B.V., a privately-held, Netherlands-based auction house, for cash consideration of
$360,000. As part of and concurrent with the closing, the companys name was changed to Corinphila
Veilingen B.V.
We access our Collectibles markets through multiple channels. Principal among these are traditional
live auctions featuring full electronic capabilities. Further, certain of our subsidiaries offer
Internet-only auctions. We also buy and sell collectible materials on a wholesale basis as a
merchant/dealer, as well as engage in a limited number of direct sales on a private treaty basis.
We believe our size and access to multiple channels are competitive advantages that help us
maximize prices realized for the various kinds and grades of collectible materials that we
encounter.
In all of our market channels, we may be offering either owned inventories or properties that have
been consigned to us by its owner. In our role as auctioneer, we match consignors (sellers) of
properties with buyers of these properties through the auction process. We will then invoice the
buyers for their purchases (including commissions owed by the buyers), collect payments from the
buyers, and make remittances to the sellers, net of their commissions owed. The auction
commissions that we typically charge to the sellers range from 0% to 20% and those charged to the
buyers range from 12.5% to 19.5%.
Traditional auctions are live, in-person auctions conducted by a licensed auctioneer. We hold
multiple auctions each year in a variety of venues, including strategically located hotels and at
major trade conferences and conventions. All traditional auctions are augmented by hard copy and/or
electronic catalogs, and most are augmented by one or more forms of electronic bidding, a growing
trend in auction services. Our traditional auctions are based on a full service auction model in
which we
take physical possession of all items offered for sale in our auctions, inspect and describe all
offerings, receive all sums due, remit sale proceeds to the seller and professionally pack and ship
items to the buyer.
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In our traditional auctions, prospective buyers place bids on each lot as presented in the order
shown in the catalog at the time and date of the auction. Before the auction, prospective buyers
may bid by lot as shown in the catalog and communicate such bids to us by mail, fax, telephone or
the Internet. At the auction, the auctioneer typically opens bidding at levels based on bids
received prior to auction or a percentage of previously established reserve prices. The item
offered is sold to the highest bidder, whether such bid was received before the auction or at the
time of sale, and such high bidder must pay the hammer price, the applicable buyers premium, and
all applicable sales taxes. Additionally, buyers pay a shipping and handling fee if they do not
accept delivery of the items at the auction venue.
The auctioneer regulates the bidding and reserves the right to refuse any bid believed by him/her
not to be made in good faith. Costs involved in conducting a traditional auction include, among
other things, the cost of inspecting, describing, storing and insuring the items to be offered for
sale; creating, printing and the production of the catalog; transportation, auction advertising,
auction venue site rental fees, security, temporary personnel, expenses of certain additional
auction-related accounting and shipping functions, and credit card merchant fees.
We operate Internet auctions through our Teletrade, Bowers and Merena, Greg Martin Auctions, and
Spectrum Wine Auctions subsidiaries. In Internet auctions, bidding takes place over the Internet
and/or telephone. Depending on which technology the Company utilizes, there may be no live
auctioneer and no bidders in a single physical location orally making bids. In certain types of
Internet auctions, a Company employee operates the live Internet bidding software, effectively
acting as the auctioneer.
Consistent with our full service traditional auction business model and its commitment to customer
service, our Internet auctions feature many of the same full service amenities as our traditional
auctions. Specifically, unless otherwise noted in a particular sales terms and conditions, we take
physical possession of all items offered for sale prior to the sale, describe the items, collect
all sums due, remit the sale proceeds to the seller, and professionally pack and ship the items
sold to the buyer.
Costs involved in conducting our Internet auctions include, among other things, the cost of
inspecting, describing, imaging, storing and insuring the items to be offered for sale. Other costs
include technology development and maintenance, computer and Internet hardware procurement and
maintenance, advertising, credit card merchant fees and expenses of certain additional
auction-related accounting and shipping functions.
The technology operating our Internet/telephone auctions conducted on our Teletrade website is
known as Interphonic. This technology, which is owned and was developed by us, permits bidders to
participate in electronic auctions either by touch-tone telephone or via the Internet.
Our collectibles presence on the Internet is through the following websites:
www.bowersandmerena.com
www.corinphila.ch
www.corinphila.nl
www.gregmartinauctions.com
www.heinrich-koehler.de
www.hrharmer.com
www.jbull.com
www.spectrumcoins.com
www.spectrumwineauctions.com
www.teletrade.com
www.corinphila.ch
www.corinphila.nl
www.gregmartinauctions.com
www.heinrich-koehler.de
www.hrharmer.com
www.jbull.com
www.spectrumcoins.com
www.spectrumwineauctions.com
www.teletrade.com
The Company also owns over 100 other domain names, including www.coins.com, www.sportscard.com, and
www.iauctions.com.
In May 2010, the Company and its three wholly-owned numismatic subsidiaries, Spectrum Numismatics
International, Inc. (SNI), Bowers and Merena Auctions, LLC (Bowers), and Teletrade, Inc.
(Teletrade), entered into a borrowing facility
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with a lender, providing for a line-of-credit (the
Collectibles Credit Facility) up to a maximum of $7.5 million. Amounts outstanding under the
Collectibles Credit Facility are secured by the assets of SNI, Bowers, and Teletrade, and are
further guaranteed by the Company. The Collectibles Credit Facility is repayable on demand, and
interest on outstanding amounts accrue at the lenders base rate plus additional basis point. As of
June 30, 2010 SNI had borrowed $2.0 million from this Collectibles Credit Facility. Separately, A
Mark, our precious metals trading company, has a Collectibles Credit Facility with this lender
totaling $15.0 million, which is a component of A Marks Trading Credit Facility. Total borrowing
capacity between SNI and A Mark cannot exceed $17.5 million with respect to this lender. As of
June 30, 2010 the total amount borrowed was $7.7 million, $2.0 million by SNI and $5.7 million by A
Mark. Amounts available for borrowing under this Collectibles Credit Facilities as of June 30, 2010
was $5.5 million.
Consignor Advances
Frequently, an owner consigning property to us will request a cash advance at the time the property
is delivered, prior to its ultimate sale at auction or otherwise. The cash advance is in the form
of a self-liquidating secured loan usually bearing interest and using the consigned property as
collateral. We hold a security interest and maintain physical possession of the collateral until it
is sold.
The ability to offer cash advances is often critical to our ability to obtain consignments of
desirable property. In the case of property sold at auction, an owner may have to wait up to 60
days after the auction sale date for settlement and payment of the owners portion of the sale
proceeds. In many instances, an owners motivation for consigning property for sale may include a
need for cash on an immediate basis. Offering cash advances allows us to attract owners who desire
immediate liquidity while preserving the opportunity to sell at auction at the highest available
price. We believe that our ability to make consignor advances on a consistent basis has enabled us
to receive regular consignments of high value lots from professional dealers and private
collectors. The amount of a cash advance generally does not exceed 75% of our estimate of the
value of the property to be sold at auction.
Complementary Merchant Dealer Operations; Private Treaty Sales
In order to complement and enhance our auction business, we frequently buy collectibles in our own
name and resell them as a merchant/dealer or in our auctions. For a variety of reasons, some
collectors require the immediate liquidation of their collections and cannot wait for an
appropriate auction. Other collectors do not wish to sell by auction and prefer a negotiated, fixed
price sale. In these instances, we use our knowledge of the markets and products to make what we
call opportunistic purchases. In most instances, collectibles purchased in this manner are resold
within 180 days either in one of our auctions or in a private treaty transaction. In other
instances, either because the markets are not yet ripe or because the collection purchased is so
large, we may conclude that the collectibles are most profitably sold over a period of time, in
which case, the collectibles purchased are held in our inventory and resold over an extended time
period. In addition to these opportunistic purchases, we continually search the collectibles
markets for favorable buying opportunities and buy individual pieces and collections to resell to a
particular collector pursuant to a specific purchase request, to fill a need for one of our
auctions to make that auction more attractive to the targeted audience, or to take advantage of
what we believe are favorable prices and buying opportunities. In these circumstances, items
purchased are generally resold in less than 180 days, but may be held for longer periods.
We earn profits, or incur losses, on the sale of owned inventory to the extent the sale prices
exceeds, or are less, than the acquisition prices paid by us. We seek to sell our owned inventory
as quickly and efficiently as possible, thereby promoting a high level of inventory turnover and
maintaining maximum liquidity.
In a private treaty sale, we contact known collectors and sell specific, usually high or ultra-high
end items, to such collectors at a privately negotiated price. When such sales are conducted for
owned items, we earn a profit based upon the sale price paid by the private buyer. We also conduct
private sales of consigned items. In such instances, we earn a fee for our services. Generally, the
fee is a percentage of the sale price; however, in some instances we will be paid a fixed,
negotiated fee.
Private treaty sales are typically settled more promptly than auction sales with the buyer paying
all or substantially all of the purchase price at the time of the sale. However, we do, from time
to time, extend credit to certain long-standing customers that have demonstrated a satisfactory
history of payment.
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A private treaty sale is attractive to some potential consignors because it provides an opportunity
for a sale at a fixed price or at a price controlled by the consignor rather than by bidders, as is
the case at public auction. Often, a private treaty sale can be consummated more quickly than a
sale at auction, which also provides the Company with the opportunity for higher margins because
such sales involve fewer costs when compared with live auction sales.
Collectibles Competition
The auction and merchant dealer markets, both traditional and Internet, for the collectibles that
we offer are highly competitive and dynamic. With the exception of the low-end and
consumer-to-consumer segments of the Internet auctions market in which eBay has secured a dominant
market position, no clear market leader exists. The market comprises thousands of merchant/dealers,
as well as thousands of individual collectors buying and selling directly through
consumer-to-consumer Internet trading platforms and at collectibles shows and conventions. Most of
these competitors, however, are small, privately owned companies, and most are focused on a single
collectible category and do not have a multi-category presence similar to ours.
Our principal numismatic auction and merchant/dealer competitors are Heritage Rare Coin Galleries,
Stacks Rare Coins, Ira and Larry Goldberg Coins & Collectibles, and U.S. Coins, Inc.
As a general matter (with some exceptions), the local market is preferred by sellers of philatelic
materials. In other words, sellers of U.S. collections generally prefer to sell their material
through U.S. auction houses, and German material is generally sold through German companies. An
exception is Switzerland, where Corinphila sells specialized collections and Latin American
materials along with Swiss collections.
Among our primary competitors in the domestic philatelic auction and merchant dealer business are
Spink Shreves Galleries, Inc., Robert A. Siegel Auction Galleries, Inc., Mystic Stamp Company, and
Regency-Superior, Ltd.
In Europe, the Company has numerous philatelic competitors that include Hanseatische
Briefmarkenauktionen OHG (HBA), Auktionshaus Ulrich Felzmann GmbH & Co. KG, Wurttembergisches
Auktionshaus Fur Postwertzeichen GmbH, and Philatelie Christoph Gartner GmbH in Germany; David
Feldman S.A., Peter Rapp AG, Chiani-Auktionen, Giorgino Auktionen, and Rolli-Schar AG in
Switzerland; Behr Philateli in France; Thomas Hoiland Auctions in Denmark; Van Dieten
Postzegelveilingin B.V., and De Nederlandsche Postzegelveiling B.V. in the Netherlands; and Harmers
of London, Stanley Gibbons, Grosvenor Auctions, and Bonhams in the UK.
Our major competitors in the arms and armor business are Bonhams & Butterfields, Rock Island
Auction Company, Little Johns Auction Service, James D. Julia, Amoskeag Auction Company,
Christies, and Sothebys Parke-Bernet.
Our competitors in the wine auction business include Christies, Sothebys, Zachys, Hart Davis
Hart, and Acker Merrall & Condit.
Our competition in the Hong Kong philatelic market includes InterAsia Auctions, Spink, and Zurich
Asia.
Seasonality
Our Collectibles business is not generally subject to seasonal changes, although we often schedule
our auctions around major coin, stamp and gun shows.
Financial and Geographical Information about Segments
See Note 17 of the Notes to Consolidated Financial Statements for financial and geographical
information about the Companys reporting segments.
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Government Regulation
Our trading and finance operations are subject to regulation, supervision and licensing
requirements under various federal, state, local and foreign laws, ordinances and regulations. Our
collectibles operations are not currently subject to material federal, state or local regulation.
Employees
As of June 30, 2010, we had 143 employees, with 111 located in North America, 28 in Europe, and 4
in Asia. 131 of these employees were considered full-time employees. We regard our relations with
our employees as good. The table below provides a breakdown of our employees by segment as of June
30, 2010, and 2009.
June 30, 2010 | June 30, 2009 | |||||||
Trading |
20 | 20 | ||||||
Collectibles |
116 | 119 | ||||||
Corporate |
7 | 3 | ||||||
Total |
143 | 142 | ||||||
Website Address
The Company makes available, free of charge, its annual report on Form 10-K, quarterly reports on
Form 10-Q and current reports on Form 8-K through a hyperlink from its website, www.spectrumgi.com,
to a website maintained by an unaffiliated third-party service. Such reports are made available on
the same day that they are electronically filed with, or furnished to, the SEC.
ITEM 1A. RISK FACTORS
We face risks and uncertainties in connection with the bankruptcy proceedings of Afinsa, our
majority shareholder.
Our majority shareholder, Afinsa, is currently in bankruptcy proceedings in Spain. Its wholly-owned
subsidiary, Auctentia, which owns 58% of the Companys stock directly, is no longer in bankruptcy
proceedings itself, but the stock of Auctentia is among the assets of Afinsas bankrupt estate.
The liquidation of Afinsas assets will include the sale, transfer or other disposition of the
stock of the Company owned by it and Auctentia. A sale, transfer or other disposition of all or a
substantial portion of the shares of Company stock held by Afinsa and its subsidiary will cause a
change of control of the Company. A holder (or group of holders) of more than 50% of the Companys
issued and outstanding stock has sufficient voting power to control the outcome of virtually all
corporate matters submitted to a vote of our stockholders. These matters could include the election
of directors, amendments to our by-laws, changes in the size and composition of our Board of
Directors, and mergers and other business combinations involving us. Such a holder may promote
policies or transactions that may not be favored by other stockholders or impede policies or
transactions that may be desirable for other stockholders. A change of control could also have
adverse tax consequences to the Company by limiting our ability to utilize our net operating loss
carryforwards and other related tax attributes.
Although SGI and Auctentia are parties to a registration rights agreement pursuant to which
Auctentia may request that substantially all of the shares of the Companys common stock
beneficially owned by it be registered by the Company at the Companys expense, the Company would
not be able to comply with any such request until it is able to meet the SEC requirements governing
registration statements, including those relating to audited financial statements. Until such time,
Afinsa (and Auctentia) would not be able to sell the shares of our Company publicly, and would have
to dispose of those shares in one or more private transactions. If and when the shares are
registered, then they will be freely tradable immediately
after any registration. Sales of such shares in the public markets in one or more block
transactions could have a negative effect on the trading price of the Companys common stock.
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We face potential liabilities as a result of ongoing proceedings against certain of the Companys
former officers and directors.
As described in further detail below, under the heading captioned Legal Proceedings SEC Action,
on March 23, 2009, following a three-year investigation, the SEC filed an action in the U.S.
District Court for the Southern District of New York against Greg Manning, formerly Chief Executive
Officer and President of the Company and First Vice Chairman of its Board of Directors, and Larry
Crawford, formerly the Chief Financial Officer of the Company, seeking a permanent injunction
against future violations of certain provisions of the federal securities laws, and disgorgement
and civil monetary penalties in an unspecified amount. The action against Mr. Manning was settled
on August 23, 2010. The action against Mr. Crawford is ongoing.
In addition, as more fully described below under Legal Proceedings Spanish Criminal
Investigation, Messrs. Manning and Crawford, along with other former officers and directors of the
Company and Central de Compras Coleccionables (CdC), a wholly-owned subsidiary of the Company,
are the subject of a criminal investigation in Spain arising out of the Companys transactions with
Afinsa. The Company understands that, under Spanish law, after the end of the investigative stage,
which is expected to last for years, the Spanish Investigative Court will determine whether there
are grounds to bring formal charges and to continue to a trial or whether the proceedings should be
dismissed. As the Company understands Spanish law, corporations cannot be charged directly with
criminal acts, but face the possibility of secondary civil liability through the actions of their
officers. Therefore, if any of these former officers or directors of SGI or CdC is ultimately found
guilty, then, under this principle of secondary civil liability, the corporation could be held
liable for certain associated penalties. However, neither SGI nor CdC is currently a party to these
criminal proceedings, and the effect, if any, on the Company cannot be determined at this time.
Messrs. Manning and Crawford (and such other officers and directors) are entitled to receive
advances from the Company for their legal fees and expenses in connection with the Spanish criminal
proceedings. In addition, the Company is continuing to advance fees and expenses to Mr. Crawford in
connection with the SEC action, and may be obligated to indemnify and reimburse Mr. Crawford for
amounts paid by him in connection with money judgments, penalties or settlements in the SEC action.
We are unable at this time to predict whether these developments will result in any kind of
additional formal proceeding against SGI or CdC, and are unable to assess the likelihood of a
favorable or unfavorable outcome of any such action, or to estimate the amount of liability in the
event of an unfavorable outcome. If we are ultimately required to pay significant defense costs,
damages or settlement amounts as a result of our indemnification obligations, such payments could
materially and adversely affect our liquidity and results of operations.
In addition, the SEC action, the Spanish criminal proceedings and any additional charges against,
or settlements by, any of our former officers, may generate negative publicity and adversely affect
the investing publics (and others) perceptions of the Company. This, in turn, could adversely
affect the market price of our common stock, our access to the capital markets and our borrowing
costs, which could adversely affect our business and our results of operations.
We are subject to ongoing obligations in connection with the SEC Settlement, and our failure to
comply with those obligations, including the obligation to file our Exchange Act reports for prior
periods, could adversely affect our business and the liquidity of our common stock.
As described in further detail below under the heading captioned Legal Proceedings SEC Action,
on March 23, 2009, the Company announced that it had reached a settlement with the SEC (the SEC
Settlement), which resolved charges filed against the Company in connection with the SECs
investigation into the Companys historical transactions with Afinsa. Under the terms of the SEC
Settlement, which was approved by the U.S. District Court for the Southern District of New York on
March 30, 2009, the Company consented, without admitting or denying the allegations made in the
SECs complaint, to a permanent injunction against any future violations of certain provisions of
the federal securities laws, including those requiring us to make all filings under the Exchange
Act.
While we will endeavor to comply fully with the terms of the SEC Settlement, it is possible that
the SECs enforcement staff may take issue with our compliance, despite our efforts. In particular,
we are not currently in compliance with the requirement that we make all necessary filings under
the Exchange Act; we have not filed amended Reports on Form 10-K
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for the years ended June 30, 2004,
and 2005 (either separately or as part of a comprehensive Report on Form 10-K); we have not filed
Reports on Form 10-K for the fiscal years ended June 30, 2006, 2007 and 2008; and we have not filed
Reports on Form 10-Q (or amended Reports on Form 10-Q, as the case may be) for any quarter during
these fiscal years. The reason we have not been able to file these Reports on Form 10-K and 10-Q to
date is that we face two major issues with completing our audit of the financial statements for our
North American Philatelic Division and therefore the audit of the Companys consolidated
financial statements for any year prior to June 30, 2008. First, many of the accounting records
for that Division for the prior periods specifically, the supporting analyses for balance sheet
and income statement accounts are incomplete and need to be reconstructed. Second, the Company
has experienced significant turnover in its accounting and corporate personnel since 2006, which
has adversely impacted the Companys ability to reconstruct these financial data.
The failure by us to comply with the SEC Settlement, or any perception that we have failed to
comply with the SEC Settlement, could result in further enforcement actions by the SEC, including
the imposition of sanctions or fines. In addition, the SEC could commence proceedings to suspend or
revoke the registration of our common stock under Section 12(j) of the Exchange Act. The SEC could
also seek to impose a trading halt in our common stock for up to ten trading days if it believes
the public interest and the protection of investors requires it to do so. Should our common stock
be de-registered, brokers, dealers and other market participants would be prohibited from buying or
selling, making a market in, or publishing quotations or otherwise effecting transactions with
respect to our common stock. As a result, public trading of our common stock would cease. This
could have an adverse impact by reducing the liquidity of our common stock and preventing investors
from buying or selling our common stock in the public market.
We are the subject of examinations by U.S., New York State and Spanish tax authorities.
In November 2005, Spanish tax authorities commenced an investigation of CdC, covering all periods
from fiscal 2001 through fiscal 2006.
In February 2008, the Internal Revenue Service (the IRS) commenced an audit of SGIs tax returns
for fiscal 2004, 2005 and 2006. In March 2008, the New York State Department of Taxation and
Finance began an audit of our tax returns for fiscal 2005, 2006 and 2007.
These audits are ongoing and the outcome cannot be determined at this time. An adverse outcome
could have a material adverse effect on the financial condition and results of operations of the
Company.
We have incurred and expect to continue to incur substantial legal, accounting and other costs and
expenses arising from our relationship with Afinsa.
In addition to our advancement and indemnification obligations described above, we have also
incurred significant expenses relating to the re-audit and restatement of our historical financial
statements, investigation by the Audit Committee, the SEC investigation and settlement and the
shareholder litigation. We may incur significant additional expenses in connection with the
re-audit and restatement of our historical financial statements, the preparation of our delinquent
Exchange Act reports and the Spanish criminal proceedings. In addition, these matters are likely to
divert the time and attention of our management from regular business operations.
Our trading business is exposed to commodity price risks and to risks of default of our
counterparties.
A-Marks precious metals inventories are subject to market value changes created by change in the
underlying commodity price, as well as supply and demand of the individual products the Company
trades. In addition, open purchase and sale commitments are subject to changes in value between the
date the purchase or sale is fixed (the trade date) and the date metal is delivered or received
(the settlement date). A-Mark seeks to minimize the effect of price changes of the underlying
commodity through the use of financial derivative instruments, such as forward and futures
contracts. A-Marks policy is to remain substantially hedged as to its inventory position and to
its individual purchase and sale commitments. A-Marks
management monitors its hedged exposure daily. However, there can be no assurance that these
hedging activities will be adequate to protect the Company against commodity price risks associated
with A-Marks business activities.
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Furthermore, even if we are fully hedged as to any given position, there is the risk of default by
our counterparties to the hedge. Any such default could have a material adverse effect on our
financial position and results of operations.
A-Marks business is heavily dependent on its heavily concentrated customer base.
One of A-Marks key assets is its customer base. This base provides deep distribution of product
and makes A-Mark a desirable trading partner for any precious metals product manufacturer,
including a sovereign mint seeking to distribute precious metals coinage or a large refiner seeking
to sell large volumes of physical precious metals. For the fiscal year ended June 30, 2010,
A-Marks top two customers represented 28.3%, and 12.0%, respectively of our Trading revenues. Any
event that would adversely affect the relationship between A-Mark and its customers, or the loss of
any significant customer, would negatively impact A-Marks results of operations.
A-Marks business is heavily dependent on its credit facility and its banking relationships.
The Trading Credit Facility provides A-Mark and CFC with the liquidity to buy and sell billions of
dollars of precious metals annually. The Trading Credit Facility is a demand facility, and any of
the five lending institutions can cancel its portion of the Trading Credit Facility upon written
notice.
The loss of a credit-line of any one of the five bank participants and the failure of A-Mark to
replace that line could have a material adverse effect on the business and financial condition of
A-Mark.
In addition, CFC is permitted to utilize a portion of the Trading Credit Facility to fund its
loans. There can be no assurance that the cash flows from our CFC business will be sufficient to
enable us to repay any borrowings under the Trading Credit Facility.
In addition, fluctuations in interest rates influence the cost of funds for borrowings under the
Trading Credit Facility.
The loss of a government purchaser/distributorship arrangement could materially adversely affect
A-Marks business and results of operations.
A-Marks business is heavily dependent on its purchaser/distributorship arrangements with various
governmental mints. A-Marks ability to offer coins and bars to its customers on a competitive
basis is based on its ability to purchase products directly from a government source. The loss of
any authorized purchaser/distributor relationship, including with the U.S. Mint, could have a
materially adverse effect on A-Marks business.
A-Marks business is heavily influenced by volatility in commodities prices.
A primary driver of A-Marks profitability is volatility in commodities prices. If prices were to
stagnate, there would likely be a reduction in trading activity, resulting in less demand for the
services A-Mark provides. Alternatively, an increase in price volatility would be likely to result
in increased business activity for A-Mark. Among the factors that can impact the price of precious
metals are supply and demand of gold; political, economic, and global financial events; movement of
the U.S. dollar versus other currencies; and the activity of large speculators such as hedge funds.
The materials held by A-Mark and our collectibles companies are subject to loss, damage, theft or
restriction on access.
There is a risk that part or all of the gold and other precious metals held by A-Mark, and the
collectibles held by our collectibles companies, could be lost, damaged or stolen. In addition,
access to A-Marks gold could be restricted by natural events (such as an earthquake) or human
actions (such as a terrorist attack). Any of these events may adversely affect our operations.
Although we maintain insurance on terms and conditions that we consider appropriate, we may not
have adequate
sources of recovery if our gold or other material is lost, damaged, stolen or destroyed, and
recovery may be limited. Among other things, our insurance policies exclude coverage in the event
of loss as a result of terrorist attacks or civil unrest.
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Our stock is not currently traded on a recognized exchange.
In early 2007, our stock was de-listed from the NASDAQ National Market because of our failure to
comply with our financial reporting obligations under the Exchange Act. Since then, our stock has
traded on the pink sheets, and is thinly traded. While we intend to re-list on a recognized
exchange as soon as we meet all applicable listing requirements, there can be no assurance that we
will be successful in doing so.
Our business is influenced by political conditions and world events.
Global political conditions and world events may affect SGI through their effect on the economies
of various countries, as well as on the decision of buyers and sellers to purchase and sell
precious metals and collectibles and the value of such precious metals and collectibles.
Our business is subject to the risk of fraud, forgeries, fakes, lack of provenance and
counterfeiting.
Both our collectibles and precious metals (particularly bullion) business are exposed to the risk
of loss as a result of materials fraud in its various forms. We seek to minimize our exposure to
this type of fraud through a number of means, including third-party authentication and
verification, reliance on our internal experts and the establishment of procedures designed to
detect fraud. However, there can be no assurance that we will be successful in preventing or
identifying this type of fraud, or in obtaining redress in the event such fraud is detected.
We have significant operations outside the United States.
Business operations outside the U.S. are subject to political, economic and other risks inherent in
operating in foreign countries, such as: the difficulty of enforcing agreements, collecting
receivables and protecting inventory and other assets through foreign legal systems; trade
protection measures and import or export licensing requirements; difficulty in staffing and
managing widespread operations; required compliance with a variety of foreign laws and regulations;
changes in the general political and economic conditions in the countries where we operate,
particularly in emerging markets; threat of nationalization and expropriation; higher costs and
risks of doing business in a number of foreign jurisdictions; limitations on the repatriation of
earnings; fluctuations in equity, revenues and profits due to changes in foreign currency exchange
rates, including measures taken by governments to devalue official currency exchange rates; and
inflation levels exceeding that of the U.S.
We try to manage these risks by monitoring current and anticipated political and economic
developments and adjusting operations as appropriate. Changes in the political or economic
environments of the countries in which we operate could have a material adverse effect on our
business, financial condition and results of operations.
We could suffer losses with our financing operations, which could affect our liquidity and results
of operations.
We offer various types of financing in our business. Our receivables from the customers with whom
we trade in precious metals represent short-term, non-interest bearing amounts due from metal sales
and are generally secured by the related metals maintained in the Companys possession, by a
security interest, or by a letter of credit issued on behalf of the customer. Advances on refined
materials represent metals advanced to customers, secured by unrefined materials received from the
customer. These advances are limited to a portion of the unrefined materials received. Wholesale
trade advances are unsecured, short-term, non-interest bearing advances made to wholesale metals
dealers and government mints. The Company periodically extends short-term credit through the
issuance of notes receivable to approved customers at interest rates determined on a
customer-by-customer basis. The amounts due from brokers principally relates to commodity hedging
transactions.
SGI also frequently extends trade credit in connection with its auction sales. The Company
evaluates each customers creditworthiness on a case-by-case basis. The sale and auction of
Company-owned inventory are, from time to time, made with extended payment terms of up to twelve
months. Certain assets held by the Company collateralize these receivables.
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The Company operates a financing business through CFC that makes secured loans at loan to value
ratios (principal loan amount divided by the liquidation value, as conservatively estimated by
management, of the collateral) of 40% to 85%. These loans are both variable and fixed interest rate
loans, with maturities from six to twelve months.
The failure or inability of borrowers to repay their loans is an inherent risk in all lending. Our
ability to minimize loan losses will depend on several factors, including (a) the loan underwriting
and other policies and controls we continue to adopt and implement, which could prove to be
inadequate to prevent loan losses from occurring; (b) our ability to sell collateral, when a
borrower defaults in the payment of a loan, for amounts sufficient to offset loan losses, which can
be affected by a number of factors outside of our control, including (i) changes in economic
conditions, (ii) increases in market rates of interest and (iii) changes in the condition or value
of the collateral that will secure the loans we make; and (c) the reserves we will need to
establish for potential loan losses, which may prove to be inadequate, in which case we would have
to incur additional charges, which would have the effect of reducing our net income and could
negatively impact our financial condition. Additionally, our CFC operations are subject to certain
state and federal laws and regulations, which may impose significant costs or limitations on the
way we conduct or expand such a business.
Changes in our liquidity and capital requirements could limit our ability to achieve our plans.
The Company currently has no working capital facility in place, other than its Trading and
Collectibles Credit Facilities., which are repayable on demand. If the cash that we generate from
our business, together with cash that we may borrow under the Trading and Collectibles Credit
Facilities, is not sufficient to fund our capital requirements, we will require additional debt
and/or equity financing. However, we may not succeed in obtaining the requisite additional
financing on terms that are satisfactory to us or at all. In addition, the Companys ability to
raise capital through the public issuance of equity or debt securities may be restricted because of
its failure to file its delinquent reports under the Exchange Act.
Failure to obtain such financing could have a material adverse effect on the Companys ability to
offer cash advances to potential consignors of property (which is an important aspect of the
marketing of an auction business), to acquire collectibles for sale in the Companys business, to
expand into sales of other collectibles, to expand our CFC operations, to initiate any other new
business activities and to execute on any strategic growth plan we might develop. Also, the Trading
and Collectibles Credit Facilities impose certain restrictive covenants, including restrictions on
the payment of dividends to the parent company, which could have an adverse impact on our liquidity
position and our ability to expand our business.
We are dependent on our key management personnel and our Trading and Collectibles experts.
Our performance is greatly dependent on the performance of our senior management and certain other
key employees. Some of our executive officers and key employees, including Greg Roberts, our CEO
and President, are experts in the collectibles and trading markets and have industry-wide
reputations. The loss of these individuals could have a negative effect on our reputation for
expertise in the collectibles and precious metals trading markets in which we operate and could
lead to a reduction in our business. Competition for available trading and collectibles experts is
intense. Accordingly, our business and our growth initiatives are heavily dependent on our ability
(i) to retain our existing collectibles experts, who have developed relatively unique skills and
enjoy a reputation for being experts within their fields, and (ii) to implement personnel
recruiting, succession and training programs that will enable us to add trading and collectibles
experts, as necessary, to grow our business and offset employee turnover that can occur from time
to time. If we are not successful in retaining our existing experts or in hiring and training new
experts, this could limit our ability to grow our business and adversely affect our operating
results and financial condition. Moreover, some of our experts could leave our company to join a
competitor or start a competing business.
We have made numerous acquisitions, which entail certain risks, as do our other growth initiatives.
We have grown in part through acquisitions and expect to continue to do so. We will consider
potential acquisitions of varying sizes and may, on a selective basis, pursue acquisitions or
consolidation opportunities involving other public companies or large privately-held companies. It
is possible that we will not realize the expected benefits from our acquisitions or that our
existing operations will be adversely affected as a result of acquisitions. The making of
acquisitions entails certain risks, including: (a) unrecorded liabilities of acquired companies
that we fail to discover during our due
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diligence investigations; (b) difficulty in assimilating
the operations and personnel of the acquired company within our existing operations or in
maintaining uniform standards; (c) loss of key employees of the acquired company; and (d) strains
on management and other personnel time and resources both to research and integrate acquisitions.
We expect to pay for future acquisitions using cash, capital stock, notes and/or assumption of
indebtedness. To the extent that our existing sources of cash are not sufficient to fund future
acquisitions, we will require additional debt or equity financing and, consequently, our
indebtedness may increase as we implement our growth strategy. We have also spent considerable
time, resources and efforts, apart from acquisitions, in attempting to grow our business operations
over the past few years. These efforts place, and are expected to continue to place, strains on our
management and other personnel and resources and require timely and continued investment in
facilities, personnel and financial and management systems and controls. We may not be successful
in implementing all of the processes that are necessary to support our growth initiatives, which
could result in our expenses increasing disproportionately to our incremental revenues, causing our
operating margins and profitability to be adversely affected.
We may not have successfully remediated previously identified material weaknesses in our internal
controls and we may identify additional material weaknesses in the future.
As described below under heading captioned Controls and Procedures, we have in the past had
material weaknesses in our internal control over financial reporting and, as of June 30, 2010, had
two material weaknesses. We have also concluded that, as of June 30, 2010, our disclosure controls
and procedures were not effective. We have adopted a plan to remediate these material weaknesses
and have taken steps to address certain of the issues associated with our disclosure controls and
procedures. However, there can be no assurance that the measures we have taken and will take to
remediate identified weaknesses and to address our disclosure control issues will be sufficient or
that we will not identify additional weaknesses in the future. Additionally, even if we believe we
have effective control over financial reporting, the process for assessing the effectiveness of
internal control over financial reporting requires subjective judgments and the application of
standards that are relatively new and subject to questions of interpretation. If we continue to
conclude that our internal control over financial reporting is not effective, the perception of our
Company may be adversely affected, which could in turn adversely affect the price of our
securities, our access to the capital markets and/or our borrowing costs.
The imposition of government regulations could increase our costs of doing business.
Our trading operations are subject to regulation, supervision and licensing requirements under
various federal, state, local and foreign laws, ordinances and regulations. New laws and
regulations could be enacted that could have a negative impact on our trading activities.
While the collectibles market is not currently subject to direct federal, state or local
regulation, from time to time government authorities discuss additional regulations which could
impose restrictions on the collectibles industry, such as regulating collectibles as securities or
requiring collectibles dealers to meet registration or reporting requirements, or regulating the
conduct of auction businesses. Adoption of laws or regulations of this nature could lead to a
decline in sales and purchases of collectibles.
The weak economy has had a negative impact on our Collectibles operations.
Our Collectibles business, which is significantly affected by the amount of discretionary consumer
spending, has been adversely impacted by the general economic climate, and further deterioration in
global economic conditions is expected to have a negative effect on our Collectibles operations and
the market value of the Collectibles inventory that we hold at any given time.
We operate in highly competitive industries.
The business of buying and selling precious metals and collectibles is highly competitive. The
Company competes with a number of precious metals trading firms, auction houses, and collectibles
companies throughout North America, Europe and the rest of the world, some of whom have greater
financial, and other types of resources, and name recognition. Our competitors may offer services,
pricing or commissions that could be deemed superior to ours.
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Our stock price may fluctuate.
The market price of the Companys common stock dropped dramatically following the events of May 9,
2006. In the past, the market price of the Companys common stock has fluctuated and may continue
to fluctuate significantly due to a number of factors, some of which may be beyond the Companys
control, including: sales of the Companys common stock by stockholders, including Afinsa; actual
or anticipated fluctuations in the Companys operating results; the operating and stock price
performance of other comparable companies; developments and publicity regarding the Spanish
criminal investigation and the SEC action; and general economic conditions.
In addition, the stock market in general has experienced volatility that has often been unrelated
to the operating performance of individual companies. These broad market fluctuations may adversely
affect the trading price of the Companys common stock, regardless of the Companys actual
performance, and could enhance the effect of any fluctuations that do relate to its operating
results.
We have not paid dividends on our common stock in the past and do not anticipate paying dividends
on our common stock in the foreseeable future.
We have not paid common stock dividends since our inception and do not anticipate paying dividends
in the foreseeable future. Our current business plan provides for the reinvestment of earnings,
with the goal of increasing sales and long-term profitability and value.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable for a smaller reporting company.
ITEM 2. PROPERTIES
Our headquarters and most of our North American Collectibles operations are located in one facility
in Irvine, CA, consisting of approximately 20,000 square feet of office space. This lease expires
on May 31, 2011. Our arms and armor auction operations are located nearby, in leased warehouse
facilities consisting of approximately 8,000 square feet, under a lease expiring on May 31, 2011.
We also lease another warehouse in Irvine under a lease expiring on August 4, 2011. Our trading
operations are conducted in facilities in Santa Monica, CA, where we lease approximately 4,300
square feet of office space under a lease which expires on April 30, 2011. We also lease
approximately 7,400 square feet in Zurich, Switzerland, approximately 8,900 square feet in
Wiesbaden, Germany, approximately 5,400 square feet in Amstelveen, Netherlands, and approximately
1,300 square feet in Hong Kong, where we conduct our European and Hong Kong Collectibles
Operations. The Zurich lease expires on May 31, 2013; the Wiesbaden lease expires on October 31,
2012; the Amstelveen lease expires on December 31, 2011; and the Hong Kong lease expires on
February 21, 2013. We also lease approximately 1,900 square feet in Madrid, Spain, where we are
winding down our CdC operations. The Madrid lease expires on June 30, 2011. We are currently under
negotiation to renew all expiring leases.
During fiscal 2009, we also leased approximately 22,500 square feet in Bethel, CT, where our North
American philatelic operations were located. We terminated this lease on August 31, 2009. Also
during fiscal 2009, we owned a building in West Caldwell, NJ, where the philatelic operations had
been located prior to moving such operations to Bethel, CT in 2007, and subsequently to Irvine, CA
in 2009. We sold this building in April 2009, for a gross sales price of approximately $2.1
million.
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ITEM 3. LEGAL PROCEEDINGS
Ongoing Legal Proceedings Against Certain of the Companys Former Officers and Directors Relating
to the Companys Transactions with Afinsa
Spanish Criminal Investigation
In May 2006, Spanish judicial authorities shut down the operations of Afinsa and began an
investigation related to alleged criminal wrongdoing, including money laundering, fraud, tax
evasion and criminal insolvency. The Spanish criminal investigation initially focused on Afinsa and
certain of its executives and was later expanded to include several former officers and directors
of SGI and CdC, including (most recently) Messrs. Manning and Crawford. From June 2003, through May
2006, we supplied philatelic material to Afinsa, and we understand that Afinsa used the material in
connection with transactions between itself and its clients, entering into contracts with investors
to sell specified philatelic material. These investors would deposit funds with Afinsa for a
specified period of years, and at the end of an agreed-upon contract term the investors would have
the option of receiving either (i) the specified stamps or other philatelic materials set forth in
the contract, or (ii) the principal sum invested, plus a contractually specified interest rate. In
most cases, Afinsa maintained (at the investors request) physical possession of the philatelic
material until the end of the contract term.
The allegations against Afinsa and the certain named individuals relate to the central claim that
Afinsas business operations constituted a fraudulent Ponzi scheme, whereby funds received from
later investors were used to pay interest to earlier investors, and that the stamps that were the
subject of the investment contracts were highly overvalued. Spanish authorities have preliminarily
alleged that Messrs. Manning and Crawford knew Afinsas business, and aided and abetted in its
activity by, among other things, causing the Company to supply allegedly overvalued stamps to
Afinsa.
Several of our other former officers and directors, including Esteban Perez, formerly the Chairman
of our Board of Directors, Carlos de Figueiredo, formerly the Second Vice Chairman of our Board of
Directors (and the son of one of the founders of Afinsa), and Ramon Egurbide, formerly the head of
our European Operations, have testified as defendants in these proceedings. Spanish authorities are
also seeking the testimony of Messrs. Manning and Crawford as defendants.
The Company understands that, under Spanish law, after the end of the investigative stage, which is
expected to last for years, the Spanish Investigative Court will determine whether there are
grounds to bring formal charges and to continue to a trial or whether the proceedings should be
dismissed.
As the Company understands Spanish law, if any of these former officers or directors of SGI or CdC
is ultimately found guilty, then, under the principle of secondary civil liability, the corporation
could be held liable for certain associated penalties. However, neither SGI nor CdC is currently a
party to these criminal proceedings, and the effect, if any, on the Company cannot be determined at
this time.
Messrs. Manning and Crawford (and certain of the other former officers and directors of the Company
who are the subject of the Spanish criminal investigation) are entitled to receive advances from
the Company for their legal fees and expenses in connection with the Spanish criminal proceedings.
SEC Action
On March 23, 2009, SGI announced that it had reached a settlement, with the SEC, resolving charges
filed against the Company in connection with the SECs three-year investigation into the Companys
historical transactions with Afinsa. The SECs charges were asserted in a Complaint that was also
filed in the U.S. District Court for the Southern District of New York on March 23, 2009.
Under the terms of the SEC Settlement, which was approved by the Court on March 30, 2009, SGI
consented, without admitting or denying the allegations made in the SECs complaint, to a permanent
injunction against any future violations of certain provisions of the federal securities laws. No
fines, civil penalties or monetary sanctions were assessed against the Company.
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Also on March 23, 2009, the SEC filed an action in the U.S. District Court for the Southern
District of New York against Messrs. Manning and Crawford in connection with its investigation,
seeking a permanent injunction against future violations of certain provisions of the federal
securities laws, and disgorgement and civil monetary penalties in an unspecified amount. The action
against Mr. Manning was settled on August 23, 2010. The action against Mr. Crawford has not been
settled and is on-going.
The Company is continuing to advance fees and expenses to Mr. Crawford in connection with the SEC
action, and may be obligated to indemnify and reimburse Mr. Crawford for amounts paid by him in
connection with judgments, penalties or settlements in the SEC action. The Company is unable to
estimate the impact of this obligation on our financial position, operations or cash flow.
Tax Investigation in Spain
On November 17, 2005, the Spanish tax authorities commenced a tax examination of CdC. This
examination, which now covers all periods from fiscal 2001, through fiscal 2006, is ongoing and the
outcome cannot be determined at this time.
Greg Manning v. SGI
On or about August 7, 2007, Mr. Manning commenced arbitration against the Company before the
American Arbitration Association, asserting claims for breach of contract and defamation, based on
his allegation that the Company wrongfully terminated his consultancy for cause in April 2007. On
or about March 28, 2008, the Company filed counterclaims against Mr. Manning for breach of
contract, breach of fiduciary duty and unjust enrichment, based on Mr. Mannings breaches of his
contractual and fiduciary obligations in connection with the Companys transactions with Afinsa.
On July 8, 2010, the Company entered into a settlement agreement with Mr. Manning, pursuant to
which it agreed to pay approximately $2.7 million in cash to Mr. Manning of which $300,000 was to
be placed into an escrow account to satisfy certain of the Companys continuing
advancement/indemnification obligations. The Company paid all amounts due under the settlement
agreement in August 2010 (subject to certain continuing indemnification obligations).
IRS and New York State Tax Audits
In February 2008, the IRS commenced an audit of SGIs tax returns for fiscal 2004, 2005 and 2006.
In March 2008, the New York State Department of Taxation and Finance began an audit of our tax
returns for fiscal 2005, 2006 and 2007.
These audits are ongoing and the outcome cannot be determined at this time.
Securities Class Action and Shareholder Derivative Lawsuit
In May 2006, the Company and certain of its current and former officers were sued in connection
with the Companys transactions with Afinsa. In the derivative lawsuit commenced in the United
States District Court for the Southern District of New York, In re Escala Group, Inc. Derivative
Litigation, the plaintiffs generally made claims against the defendants for breach of fiduciary
duty, mismanagement, waste of corporate assets and unjust enrichment. In the securities class
action, which was also commenced in the United States District Court for the Southern District of
New York, In re Escala Group, Inc. Securities Litigation, the plaintiffs alleged that the
defendants participated in a scheme with Afinsa that caused the Companys reported revenues, gross
profit, net income and inventory to be materially overstated, and that the defendants made
materially false and misleading statements in the Companys publicly filed financial reports.
Both of these matters were settled in December 2008. Under the court-approved settlements, all
claims asserted in both actions were dismissed with prejudice and without any admission of
liability or wrongdoing.
As part of the settlement of the derivative lawsuit, the Company recovered $5.5 million from
insurers on behalf of certain of the named defendants in one or both proceedings. The Company also
agreed to adopt (and has since adopted) certain corporate governance policies and procedures
relating to revenue recognition, our internal audit function, codes of ethics, and
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board and
committee composition and continuing education, among other things. The Company also paid all of
plaintiffs court-approved attorneys fees of $925,000, together with approved expenses of $70,000.
The Companys insurer funded $475,000 of these amounts.
Under the settlement of the securities class action, SGI was required to contribute an aggregate of
$6.0 million in cash and 4.0 million newly issued shares of its stock to a settlement fund for the
benefit of the class members. These amounts also covered the legal fees and expenses of the
plaintiffs counsel in the action. During the year ended June 20, 2008, the Company contributed the
full $6 million in cash to the fund, a substantial portion of which was funded by insurers. After
taking into account recoveries, the Companys net cash payment obligations under both settlements
was approximately $1.1 million.
As part of its order relating to the securities class action, the court awarded attorneys fees to
plaintiffs counsel of $3.25 million, of which 44.5% was to be paid in common stock of the Company.
Accordingly, on January 14, 2009, the Company issued to plaintiffs counsel a total of 772,430
shares of the Companys common stock, based upon a value of $1.87 per share. (The date of the
issuance of the shares and the calculation of the value of the shares to be issued was determined
in accordance with the settlement agreement.) Thereafter, in February 2009, SGI repurchased those
shares at a purchase price of $1.55 per share. The shares have since been cancelled and returned to
the status of authorized but unissued shares.
On October 1, 2009, the Company issued the remaining 3,277,777 shares of common stock to the
settlement fund. The Company has no further obligation or liability under the settlement agreement.
For a description of the accounting treatment of this settlement, see Note 15 to the Notes to
Consolidated Financial Statements.
Seymour Ehrenpreis v. Nutmeg Stamps, et al
In May 2009, Seymour Ehrenpreis commenced an action against a subsidiary of the Company and certain
of its officers for breach of contract and other matters, all based on allegations of failure to
fulfill oral commitments. The plaintiff seeks compensatory damages of at least $1.3 million and
punitive damages of at least $1.3 million. This action is in its early stages and the Company
cannot currently estimate the likelihood of an adverse outcome. The Company intends to assert a
vigorous defense against this action.
PART II.
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The common stock of the Company is traded on the Pink OTC Markets Inc. (Pink Sheets) under the
symbol SPGZ.PK. Prior to January 2007, our stock was traded on NASDAQs National Market under the
symbol ESCL. In January 2007, our stock was de-listed from the NASDAQ National Market because of
our failure to comply with our financial reporting obligations under the Exchange Act.
As of September 13, 2010, there were 1,015 stockholders of record of our common stock and the last
reported sale price of our stock as reported by the Pink Sheets was $1.90.
The following tables set forth the range of high and low closing prices for our common stock, for
each of the periods indicated, as reported by the Pink Sheets. These quotations below reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
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2010 | ||||||||
Quarter | High | Low | ||||||
First |
$ | 2.99 | $ | 2.00 | ||||
Second |
$ | 3.30 | $ | 1.81 | ||||
Third |
$ | 1.95 | $ | 1.67 | ||||
Fourth |
$ | 2.25 | $ | 1.70 |
2009 | ||||||||
Quarter | High | Low | ||||||
First |
$ | 2.80 | $ | 1.65 | ||||
Second |
$ | 2.65 | $ | 1.70 | ||||
Third |
$ | 2.95 | $ | 0.86 | ||||
Fourth |
$ | 2.99 | $ | 1.85 |
Dividend Policy
We have never declared or paid any cash dividends on our stock. We currently anticipate that any
future earnings will be retained by the Company to support our growth strategy. The payment of any
future dividends will be at the discretion of our Board of Directors and will depend upon, among
other things, future earnings, operations, capital requirements, our general financial condition,
contractual restrictions and general business conditions.
In addition, A-Marks credit facility has certain restrictive financial covenants which require
A-Mark and SGI to maintain a minimum tangible net worth (as defined) of $20.0 million and $50.0
million, respectively. SGIs ability to pay dividends, if it were to desire to do so, could be
limited as a result of these restrictions.
Equity Compensation Plan Information
The following table provides information as of June 30, 2010, with respect to the shares of our
common stock that may be issued under existing equity compensation plans.
(c) | ||||||||||||
Number of securities | ||||||||||||
(a) | remaining available for | |||||||||||
Number of securities | (b) | future issuance under | ||||||||||
to be issued upon | Weighted average | equity compensation | ||||||||||
exercise of | exercise price of | plans (excluding | ||||||||||
outstanding options, | outstanding options, | securities reflected in | ||||||||||
Plan category | warrants and rights | warrants and rights | column (a)) | |||||||||
Equity compensation plans approved by security holders (1) |
1,481,386 | $ | 2.48 | 711,999 | ||||||||
Equity compensation plans not approved by security holders (2) |
| | | |||||||||
Total |
1,481,386 | $ | 2.48 | 711,999 | ||||||||
(1) | Consists of stock options and restricted stock granted under the 1993 Stock Option Plan, as amended (the 1993 Plan), and the 1997 Stock Incentive Plan, as amended (the 1997 Plan). Spectrums stockholders previously approved the 1993 and 1997 Plans. Under the 1997 Plan, SGI has granted options and other equity awards as a means of attracting and retaining officers, employees, non-employee directors and consultants, to provide incentives to such persons, and to align the interests of such persons with the interests of stockholders by providing compensation based on the value of SGIs stock. Awards under the 1997 Plan may be granted in the form of non-qualified stock options, stock appreciation rights (SARs), restricted stock, restricted stock units, dividend equivalent rights and other stock-based awards (which may include outright grants of shares). The 1997 Plan currently is administered by the Compensation Committee of the Board of Directors, which may in its discretion select officers and other employees, directors (including non-employee directors) and consultants to SGI and its subsidiaries to receive grants or awards. At June 30, 2010, there were 711,999 shares remaining available for future awards under the 1997 Plan. Under the 1997 Plan, the exercise price of options and base price of SARs may be set in the discretion of the Board, and stock options and SARs may have any term. The 1997 Plan limits the number of stock options and SARs that may be granted to any one employee to 550,000 in any year. The 1997 Plan will terminate when no shares remain available for issuance and no awards remain outstanding. | |
(2) | Does not include an aggregate of 37,500 Stock Appreciation Awards and Long-Term Incentive Awards. The shares of common stock issuable upon the exercise of these rights cannot be determined until the applicable measurement date. These awards generally provide for the recipient to receive an amount, payable in stock (in certain cases upon the payment of an exercise price), equal to the appreciation in value of a specified number of shares of common stock. |
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ITEM 6. SELECTED FINANCIAL DATA
Not applicable for a smaller reporting company.
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
This Annual Report on Form 10-K contains statements that are considered forward-looking statements.
Forward-looking statements give the Companys current expectations and forecasts of future events.
All statements other than statements of current or historical fact contained in this annual report,
including statements regarding the Companys future financial position, business strategy, budgets,
projected costs and plans and objectives of management for future operations, are forward-looking
statements. The words anticipate, believe, continue, estimate, expect, intend, may,
plan, and similar expressions, as they relate to the Company, are intended to identify
forward-looking statements. These statements are based on the Companys current plans, and the
Companys actual future activities and results of operations may be materially different from those
set forth in the forward-looking statements. These forward-looking statements are subject to risks
and uncertainties that could cause actual results to differ materially from the statements made.
Any or all of the forward-looking statements in this annual report may turn out to be inaccurate.
The Company has based these forward-looking statements largely on its current expectations and
projections about future events and financial trends that it believes may affect its financial
condition, results of operations, business strategy and financial needs. The forward-looking
statements can be affected by inaccurate assumptions or by known or unknown risks, uncertainties
and assumptions. The Company undertakes no obligation to publicly revise these forward-looking
statements to reflect events occurring after the date hereof. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by the cautionary statements contained in this annual report.
The following discussion and analysis of our financial condition and results of operations should
be read in conjunction with our consolidated financial statements and related notes that appear
elsewhere in this Annual Report on Form 10-K. In addition to historical consolidated financial
information, the following discussion contains forward-looking statements that reflect our plans,
estimates and beliefs. Our actual results could differ materially from those discussed in the
forward-looking statements. Factors that could cause or contribute to these differences include
those discussed below and elsewhere in this Form 10-K.
INTRODUCTION
Managements discussion and analysis of financial condition and results of operations is provided
as a supplement to the accompanying consolidated statements and footnotes to help provide an
understanding of our financial condition, the changes in our financial condition and the results of
our operations. Our discussion is organized as follows:
| Overview. This section provides a general description of our business, as well as recent significant transactions and events that we believe are important in understanding the results of operations, as well as to anticipate future trends in those operations. |
| Results of operations. This section provides an analysis of our results of operations presented in the accompanying consolidated statements of operations by comparing the results for fiscal 2010, to fiscal 2009. |
| Financial condition, liquidity and capital resources. This section provides an analysis of our cash flows, working capital and financial commitments, as well as a discussion of our outstanding debt that existed as of June 30, 2010, and 2009. Included in the discussion of outstanding debt is a discussion of the amount of financial capacity available to fund our future commitments, as well as a discussion of other financing arrangements. |
| Critical accounting estimates. This section discusses those accounting policies that both are considered important to our financial condition and results, and require significant judgment and estimates on the part of management in their |
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application. In addition, all of our significant accounting policies, including critical accounting policies, are summarized in Note 2 to the accompanying consolidated financial statements. |
| Recent accounting pronouncements. This section discusses new accounting pronouncements, dates of implementation and impact on our accompanying consolidated financial statements, if any. |
OVERVIEW
Business
We conduct our operations within two business segments: Trading and Collectibles. For the fiscal
year ended June 30, 2010, our Trading and Collectibles segments represented $5.8 billion, or 97%,
and $177.7 million, or 3%, respectively, of our total revenues, and achieved operating
income/(loss) of $7.1 million and $(2.2) million, respectively. This was offset by net
corporate expenses in the amount of $13.3 million which contributed to a total operating (loss) for
the year of $(8.3) million.
For the fiscal year ended June 30, 2009, our Trading and Collectibles segments represented $4.1
billion, or 96%, and $164.9 million, or 4%, respectively, of our total revenues, and achieved
operating income/(loss) of $26.2 million and ($7.6) million, respectively. This was offset by
net corporate expenses in the amount of $10.3 million which contributed to total operating income
for the year of $8.4 million.
The corporate expenditures for both fiscal years 2010 and 2009 related primarily to the
consolidation of the corporate accounting department, and legal fees and other professional fees
associated with our historical legal and accounting issues (relating primarily to our transaction
with Afinsa). In addition, in fiscal 2010, we settled the litigation with Mr. Manning, and in
fiscal year 2009, we settled the shareholder litigation.
Trading Segment
Our Trading segment operates in the United States through A-Mark Precious Metals, Inc. (A-Mark).
A-Mark is a distributor and service provider to consumers, wholesalers, retailers and dealers of
precious metals throughout the world from facilities located in Santa Monica, California. A-Mark is
a wholly-owned subsidiary of Spectrum PMI, Inc., which in turn is 80% owned by the Company.
Collateral Finance Corporation (CFC), a licensed California Finance Lender and a wholly owned
subsidiary of A-Mark, offers loans on precious metals, rare coins and other collectibles to coin
dealers, collectors and investors.
Collectibles Segment
Our Collectibles segment is a global integrated network of companies with operations in North
America, Europe and Asia as well as on the Internet. Our collectibles business is focused on
numismatic (coins) and philatelic (stamps) materials, rare and fine vintage wines, and antique
arms, armor and historical memorabilia (militaria). We primarily sell these materials, both owned
and consigned, through our auction subsidiaries and through wholesale merchant/dealer
relationships.
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RESULTS OF OPERATIONS
Year ended June 30, 2010, Compared with Year Ended June 30, 2009
Consolidated Results of Operations
Our operating results for the years ended June 30, 2010, and 2009 are as follows:
% of | 2009(1) | % of | $ Increase/ | % of Increase/ | ||||||||||||||||||||
(thousands of dollars) | 2010 | revenue | (as restated) | revenue | (decrease) | (decrease) | ||||||||||||||||||
Revenues |
$ | 6,012,438 | 100.0 | % | $ | 4,286,029 | 100.0 | % | $ | 1,726,409 | 40.3 | % | ||||||||||||
Gross profit |
53,839 | 0.9 | 70,800 | 1.6 | (16,961 | ) | (24.0 | )% | ||||||||||||||||
General and administrative expenses |
28,982 | 0.5 | 29,963 | 0.7 | (981 | ) | (3.3 | )% | ||||||||||||||||
Salaries and wages |
26,467 | 0.5 | 29,814 | 0.7 | (3,347 | ) | (11.2 | )% | ||||||||||||||||
Depreciation and amortization |
1,699 | 0.0 | 1,807 | 0.0 | (108 | ) | (6.0 | )% | ||||||||||||||||
Impairment of goodwill and intangible assets |
2,271 | 0.0 | 860 | 0.0 | 1,411 | 164.1 | % | |||||||||||||||||
Legal settlement |
2,697 | 0.0 | | 0.0 | 2,697 | 100.0 | % | |||||||||||||||||
Operating (loss) income |
(8,277 | ) | (0.1 | ) | 8,356 | 0.2 | (16,633 | ) | (199.1 | )% | ||||||||||||||
Interest income |
6,390 | 0.1 | 5,614 | 0.2 | 776 | 13.8 | % | |||||||||||||||||
Interest expense |
(2,267 | ) | (0.0 | ) | (2,373 | ) | (0.1 | ) | (106 | ) | (4.5 | )% | ||||||||||||
Other income (expense), net |
648 | 0.0 | (393 | ) | 0.0 | 1,041 | 264.9 | % | ||||||||||||||||
Unrealized gains on foreign exchange |
3,304 | 0.0 | 3,068 | 0.1 | 236 | 7.7 | % | |||||||||||||||||
Income/(Loss) before taxes |
(202 | ) | (0.0 | ) | 14,272 | 0.4 | (14,474 | ) | (101.4 | )% | ||||||||||||||
Income tax (provision) benefit |
640 | 0.0 | (3,137 | ) | 0.1 | 3,777 | 120.4 | % | ||||||||||||||||
Net income |
438 | (0.0 | ) | 11,135 | 0.3 | (10,697 | ) | (96.1 | )% | |||||||||||||||
Less: Net income attributable to the
non-controlling interests |
(1,490 | ) | (0.0 | ) | (3,999 | ) | (0.1 | ) | 2,509 | 62.7 | % | |||||||||||||
Net (loss) income attributable to Spectrum
Group International, Inc. |
$ | (1,052 | ) | (0.0 | )% | $ | 7,136 | 0.2 | % | $ | (8,188 | ) | (114.7 | )% | ||||||||||
Earnings (Loss) per share |
||||||||||||||||||||||||
Basic |
$ | (0.03 | ) | $ | 0.23 | $ | (0.26 | ) | (113.0 | )% | ||||||||||||||
Diluted |
$ | (0.03 | ) | $ | 0.23 | $ | (0.26 | ) | (113.0 | )% | ||||||||||||||
Weighted average shares outstanding |
||||||||||||||||||||||||
Basic |
31,939 | 30,934 | ||||||||||||||||||||||
Diluted |
31,939 | 31,649 | ||||||||||||||||||||||
(1) | The 2009 consolidated statement of operations has been restated for certain errors in classification. Such reclassifications did not result in an adjustment to the Companys reported net income. See further discussion at Note 3 to the consolidated financial statements. In addition, the 2009 consolidated statement of operations has been retrospectively adjusted in accordance with ASC 810. |
Revenues and Gross Profit
Revenues increased by $1.7 billion, or 40.3%, to $6.0 billion in 2010, from $4.3 billion in 2009.
This was due primarily to increased activity in our Trading segment. Our Trading segment
experienced an increase in revenues of $1.7 billion, or
42.0%, to $5.8 billion in 2010, from $4.1 billion in 2009. This increase was the result of a number
of factors, including higher precious metal prices and increased demand for precious metal products
worldwide.
Our Collectibles segment experienced an increase in revenues of $12.9 million, or 7.8%, to $177.7
million in 2010, from $164.9 million in 2009. The increase was primarily due to favorable economic
conditions in fiscal 2010 when compared to 2009 and was attributable to numismatic revenue, which
increased $24.1 million or 18.3% to $156.2 million in fiscal year 2010. Our Wine, Philatelic, Arms
and Armor businesses experienced a decrease in revenues of $11.2 to $21.6 million in fiscal 2010
from $32.8 million in 2009. This decrease was driven by the Philatelic business which experienced
$13.2 million decrease in sales and offset by an increase in sales from our Wine business which
contributed $1.2 million and our Arms and Armor business which contributed $0.8 million in fiscal
year 2010.
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Our gross profit decreased by $17.0 million, to $53.8 million in 2010, from $70.8 million in 2009.
This was primarily due to the decrease in our Trading segment margins resulting from the
contraction of silver coin premiums in fiscal year 2010 as compared to fiscal 2009, when silver
coin premiums had greatly expanded as a result of supply constraints and financial market fears.
Also contributing to the Trading segments lower margin was the decrease in sales ratio of silver
products to gold products, which produce lower margins. As such, the gross profit in our Trading
segment decreased by $22.9 million to $20.3 million in 2010 from $43.2 million in 2009. This was
partially offset by an increase in the gross profit of our Collectibles segment of $5.9 million, or
21.5%, to $33.6 million in 2010, from $27.6 million in 2009. The increase was primarily
attributable to the improve economy in fiscal year 2010, which contributed to the Numismatic
divisions overall increase revenue as well as the performance of our new Spectrum Wine Auction
division.
Our gross profit margins decreased to 0.9% in 2010, from 1.6% in 2009. This decrease was
attributable primarily to a decrease in our gross profit margins in our Trading segment to 0.3% in
2010 from 1.0% in 2009, for the reasons described above. This gross profit margin decrease was
partially offset by an increase in our gross profit margins in our Collectibles segment to 18.9% in
2010, from 16.8% in 2009 driven by better economic condition in 2010.
Operating Expenses
General and administrative expenses decreased $1.0 million, or 3.3%, to $29.0 million in 2010, from
$30.0 million in 2009. The decrease was from a variety of general and administrative expense
categories. In 2009, we incurred expenses in relocating the Arms and Amor and the North American
Philatelic operation to Irvine, California.
The Company records direct auction related expenses such as commissions, catalog expenses, auction
site fees, security, and other related costs associated with running an auction in general and
administration expenses. These costs are shared amongst other operating divisions and not tracked
specifically by each auction.
Salaries and wages expenses decreased $3.3 million, or 11.2%, to $26.5 million in 2010, from $29.8
million in 2009. The decrease was primarily due to the Trading segment, which decreased
approximately $5.0 million because of decreases in performance related compensation. This decrease
was partially offset by an increase mainly in corporate salary expense of $0.6 million. We are
building our corporate team to improve our financial reporting to remove our material weakness and
to reduce the use of consultants.
Impairment expense increased to $2.3 million in 2010, from $0.9 million in 2009, due to recognition
of a goodwill impairment charge of $0.4 million, a trademarks impairment charge of $1.1 million,
and a customer lists impairment charge of $0.8 million, all relating to the Companys Collectibles
segment.
Depreciation and amortization expenses were $1.7 million and $1.8 million in 2010, and 2009,
resulting in a decreased of $0.1 million.
Interest Income
Interest income increased by $0.8 million, to $6.4 million in 2010, from $5.6 million in 2009. The
increase is primarily due to an increase in the Trading segments interest income of $1.1 million,
to $6.0 million in 2010, from $4.9 million in 2009, in part due to the increased activities in
CFCs lending business, which represented a $0.5 million increase in interest income.
Interest Expense
Interest expense decreased by $0.1 million, or 4.5%, to $2.3 million in 2010, from $2.4 million in
2009. This was related primarily to the Trading segments lines-of-credit facility usage. Our
Trading segment utilizes their lines-of-credit extensively for working capital requirements. For
the year ended June 30, 2010, our consolidated average debt balance was approximately $45.5
million, compared to $59.3 million for the year ended June 30, 2009. The Companys decrease in
interest expense was due primarily to lower average debt outstanding which was offset by a slight
increase in interest rates in fiscal 2010 with the Companys base LIBOR rate increasing to 0.35% in
2010, from 0.32% in 2009.
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Other Income
Other income (net of expense) increased by $1.0 million, to $0.6 million in 2010, from $(0.4)
million in 2009. This change was the result of various small items.
Legal Settlement
The Companys legal settlement totaling $2.7 million relates to the legal settlement with Mr.
Manning, the Companys former CEO, who had commenced an arbitration action against the Company,
alleging that the Company had wrongfully terminated his consultancy for cause in April 2007.
Provision for Income Taxes
The Companys income tax provision decreased by $3.8 million, to $0.6 million benefit in 2010, from
an expense of $3.1 million in 2009. Our effective tax rates on income/(loss) before taxes for the
years ended June 30, 2010, and 2009, were approximately (316.8%), and 22.0%, respectively. A
reconciliation of the income tax provision to the amount computed by applying the statutory federal
income tax rate of 34% to the income (loss) before income tax provision for the years ended June
30, 2010, and 2009, as follows:
2010 | 2009 | |||||||
(in thousands) | (in thousands) | |||||||
Statutory income tax |
$ | 69 | $ | (4,852 | ) | |||
State and local income taxes, net of federal
tax benefit |
(119 | ) | (1,132 | ) | ||||
Foreign taxes at rates different for U.S. rates |
156 | (68 | ) | |||||
Tax on unrepatriated foreign earnings |
(298 | ) | 10 | |||||
Deferred tax asset write-offs/adjustments |
(563 | ) | | |||||
Valuation allowance |
3,104 | 3,298 | ||||||
Uncertain tax positions |
(1,993 | ) | (81 | ) | ||||
Other |
284 | (312 | ) | |||||
Income tax benefit (expense) |
$ | 640 | $ | (3,137 | ) | |||
For the year ended June 30, 2010, the net tax benefit of $0.6 million predominantly includes: a tax
benefit of $1.7 million related to a carryback claim for losses incurred in the U.S. during fiscal
2010; a tax benefit of $1.5 million related to an additional five-year carryback claim for losses
incurred in the U.S. during fiscal 2008; partially offset by an (increase) in unrecognized tax
benefits of $(2.0) million; and partially offset by a foreign income tax (provision) of $(0.8)
million. Our effective tax rate for the year ended June 30, 2010 was significantly impacted by an
increase in the valuation allowance of $3.1 million, partially offset by deferred tax asset
adjustments of $(0.6) million.
For the year ended June 30, 2009, the net tax (provision) of $(3.1) million predominantly includes
a tax (provision) of $(2.7) million for U.S. federal and State taxes related to taxable profits
earned in the U.S. during fiscal 2009, and a foreign income tax (provision) of $(0.4) million. Our
effective tax rate for the year ended June 30, 2009 was significantly impacted by an increase in
the valuation allowance of $3.3 million.
Non-Controlling Interests
Income attributable to non-controlling interests decreased $2.5 million, to $1.5 million in 2010,
from $4.0 million in 2009, primarily due to lower 2010 profits in the Trading segment, which is 20%
owned by Auctentia.
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Net Income
Net income decreased $8.2 million, to a net (loss) of $(1.1) million in 2010, from a net income of
$7.1 million in 2009, due primarily to decreased profits in the Companys Trading segment. The
Trading segments operations benefited in 2009 from a number of factors, including higher precious
metals prices, precious metals market volatility, and increased demand for precious metal products
worldwide.
Earnings (Loss) per Share
Basic earnings per share decreased $0.26 per share to net (loss) of $(0.03) per share in 2010, from
net income of $0.23 per share in 2009. Diluted earnings per share also decreased $0.26 per share to
net (loss) of $(0.03) per share in 2010, from net income of $0.23 per share in 2009. The decrease
in both basic and diluted earnings per share was primarily due to lower profits in the Companys
Trading segment in 2010.
Trading Segment
The operating results of our Trading segment for the year ended June 30, 2010, and 2009 are as
follows:
% of | 2009(1) | % of | $ | % | ||||||||||||||||||||
(thousands of dollars) | 2010 | revenue | (as restated) | revenue | Increase/(decrease) | Increase/(decrease) | ||||||||||||||||||
Trading revenues |
$ | 5,834,712 | 100.0 | % | $ | 4,121,159 | 100.0 | % | $ | 1,713,553 | 41.6 | % | ||||||||||||
Gross profit |
20,256 | 0.3 | 43,162 | 1.0 | (22,906 | ) | (53.1 | )% | ||||||||||||||||
General and administrative expenses |
3,562 | 0.0 | 2,838 | 0.1 | 724 | 25.5 | % | |||||||||||||||||
Salaries and wages |
8,904 | 0.2 | 13,082 | 0.3 | (4,178 | ) | (31.9 | )% | ||||||||||||||||
Depreciation and amortization |
671 | 0.0 | 997 | 0.0 | (326 | ) | (32.7 | )% | ||||||||||||||||
Operating income |
$ | 7,119 | 0.1 | % | $ | 26,245 | 0.6 | % | $ | (19,126 | ) | (72.9 | )% | |||||||||||
(1) | The 2009 consolidated statement of operations and related segment disclosures have been restated for certain errors in classification. Such reclassifications did not result in an adjustment to the Companys reported net income. See further discussion at Note 3 to the consolidated financial statements. |
Trading Revenues
Our Trading segments revenues increased by $1.7 billion, to $5.8 billion in 2010, from $4.1
billion in 2009. This increase was the result of a number of factors, including higher precious
metal prices, and increased demand for precious metal products worldwide.
Gross Profit
The Trading segments gross profit decreased by $22.9 million, to $20.3 million in 2010 from $43.2
million in 2009. This decrease was primarily a result of the contraction of the silver coin
premium in fiscal year 2010 as compared to fiscal year 2009, when silver coin premiums had greatly
expanded as a result of supply constraints and investor uncertainty in the financial markets.
Contributing further to this decline was a decrease in the sales ratio of our silver products to
our gold products, which produce lower margins.
General and Administrative Expenses
Our Trading segments general and administrative expenses increased by $0.7 million, to $3.6
million in 2010, from $2.8 million in 2009. The increase was driven by professional and legal fees.
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Salaries and Wages
Salaries and wages expenses decreased by $4.2 million, to $8.9 million in 2010, from $13.1 million
in 2009. This was due primarily to lower levels of contract performance based compensation
expenses, which decreased by $5.0 million in fiscal 2010 from 2009.
Depreciation and Amortization
Depreciation and amortization expenses decreased $0.3 million, to $0.7 million in 2010, from $1.0
million in 2009.
Collectibles Segment
The revenues in our operations by Collectibles type for the years ended June 30, 2010, and 2009 are
as follows:
For the Years Ended June 30, | ||||||||||||||||||||||||
2010 | 2009(1) | |||||||||||||||||||||||
(as restated) | ||||||||||||||||||||||||
$ | % of | |||||||||||||||||||||||
Increase/ | Increase/ | |||||||||||||||||||||||
(thousands of dollars) | $ | % to total | $ | % to total | (decrease) | (decrease) | ||||||||||||||||||
Collectibles revenues |
$ | 177,726 | 100.0 | % | $ | 164,870 | 100.0 | % | $ | 12,856 | 7.8 | % | ||||||||||||
Revenues by Collectibles Type: |
||||||||||||||||||||||||
Numismatic |
$ | 156,174 | 87.9 | % | $ | 132,070 | 80.1 | % | $ | 24,104 | 18.3 | % | ||||||||||||
Philatelic |
17,804 | 10.0 | 31,024 | 18.8 | (13,220 | ) | (42.6 | )% | ||||||||||||||||
Militaria, Wine and other |
3,748 | 2.1 | 1,776 | 1.1 | 1,972 | 111.0 | % | |||||||||||||||||
$ | 177,726 | 100.0 | % | $ | 164,870 | 100.0 | % | $ | 12,856 | 7.8 | % | |||||||||||||
(1) | The 2009 consolidated statement of operations and related segment disclosures have been restated for certain errors in classification. Such reclassifications did not result in an adjustment to the Companys reported net income. See further discussion at Note 3 to the consolidated financial statements. |
Collectibles Revenues
Our Collectibles segments revenues increased by $12.9 million, or 7.8%, to $177.7 million in 2010,
from $164.9 million in 2009. The increase in revenue was driven by an increase in our Numismatics
business by $24.1 million or 18.3% to 156.2 million in 2010, from $132.1 million in 2009.
Militaria, Wine and other had an increase in revenues of $2.0 million, or 111.0%, to $3.7 million
in 2010, from $1.8 million in 2009, of which $1.2 million related to wine auction business, which
held its first auction in November 2009. Our Philatelic revenue decreased by $13.2 million to
$17.8 million in 2010 from $31.0 million in 2009, a decrease that we had anticipated as a result of
the implementation of our plan to consolidate our U.S stamp operations.
The operating results of our Collectibles segment for the years ended June 30, 2010, and 2009 are
as follows:
$ | % | |||||||||||||||||||||||
% of | 2009(1) | % of | Increase/ | Increase/ | ||||||||||||||||||||
(thousands of dollars) | 2010 | revenue | (as restated) | revenue | (decrease) | (decrease) | ||||||||||||||||||
Collectibles revenue |
$ | 177,726 | 100.0 | % | $ | 164,870 | 100.0 | % | $ | 12,856 | 7.8 | % | ||||||||||||
Gross profit |
33,583 | 18.9 | 27,638 | 16.8 | 5,945 | 21.5 | % | |||||||||||||||||
General and administrative expenses |
18,083 | 10.2 | 19,309 | 11.7 | (1,226 | ) | (6.3 | )% | ||||||||||||||||
Salaries and wages |
14,445 | 8.0 | 14,262 | 8.7 | 183 | 1.3 | % | |||||||||||||||||
Depreciation and amortization |
1,009 | 0.6 | 802 | 0.5 | 207 | 25.8 | % | |||||||||||||||||
Impairment of goodwill and intangible assets |
2,271 | 1.3 | 860 | 0.5 | 1,411 | 164.1 | % | |||||||||||||||||
Operating loss |
$ | (2,225 | ) | (1.3 | )% | $ | (7,595 | ) | (4.6 | )% | $ | 5,370 | (70.7 | )% | ||||||||||
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(1) | The 2009 consolidated statement of operations and related segment disclosures have been restated for certain errors in classification. Such reclassifications did not result in an adjustment to the Companys reported net income. See further discussion at Note 3 to the consolidated financial statements. |
Gross Profit
Gross profit increased $6.0 million, or 21.5%, to $33.6 million in 2010, from $27.6 million in
2009. The increase was primarily attributable to the improved economy in fiscal year 2010, which
contributed to the Numismatic divisions overall increased revenue as well as the performance of
our new Spectrum Wine Auctions division, which contributed $1.1 million or 0.6% to the Companys
Collectibles segments gross profit.
General and Administrative Expenses
General and administrative expenses in our Collectibles segment decreased $1.2 million, or 6.3%, to
$18.1 million in 2010, from $19.3 million in 2009. This decrease resulted from the Companys
cost-cutting efforts in its North American Collectible operations, including the consolidation of
the North American Philatelic division.
Salaries and Wages
Salaries and wages increased $0.2 million, or 1.3%, to $14.5 million in 2010, from $14.3 million in
2009. Salaries and wages were held consistent with prior year however the slight increase was
primarily due to severance payments as a result of consolidation efforts of the worldwide
Philatelic business.
Impairment of Goodwill and Other Purchased Intangible Assets
Impairment of goodwill and intangible assets increased to $2.3 million in 2010, from $0.9 million
in 2009, due to recognition of a goodwill impairment charge of $0.4 million, a trademark impairment
charge of $1.1 million and a customer lists impairment charges of $0.8 million, in 2010, all
related to the Companys Collectibles segment.
Depreciation and Amortization
Depreciation and amortization expenses were consistent with the prior year, increasing slightly by
$0.2 million, or 25.8%, to $1.0 million in 2010, from $0.8 million in 2009.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The following details cash flows components for the years ended June 30, 2010, and 2009:
(thousands of dollars) | 2010 | 2009(1) | ||||||
Cash provided by operating activities |
$ | 12,981 | $ | 6,334 | ||||
Cash provided by (used in) investing activities |
$ | 1,171 | $ | (8,321 | ) | |||
Cash used in financing activities |
$ | (7,964 | ) | $ | (14,293 | ) |
(1) | The 2009 consolidated statement of cash flow has been restated for certain errors in classification. Such reclassifications did not result in an adjustment to the Companys overall cash. See further discussion at Note 3 to the consolidated financial statements. |
Our principal capital requirements have been to fund (i) working capital, (ii) acquisitions
and (iii) capital expenditures. Our working capital requirements fluctuate with market conditions,
our precious metal trading activities, the availability of philatelic and numismatic materials, and
the timing of our auctions.
Our operating activities provided $13.0 million in cash for fiscal 2010, versus $6.3 million in
fiscal 2009. The primary contribution of cash in fiscal 2010 was primarily due to the Trading
segments net increase in its borrowed metals position of $25.7 million offset by net purchases of
inventory of $(23.6) million, lower receivables of $1.6 million, and an increase in other non-cash
items of $8.8 million.
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In fiscal year 2009, our operating activities provided cash of $6.3 million driven by $11.1 million
in net income and further increased by the reduction of inventory by $13.9 million as well as
reduction in prepaid expenses and other assets by $2.3 million and non-cash of $5.8 million.
Offsetting the increase were reductions in accounts payable by $6.2 million, as well as an increase
in receivables and secured loans of $(20.6) million.
Our investing activities provided cash in 2010, of $1.2 million versus $(8.3) million used in
fiscal 2009, primarily as a result of cash proceeds from the sales of marketable securities of $1.0
million, maturities of short-term investments of $0.8 million, and the decrease in restricted cash
of $0.7 million, offset by the investment in property plant and equipment totaling $(0.7) million.
Our investing activities used $(8.3) million cash in 2009, were primarily a result of the
investment in property plant and equipment totaling $(1.6) million, cash paid for the acquisition
of Ponterio and Associates of $(0.6) million, cash used to purchase short term investments and
marketable securities of $(8.7) million, an increase in our restricted cash of $(0.7) million. This
was offset in part due to the sale of a property owned by the Company in New Jersey which was sold
in fiscal 2009, generating proceeds of $2.1 million and offset by the sales of marketable
securities generating proceeds of $1.2 million.
Our financing activities used cash in 2010, of $(8.0) million versus $(14.3) million used in fiscal
2009. This was due primarily to the Trading segments net decrease in its lines of credit of $(5.6)
million, distributions related to Winter Bullion Games Venture (WBGV) of $(1.3) million, and a
dividend paid of $(1.0) million to our non-controlling interest shareholder.
Our use of cash from financing activities in 2009 was $(14.3) million, primarily related to net
pay down under our lines-of-credit of $(13.0) million, and repurchased shares issued for the class
action settlement which used cash of $(1.3) million.
A-Mark has a borrowing facility (Trading Credit Facility) with a group of five financial
institutions under an inter-creditor agreement, which provides for lines-of-credit of up to $115.0
million including a facility for letters of credit up to a maximum of $115.0 million. A-Mark
routinely uses the Trading Credit Facility to purchase metals from its suppliers and for operating
cash flow purposes. Amounts under the Trading Credit Facility bear interest based on the London
Interbank Offered Rate (LIBOR) plus a margin. The 1-Month LIBOR rate was approximately 0.35% and
0.32% as of June 30, 2010, and 2009, respectively. Borrowings are due on demand and totaled $45.2
million and $52.8 million for lines-of-credit, and $4.8 million and $4.8 million for letters of
credit at June 30, 2010, and 2009, respectively. Amounts borrowed under the Trading Credit Facility
are secured by A-Marks receivables and inventories. The amounts available under the Trading Credit
Facility are formula based and totaled $65.0 million at June 30, 2010. The Trading Credit Facility
also limits the ability of A-Mark to pay dividends to SGI. The Trading Credit Facility is
cancelable by written notice from the financial institutions.
A-Marks Trading Credit Facility has certain restrictive financial covenants which require A-Mark
and SGI to maintain a minimum tangible net worth, as defined, of $20.0 million and $50.0 million,
respectively. A-Marks and SGIs tangible net worth at June 30, 2010, were $25.7 million and $70.0
million, respectively. The Companys ability to pay dividends, if it were to elect to do so, could
be limited as a result of these restrictions.
In May 2010, the Company and its three wholly-owned numismatic subsidiaries, Spectrum Numismatics
International, Inc. (SNI), Bowers and Merena Auctions, LLC (Bowers), and Teletrade, Inc.
(Teletrade), entered into a borrowing facility with a lender in May 2010, providing for a
line-of-credit (the Collectibles Credit Facility) up to a maximum of $7.5 million. Amounts
outstanding under the Collectibles Credit Facility, $2.0 million at June 30, 2010, are secured by
the assets of SNI, Bowers, and Teletrade, and are further guaranteed by the Company. The Companys
obligations under the guaranty are secured by the pledge of SNI shares owned by it. The
Collectibles Credit Facility is repayable on demand and interest on outstanding amounts accrue at
the lenders base rate plus a per annum basis point. Separately, the Companys precious metals
trading company, has a line of credit with this lender totaling $15.0 million, which is a component
of A-Marks Trading Credit Facility. Total borrowing capacity between SNI and A-Mark cannot exceed
$17.5 million with respect to this lender as of June 30, 2010 the total amount borrowed was $7.7
million, $2.0 million by SNI and $5.7 million by A-Mark. Amounts available for borrowing under
this Collectibles Credit Facility as of June 30, 2010 was $5.5 million
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A-Mark also borrows metals from several of its suppliers under short-term agreements bearing
interest at a designated rate. Amounts under these agreements are due at maturity and require
repayment either in the form of metals borrowed or cash. A-Mark had borrowed metals included in
inventories with market values totaling $40.8 million and $15.1 million at June 30, 2010, and 2009,
respectively. Certain of these metals are secured by letters of credit issued under A-Marks
Trading Credit Facility, which totaled $4.8 million and $4.8 million at June 30, 2010, and 2009,
respectively.
The Company is currently not traded on a national exchange and is delinquent in certain historical
filings with the Securities and Exchange Commission. As a result, the Company may be limited in its
ability to issue equity or debt instruments. There can be no assurance the Company will be listed
on a national exchange in future periods.
Historically, for our Collectibles we have relied on funds provided by operating activities, equity
offerings, short and long-term borrowings and seller-financed notes to meet our liquidity needs. We
invest our excess cash predominantly in money market funds. For our Trading segment we rely on
funds provided by operating activities and our borrowing arrangements with our bank group.
We believe that our current cash and cash equivalents, marketable securities, Trading and
Collectibles Credit Facilities, and cash we anticipate to generate from operating activities will
provide us with sufficient liquidity to satisfy our working capital needs, capital expenditures,
investment requirements and commitments through at least the next twelve months. Certain of the
Companys foreign subsidiaries have nominal statutory restricted capital requirements. The
Companys liquidity could be impacted by the potential adverse outcomes, if any, relating to its
open contingent matters, including, an ongoing Internal Revenue Service examination, a foreign tax
inspection and certain litigation as described in Item 3: Legal Proceedings of this document.
As of June 30, 2010, we had cash and cash equivalents and marketable securities of $28.8 million,
compared to $26.4 million as of June 30, 2009. The Companys working capital increased by $8.0
million, or 12.0%, to $78.4 million in 2010, from $70.4 million in fiscal 2009.
In June 2010, the Companys majority-owned subsidiary, Spectrum PMI, declared a $12.5 million
dividend. This resulted in payments of $10.0 million to the Company and $2.5 million to Afinsa in
July 2010.
In July 2009, the Companys majority-owned subsidiary, Spectrum PMI, paid a $5.0 million dividend.
This resulted in a $4.0 million payment to the Company and a $1.0 million payment to Auctentia.
CONTRACTURAL OBLIGATIONS, CONTINGENT LIABILITIES, AND COMMITMENTS
As of June 30, 2010, we have known cash commitments over the next several years as follows:
Payments due by period | ||||||||||||||||||||||||
5 years and | ||||||||||||||||||||||||
(thousands of dollars) | Total | 1 year | 2 years | 3 years | 4 years | thereafter | ||||||||||||||||||
Borrowings under
lines-of-credit
Collectibles |
$ | 2,000 | $ | 2,000 | $ | | $ | | $ | | $ | | ||||||||||||
Borrowings under
lines-of-credit Trading |
$ | 45,200 | $ | 45,200 | $ | | $ | | $ | | $ | | ||||||||||||
Operating lease obligations |
1,755 | 1,168 | 362 | 224 | | | ||||||||||||||||||
Total |
$ | 48,955 | $ | 48,368 | $ | 362 | $ | 224 | $ | | $ | | ||||||||||||
On April 9, 2008, in connection with a Joint Venture Limited Liability Company Agreement (the JV
Agreement) with a third party marketing company, A-Mark entered into a series of agreements with
the Royal Canadian Mint to purchase a minimum amount of bullion and commemorative coins in exchange
for certain exclusive distribution rights. On July 21, 2009, A-Mark signed an amendment with the
Royal Canadian Mint to reduce its minimum purchase commitment of Olympic Numismatic Coin Products.
Under the terms of this agreement, as amended, A-Mark was required to purchase 20,750 One Ounce
Gold Bullion Coins and 150,000 One Ounce Silver Bullion. A-Mark was also required to purchase $7.0
million (Canadian Dollars) in commemorative coins. A-Mark met these requirements by February 2010
and as a result in May 2010,
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the parties agreed to a partial distribution, whereby all
remaining funds at the time, except for $10,000, were distributed to the parties.
The Company manages the value of certain specific assets and liabilities of its trading business,
including trading inventories in the accompanying consolidated financial statements included
elsewhere in this document), by employing a variety of strategies. These strategies include the
management of exposure to changes in the market values of the Companys trading inventories through
the purchases and sales of a variety of derivative products such as metals forwards and futures.
The Companys trading inventories, and purchase and sale transactions consist primarily of precious
metals bearing products. The value of these assets and liabilities are linked to the prevailing
price of the underlying precious metals. The Companys precious metals inventories are subject to
market value changes, created by changes in the underlying commodity markets. Inventories purchased
or borrowed by the Company are subject to price changes. Inventories borrowed are considered
natural hedges, since changes in value of the metals held are offset by the obligation to return
the metals to the suppliers. Open purchase and sale commitments are subject to changes in value between the dates the purchases
or sale prices are fixed (the trade date) and the date the metals are received or delivered (the
settlement date). The Company seeks to minimize the effect of price changes of the underlying
commodities through the use of forwards and futures contracts.
The Companys policy is to substantially hedge its inventory position, net of open purchase and
sales commitments, that is subject to price risk The Company regularly enters into metals commodity
forwards and futures contracts with major financial institutions to hedge price changes that would
cause changes in the value of its physical metals positions and purchase commitments and sale
commitments. The Company has access to all of the precious metals markets, allowing it to place
hedges. However, the Company also maintains relationships with major market makers in every major
precious metals dealing center.
The Companys management sets credit and position risk limits. These limits include gross position
limits for counterparties engaged in purchase and sales transactions with the Company. They also
include collateral limits for different types of purchase and sale transactions that counter
parties may engage in from time to time.
Due to the nature of the Companys global hedging strategy, the Company is not using hedge
accounting as defined in the Derivatives and Hedging topic of the FASBs (Financial Accounting
Standards Board) Accounting Standards Codification (ASC). Gains or losses resulting from the
Companys futures and forwards contracts are reported as unrealized gains or losses on commodity
contracts with the related unrealized amounts due from or to counterparties reflected as derivative
assets or liabilities (see Note 6). Gains or losses resulting from the termination of hedge
contracts are reported as realized gains or losses on commodities contracts. Net (gains)/losses on
derivative instruments in the consolidated statements of operations of $(18.5) million and $2.6
million for the years ended June 30, 2010, and 2009, respectively, includes both realized and
unrealized amounts.
At June 30, 2010, and 2009, the Company had outstanding purchase and sale commitments arising in
the normal course of business totaling $153,215,000 and $131,844,000, and $(56,903,000) and
$(38,370,000), respectively; purchase and sale commitments related to open forwards contracts
totaling $49,985,000 and $27,731,000; and purchase and sale commitments relating to open futures
contracts totaling $105,769,000 and $132,651,000, respectively. The Company uses forwards and
futures contracts to protect its inventories from market exposure.
The contract amounts of these forwards and futures contracts and the open purchases and sales
orders are not reflected in the accompanying consolidated balance sheets. The differences between
the market prices of the underlying metals or contracts
and the trade amounts are recorded at fair value. The Companys open purchases and sales
commitments generally settle within two business days, and for those commitments that do not have
stated settlement dates, the Company has the right to settle the positions upon demand. Futures and
forwards contracts open at June 30, 2010, are scheduled to settle within 90 days.
The Company is exposed to the risk of failure of the counter parties to its derivative contracts.
Significant judgment is applied by the Company when evaluating the fair value implications. The
Company regularly reviews the creditworthiness of
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its major counterparties and monitors its
exposure to concentrations. At June 30, 2010, the Company believes its risk of counterparty default
is mitigated as a result of such evaluation and the short-term duration of these arrangements.
CRITICAL ACCOUNTING ESTIMATES
Our consolidated financial statements are prepared in accordance with U.S. GAAP. In connection with
the preparation of our financial statements, we are required to make assumptions and estimates
about future events, and apply judgments that affect the reported amounts of assets, liabilities,
revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on
historical experience, current trends and other factors that management believes to be relevant at
the time our consolidated financial statements are prepared. On a regular basis, management reviews
the accounting policies, assumptions, estimates and judgments to ensure that our consolidated
financial statements are presented fairly and in accordance with GAAP. However, because future
events and their effects cannot be determined with certainty, actual results could differ from our
assumptions and estimates, and such differences could be material.
Our significant accounting policies are discussed in Notes 1 and 2, Basis of Presentation and
Summary of Significant Accounting Policies, respectively, of the Notes to Consolidated Financial
Statements that are included in Item 8, Consolidated Financial Statements and Supplementary Data,
of this Annual Report on Form 10-K. Management believes that the following accounting policies are
the most critical to aid in fully understanding and evaluating our reported financial results, and
they require managements most difficult, subjective or complex judgments, resulting from the need
to make estimates about the effect of matters that are inherently uncertain. Management has
reviewed these critical accounting estimates and related disclosures with the Audit Committee of
our Board of Directors.
Revenue Recognition
Trading Segment. The Company records sales of precious metals upon shipment and transfer of title
(see further discussion below). The Company records revenues from its metal assaying and melting
services after the related services are completed. Commodity futures and forwards contract
transactions are recorded at fair value on the trade dates. Open futures and forwards contracts are
reflected in Receivables and Secured Loans, Net Trading Operations in the consolidated balance
sheets as the difference between the original contract values and the market values; or at fair
value. The change in unrealized gains (losses) on open contracts from one period to the next is
reflected in net (gains) losses on derivative instruments, which is a component of Cost of Precious
Metals Sold in the consolidated statements of operations. Financing revenue is recorded over the
terms of the related receivable and consists of interest and related fees.
The Company accounts for its metals and sales contracts using settlement date accounting. Pursuant
to such accounting, the Company recognizes the sales or purchases of the metals at their settlement
dates. During the period between the trade and settlement dates, the Company has essentially
entered into forwards contracts that meet the definition of derivatives in accordance with ASC 815
Derivatives and Hedging. The Company records the derivatives at the trade date with corresponding
unrealized gains (losses) which are reflected in the Cost of Precious Metals Sold in the
consolidated statements of operations. The Company adjusts the derivatives to fair values on a
daily basis until the transactions are settled. Sales which are physically settled are recognized
in gross on the consolidated statements of operations.
Collectibles Segment. The Companys collectibles segment derives revenues from two primary sources:
auctions and private treaty sales.
Auction Sales. In its role as auctioneer, the Company generally functions as an agent accepting
property on consignment from its selling clients. The Company sells property as agent of the
consignor, billing the buyer for property purchased,
receiving payment from the buyer and remitting to the consignor the consignors portion of the
buyers payment after deducting the Companys commissions, expenses and applicable taxes. The
Companys commissions include those earned from the buyer (buyers premium revenue) and those
earned from the consignor (sellers commission revenue), both of which are calculated as a
percentage of the value of the final bid at auction (the hammer price) of property sold at
auction. The Company recognizes revenues from the buyers premium and sellers commission upon
delivery of the property sold at auction, which generally occurs upon cash receipt..
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The Company also sells its own inventory at auction. Revenue from the sales of owned inventory at
auction is recognized upon receipt of cash and is recorded at the hammer price on a gross basis,
with corresponding product cost recorded as a direct cost of sale. In addition, the Company
recognizes a commission on the hammer price, which is paid by the buyer. Sales returns have not
been material.
The Company does not provide any guarantee with respect to the authenticity of property offered for
sale at its live auctions; however it does authenticate the materials sold via Internet auctions.
All property presented for sale at live auction is sold as genuine and as described by the Company
in its auction catalogues. In the event that auctioned property is deemed to be other than
authentic (in the opinion of a competent authority mutually acceptable to the buyer and the
Company), the Company refunds the purchase price if returned within a specified time period.
Historically, returns have not been material and the Company generally sells large collections on
an as is basis. Critical estimates related to revenue recognition are not considered significant
because the Company recognizes revenue from auction sales upon delivery of the property, , which
generally occurs upon cash receipt.
Private Treaty Sales. The Company engages in private treaty sales of both consigned property and
sales of owned inventory to third parties (merchant/dealer relationships and direct to consumer
sales). Private treaty sales of consigned property occur when an owner of property arranges with
the Company to sell such consigned property to a third party at a privately negotiated price. In
such a transaction, the owner may set selling price parameters for the Company or the Company may
solicit selling prices for the owner, and the owner may reserve the right to reject any selling
price. The Company does not guarantee a fixed price to the owner, which would be payable regardless
of the actual sales price ultimately received. The Company recognizes private treaty sales of
consigned property at an amount equal to a percentage of the sales price. Such amounts of revenue
are recorded on a net basis as commissions earned and are recognized upon delivery of the property
sold, which generally occurs upon cash receipt. Critical estimates related to revenue recognition
are not considered significant because the Company recognizes private treaty sales of owned
property upon receipt of cash, which generally occurs upon delivery of the property.
Stock Based Compensation
SGI has certain stock option plans that provide for the issuance of options and restricted stock
grants to key employees and directors to purchase shares of common stock of the Company. See Note
16 to the Notes to Consolidated Financial Statements.
Effective, July 1, 2005, the Company accounts for stock-based compensation under ASC 718
Compensation-Stock Compensation and ASC 505-50 Equity-Based Payments to Non-Employees. This
standard uses the modified prospective method, which requires measurement of compensation cost for
all stock awards at fair value on date of grant and recognition of compensation over the service
period for awards expected to vest. Further, under the modified prospective method, the fair value
associated with the unvested portion of the prior grants remaining at the date of adoption is
recorded to stock compensation expense over the future requisite service period. During fiscal
2009, the Company granted no stock options; however, the Company granted restricted stock. The fair
value of restricted stock grants is based on quoted market price at the date of grant and is
expensed over the vesting period net off estimated forfeitures. All of the options granted are
valued using the Black-Scholes valuation model, which is consistent with the Companys valuation
techniques previously utilized for options in footnote disclosures required under ASC 718. The
Black-Scholes valuation model requires the input of subjective assumptions including estimating the
length of time employees will retain their vested stock options before exercising them (the
expected term), the estimated volatility of the common stock price over the expected term, and
the number of options that will ultimately not complete their vesting requirements (forfeitures).
Changes in these subjective assumptions can materially affect the estimate of fair value of
stock-based compensation and, consequently, the related
amount recognized as an expense on the consolidated statements of operations. As required under the
accounting rules, the Company reviews its valuation assumptions at each grant date and, as a
result, is likely to change its valuation assumptions used to value employee stock-based awards
granted in future periods. The values derived from using Black-Scholes model are recognized as
expense over the vesting period, net of estimated forfeitures. The estimation of stock awards that
will ultimately vest requires significant judgment. Actual results, and future changes in
estimates, may materially differ from the Companys current estimates.
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Income Taxes
As part of the process of preparing its consolidated financial statements, the Company is required
to estimate its provision for income taxes in each of the tax jurisdictions in which it conducts
business, in accordance with the ASC 740 Income Taxes. The Company computes its annual tax rate
based on the statutory tax rates and tax planning opportunities available to it in the various
jurisdictions in which it earns income. Significant judgment is required in determining the
Companys annual tax rate and in evaluating uncertainty in its tax positions. The Company
recognizes a benefit for tax positions that it believes will more likely than not be sustained upon
examination. The amount of benefit recognized is the largest amount of benefit that the Company
believes has more than a 50% probability of being realized upon settlement. The Company regularly
monitors its tax positions and adjusts the amount of recognized tax benefit based on its evaluation
of information that has become available since the end of its last financial reporting period. The
annual tax rate includes the impact of these changes in recognized tax benefits. When adjusting the
amount of recognized tax benefits, the Company does not consider information that has become
available after the balance sheet date, but does disclose the effects of new information whenever
those effects would be material to the Companys consolidated financial statements. The difference
between the amount of benefit taken or expected to be taken in a tax return and the amount of
benefit recognized for financial reporting represents unrecognized tax benefits. These unrecognized
tax benefits are presented in the consolidated balance sheet principally within income taxes
payable.
The Company records valuation allowances to reduce deferred tax assets to the amount that is more
likely than not to be realized. Significant judgment is applied when assessing the need for
valuation allowances. Areas of estimation include the Companys consideration of future taxable
income and ongoing prudent and feasible tax planning strategies. Should a change in circumstances
lead to a change in judgment about the utilization of deferred tax assets in future years, the
Company would adjust related valuation allowances in the period that the change in circumstances
occurs, along with a corresponding increase or charge to income. Changes in recognized tax benefits
and changes in valuation allowances could be material to the Companys results of operations for
any period, but is not expected to be material to the Companys consolidated financial position.
The Company adopted the provisions for Accounting for Uncertainty in Income Taxes under ASC 740
Income Taxes. This interpretation clarifies the accounting for uncertainty in income taxes
recognized in an enterprises financial statements in accordance with ASC 740, and prescribes a
recognition threshold and measurement criteria for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. The interpretation
also provides guidance on de-recognition, classification, interest, and penalties, accounting in
interim periods, disclosure, and transition. Significant judgment is required to identify all
pertinent facts and circumstance and to estimate potential outcomes of investigations by tax
authorities. We believe we have adequately provided for any uncertain tax positions in accordance
with ASC 740. However, future results may include favorable or unfavorable adjustments to our
estimated tax liabilities in the period assessments are made or resolved or when statutes of
limitation on potential assessments expire.
Fair Value Measurements
The Company carries a portion of its assets and liabilities at fair value. The majority of such
assets and liabilities are carried at fair value on a recurring basis. In addition, certain assets
are carried at fair value on a nonrecurring basis, including goodwill and purchased intangible
assets accounted for at fair value that are only subject to fair value adjustments under certain
circumstances.
We adopted ASC 820 Fair Value Measurements and Disclosures. This standard established a three-level
valuation hierarchy for disclosure of fair value measurements. An instruments categorization
within the hierarchy is based upon the lowest level
of input that is significant to the fair value measurement. Therefore, for instruments classified
in levels 1 and 2 of the hierarchy, where inputs are principally based on observable market data,
there is less judgment applied in arriving at a fair value measurement. For instruments classified
within level 3 of the hierarchy, judgments are more significant.
For instruments classified within level 3 of the hierarchy, judgments may be significant. In
arriving at an estimate of fair value for an instrument within level 3, management must first
determine the appropriate model to use. Second, due to the lack of significant inputs, management
must assess all relevant empirical data in deriving valuation inputs including but not
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limited to
projected future cash flows, discount rates, royalty rates, interest rates, customer attrition
rates and foreign exchange rates. Imprecision in estimating unobservable market inputs can impact
the carrying amount of assets in the balance sheet. Furthermore, while the Company believes its
valuation methods are appropriate and consistent with those of other market participants, the use
of different methodologies or assumptions to determine the fair value of certain assets could
result in a different estimate of fair value at the reporting date.
Financial Derivatives
Futures contracts, forward contracts and open purchase and sales commitments are valued at their
intrinsic values, based on the difference between the quoted market price and the contractual
price. The Company is exposed to the risk of failure of the counter parties to its derivative
contracts. Significant judgment is applied by the Company when evaluating the fair value
implications, if any, resulting from this risk. The Company regularly reviews the creditworthiness
of its major counterparties and monitors its exposure to concentrations. At June 30, 2010, the
Company believes its risk of counterparty default is mitigated as a result of such evaluation and
the short-term duration of these arrangements.
Goodwill and Other Purchased Intangible Assets
The FASB issued ASC 805 Business Combinations, and ASC 350 Intangibles Goodwill and Others, both
of which were effective for fiscal years beginning after December 15, 2001. Under these rules,
goodwill is no longer amortized but is subject to annual impairment tests in accordance with ASC
350. Other identifiable intangible assets continue to be amortized over their useful lives. The
Company regularly reviews business conditions and other relevant factors to determine whether
impairment conditions exist and performs its annual impairment test at year-end each year. The
Company utilizes the discounted cash flow method to determine the fair value of each of its
reporting units, which include the individual operating entities of the trading and collectible
reporting segments. If the carrying amount of a reporting unit exceeds its fair value, the amount
of the impairment loss must be measured. The impairment loss would be calculated by comparing the
implied fair value of goodwill to its carrying amount. In calculating the implied fair value of the
reporting unit goodwill, the present value of the reporting units expected future cash flows is
allocated to all of the other assets and liabilities of that unit based on their fair values. The
excess of the present value of the reporting units expected future cash flows over the amount
assigned to its other assets and liabilities is the implied fair value of goodwill. An impairment
loss would be recognized when the carrying amount of goodwill exceeds its implied fair value.
Estimates critical to these calculations include projected future cash flows, discount rates,
royalty rates, customer attrition rates and foreign exchange rates. Imprecision in estimating
unobservable market inputs can impact the carrying amount of assets in the balance sheet.
Furthermore, while we believe our valuation methods are appropriate, the use of different
methodologies or assumptions to determine the fair value of certain assets could result in a
different estimate of fair value at the reporting date. Refer to Note 18 for a further
discussion of the methodology and inputs used to arrive at our impairment to goodwill and other
purchased intangible assets.
Long-Lived Assets
Long-lived assets, other than goodwill, are evaluated for impairment when events or changes in
business circumstances indicate that the carrying amount of the assets may not be fully
recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows
expected to result from the use of these assets and its eventual disposition is less than its
carrying amount. Intangible assets are primarily evaluated on an annual basis, generally in
conjunction with the Companys evaluation of goodwill balances. Impairment, if any, is assessed by
using internally developed discounted cash flows estimates, and independent appraisals to determine
fair value. The determination of whether or not long-lived assets have become impaired involves a
significant level of judgment in the assumptions underlying the approach used to determine the
estimated future cash flows expected to result from the use of those assets. Changes in the
Companys strategy,
assumptions and/or market conditions could significantly impact these judgments and require
adjustments to recorded amounts of long-lived assets.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2007, the FASB issued ASC 805 Business Combinations. This standard is effective for
business combinations for which the acquisition date is on, or after,
the beginning of the first
annual reporting period beginning on, or after,
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December 15, 2008. This standard requires the
acquiring entity in a business combination to recognize all (and only) the assets acquired and
liabilities assumed in the transaction; establishes the acquisition-date fair value as the
measurement objective for all assets and liabilities assumed; and requires the acquirer to disclose
to investors and other users all of the information they need to evaluate and understand the nature
and financial effect of the business combination. This standard was adopted on July 1, 2009. The
adoption did not have a material impact on the Companys consolidated financial statements.
In December 2007, the FASB issued ASC 810 Consolidation. This standard requires that
non-controlling (minority) interests be reported as a component of equity, that net income
attributable to the parent and to the non-controlling interest be separately identified in the
income statement, that changes in a parents ownership interest while the parent retains its
controlling interest be accounted for as equity transactions, and that any retained non-controlling
equity investment upon the deconsolidation of a subsidiary be initially measured at fair value.
This standard is an amendment of Accounting Research Bulletin No. 51, Consolidated Financial
Statements, and related interpretations. This standard was adopted on July 1, 2009. The adoption
resulted in a change in the reporting presentation of minority interest, now classified as
non-controlling interest, in the consolidated balance sheet and consolidated statement of
operations, stockholders equity and cash flows. The 2009 consolidated financial statements have
been restated to reflect this change in presentation.
In March 2008, the FASB issued ASC 815 Derivatives and Hedging. This standard expanded the
disclosure requirements about an entitys derivative instruments and hedging activities. The
disclosure provisions apply to all entities with derivative instruments originally subject to ASC
815, and its related interpretations. The provisions also apply to related hedged items, bifurcated
derivatives, and non-derivative instruments that are designated and qualify as hedging instruments.
Entities with instruments subject to ASC 815 must provide more robust qualitative disclosures and
expanded quantitative disclosures. Such disclosures, generally will need to be presented for every
annual and interim reporting period. This standard was adopted on July 1, 2009. The adoption of
this statement did not have a material impact on the Companys consolidated financial statements.
In May 2009, the FASB issued ASC 855 Subsequent Events. This standard sets forth: (i) the period
after the balance sheet date during which management of a reporting entity should evaluate events
or transactions that may occur for potential recognition or disclosure in the financial statements;
(ii) the circumstances under which an entity should recognize events or transactions occurring
after the balance sheet date in its financial statements; and (iii) the disclosures that an entity
should make about events or transactions that occurred after the balance sheet date. This standard
is effective for interim and annual periods ending after June 15, 2009. The Company adopted this
standard at June 30, 2009. This standard did not impact the consolidated financial results other
than requiring additional disclosures. See Note 19 of the Notes to Consolidated Financial
Statements for subsequent events impacting the Company.
In June 2009, the FASB issued ASC 860 Transfers and Servicing. This standard removes the exemption
from consolidation for Qualifying Special Purpose Entities (QSPEs), and also limits the
circumstances in which a financial asset, or portion of a financial asset, should be derecognized
when the transferor has not transferred the entire original financial asset to an entity that is
not consolidated with the transferor in the financial statements being presented and/or when the
transferor has continuing involvement with the transferred financial asset. The Company adopted
this standard for interim and annual reporting periods beginning on July 1, 2009. The adoption of
this standard did not have any material impact on the consolidated financial statements.
In June 2009, the FASB issued ASC 810 Consolidation. This standard amends FASB Interpretation 46(R)
to eliminate the quantitative approach previously required for determining the primary beneficiary
of a variable interest entity and requires ongoing qualitative reassessments of whether an
enterprise is the primary beneficiary of a variable interest entity. This
standard will become effective for the Company on July 1, 2010. The Company does not expect the
adoption of this standard to have a material impact on the consolidated financial statements.
In October 2009, the FASB updated accounting standards for Multiple-Deliverable Revenue
Arrangements in ASC 605 Revenue Recognition. This update addresses the unit of accounting for
arrangements involving multiple deliverables and how to allocate arrangement consideration to one
or more units of
accounting. It eliminates the criteria that objective and reliable evidence of the
fair value of any undelivered items must exist for the delivered items to be considered separate
units of
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accounting. This standard will become effective for the Company on July 1, 2010. The
Company is evaluating the potential impact of adopting this standard on the consolidated financial
statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable for a smaller reporting company.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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SPECTRUM GROUP INTERNATIONAL, INC.
FINANCIAL STATEMENTS
INDEX
FINANCIAL STATEMENTS
INDEX
Page | ||||
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F-4 | ||||
F-5 | ||||
F-6 | ||||
F-7 | ||||
F-8 |
F-1
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Spectrum Group International, Inc.
Spectrum Group International, Inc.
We have audited the accompanying consolidated balance sheets of Spectrum Group International, Inc.
(the Company) as of June 30, 2010 and 2009, and the related consolidated statements of
operations, stockholders equity, and cash flows for each of the years then ended. These
consolidated financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial statements based on our
audits. We did not audit the combined financial statements of the European Operations of Spectrum
Group International, Inc. (the European Operations). Such European Operations comprised
approximately $15,673,000 or 6.6% and $19,791,000 or 9.1% of total assets as of June 30, 2010 and
2009, respectively, and $9,232,000 or 0.2% and $9,680,000 or 0.2% of total revenues and $7,397,000
or 13.7% and $5,863,000 or 8.3% of gross profit for the years then ended, respectively. The
combined financial statements of the European Operations were audited by other auditors, whose
report has been furnished to us, and our opinion, insofar as it relates to the amounts included for
the European Operations, is based solely on the report of the other auditors.
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 consolidated financial statements 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
Companys 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 consolidated financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the consolidated
financial statements. We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the consolidated
financial statements referred to above present fairly, in all material respects, the consolidated
financial position of the Spectrum Group International, Inc. as of June 30, 2010 and 2009, and the
results of its operations and its cash flows for each of the years then ended, in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 2 to the accompanying consolidated financial statements, effective July 1,
2009, the Company changed the manner in which it accounts for non-controlling interest and business
combinations. The 2009 consolidated financial statements have been restated to reflect this change
in presentation.
As further discussed in Note 3 to the accompanying consolidated financial statements, the Company
has restated its 2009 consolidated statements of operations and cash flows to correct for certain
errors in classification.
/s/ BDO USA, LLP
Costa Mesa, California
September 16, 2010
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Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholder
Spectrum Group International, Inc.
Spectrum Group International, Inc.
We have audited the accompanying combined balance sheets of the European Operations of Spectrum
Group International, Inc. (as defined in Footnote 1, the Companies) as of June 30, 2010 and 2009, and
the related combined statements of operations, stockholders equity, and cash flows for the
years then ended. These combined financial statements are the responsibility of the Companies
management. Our responsibility is to express an opinion on these combined financial statements
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 combined financial statements are free of material
misstatement. The Companies are 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
Companies 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 combined financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall combined financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present fairly, in all material
respects, the combined financial position of the Companies included in the European Operations of
Spectrum Group International, Inc. as of June 30, 2010 and 2009, and the results of their
operations and their cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America.
/s/ Fabregas/Mercade
Barcelona, Spain
September 16, 2010
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SPECTRUM GROUP INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
June 30, | June 30, | |||||||
2010 | 2009 | |||||||
(as restated) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 22,320 | $ | 17,545 | ||||
Restricted cash |
| 650 | ||||||
Short-term investments and marketable securities |
6,433 | 8,175 | ||||||
Receivables and secured loans, net trading operations |
42,901 | 46,214 | ||||||
Accounts receivable and consignor advances, net collectibles operations |
6,127 | 7,006 | ||||||
Inventories, |
138,077 | 115,654 | ||||||
Prepaid expenses and other assets |
1,333 | 2,028 | ||||||
Total current assets |
217,191 | 197,272 | ||||||
Property and equipment, net |
2,277 | 2,668 | ||||||
Goodwill |
5,942 | 5,960 | ||||||
Other purchased intangibles, net |
5,948 | 8,301 | ||||||
Other assets |
259 | 126 | ||||||
Income taxes receivable |
4,974 | 3,424 | ||||||
Deferred tax assets |
144 | 398 | ||||||
Total assets |
$ | 236,735 | $ | 218,149 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable and consignor payables |
$ | 30,397 | $ | 20,788 | ||||
Liabilities on borrowed metals |
40,841 | 15,100 | ||||||
Accrued expenses, accrued compensation and other current liabilities |
13,411 | 23,161 | ||||||
Accrued legal settlement |
2,697 | 6,556 | ||||||
Income taxes payable |
825 | 6,582 | ||||||
Lines-of-credit |
47,200 | 52,750 | ||||||
Deferred tax liability |
934 | 1,920 | ||||||
Dividend
payable to Auctentia |
2,500 | | ||||||
Total current liabilities |
138,805 | 126,857 | ||||||
Deferred and other long term tax liabilities |
7,794 | 189 | ||||||
Total liabilities |
146,599 | 127,046 | ||||||
Commitments, contingencies and subsequent events |
||||||||
Stockholders equity: |
||||||||
Spectrum Group International, Inc. stockholders equity: |
||||||||
Preferred stock, $.01 par value, authorized 10,000 shares; issued and outstanding: none |
| | ||||||
Common stock, $.01 par value, authorized 40,000 shares; issued and outstanding: 31,893
and 28,309
at June 30, 2010, and 2009, respectively |
319 | 283 | ||||||
Additional paid-in capital |
241,615 | 233,385 | ||||||
Accumulated other comprehensive income |
3,529 | 8,419 | ||||||
Accumulated deficit |
(162,350 | ) | (161,298 | ) | ||||
Total Spectrum Group International, Inc. stockholders equity |
83,113 | 80,789 | ||||||
Non-controlling interests |
7,023 | 10,314 | ||||||
Total stockholders equity |
90,136 | 91,103 | ||||||
Total liabilities and stockholders equity |
$ | 236,735 | $ | 218,149 | ||||
See reports of Independent Registered Public Accounting Firms and accompanying notes to consolidated financial statements.
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SPECTRUM GROUP INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Year Ended June 30, | Year Ended June 30, | |||||||
2010 | 2009 | |||||||
(as restated) | ||||||||
Revenues: |
||||||||
Sales of precious metals |
$ | 5,834,712 | $ | 4,121,159 | ||||
Collectibles revenues: |
||||||||
Sales of inventories |
154,943 | 144,320 | ||||||
Commissions earned |
22,783 | 20,550 | ||||||
Total revenue |
6,012,438 | 4,286,029 | ||||||
Cost of sales: |
||||||||
Cost of precious metals sold |
5,814,456 | 4,077,997 | ||||||
Cost of collectibles sold |
144,143 | 137,232 | ||||||
Total cost of sales |
5,958,599 | 4,215,229 | ||||||
Gross profit |
53,839 | 70,800 | ||||||
Operating expenses: |
||||||||
General and administrative |
28,982 | 29,963 | ||||||
Salaries and wages |
26,467 | 29,814 | ||||||
Depreciation and amortization |
1,699 | 1,807 | ||||||
Goodwill and intangible asset impairments |
2,271 | 860 | ||||||
Legal settlement |
2,697 | | ||||||
Total operating expenses |
62,116 | 62,444 | ||||||
Operating (loss) income |
(8,277 | ) | 8,356 | |||||
Interest and other income (expense): |
||||||||
Interest income |
6,390 | 5,614 | ||||||
Interest expense |
(2,267 | ) | (2,373 | ) | ||||
Other income (expense), net |
648 | (393 | ) | |||||
Unrealized gains on foreign exchange |
3,304 | 3,068 | ||||||
Total interest and other income (expense), net |
8,075 | 5,916 | ||||||
(Loss) Income before income taxes |
(202 | ) | 14,272 | |||||
Income tax (provision)benefit |
640 | (3,137 | ) | |||||
Net income |
438 | 11,135 | ||||||
Less: Net income attributable to the
non-controlling interests |
(1,490 | ) | (3,999 | ) | ||||
Net (loss) income attributable to Spectrum
Group International, Inc. |
$ | (1,052 | ) | $ | 7,136 | |||
(Loss)Earnings per share attributable to
Spectrum Group International, Inc. |
||||||||
Basic |
$ | (0.03 | ) | $ | 0.23 | |||
Diluted |
$ | (0.03 | ) | $ | 0.23 | |||
Weighted average shares outstanding |
||||||||
Basic |
31,939 | 30,934 | ||||||
Diluted |
31,939 | 31,649 | ||||||
See reports of Independent Registered Public Accounting Firms and accompanying notes to consolidated financial statements.
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SPECTRUM GROUP INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(in thousands)
Total | ||||||||||||||||||||||||||||||||
Spectrum | ||||||||||||||||||||||||||||||||
Group | ||||||||||||||||||||||||||||||||
Accumulated | International, | |||||||||||||||||||||||||||||||
Common | Common | Additional | Other | Non- | Inc. | |||||||||||||||||||||||||||
Stock | Stock | Paid-in | Comprehensive | Accumulated | controlling | Stockholders | Comprehensive | |||||||||||||||||||||||||
in Shares | in $ | Capital | Income (Loss) | Deficit | Interests | Equity | Income/(Loss) | |||||||||||||||||||||||||
Balance, June 30, 2008 (restated) |
28,209 | $ | 282 | $ | 232,123 | $ | 13,141 | $ | (168,434 | ) | $ | 6,315 | $ | 83,427 | $ | | ||||||||||||||||
Net income |
| | | | 7,136 | 3,999 | 11,135 | 11,135 | ||||||||||||||||||||||||
Less: Total comprehensive income attributable to
non-controlling interest |
| | | | | | | (3,999 | ) | |||||||||||||||||||||||
Unrealized gain on marketable securities, net of tax |
| | | 313 | | | 313 | 313 | ||||||||||||||||||||||||
Change in cumulative foreign currency translation
adjustment |
| | | (5,035 | ) | | | (5,035 | ) | (5,035 | ) | |||||||||||||||||||||
Comprehensive income |
$ | 2,414 | ||||||||||||||||||||||||||||||
Issuance of stock for class action settlement |
772 | 8 | 1,437 | | | | 1,445 | |||||||||||||||||||||||||
Repurchase of stock issued for class action settlement |
(772 | ) | (8 | ) | (1,190 | ) | | | | (1,198 | ) | |||||||||||||||||||||
Taxes paid in exchange for cancellation of restricted stock |
| | (98 | ) | | | | (98 | ) | |||||||||||||||||||||||
Stock based compensation |
| | 1,114 | | | | 1,114 | |||||||||||||||||||||||||
Issuance of common stock for restricted stock grants |
100 | 1 | (1 | ) | | | | | ||||||||||||||||||||||||
Balance, June 30, 2009 (restated) |
28,309 | 283 | 233,385 | 8,419 | (161,298 | ) | 10,314 | 91,103 | ||||||||||||||||||||||||
Net (loss) income |
| | | | (1,052 | ) | 1,490 | 438 | 438 | |||||||||||||||||||||||
Less: Total comprehensive income attributable to
non-controlling interest |
| | | | | | | (1,490 | ) | |||||||||||||||||||||||
Unrealized loss on marketable securities, net of tax |
| | | (173 | ) | | | (173 | ) | (173 | ) | |||||||||||||||||||||
Change in cumulative foreign currency translation
adjustment |
| | | (4,717 | ) | | | (4,717 | ) | (4,717 | ) | |||||||||||||||||||||
Comprehensive loss |
$ | (5,942 | ) | |||||||||||||||||||||||||||||
Dividend paid to Auctentia |
| | | | | (1,000 | ) | (1,000 | ) | |||||||||||||||||||||||
Dividend declared to Auctentia |
| | | | | (2,500 | ) | (2,500 | ) | |||||||||||||||||||||||
Distribution paid to a non-controlling interest |
| | | | | (1,281 | ) | (1,281 | ) | |||||||||||||||||||||||
Issuances of common stock for legal settlement |
3,278 | 33 | 6,523 | | | | 6,556 | |||||||||||||||||||||||||
Taxes paid in exchange for cancellation of restricted stock |
| | (133 | ) | | | | (133 | ) | |||||||||||||||||||||||
Stock based compensation |
| | 1,843 | | | | 1,843 | |||||||||||||||||||||||||
Issuance of common stock for restricted stock grants |
306 | 3 | (3 | ) | | | | | ||||||||||||||||||||||||
Balance, June 30, 2010 |
31,893 | $ | 319 | $ | 241,615 | $ | 3,529 | $ | (162,350 | ) | $ | 7,023 | $ | 90,136 | ||||||||||||||||||
See reports of Independent Registered Public Accounting Firms and accompanying notes to consolidated financial statements.
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SPECTRUM GROUP INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended | Year Ended | |||||||
June 30, | June 30, | |||||||
2010 | 2009 | |||||||
(as restated) | ||||||||
Cash flows from operating activities: |
||||||||
Net (loss) income |
$ | 438 | $ | 11,135 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Unrealized loss on derivative instruments |
5,110 | 4,696 | ||||||
Unrealized (gain) on foreign currency |
(3,304 | ) | (3,000 | ) | ||||
Depreciation and amortization |
1,699 | 1,807 | ||||||
Loss on abandonment of property and equipment |
144 | | ||||||
Goodwill and other purchased intangibles impairment charge |
2,271 | 860 | ||||||
Provision for bad debts |
(22 | ) | 440 | |||||
Provision for inventory reserves |
1,221 | 1,356 | ||||||
Stock based compensation |
1,843 | 1,115 | ||||||
Legal settlement |
2,697 | | ||||||
Gain on sale of land and building |
| (432 | ) | |||||
Gains on sales of marketable securities |
(135 | ) | (254 | ) | ||||
Changes in assets and liabilities: |
||||||||
Receivables and secured loans trading operations |
1,598 | (20,629 | ) | |||||
Accounts receivable and consignor advances collectibles operations |
918 | (432 | ) | |||||
Litigation settlement receivable |
| 5,975 | ||||||
Inventories |
(23,644 | ) | 13,911 | |||||
Liabilities on borrowed metals |
25,741 | (3,688 | ) | |||||
Prepaid expenses and other assets |
562 | 2,309 | ||||||
Accounts payable, accrued expenses and other liabilities |
(3,722 | ) | (6,233 | ) | ||||
Income taxes |
(468 | ) | 4,651 | |||||
Deferred taxes |
34 | (12 | ) | |||||
Accrued litigation settlement |
| (7,241 | ) | |||||
Net cash (used in) provided by operating activities |
12,981 | 6,334 | ||||||
Cash flows from investing activities: |
||||||||
Capital expenditures for property and equipment |
(699 | ) | (1,595 | ) | ||||
Proceeds from disposition of assets |
| 2,072 | ||||||
Cash paid for acquisitions, net of cash acquired |
(657 | ) | (592 | ) | ||||
Net sales (purchases) of short-term investments and marketable securities |
827 | (8,734 | ) | |||||
Proceeds from sales of marketable securities |
1,050 | 1,178 | ||||||
Decrease (increase) in restricted cash |
650 | (650 | ) | |||||
Net cash provided by (used in) investing activities |
1,171 | (8,321 | ) | |||||
Cash flows from financing activities: |
||||||||
Net borrowings under lines-of-credit |
(5,550 | ) | (12,997 | ) | ||||
Repurchase of stock issued for class action settlement |
| (1,198 | ) | |||||
Dividend paid to a non-controlling interest |
(1,000 | ) | | |||||
Distribution paid to a non-controlling interest |
(1,281 | ) | | |||||
Taxes paid on behalf of employees with respect to vesting of restricted stock |
(133 | ) | (98 | ) | ||||
Net cash provided by (used in) financing activities |
(7,964 | ) | (14,293 | ) | ||||
Effects of exchange rates on cash |
(1,413 | ) | (2,035 | ) | ||||
Net increase (decrease) in cash and cash equivalents |
4,775 | (18,315 | ) | |||||
Cash and cash equivalents, beginning of year |
17,545 | 35,860 | ||||||
Cash and cash equivalents, end of year |
$ | 22,320 | $ | 17,545 | ||||
Supplemental disclosures of cash flow information: |
||||||||
Cash paid during the year for: |
||||||||
Interest expense |
$ | 1,473 | $ | 2,159 | ||||
Income taxes |
$ | 1,001 | $ | 4,582 | ||||
See reports of Independent Registered Public Accounting Firms and accompanying notes to consolidated financial statements.
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Table of Contents
SPECTRUM GROUP INTERNATIONAL, INC.
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
1. BASIS OF PRESENTATION
Basis of Presentation
The consolidated financial statements reflect the financial condition, results of operations, and
cash flows of Spectrum Group International, Inc. (the Company or SGI) and its subsidiaries, and
were prepared utilizing U.S. GAAP. The Company conducts its operations in two reporting segments:
trading and collectibles. Each of these reporting segments represent an aggregation of various
operating segments that meet the aggregation criteria set forth in the Segment Reporting Topic ASC
280 of the FASB Accounting Standards Codification.
Business Segments
Trading Segment
The Companys trading business is conducted through A-Mark Precious Metals, Inc. (A-Mark) and its
subsidiaries. A-Mark is a full-service precious metals trading company. Its products include gold,
silver, platinum and palladium for storage and delivery in the form of coins, bars, wafers and
grain. The Companys trading-related services include financing, leasing, consignment, hedging and
various customized financial programs. The Company owns 80% of A-Mark through its 80% ownership
interest in Spectrum PMI, Inc. (SPMI), which owns all of the common stock of A-Mark. The
remaining 20% of SPMI is owned by Auctentia, S.L. (Auctentia), a wholly owned subsidiary of
Afinsa Bienes Tangibles, S.A. (Afinsa), which, together with Auctentia, owns approximately 58% of
the Companys outstanding common stock at June 30, 2010. Through its subsidiary Collateral Finance
Corporation (CFC), a licensed California Finance Lender, A-Mark offers loans on precious metals
and rare coins collateral to coin dealers, collectors and investors.
Collectibles Segment
The Companys collectibles business operates as an integrated network of global companies
concentrating on numismatic (coins) and philatelic (stamps) materials, rare and fine vintage wines,
and antique arms, armor, and historical memorabilia (militaria). Products are offered by way of
auction or private treaty sales. The Company has offices and auction houses in North America,
Europe and Asia. In addition to traditional live auctions, the Company also conducts Internet and
telephone auctions.
European Operations
The European Operations (the European Operations) of the Company are comprised of nine European
companies, each of which is wholly-owned by the Company. The European Operations are primarily
engaged in the sale of philatelic materials by auction.
Reclassifications
Certain items previously reported in specific financial statement captions have been reclassified
to conform to the 2010 consolidated financial statement presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and all of its
wholly-owned and majority-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
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Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP 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 consolidated
financial statements, and the reported amounts of revenue and expenses during the reporting
periods. These estimates include, among others, determination of lower-of-cost-or-market estimates
for inventory and allowances for doubtful accounts, impairment assessments of long-lived assets and
intangibles, valuation reserve determinations on deferred tax assets, calculations of loss accruals
and other complex contingent liabilities, and revenue recognition judgments. Significant estimates
also include the Companys fair value determinations with respect to its financial instruments and
precious metals materials. Actual results could materially differ from these estimates.
Concentrations of credit risk
Financial instruments that potentially subject the Company to concentrations of credit risk vary
based on the business segment. Both segments are subject to the risks associated with holding cash
and cash equivalents. Cash and cash equivalents are maintained with several financial institutions.
The Company maintains cash balances at financial institutions, both foreign and domestic, that are
in excess of FDIC, or its foreign equivalent, insurance coverage limits.
Concentrations specific to the Companys business segments are as follows:
Trading Segment. Assets that potentially subject the Company to concentrations of credit risk
consist principally of receivables, loans of inventory to customers, and inventory hedging
transactions. Concentration of credit risk with respect to receivables is limited due to the
large number of customers composing the Companys customer base, the geographic dispersion of the
customers, and the collateralization of substantially all receivable balances. Based on an
assessment of credit risk, the Company typically grants collateralized credit to its customers.
Credit risk with respect to loans of inventory to customers is minimal, as substantially all
amounts are secured by letters of credit issued by creditworthy financial institutions. The
Company enters into inventory hedging transactions, principally utilizing metals commodity
futures contracts traded on national futures exchanges or forwards contracts with only major
credit worthy financial institutions. Substantially all of these transactions are secured by the
underlying metals positions.
Collectibles Segment. In certain circumstances, either in connection with auction sales or
private treaty sales, which are held throughout the collectibles division, the Company may extend
trade credit and release the sold goods to the purchasers prior to the receipt of payments. In
addition, the Company may extend advances to consignors on collectible inventory held for future
auctions. The Company evaluates each customers creditworthiness at period end and specifically
identifies trade receivables and consignor advances for risk of loss based on analysis of several
factors including a specific review of the collectability of customer accounts, historical
collection experience, current economic and business conditions, and aging of accounts and
provides an allowance for the portion of receivables or advances for which collection is
doubtful. The Company continuously monitors payments from its customers and maintains allowances
for doubtful accounts for estimated losses in the period they become known. The Company charges
off uncollectable receivables and advances when management deems it appropriate based upon
analysis of each account
In limited situations, trade credit is extended with respect to the sale of consigned products,
where the purchasers take possession of the consignors property. Although the terms and
provisions of the Companys auctions and consignment agreements do not require the Company to
extend such credit and generally obligate the Company to pay the consignors only after the
Company has received payments from the purchasers, when the consigned goods are delivered to
purchasers prior to the receipt of payments, the Company may be deemed to have assumed risk of
loss associated with the trade credit, and the responsibility of collection of the trade credit
amounts from the purchasers. Losses to date under these situations have not been material.
Cash Equivalents
The Company considers all highly liquid investments with remaining maturities of three months or
less, when purchased, to be cash equivalents.
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Restricted Cash
The Company maintained a restricted cash balance at June 30, 2009 as collateral for a stand-by
letter of credit. The restricted cash was released during 2010.
Short-Term Investments and Marketable Securities
Short-term investments represent uninsured bank notes with maturities greater than 90 days held by
the Companys European Operations. The Companys short-term investments are carried at the
lower-of-cost-or-market.
The Company classifies and accounts for debt and equity securities in accordance ASC 320
Investments Debt and Equity Securities. The Company has classified all of its marketable
securities as available for sale, thus securities are recorded at fair market value and any
associated unrealized gains or losses, net of deferred taxes, is included as a separate component
of stockholders equity, Accumulated Other Comprehensive Income. The Company had retained an
interest in one marketable security which has a historical cost basis of $0 and $655,000, at June
30, 2010 and 2009, respectively, and a carrying value (at market) of $0 and $914,000, at June 30,
2010, and 2009, respectively.
Inventories
Trading Inventories
The Trading segments inventories primarily include bullion and bullion coins and are stated at
published market values plus purchase premiums paid on acquisition of the metal. The amount of
premium included in the inventories as of June 30, 2010, and 2009 totaled $1,034,000 and
$1,477,000, respectively. Commemorative coins, which are not hedged, are included in inventory at
the lower-of-cost- or-market totaled $0 and $3,620,000 as of June 30, 2010, and 2009, respectively.
For the years ended June 30, 2010, and 2009, the unrealized gains resulting from the differences
between market value and cost of physical inventories totaled $7,494,000 and $8,488,000,
respectively, and is included as a reduction of the Cost of Precious Metals Sold in the
accompanying consolidated statements of operations. Such gains are generally offset by the results
of hedging transactions, which have been reflected as net losses on derivative instruments, which
is a component of Cost of Precious Metals Sold in the consolidated statements of operations.
The Trading segments inventories included amounts borrowed from various suppliers under ongoing
agreements totaling $40,841,000 at June 30, 2010, and $15,100,000 at June 30, 2009. Corresponding
obligations related to Liabilities on Borrowed Metals are reflected on the consolidated balance
sheets. The Trading segment also protects substantially all of its physical inventories from market
risks through commodity hedge transactions.
The Trading segment periodically loans metals to customers on a short-term consignment basis,
charging interest fees based on the value of the metals loaned. Inventories loaned under
consignment arrangements to customers at June 30, 2010 totaled $19,015,000 and at June 30, 2009
totaled $15,701,000. Such inventories are removed at the time the customers elect to price and
purchase the metals, and the Company records a corresponding sale and receivable. Substantially all
inventories loaned under consignment arrangements are secured by letters of credit issued by major
financial institutions for the benefit of the Company or under an all-risk insurance policy with
the Company as the loss-payee.
Collectibles Inventories
The Collectibles segments inventories are stated at the lower-of-cost or managements estimate of
net realizable value, and are accounted for under the specific identification method. In instances
where bulk purchases are made, the cost allocation is based on the relative market values of the
respective goods. The Company periodically reviews the age and turnover of its inventory to
determine whether any inventory has declined in value, and incurs a charge to operations for such
declines. The Company records write-downs based on two methodologies; specific write-downs on
certain items based on declines in the marketplace, and estimated write-downs based on inventory
aging depending on the category and type of inventory (where such percentages are supported by
historical experience). If actual market conditions are less favorable than those projected
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by management and the Companys estimates prove to be inaccurate, additional write-downs or
adjustments to recognize additional cost of sales may be required.
The Company has agreements with certain suppliers and employees to share the net profits or losses
attributable to the sale of specified items of inventory. The Company determines the selling price
of the inventory and acts as the principal in these transactions; taking title to the inventory and
bearing risk of loss, collection, delivery and return. The cost associated with the profit sharing
is reflected in general and administrative expense for suppliers and salaries and wages expense for
employees in the consolidated statements of operations.
Derivative Financial Instruments
The Companys trading operations enter into a variety of transactions that are accounted for under
ASC 815 Derivatives and Hedging. These transactions consist primarily of precious metals forwards
and futures contracts. The derivative instruments do not qualify for hedge accounting and
accordingly are marked-to-market through current earnings. See further discussion of derivative
financial instruments in Note 12.
Property and Equipment
The Companys property and equipment consists primarily of computer and office equipment; furniture
and fixtures, leasehold improvements and computer software. The Companys land and building owned
at June 30, 2008, was sold in April 2009, and had been reflected in accordance with ASC 360
Property, Plant and Equipment, held for sale at the lower of cost or net realizable value. The
gain on the sales of the building totaled $432,000 for the year ended June 30, 2009, which is
reflected as a component of general and administrative expenses in the consolidated statement of
operations. Property and equipment are stated at historical cost less accumulated depreciation and
amortization. Depreciation and amortization are computed on a straight-line basis over the
estimated useful lives of the assets or, when applicable, the life of the lease, whichever is
shorter. Equipment is depreciated over estimated useful lives ranging from three to ten years.
Furniture and fixtures, and leasehold improvements are depreciated over estimated useful lives
ranging from three to twenty years. Computer software is amortized over estimated useful lives
ranging from three to five years.
Goodwill and Other Purchased Intangible Assets
The FASB issued ASC 805 Business Combinations, and ASC 350 Intangibles Goodwill and Other), both
of which became effective for fiscal years beginning after December 15, 2001. Under these rules,
goodwill is no longer amortized but is subject to annual impairment tests in accordance with ASC
350. Other identifiable intangible assets continue to be amortized over their useful lives. The
Company regularly reviews business conditions and other relevant factors to determine whether
impairment conditions exist and performs its annual impairment test at year-end each year. The
Company utilizes the discounted cash flow method to determine the fair value of each of its
reporting units, which includes the individual operating entities of the trading and collectible
reporting segments. If the carrying amount of a reporting unit exceeds its fair value, the amount
of the impairment loss must be measured. The impairment loss would be calculated by comparing the
implied fair value of goodwill to its carrying amount. In calculating the implied fair value of the
reporting units goodwill, the present value of the reporting units expected future cash flows is
allocated to all of the other assets and liabilities of that unit based on their fair values. The
excess of the present value of the reporting units expected future cash flows over the amount
assigned to its other assets and liabilities is the implied fair value of goodwill. An impairment
loss would be recognized when the carrying amount of goodwill exceeds its implied fair value.
During the year ended June 30, 2010, Bowers and Merena Auctions (Numismatic) had a goodwill
impairment charge in the amount of $433,000, a trademark impairment charge of $486,000, and a
customer list impairment charge of $324,000. H.R. Harmer Nutmeg Auctions (Philatelic) had a
trademark impairment charge of $232,000 and a customer list impairment charge of $95,000. Lastly,
Greg Martin Auctions (Militaria) had a customer list impairment charge of $357,000 and a trademark
impairment of $344,000. The Company recorded these impairment charges primarily due to the
operating loss incurred in the Companys militaria auction business and managements evaluation of
economic conditions and projected future performance in the Collectibles businesses. Other
purchased intangible assets primarily consist of the value of customer relationships, non-compete
agreements and trademarks. Amortizable intangible assets are primarily being amortized on a basis
that approximates economic use, over periods ranging
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from four to fifteen years. Refer to Note 18 for further discussion of the methodology and inputs
used to arrive at our impairment to goodwill and other purchase intangible assets.
Long-Lived Assets
Long-lived assets, other than goodwill and purchased intangibles, are evaluated for impairment when
events or changes in business circumstances indicate that the carrying amount of the assets may not
be fully recoverable. An impairment loss would be recognized when estimated undiscounted future
cash flows expected to result from the use of these assets and its eventual disposition is less
than its carrying amount. Impairment, if any, is assessed by using internally developed discounted
cash flows estimates, and independent appraisals to determine fair value. The determination of
whether or not long-lived assets have become impaired involves a significant level of judgment in
the assumptions underlying the approach used to determine the estimated future cash flows expected
to result from the use of those assets. Changes in the Companys strategy, assumptions and/or
market conditions could significantly impact these judgments and require adjustments to recorded
amounts of long-lived assets. For the years ended June 30, 2010, and 2009, no impairments of
long-lived assets were identified.
Consolidated Joint Venture
On March 28, 2008, A-Mark entered into a Joint Venture Limited Liability Company Agreement (JV
Agreement) with a third party marketing company and contributed $450,000 for a 50% ownership in
the joint venture named Winter Games Bullion Ventures, LLC (WGBV), which was formed on March 28,
2008. The purpose of the joint venture was solely to purchase, market, distribute and sell 2010
Vancouver Winter Olympic Bullion and Commemorative Coins. The term of the JV Agreement was through
June 30, 2011, unless extended by mutual agreement of the members or sooner terminated, as defined
in the JV Agreement. In May 2010, the parties agreed to a partial distribution totaling $2.6
million of which SGI received $1.3 million or 50% of the partial distribution. The remaining
$10,000 was undistributed to cover residual expenses.
The Company has determined that WGBV was a variable interest entity (VIE) and that A-Mark is the
primary beneficiary. In accordance with ASC 810 Consolidation, A-Mark has consolidated the
financial position of WGBV as of June 30, 2010, and 2009, and the results of its operations for the
years then ended in these consolidated financial statements. See further discussion in Note 14.
Consignor Advances and Payables
Consignor advances are cash advances on inventory consigned from a third party for sale by the
Company at a later date at which time the advance will be deducted from the proceeds due to the
consignors. Consignor advances are short-term in duration and typically interest bearing at
prevailing rates. Amounts payable to consignors represent amounts due the third parties for the
sale of their consigned inventory by the Company. Such amounts are non-interest bearing.
Accrued Compensation
Accrued compensation expenses, including incentive-based compensation, totaled $7,619,000 and
$13,424,000, at June 30, 2010, and 2009, respectively, and are reflected in Accrued Expenses,
Accrued Compensation and Other Current Liabilities.
Fair Value Measurements
The Company adopted ASC 820 Fair Value Measurements and Disclosures. This standard defines fair
value for financial reporting. The Company has valued its assets and liabilities subject to fair
value determination in accordance with the valuation hierarchy defined within ASC 820. See further
discussion in Note 18.
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Table of Contents
Fair Value of Financial Instruments
The carrying amounts of financial instruments approximated fair value as of June 30, 2010, and June
30, 2009, due to the relative short maturity of these instruments. The financial instruments
include cash and cash equivalents, restricted cash, receivables and secured loans, accounts
receivable and consignor advances, accounts payable and consignor payables, liabilities on borrowed
metals and lines-of-credit.
Revenue Recognition
Trading Segment. The Company records sales of precious metals upon shipment and transfer of title
(see further discussion below). The Company records revenues from its financing activities in
arrears at each month-end. Commodity futures and forwards contract transactions are recorded at
fair value on the trade dates. Open futures and forwards contracts are reflected in Receivables and
Secured Loans, Net Trading Operations in the consolidated balance sheets as the difference
between the original contract values and the market values; or at fair value. The change in
unrealized gains (losses) on open contracts from one period to the next is reflected in net (gains)
losses on derivative instruments, which is a component of Cost of Precious Metals Sold in the
consolidated statements of operations. Financing revenue is recorded over the terms of the related
receivables and consists of interest and related fees.
The Company accounts for its metals and sales contracts using settlement date accounting. Pursuant
to such accounting, the Company recognizes the sales or purchases of the metals at settlement date.
During the period between trade and settlement dates, the Company has essentially entered into a
forwards contract that meets the definition of a derivative in accordance with ASC 815 Derivatives
and Hedging. The Company records the derivatives at the trade date with corresponding unrealized
gains (losses) which are reflected in the Cost of Precious Metals Sold in the consolidated
statements of operations. The Company adjusts the derivatives to fair value on a daily basis until
the transactions are settled. Sales which are physically settled are recognized in gross in the
consolidated statements of operations.
Collectibles Segment. The Companys Collectibles segment derives revenues from two primary sources:
auctions and private treaty sales.
Auction Sales. In its role as auctioneer, the Company generally functions as an agent accepting
properties on consignment from its selling clients. The Company sells properties as an agent of the
consignors, billing the buyers for properties purchased, receiving payments from the buyers, and
remitting to the consignors the consignors portion of the buyers payments after deducting the
Companys commissions, expenses, applicable taxes and advances. The Companys commissions include
those earned from the buyers (buyers premium revenue) and those earned from the consignors
(sellers commission revenue), both of which are calculated as a percentage of the value of the
final bid at auction (the hammer price) of property sold at auction. The Company recognizes
revenues from the buyers premiums and sellers commissions upon delivery of property sold at
auction, which generally occurs upon cash receipt. Commissions earned for the years ended June 30,
2010, and 2009, totaled $22,783,000 and $20,550,000, respectively.
The Company records direct auction related expenses such as commissions, catalog expenses, auction
site fees, security, and other related costs associated with running an auction in general and
administration expenses. These costs are shared amongst other operating divisions and not tracked
specifically by each auction.
The Company also sells its own inventory at auction. Revenue from the sales of owned inventory at
auction is recognized upon receipt of cash , which generally occurs upon delivery of the inventory,
and is recorded at the hammer price on a gross basis, with corresponding product cost recorded as a
direct cost of sale. In addition, the Company recognizes commissions earned on the hammer price,
which is paid by the buyer. Sales returns have not been material.
The Company does not provide any guarantee with respect to the authenticity of property offered for
sale at its live auctions; however it does authenticate the materials sold via Internet auctions.
All property presented for sale at live auction is sold as genuine and as described by the Company
in its auction catalogues. In the event that auctioned property is deemed to be other than
authentic (in the opinion of a competent authority mutually acceptable to the buyer and the
Company), the Company
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refunds the purchase price if returned within a specified time period. Historically, returns have
not been material and the Company generally sells large collections on an as is basis.
Private Treaty Sales. The Company engages in private treaty sales of both consigned property and
sales of owned inventory to third parties (merchant/dealer relationships and direct to consumer
sales). Private treaty sales of consigned property occur when an owner of property arranges with
the Company to sell such consigned property to a third party at a privately negotiated price. In
such a transaction, the owner may set selling price parameters for the Company, or the Company may
solicit selling prices for the owner, and the owner may reserve the right to reject any selling
price. The Company does not guarantee a fixed price to the owner, which would be payable regardless
of the actual sales price ultimately received. The Company recognizes private treaty sales of
consigned property at an amount equal to a percentage of the sales price. Such amounts of revenue
are recorded on a net basis as commissions earned and are recognized upon delivery of property
sold, which generally occurs upon cash receipt. The Company recognizes private treaty sales of
owned property upon receipt of cash, which generally occurs upon delivery of the property.
Commodity Contracts
Net (gains) losses on derivative instruments, which are included in the cost of precious metals
sold, includes amounts recorded on the Companys outstanding metals forwards and futures contracts
and on open physical purchase and sale commitments. The Company records changes in the market value
of its metals forwards and futures contracts as income or loss, the effect of which is to offset
changes in market values of the underlying metals positions.
The Company records the differences between market values and trade values of the underlying
commodity contracts as a derivative asset or liability, as well as recording unrealized (gains) or
losses on derivative instruments in the Companys consolidated statements of operations. During the
year ended June 30, 2010, the Company recorded net unrealized loss on open futures commodity and
forwards contracts and open purchase and sale commitments of $5,432,000 and a net realized (gains)
losses on futures commodity contracts of $13,029,000 in net (gains) losses on derivative
instruments in the consolidated statements of operations. During the year ended June 30, 2009, the
Company recorded net unrealized (gains) on open futures commodity and forwards contracts and open
purchase and sale commitments of $(6,988,000), and a net realized loss on future commodity
contracts of $9,635,000 on derivative instruments (reflected in the Cost of Precious Metals Sold)
in the consolidated statements of operations.
Foreign Currencies Translation
The consolidated financial position and results of operations of the Companys foreign subsidiaries
are determined using local currencies as the functional currencies. Assets and liabilities of these
subsidiaries are translated at the exchange rate in effect at each year-end. Statements of
operations accounts are translated at the average rate of exchange prevailing during the year.
Translation adjustments arising from the use of differing exchange rates from period-to-period are
included in Accumulated Other Comprehensive Income, a component of stockholders equity. Gains and
losses resulting from other foreign currency transactions are included in Interest and Other Income
(Expense).
For the years ended June 30, 2010, and 2009, the Company recognized unrealized gains of $3,304,000
and $3,068,000, respectively, on foreign exchange in the consolidated statements of operations in
connection with the transaction adjustments of Euro denominated loans totaling $22,891,000 and
$28,008,000 at June 30, 2010, and 2009, respectively, owed by SGI and its US subsidiaries to
certain of its subsidiaries included in its European Operations.
Comprehensive Income (Loss)
Comprehensive income (loss) is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. The components of our comprehensive (loss)
income for the twelve months ended June 30, 2010 and 2009 includes net income, adjustments to
stockholders equity for the foreign currency translation adjustments, and changes in net
unrealized (loss) gain on available-for-sale securities. The foreign currency translation
adjustment was due to exchange rate fluctuations in our foreign affiliates local currencies.
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Stock Based Compensation
SGI has equity plans that provide for the award of options and other equity grants to officers,
employees, non-employee directors and consultants. See Note 16 to the Notes to Consolidated
Financial Statements.
The Company accounts for stock-based compensation under ASC 718 Compensation-Stock Compensation and
ASC 505-50 Equity-Based Payments to Non-Employees. These standards use the modified prospective
method, which requires measurement of compensation cost for all stock awards at fair value on date
of grant and recognition of compensation over the service period for awards expected to vest.
Further, under the modified prospective method, the fair value associated with the unvested portion
of the prior grants remaining at the date of adoption is recorded to stock compensation expense
over the future requisite service period. During the years ended June 30, 2010 and 2009, the
Company granted no stock options; however, the Company granted restricted stock grants. The fair
value of restricted stock grants is based on quoted market price at the date of grant. All of the
options previously granted were valued using the Black-Scholes valuation model, which is consistent
with the Companys valuation techniques previously utilized for options in footnote disclosures
required under ASC 718. The Black-Scholes valuation model requires the input of subjective
assumptions including estimating the length of time employees will retain their vested stock
options before exercising them (the expected term), the estimated volatility of the common stock
price over the expected term, and the number of options that will ultimately not complete their
vesting requirements (forfeitures). Changes in these subjective assumptions can materially affect
the estimate of fair value of stock-based compensation and, consequently, the related amount
recognized as an expense on the consolidated statements of operations. As required under the
accounting rules, the Company reviews its valuation assumptions at each grant date and, as a
result, is likely to change its valuation assumptions used to value employee stock-based awards
granted in future periods. The values derived from using Black-Scholes model are recognized as
expense over the vesting period, net of estimated forfeitures. The estimation of stock awards that
will ultimately vest requires significant judgment. Actual results, and future changes in
estimates, may materially differ from the Companys current estimates.
Marketing
Auction catalogue production and distribution costs, auction marketing/advertising costs and all
other marketing/advertising costs are expensed as incurred. Advertising and promotion expenses for
the years ended June 30, 2010, and 2009, were $3,886,000 and $3,898,000, respectively.
Shipping and Handling
Shipping and handling costs represent costs associated with shipping product to customers, and
receiving product from vendors. Shipping and handling costs incurred totaled $5,174,000 and
$3,523,000 for the years ended June 30, 2010, and 2009, respectively, and are included in the
general and administrative expenses in the consolidated statements of operations.
Income Taxes
As part of the process of preparing its consolidated financial statements, the Company is required
to estimate its provision for income taxes in each of the tax jurisdictions in which it conducts
business, in accordance with the provisions of ASC 740 Income Taxes. The Company computes its
annual tax rate based on the statutory tax rates and tax planning opportunities available to it in
the various jurisdictions in which it earns income. Significant judgment is required in determining
the Companys annual tax rate and in evaluating uncertainty in its tax positions. The Company
recognizes a benefit for tax positions that it believes will more likely than not be sustained upon
examination. The amount of benefit recognized is the largest amount of benefit that the Company
believes has more than a 50% probability of being realized upon settlement. The Company regularly
monitors its tax positions and adjusts the amount of recognized tax benefit based on its evaluation
of information that has become available since the end of its last financial reporting period. The
annual tax rate includes the impact of these changes in recognized tax benefits. When adjusting the
amount of recognized tax benefits, the Company does not consider information that has become
available after the balance sheet date, but does disclose the effects of new information whenever
those effects would be material to the Companys consolidated financial statements. The difference
between the amount of benefit taken or expected to be taken in a tax return and the amount of
benefit recognized for financial
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reporting represents unrecognized tax benefits. These unrecognized tax benefits are presented in
the consolidated balance sheet principally within Income Taxes Payable.
The Company records valuation allowances to reduce deferred tax assets to the amount that is more
likely than not to be realized. When assessing the need for valuation allowances, the Company
considers future taxable income and ongoing prudent and feasible tax planning strategies. Should a
change in circumstances lead to a change in judgment about the utilization of deferred tax assets
in future years, the Company would adjust related valuation allowances in the period that the
change in circumstances occurs, along with a corresponding increase or charge to income.
Changes in recognized tax benefits and changes in valuation allowances could be material to the
Companys consolidated results of operations for any period, but is not expected to be material to
the Companys consolidated financial position.
The Company adopted the provisions of ASC 740 which clarifies the accounting for uncertainty in
income taxes recognized in an enterprises financial statements. ASC 740 prescribes a recognition
threshold and measurement criteria for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. The interpretation also provides guidance
on de-recognition, classification, interest, and penalties, accounting in interim periods,
disclosure, and transition. The potential interest and/or penalties associated with an uncertain
tax position are recorded in Income Tax Provision on the consolidated statements of operations.
Please refer to Note 10 for further discussion regarding the adoption of this pronouncement.
Earnings per Share
Basic earnings per share does not include the effects of potentially dilutive stock options and
other long-term incentive stock awards, and is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the period. For the
years ended June 30, 2010 and 2009, basic and diluted earnings per share include vested but
unissued restricted stock of 596,228 and 123,199, respectively. Diluted earnings per share
reflects, in periods in which they have a dilutive effect, commitments to issue common stock and
common stock issuable upon exercise of stock options for periods in which the options exercise
price is lower than the Companys average share price for the period.
A reconciliation of shares used in calculating basic and diluted earnings per common shares
follows. Since the Company incurred a net loss for the fiscal year ended June 30, 2010, basic and
diluted loss per share were the same because the inclusion of 922,658 potential common shares,
related to 604,325 outstanding stock options, 280,833 restricted stock grants, and 37,500 stock
appreciation rights (SARs), in the computation of net loss per share would have been
anti-dilutive. In computing diluted earnings per share for the year ended June 30, 2009, the
Company excluded options to purchase 359,075 shares of common stock and 37,500 SARs, where exercise
prices were in excess of the quoted market price of the Companys common stock, because inclusion
would have been anti-dilutive.
(thousands of shares) | (thousands of shares) | |||||||
Year Ended June 30, 2010 | Year Ended June 30, 2009 | |||||||
Basic weighted average shares outstanding (1) (2) |
31,939 | 30,934 | ||||||
Effect of common stock equivalents stock options and
stock issuable under employee compensation plans |
| 715 | ||||||
Diluted weighted average shares outstanding |
31,939 | 31,649 | ||||||
(1) | Basic weighted average shares outstanding include the full effect of shares issuable pursuant to the litigation settlement (Note 15) as of the date the settlement agreement was executed. | |
(2) | Basic weighted average shares, as of years ending June 30, 2010 and 2009 include the effect of vested but unissued restricted stock grants. |
Supplemental Disclosure of Noncash Investing and Financing Activities
In October 2009, the Company issued 3,277,777 shares of common stock totaling $6,556,000 to the
settlement fund to resolve a shareholders law suit. The Company has no further obligation or
liability under the settlement agreement.
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In December 2008, in connection with the Companys acquisition of Ponterio & Associates, the
Company recorded a liability of $200,000 as purchase price consideration payable in December 2009.
In January 2009, the Company issued 772,430 shares of common stock to the attorneys of class action
claimants in connection with the settlement of a lawsuit. The Company repurchased the shares for
$1,197,000, or $1.55 per share, subsequently retiring the shares in January 2009.
Recent Accounting Pronouncements
In December 2007, the FASB issued ASC 805 Business Combinations. This standard is effective for
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. This standard requires the
acquiring entity in a business combination to recognize all (and only) the assets acquired and
liabilities assumed in the transaction; establishes the acquisition-date fair value as the
measurement objective for all assets and liabilities assumed; and requires the acquirer to disclose
to investors and other users all of the information they need to evaluate and understand the nature
and financial effect of the business combination. This standard was adopted on July 1, 2009. The
adoption did not have a material impact on the Companys consolidated financial statements.
In December 2007, the FASB issued ASC 810 Consolidation. This standard requires that
non-controlling (minority) interests be reported as a component of equity, that net income
attributable to the parent and to the non-controlling interest be separately identified in the
income statement, that changes in a parents ownership interest while the parent retains its
controlling interest be accounted for as equity transactions, and that any retained non-controlling
equity investment upon the deconsolidation of a subsidiary be initially measured at fair value.
This standard is an amendment of Accounting Research Bulletin No. 51, Consolidated Financial
Statements, and related interpretations. This standard was adopted on July 1, 2009. The adoption
resulted in a change in the reporting presentation of minority interest, now classified as
non-controlling interest, in the consolidated balance sheet and consolidated statement of
operations, stockholders equity and cash flows. The 2009 consolidated financial statements have
been restated to reflect this change in presentation.
In March 2008, the FASB issued ASC 815 Derivatives and Hedging. This standard expanded the
disclosure requirements about an entitys derivative instruments and hedging activities. The
disclosure provisions apply to all entities with derivative instruments originally subject to ASC
815, and its related interpretations. The provisions also apply to related hedged items, bifurcated
derivatives, and non-derivative instruments that are designated and qualify as hedging instruments.
Entities with instruments subject to ASC 815 must provide more robust qualitative disclosures and
expanded quantitative disclosures. Such disclosures generally will need to be presented for every
annual and interim reporting period. This standard was adopted on July 1, 2009. The adoption of
this statement did not have a material impact on the Companys consolidated financial statements.
In May 2009, the FASB issued ASC 855 Subsequent Events. This standard sets forth: (i) the period
after the balance sheet date during which management of a reporting entity should evaluate events
or transactions that may occur for potential recognition or disclosure in the financial statements;
(ii) the circumstances under which an entity should recognize events or transactions occurring
after the balance sheet date in its financial statements; and (iii) the disclosures that an entity
should make about events or transactions that occurred after the balance sheet date. This standard
is effective for interim and annual periods ending after June 15, 2009. The Company adopted this
standard at June 30, 2009. This standard did not impact the consolidated financial results other
than requiring additional disclosures. See Note 19 of the Notes to Consolidated Financial
Statements for subsequent events impacting the Company.
In June 2009, the FASB issued ASC 860 Transfers and Servicing. This standard removes the exemption
from consolidation for Qualifying Special Purpose Entities (QSPEs), and also limits the
circumstances in which a financial asset, or portion of a financial asset, should be derecognized
when the transferor has not transferred the entire original financial asset to an entity that is
not consolidated with the transferor in the financial statements being presented and/or when the
transferor has continuing involvement with the transferred financial asset. The Company adopted
this standard for interim and annual reporting periods beginning on July 1, 2009. The adoption of
this standard did not have any material impact on the consolidated financial statements.
In June 2009, the FASB issued ASC 810 Consolidation. This standard amends FASB Interpretation 46(R)
to eliminate the quantitative approach previously required for determining the primary beneficiary
of a variable interest entity and requires
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ongoing qualitative reassessments of whether an enterprise is the primary beneficiary of a variable
interest entity. This standard will become effective for the Company on July 1, 2010. The Company
does not expect the adoption of this standard to have a material impact on the consolidated
financial statements.
In October 2009, the FASB updated accounting standards for Multiple-Deliverable Revenue
Arrangements in ASC 605 Revenue Recognition. This update addresses the unit of accounting for
arrangements involving multiple deliverables and how to allocate arrangement consideration to one
or more units of accounting. It eliminates the criteria that objective and reliable evidence of the
fair value of any undelivered items must exist for the delivered items to be considered separate
units of accounting. This standard will become effective for the Company on July 1, 2010. The
Company is evaluating the potential impact of adopting this standard on the consolidated financial
statements.
Adoption of Accounting Standards Codification 810
Effective July 1, 2009, the Company adopted the provisions of ASC 810 Consolidation, which resulted
in a change in the reporting presentation of minority interest, now classified as non-controlling
interest, in the consolidated balance sheet and consolidated statements of operations,
stockholders equity and cash flows. The 2009 consolidated financial statements have been restated
to reflect this change in presentation. The adoption of this provision was limited to increasing
net income by $3,999,000 (the net income attributable to the non-controlling interest). This
adoption had no impact on earnings per share.
3. RESTATEMENTS OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS
Correction of Errors to the 2009 Consolidated Financial Statement
During the quarter ended December 31, 2009, the Company began efforts to develop an improved
companywide financial consolidation process. The new process was intended to streamline the
preparation of the Companys consolidated financial statements and provide greater visibility into
its divisional and consolidated results of operations and financial position.
In applying the new reporting process noted above, management of the Company became aware that
certain numbers in the Companys previously filed Report on Form 10-K for the year ended June 30,
2009, would require corrections, primarily comprised of classification errors within the Companys
consolidated statement of operations. The need to adjust previously-reported amounts was identified
principally as a result of the enhanced visibility provided by the new consolidation process. The
reclassification adjustment resulted in:
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Correction of an error for the year ended June 30, 2009:
(in thousands) | Year Ended June 30, 2009 | |||||||||||
As Originally | As | |||||||||||
Reported | Adjustment | Corrected | ||||||||||
Revenue: |
||||||||||||
Sales of precious metals |
$ | 4,126,909 | $ | (5,750 | ) | $ | 4,121,159 | a | ||||
Sales of inventory |
144,320 | | 144,320 | |||||||||
Auction commissions earned |
22,113 | (1,563 | ) | 20,550 | a | |||||||
Total revenue |
4,293,342 | (7,313 | ) | 4,286,029 | ||||||||
Cost of sales: |
||||||||||||
Cost of precious metals sold |
4,084,419 | (6,422 | ) | 4,077,997 | a | |||||||
Cost of collectibles sold |
138,589 | (1,357 | ) | 137,232 | b | |||||||
Total cost of sales |
4,223,008 | (7,779 | ) | 4,215,229 | ||||||||
Gross profit |
70,334 | 466 | 70,800 | |||||||||
Operating expenses: |
||||||||||||
General and administrative |
30,169 | (206 | ) | 29,963 | a,b | |||||||
Salaries and wages |
29,814 | | 29,814 | |||||||||
Depreciation and amortization |
1,807 | | 1,807 | |||||||||
Litigation settlement |
860 | | 860 | |||||||||
Total operating expenses |
62,650 | (206 | ) | 62,444 | ||||||||
Operating (loss) income |
7,684 | 672 | 8,356 | |||||||||
Interest and other income (loss): |
||||||||||||
Interest income |
5,614 | | 5,614 | |||||||||
Interest expense |
(2,373 | ) | | (2,373 | ) | |||||||
Other income (expense), net |
279 | (672 | ) | (393 | )a | |||||||
Unrealized gains (loss) on
foreign exchange |
3,068 | | 3,068 | |||||||||
Interest and other income
(expense) |
6,588 | (672 | ) | 5,916 | ||||||||
Income (loss) before income
taxes and non-controlling
interest |
$ | 14,272 | $ | | $ | 14,272 | ||||||
(a) | Represents the elimination of intercompany transactions | |
(b) | Represents the reclassification of auction related expenses from cost of sales to selling, general and administrative |
The Company discovered during the 4th quarter of 2010 that the 2009 consolidated
statement of cash flow incorrectly reported the change in liability associated with borrowed metals
totaling $3,688,000 used in trading operations as financing activities rather than operating
activities. The liability associated with the borrowed metals serves to operate the trading
segment and the amount was re-classed from financing activities to operating activities. We also
discovered during the 4th quarter 2010, the 2009 consolidated statement of cash flow had
classified unrealized foreign currency gain from the transaction adjustments of our European
denominated loans as effects of exchange rate on cash. The proper classification should have been
a component of cash provided by operating activities. In order to provide clarity to the statement
of cash flow, we appropriately reclassified the unrealized foreign currency gain from effects of
exchange rate on cash as a component of cash provided by operating activities as an adjustment to
net income. The need to adjust previously-reported amounts was identified principally as a result
of the enhanced visibility provided by the new consolidation process. Below is a table showing the
impacts to the reclassification.
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June 30, 2009 | June 30, 2009 | |||||||||||
As Corrected | As Originally Reported | Inc/(dec) | ||||||||||
(in thousands) | (in thousands) | (in thousands) | ||||||||||
Net cash provided by operating activities |
$ | 6,334 | $ | 13,022 | $ | (6,688 | ) | |||||
Net cash used in investing activities |
(8,321 | ) | (8,321 | ) | | |||||||
Net cash used in financing activities |
(14,293 | ) | (17,981 | ) | 3,688 | |||||||
Effects of exchange rates in cash |
(2,035 | ) | (5,035 | ) | 3,000 | |||||||
Net cash increase (decrease) in cash and cash
equivalents |
(18,315 | ) | (18,315 | ) | | |||||||
Cash and cash equivalents, beginning of year |
35,860 | 35,860 | | |||||||||
Cash and cash equivalents, end of year |
$ | 17,545 | $ | 17,545 | $ | | ||||||
The Company restated its disclosure of unrecognized tax benefit for 2009. Specifically, an amount
of $4,170,000 had been improperly included in the beginning and ending Fiscal 2009 balances, and
has been removed to correct for this error.
The Company assessed the impact of the corrections on previously-reported numbers and concluded
that such adjustments are immaterial to the consolidated financial statements and segmented
financial data for each of such periods, individually and in the aggregate. In reaching this
conclusion, management of the Company considered both the quantitative and qualitative
characteristics of such adjustments.
The impacts of the identified adjustments were limited to classifications among individual
line-items in the consolidated statement of operations and cash flows. The adjustments had no
impact on previously-reported net income or earnings per share data. Based upon the immateriality
of the identified adjustments, the Company will not amend it previously-filed Reports on form 10-K.
4. CUSTOMER CONCENTRATIONS
Customers providing 10 percent or more of the Companys Trading segment revenues for the years
ended June 30, 2010, and 2009, are listed below:
2010 | 2009 | |||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
In $s | As a % | In $s | As a % | |||||||||||||
Total Trading segment revenue |
$ | 5,834,712 | 100.0 | % | $ | 4,121,159 | 100.0 | % | ||||||||
Trading segment customer concentrations |
||||||||||||||||
Customer A |
$ | 1,650,760 | 28.3 | % | $ | 953,278 | 23.1 | % | ||||||||
Customer B |
701,981 | 12.0 | 256,801 | 6.2 | ||||||||||||
Total |
$ | 2,352,741 | 40.3 | % | $ | 1,210,079 | 29.3 | % | ||||||||
Customers providing 10 percent or more of the Companys Trading segment accounts receivable,
excluding $22,690,000 and $17,727,000 in secured loans, as of June 30, 2010, and 2009,
respectively, are listed below:
2010 | 2009 | |||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
In $s | As a % | In $s | As a % | |||||||||||||
Trading segment accounts receivable |
$ | 18,615 | 100.0 | % | $ | 16,205 | 100.0 | % | ||||||||
Trading segment customer concentrations |
||||||||||||||||
Customer A |
$ | 3,101 | 16.7 | % | $ | 3,894 | 24.0 | % | ||||||||
Customer B |
2,657 | 14.3 | 2,535 | 15.6 | ||||||||||||
Total |
$ | 5,758 | 31.0 | % | $ | 6,429 | 39.6 | % | ||||||||
Customers providing 10 percent or more of the Companys Trading segment secured loans as of June
30, 2010, and 2009, respectively, are listed below:
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2010 | 2009 | |||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
In $s | As a % | In $s | As a % | |||||||||||||
Trading segment secured loans |
$ | 22,690 | 100.0 | % | $ | 17,727 | 100.0 | % | ||||||||
Trading segment customer concentrations |
||||||||||||||||
Customer A |
$ | 7,396 | 32.6 | % | $ | 3,043 | 17.2 | % | ||||||||
Customer B |
2,770 | 12.2 | 2,600 | 14.7 | ||||||||||||
Customer C |
2,511 | 11.0 | 2,502 | 14.1 | ||||||||||||
Total |
$ | 12,677 | 55.8 | % | $ | 8,145 | 46.0 | % | ||||||||
The loss of any of the above customers of the Trading segment could have a material adverse effect
on the operations of the Company.
For the years ended June 30, 2010, and 2009, the Collectibles segment had no reportable
concentrations.
5. RECEIVABLES
Receivables and secured loans from the Companys Trading segment consist of the following at June
30, 2010, and 2009:
June 30, 2010 | June 30, 2009 | |||||||
(in thousands) | (in thousands) | |||||||
Customer trade receivables |
$ | 6,077 | $ | 9,138 | ||||
Wholesale trade advances |
5,407 | 3,493 | ||||||
Secured loans |
22,690 | 17,727 | ||||||
Due from brokers |
7,131 | 3,574 | ||||||
Subtotal |
41,305 | 33,932 | ||||||
Less: allowances for doubtful accounts |
(102 | ) | (319 | ) | ||||
Subtotal |
41,203 | 33,613 | ||||||
Derivative assets open purchase and sales commitments |
1,698 | | ||||||
Derivative assets futures contracts |
| 10,875 | ||||||
Derivative assets forwards contracts |
| 1,726 | ||||||
Receivables and secured loans, net |
$ | 42,901 | $ | 46,214 | ||||
Customer trade receivables represent short-term, noninterest-bearing amounts due from metal sales
and are generally secured by the related metals stored with the Company, a letter of credit issued
on behalf of the customer, or other secured interests in assets of the customer.
Secured loans represent short term loans made to customers of CFC. Loans are fully secured by
bullion, numismatic and semi-numismatic material, which is held in safekeeping by CFC. For the
years ended June 30, 2010, and 2009, the loans carried an average effective interest rate of 9.6%,
and 10%, respectively, per annum and mature in periods generally ranging from three months to one
year.
Wholesale trade advances represent advances on refined materials represent metals advanced to
customers, secured by unrefined materials received from the customer. These advances are limited to
a portion of the unrefined materials received. These advances are unsecured, short-term,
noninterest-bearing advances made to wholesale metals dealers and government mints.
Due from brokers principally consists of the margin requirements held at brokers related to open
futures contracts.
The Companys derivative assets and liabilities (depending on the year and ending position)
represent the net fair value of the difference between market values and trade values at the trade
dates for open metals purchase and sales contracts, as adjusted on a daily basis for changes in
market values of the underlying metals, until settled. (See above and Note 12).
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Table of Contents
The Companys derivative assets and liabilities (depending on the year and ending position) also
represent the net fair value of open metals forwards and futures contracts. The metals forwards and
futures contracts are settled at the contracts settlement dates (see above and Note 12).
Accounts receivable and consignor advances from the Companys Collectibles Segment consist of the
following at June 30, 2010, and 2009:
June 30, 2010 | June 30, 2009 | |||||||
(in thousands) | (in thousands) | |||||||
Auction and trade |
$ | 6,510 | $ | 7,555 | ||||
Less: allowance for doubtful accounts |
(383 | ) | (549 | ) | ||||
Accounts receivable and consignor advances, net |
$ | 6,127 | $ | 7,006 | ||||
The Company frequently extends trade credit in connection with its auction sales. The Company
evaluates each customers creditworthiness on a case-by-case basis. Generally, the customers that
receive trade credit are established collectors and professional dealers that have regularly
purchased property at the Companys auctions or whose reputation within the industry is known and
respected by the Company. The Company makes judgments as to the ability to collect outstanding
auction and consignor advances receivables and provides allowances for the portion of receivables
when collection becomes doubtful. Provisions are made based upon a specific review of all
significant outstanding invoices. The Company continuously monitors payments from its customers and
maintains allowances for doubtful accounts for estimated losses in the period they become probable.
After all attempts to collect a receivable have failed, the receivable is written off against the
allowance. Based on the information available, the Company believes its allowance for doubtful
accounts as of June 30, 2010, and 2009, is adequate. However, actual write-offs could exceed the
recorded allowance.
Activity in the allowance for doubtful accounts for Trading and Collectibles for the years ended
June 30, 2010, and 2009, are as follows:
Year Ended | Year Ended | |||||||
June 30, 2010 | June 30, 2009 | |||||||
(in thousands) | (in thousands) | |||||||
Beginning balance |
$ | (868 | ) | $ | (521 | ) | ||
Provision for losses |
22 | (440 | ) | |||||
Charge-offs to reserve |
309 | 39 | ||||||
Foreign currencies exchange rate charges |
52 | 54 | ||||||
Ending balance |
$ | (485 | ) | $ | (868 | ) | ||
6. INVENTORIES
Inventories as of June 30, 2010, and 2009, consisted of the following:
June 30, 2010 | June 30, 2009 | |||||||
(in thousands) | (in thousands) | |||||||
Trading segment inventories |
$ | 114,102 | $ | 92,043 | ||||
Less: provision for losses |
(350 | ) | (104 | ) | ||||
Trading, net |
$ | 113,752 | $ | 91,939 | ||||
Collectibles segment inventories |
$ | 25,290 | $ | 26,719 | ||||
Less: provision for losses |
(965 | ) | (3,004 | ) | ||||
Collectibles, net |
$ | 24,325 | $ | 23,715 | ||||
Total inventories, gross |
$ | 139,392 | $ | 118,762 | ||||
Less: provisions for losses |
(1,315 | ) | (3,108 | ) | ||||
Net inventories |
$ | 138,077 | $ | 115,654 | ||||
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Activity in the allowance for inventory loss reserves for the years ended June 30, 2010, and 2009,
are as follows:
Year Ended | Year Ended | |||||||
June 30, 2010 | June 30, 2009 | |||||||
(in thousands) | (in thousands) | |||||||
Beginning balance |
$ | (3,108 | ) | $ | (10,868 | ) | ||
Provision for losses |
(1,221 | ) | (1,356 | ) | ||||
Charge-offs to reserve |
2,947 | 7,867 | ||||||
Foreign currencies exchange rate changes |
67 | 1,249 | ||||||
Ending balance |
$ | (1,315 | ) | $ | (3,108 | ) | ||
7. PROPERTY AND EQUIPMENT
The Companys property and equipment for the years ended June 30, 2010, and 2009, are as follows:
June 30, 2010 | June 30, 2009 | |||||||
(in thousands) | (in thousands) | |||||||
Equipment |
$ | 2,102 | $ | 2,753 | ||||
Furniture and fixtures |
1,376 | 1,458 | ||||||
Vehicles |
248 | 207 | ||||||
Software |
1,741 | 1,448 | ||||||
Leasehold improvements |
1,365 | 1,559 | ||||||
6,832 | 7,425 | |||||||
Less: accumulated depreciation and amortization |
(4,555 | ) | (4,757 | ) | ||||
Net property and equipment |
$ | 2,277 | $ | 2,668 | ||||
Depreciation and amortization for the years ended June 30, 2010, and 2009, were approximately
$943,000 and $602,000, respectively.
During 2010, the Company disposed of some fixed assets resulting in a net loss of $144,000 which
was reflected as a component of general and administrative expenses. On April 1, 2009, the Company
sold real estate held for sale in the amount of $2,072,000, and recognized a gain of $432,000,
which was reflected as a component of general and administrative expenses.
8. GOODWILL AND OTHER PURCHASED INTANGIBLE ASSETS
Acquisitions
On January 1, 2010, Heinrich Köhler Auktionshaus Gmbh & Co KG acquired 100% of Postzegelveiling
Wiggers De Vries B.V. (PW), a privately-held, Netherlands-based auction house, for cash
consideration of $360,000. As part of and concurrent with the closing PWs name was changed to
Corinphila Veilingen B.V. In conjunction with the acquisition, $167,000 and $136,000 in goodwill
and customer lists were recorded, respectively.
In December 2008, the Company purchased Ponterio & Associates for $792,000, of which $592,000
was paid in December 2008 and $200,000 was paid in December 2009. The Company entered into an
earn-out agreement in connection with the purchase of Ponterio & Associates in which the Company
was obligated to provide additional consideration, thus increasing the original purchase price,
based on performance provisions of qualified earnings during the period from December 1, 2008
through November 30, 2009. The Company finalized the computation of the earn-out obligation as of
December 31, 2009 accruing $335,000 as of that date. Goodwill recorded in connection with this
earn-out is $248,000 and the Company recorded purchased intangibles relating to this earn-out
totaling $87,000.
Goodwill
During the year ended June 30, 2010, the Company recorded an additional $248,000 of goodwill
relating to an earn-out agreement in connection with the acquisition of Ponterio & Associates
(Numismatic), and $167,000 of goodwill related to the
F-23
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acquisition of Corinphila Veilingen B.V. (Philatelic). Ponterio & Associates is the only
acquisition that is tax deductible. The Company also recognized an impairment charge of $433,000 to
reduce the carrying value of goodwill of Bowers and Merena Auctions (Numismatic). During the year
ended June 30, 2009, the Company recorded $215,000 of goodwill relating to the acquisition of
Ponterio & Associates, and recognized an impairment charge of $780,000 to reduce the carrying value
of goodwill of Greg Martin Auctions (Militaria) to estimated fair value. The changes in the
carrying values of goodwill by business segments for the years ended June 30, 2010, and 2009, are
as described below:
June 30, 2009 | Additions and | June 30, 2010 | ||||||||||||||
(in thousands) | Adjustments | Impairments | (in thousands) | |||||||||||||
Trading |
$ | 4,884 | $ | | $ | | $ | 4,884 | ||||||||
Collectibles |
1,076 | 415 | (433 | ) | 1,058 | |||||||||||
$ | 5,960 | $ | 415 | $ | (433 | ) | $ | 5,942 | ||||||||
June 30, 2008 | Additions and | June 30, 2009 | ||||||||||||||
(in thousands) | Adjustments | Impairments | (in thousands) | |||||||||||||
Trading |
$ | 4,884 | $ | | $ | | $ | 4,884 | ||||||||
Collectibles |
1,641 | 215 | (780 | ) | 1,076 | |||||||||||
$ | 6,525 | $ | 215 | $ | (780 | ) | $ | 5,960 | ||||||||
Cumulative goodwill impairment totaled $4,263,000 and $3,830,000 at June 30, 2010 and 2009,
respectively. See Note 18 for further discussion of impairments, including methodology and inputs
used.
Other Purchased Intangible Assets
The carrying value of other purchased intangibles at June 30, 2010, and 2009, are as described
below:
June 30, 2010 | June 30, 2009 | |||||||||||||||||||||||||||||||||||
Estimated | (in thousands) | (in thousands) | ||||||||||||||||||||||||||||||||||
Useful | Gross | Gross | ||||||||||||||||||||||||||||||||||
Lives | Carrying | Accumulated | Accumulated | Net Book | Carrying | Accumulated | Accumlated | Net Book | ||||||||||||||||||||||||||||
(Years) | Amount | Amortization | Impairment | Value | Amount | Amortization | Impairment | Value | ||||||||||||||||||||||||||||
Trademarks |
Indefinite | $ | 2,685 | $ | | $ | (1,142 | ) | $ | 1,543 | $ | 2,616 | $ | | $ | (80 | ) | $ | 2,536 | |||||||||||||||||
Customer lists |
5-15 | 9,326 | (4,175 | ) | (776 | ) | 4,375 | 9,161 | (3,500 | ) | | 5,661 | ||||||||||||||||||||||||
Non- competes and
others |
4-15 | 2,309 | (2,279 | ) | | 30 | 2,302 | (2,198 | ) | | 104 | |||||||||||||||||||||||||
$ | 14,320 | $ | (6,454 | ) | $ | (1,918 | ) | $ | 5,948 | $ | 14,079 | $ | (5,698 | ) | $ | (80 | ) | $ | 8,301 | |||||||||||||||||
Other than trademarks, all of the Companys other purchased intangible assets are subject to
amortization. Amortization expenses, excluding impairment charges, related to the Companys
intangible assets were $756,000 and $1,205,000 for the years ended June 30, 2010, and 2009,
respectively. During the year ended June 30, 2010, the Company recorded $242,000 of additional
other purchased intangibles, including $87,000 for an earn-out agreement in connection with the
purchase of Ponterio & Associates as noted below, and $136,000 for the acquisition of Corinphila
Veilingen B.V. Also, during the year ended June 30, 2010, trademark impairment charges of $486,000,
$232,000, and $344,000 related to Bowers and Merena Auctions, H.R. Harmer Nutmeg Auctions
(Philatelic) and Greg Martin Auctions, respectively, and a customer list impairment charge of
$324,000, $95,000, and $357,000 related to Bowers and Merena Auctions, H.R. Harmer Nutmeg
Auctions, and Greg Martin were recorded. During the year ended June 30, 2009, the Company purchased
Ponterio & Associates for $592,000 in cash, plus a $200,000 hold-back that was paid in December
2009. The Company originally recorded $854,000 of other purchased intangibles that was allocated as
follows: $542,000 to trademark; $271,000 to customer list; and $41,000 to non-compete agreements.
Also, during the year ended June 30, 2009, an impairment charge related to the Bowers and Merena
Auctions trademark was recorded for $80,000. The Company wrote off $64,000 in fully amortized
non-compete intangibles during the three month period ended December 31, 2009.
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Estimated amortization expenses on an annual basis for the succeeding five years are as follows: |
Years ending June 30: | (in thousands) | |||
2011 |
$ | 442 | ||
2012 |
442 | |||
2013 |
437 | |||
2014 |
432 | |||
2015 |
432 | |||
Thereafter |
2,220 | |||
Total |
$ | 4,405 | ||
9. ACCOUNTS PAYABLE AND CONSIGNOR PAYABLES
Accounts payable consists of the following as of June 30, 2010, and 2009:
June 30, 2010 | June 30, 2009 | |||||||
(in thousands) | (in thousands) | |||||||
Trade payables to customers |
$ | 6,859 | $ | 5,696 | ||||
Advances from customers |
12,153 | 5,834 | ||||||
Net liabilities on margin accounts |
10,530 | 3,041 | ||||||
Due to brokers |
| 648 | ||||||
Derivative liabilities open purchase and sales commitments |
| 5,356 | ||||||
Derivative liabilities future contracts |
507 | | ||||||
Derivative liabilities forward contracts |
45 | | ||||||
Other accounts payable |
303 | 213 | ||||||
Accounts payable and consignor payable |
$ | 30,397 | $ | 20,788 | ||||
10. INCOME TAXES
Income (loss) before income taxes and non-controlling interests is shown below:
Year Ended | Year Ended | |||||||
June 30, | June 30, | |||||||
2010 | 2009 | |||||||
(in thousands) | (in thousands) | |||||||
U.S. |
$ | (2,045 | ) | $ | 13,173 | |||
Foreign |
1,843 | 1,099 | ||||||
Income / (loss) before income taxes
and non-controlling interests |
$ | (202 | ) | $ | 14,272 | |||
The income tax (provision)/benefit included the following for the years ended June 30, 2010, and
2009:
Year Ended | Year Ended | |||||||
June 30, | June 30, | |||||||
2010 | 2009 | |||||||
(in thousands) | (in thousands) | |||||||
Current: |
||||||||
Federal |
$ | 3,164 | $ | (1,845 | ) | |||
State |
(2,002 | ) | (869 | ) | ||||
Foreign |
(570 | ) | (435 | ) | ||||
Total current tax (provision)/ benefit |
592 | (3,149 | ) | |||||
Deferred: |
||||||||
Federal |
162 | 61 | ||||||
State |
68 | (42 | ) | |||||
Foreign |
(182 | ) | (7 | ) | ||||
Total deferred tax (provision)/ benefit |
48 | 12 | ||||||
Income tax (provision)/benefit |
$ | 640 | $ | (3,137 | ) | |||
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Table of Contents
The long term tax receivable of $4,974,000 represents a $3,424,000 carry-back claim for the 2005
taxable year and a $1,560,000 carry-back claim for the 2008 taxable year. Management of the
Company intends to effect the filing of such claims in Fiscal 2011.
Deferred income taxes are provided for differences in the basis of assets and liabilities for
financial reporting purposes and tax reporting purposes. Deferred tax assets (liabilities) are
comprised of the following as of June 30, 2010, and 2009:
June 30, | June 30, | |||||||
2010 | 2009 | |||||||
(in thousands) | (in thousands) | |||||||
Deferred tax assets: |
||||||||
Inventories |
$ | 656 | $ | 1,149 | ||||
Unrealized gains on futures contracts |
201 | | ||||||
Unrealized losses on open purchase and sales commitments |
| 1,444 | ||||||
Investments |
| 263 | ||||||
Stock-based compensation |
855 | 235 | ||||||
Intangible assets |
3,438 | 1,797 | ||||||
Property, plant & equipment |
109 | 84 | ||||||
Accrued compensation |
895 | 1,399 | ||||||
Legal settlement |
1,074 | 2,611 | ||||||
Net operating loss carry-forwards |
5,184 | 1.945 | ||||||
Charitable contribution carry-forward |
12 | 2,894 | ||||||
Foreign tax credit carry-forwards |
6,087 | 6,499 | ||||||
Accrual to cash adjustments |
1,200 | 1,295 | ||||||
Other |
541 | 844 | ||||||
Total deferred tax assets |
20,252 | 22,459 | ||||||
Less: valuation allowances |
(12,726 | ) | (13,984 | ) | ||||
Net deferred tax assets after valuation allowances |
7,526 | 8,475 | ||||||
Deferred tax liabilities: |
||||||||
Inventories |
2,580 | 742 | ||||||
Unrealized gains on open purchase and sales contracts |
654 | | ||||||
Unrealized gains on futures contracts |
| 4,152 | ||||||
Intangible assets |
698 | 136 | ||||||
Un-repatriated foreign earnings |
1,328 | 738 | ||||||
Withholding tax on foreign earnings |
1,179 | 1,177 | ||||||
Unrealized loss on foreign exchange |
1,354 | | ||||||
Unrealized foreign exchange translation adjustment |
1,395 | 3,241 | ||||||
Other |
83 | | ||||||
Total deferred tax liabilities |
9,271 | 10,186 | ||||||
Net deferred tax liabilities |
$ | 1,745 | $ | 1,711 | ||||
The Companys valuation allowance (decreased) increased by approximately $(1,258,000) and $82,000
during the years ended June 30, 2010 and 2009, respectively. As of June 30, 2010 and 2009, the
valuation allowance of approximately $12,726,000 and $13,984,000 respectively, was applied to
offset gross deferred tax assets that are not more likely than to be realized based on future
expectations of taxable income and the future likelihood of utilizing foreign tax credit
carry-forwards.
As of June 30, 2010, the Company has U.S. State net operating loss carry-forwards of approximately
$19,245,000, which expire at various periods beginning with the year ending June 30, 2011 through
the year ending June 30, 2030. The Company has Spanish and Swiss net operating loss carry-forwards
as of June 30, 2010 of approximately $9,895,000 and $371,000, respectively, which begin to expire
with the years ending June 30, 2021 and June 30, 2016, respectively. The Spanish net operating
loss carry-forwards has a full valuation allowance as the Spanish company is not expected to have
taxable income in the future. As of June 30, 2010, the Company has a foreign tax credit
carry-forward of approximately $6,087,000 that begins to expire during the year ending June 30,
2016.
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Table of Contents
On September 30, 2008, California enacted Assembly Bill 1452 which among other provisions, suspends
net operating loss deductions for 2008 and 2009 and extends the carry forward period of any net
operating losses not utilized due to such suspension; adopts the federal 20-year net operating loss
carry forward period; phases-in the federal two-year net operating loss carry-back periods
beginning in 2011 and limits the utilization of tax credits to 50 percent of a taxpayers taxable
income. The Company does not expect this change in tax law to materially impact its tax provision.
The California net operating loss carry-forward totaled $9,418,000 at June 30, 2010.
On November 6, 2009, the U.S. Congress enacted the Worker, Homeownership, and Business Assistance
Act of 2009 (P.L. 111-92). The new law significantly expanded the scope of the U.S. five-year net
operating loss carry-back. The Company recorded an additional current income tax benefit of
$1,550,000 during the year ended June 30, 2010, to account for additional carry-back opportunities
to the tax years ended June 30, 2005.
A reconciliation of the income tax provisions to the amounts computed by applying the statutory
federal income tax rate (34%) to the income (loss) before income tax provisions for the years ended
June 30, 2010, and 2009, are as below:
2010 | 2009 | |||||||
(in thousands) | (in thousands) | |||||||
(as restated) | ||||||||
Statutory income tax (expense)benefit |
$ | 69 | $ | (4,852 | ) | |||
State and local taxes, net of federal tax
benefit |
(119 | ) | (1,132 | ) | ||||
Foreign taxes at rates different for U.S. rates |
156 | (68 | ) | |||||
Tax on unrepatriated foreign earnings |
(298 | ) | 10 | |||||
Deferred tax asset write-offs/adjustments |
(563 | ) | | |||||
Valuation allowance |
3,104 | 3,298 | ||||||
Uncertain tax position |
(1,993 | ) | (81 | ) | ||||
Other |
284 | (312 | ) | |||||
Income tax (provision)/benefit |
$ | 640 | $ | (3,137 | ) | |||
The comparison of the effective income tax rate between periods is significantly influenced by the
level and mix of earnings and losses by taxing jurisdiction, foreign tax rate differentials, the
relative impact of permanent book to tax differences on lower pre-tax results by taxing
jurisdictions, recording of uncertain tax positions, and the recording of a valuation allowance
against certain state and foreign deferred tax assets and loss carry-forwards. Income taxes have
been provided on undistributed earnings of certain foreign subsidiaries that are not intended to be
indefinitely reinvested outside of the U.S. as of June 30, 2010 and 2009, respectively.
In July 2006, new accounting rules were issued, which clarified the accounting for uncertainty in
income taxes recognized in an entitys financial statements and prescribed a recognition threshold
and measurement attributes for financial statement disclosure of tax positions taken or expected to
be taken on a tax return. Under these rules, the impact of an uncertain income tax position on the
income tax return must be recognized at the largest amount that is more likely-than-not to be
sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be
recognized if there is less than a 50% likelihood of its being sustained. Additionally, these rules
provide guidance on de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition.
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction,
various state and foreign jurisdictions.
F-27
Table of Contents
The June 30, 2010 and 2009 balances are reflected as total liability for unrecognized tax benefit as follows (in thousands of dollars):
2010 | 2009 | |||||||
(in thousands) | (in thousands) | |||||||
(as restated) | ||||||||
Current Liabilities |
||||||||
Accrued Income Taxes |
$ | | $ | | ||||
Non-Current Liabilities |
||||||||
Deferred income taxes (contra assets,
netted against corresponding tax refund
receivables) |
20,426 | 20,426 | ||||||
Tax liability |
5,974 | 1,991 | ||||||
Total Liability for unrecognized tax benefits |
$ | 26,400 | $ | 22,417 | ||||
A reconciliation of the total unrecognized tax benefit at the beginning and end of the period:
2010 | 2009 | |||||||
(in thousands) | (in thousands) | |||||||
(as restated) | ||||||||
Balance at July 1, |
$ | 22,417 | $ | 22,247 | ||||
Increase as a result of tax position taken
during the current period |
3,983 | 170 | ||||||
Total Liability for unrecognized tax benefits |
$ | 26,400 | $ | 22,417 | ||||
Included in the balance in unrecognized tax benefits at June 30, 2010 and 2009, respectively, there
are $5,974,000 and $1,991,000 of tax benefits that, if recognized, would affect the effective tax
rate.
Interest and penalties recognized in the Companys consolidated statement of operations for the
years ended June 30, 2010 and 2009 are $381,000 and $114,000, respectively. Interest and penalties
of $865,000 and $484,000 are accrued as of June 30, 2010 and 2009, respectively, which is included
in deferred and other long term tax liabilities in the accompanying consolidated balance sheet.
Within the Deferred and Other Long Term Tax Liabilities include deferred taxes of $955,000 and
uncertain tax liabilities of $6,839,000. The uncertain tax liabilities include interest and
penalties.
Final determination of a significant portion of the Companys global unrecognized tax benefits that
will be effectively settled remains subject to ongoing examination by various taxing authorities,
including the Internal Revenue Service (IRS). The Company is actively pursuing strategies to
favorably settle or resolve these liabilities for unrecognized tax benefits. If the Company is
successful in mitigating these liabilities, in whole or in part, the impact will be recorded as an
adjustment to income tax expense in the period of settlement. The Company is currently under
examination by the IRS for the years ended June 30, 2004, 2005 and 2006, and other taxing
jurisdictions on certain tax matters, including challenges to certain positions the Company has
taken. With few exceptions, either examinations have been completed by tax authorities or the
statute of limitations have expired for U.S. federal, state and local income tax returns filed by
the Company for the years through 2003. Our Spanish operations are currently under examination as
discussed at Note 15. For our remaining foreign operations, either examinations have been completed
by tax authorities or the statute of limitations has expired for tax returns filed by the Company
for the years through 2002. As of June 30, 2010 the Company does not anticipate any material
changes to the balance in uncertain tax positions within the next twelve months.
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Table of Contents
11. FINANCING AGREEMENTS
A-Mark has a borrowing facility (Trading Credit Facility) with a group of five financial
institutions under an inter-creditor agreement, which provides for lines-of-credit of up to
$115,000,000 including a facility for letters of credit up to a maximum of $115,000,000. A-Mark
routinely uses the Trading Credit Facility to purchase metals from its suppliers and for operating
cash flow purposes. Amounts under the Trading Credit Facility bear interest based on London
Interbank Offered Rate (LIBOR) plus a margin. The 1-Month LIBOR rate was approximately 0.35% and
0.32% as of June 30, 2010, and 2009, respectively. Borrowings are due on demand and totaled
$45,200,000 and $52,750,000 for lines-of-credit and $4,750,000 and $4,750,000 for letters of credit
at June 30, 2010, and 2009, respectively. Amounts borrowed under the Credit Facility are secured by
A-Marks receivables and inventories. The amounts available under the Trading Credit Facility are
formula based and totaled $65,000,000 at June 30, 2010. The Trading Credit Facility also limits the
ability of A-Mark to pay dividends to SGI. The Trading Credit Facility is cancelable by written
notice from the financial institutions.
A-Marks Trading Credit Facility has certain restrictive financial covenants which require it and
SGI to maintain a minimum tangible net worth, as defined, of $20.0 million and $50.0 million,
respectively. A-Marks and SGIs tangible net worth at June 30, 2010, were $25.7 million and $70
million, respectively. The Companys ability to pay dividends, if it were to elect to do so, could
be limited as a result of these restrictions.
A-Mark also borrows metals from several of its suppliers under short-term agreements bearing
interest at a designated rate. Amounts under these agreements are due at maturity and require
repayment either in the form of metals borrowed or cash. A-Marks had borrowed metals included in
inventories with market values totaling $40,841,000 and $15,100,000 at June 30, 2010, and 2009,
respectively. Certain of these metals are secured by letters of credit issued under the Trading
Credit Facility, which totaled $4,750,000 and $4,750,000 at June 30, 2010, and 2009, respectively.
Interest expense related to the A-Marks borrowing arrangements totaled $1,616,000, and $2,150,000,
for the years ended June 30, 2010, and 2009, respectively.
In May 2010, the Company and its three wholly-owned numismatic subsidiaries, Spectrum Numismatics
International, Inc. (SNI), Bowers and Merena Auctions, LLC (Bowers), and Teletrade, Inc.
(Teletrade), entered into a borrowing facility with a lender, providing for a line-of-credit (the
Collectibles Credit Facility) up to a maximum of $7.5 million. Amounts outstanding under the
Credit Facility are secured by the assets of SNI, Bowers, and Teletrade, and are further guaranteed
by the Company. The Companys obligations under the guaranty are secured by the pledge of SNI
shares owned by it. The Collectibles Credit Facility is repayable on demand, and interest on
outstanding amounts accrue at the lenders base rate (3.25% at June 30, 2010, which is subject to
change), plus 1.5% per annum. Separately, A-Mark, the Companys precious metals trading company,
has a line of credit with this lender totaling $15.0 million, which is a component of A-Marks
Trading Credit Facility. Total borrowing capacity between SNI and A-Mark cannot exceed $17.5
million with respect to this lender. As of June 30, 2010 the total amount borrowed was $7.7
million, $2.0 million by SNI and $5.7 million by A-Mark.
The amount outstanding as of June 30, 2010, was $2.0 million at an interest rate of 4.75%. Amounts
available for borrowing under this Collectibles Credit Facility as of June 30, 2010 was $5.5
million. Total interest expense related to this Collectibles Credit Facility totaled $15,000 for
the year ended June 30, 2010.
12. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
The Company manages the value of certain specific assets and liabilities of its trading business,
including trading inventories by employing a variety of strategies. These strategies include the
management of exposure to changes in the market values of the Companys trading inventories through
the purchase and sale of a variety of derivative products such as metals forwards and futures.
The Companys trading inventories and purchase and sale transactions consist primarily of precious
metals bearing products. The value of these assets and liabilities are linked to the prevailing
price of the underlying precious metals. The Companys precious metals inventories are subject to
market value changes, created by changes in the underlying commodity markets.
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Inventories purchased or borrowed by the Company are subject to price changes. Inventories borrowed
are considered natural hedges, since changes in value of the metals held are offset by the
obligation to return the metals to the supplier.
Open purchase and sale commitments are subject to changes in value between the date the purchase or
sale price is fixed (the trade date) and the date the metals are received or delivered (the
settlement date). The Company seeks to minimize the effect of price changes of the underlying
commodity through the use of forwards and futures contracts.
The Companys policy is to substantially hedge its inventory positions, net of open purchase and
sales commitments that are subject to price risk. The Company regularly enters into metals
commodity forwards and futures contracts with major financial institutions to hedge price changes
that would cause changes in the value of its physical metals positions and purchase commitments and
sale commitments. The Company has access to all of the precious metals markets, allowing it to
place hedges. However, the Company also maintains relationships with major market makers in every
major precious metals dealing center.
Due to the nature of the Companys global hedging strategy, the Company is not using hedge
accounting as defined in under ASC 815 Derivatives and Hedging. Gains or losses resulting from the
Companys futures and forwards contracts are reported as unrealized gains or losses on commodities
contracts with the related unrealized amounts due from or to counterparties reflected as derivative
assets or liabilities (see Note 6). Gains or losses resulting from the termination of hedge
contracts are reported as realized gains or losses on commodities contracts. Net losses on
derivative instruments in the consolidated statements of operations of $18,461,000, and $2,647,000,
for the years ended June 30, 2010, and 2009, respectively, includes both realized and unrealized
amounts.
The Companys management sets credit and position risk limits. These limits include gross position
limits for counterparties engaged in purchase and sales transactions with the Company. They also
include collateral limits for different types of purchase and sale transactions that counter
parties may engage in from time to time.
A summary of the market values of the Companys physical inventory positions, purchase and sale
commitments, and its outstanding forwards and futures contracts is as follows at June 30, 2010, and
2009:
June 30, 2010 | June 30, 2009 | |||||||
(in thousands) | (in thousands) | |||||||
As restated | ||||||||
Trading inventories, net |
$ | 113,753 | $ | 91,939 | ||||
Less un-hedged inventories: |
||||||||
Inventory reserve |
350 | 104 | ||||||
Commemorative coins |
| (3,517 | ) | |||||
Premiums on metal positions |
(1,034 | ) | (1,477 | ) | ||||
Subtotal |
113,069 | 87,049 | ||||||
Commitments at market: |
||||||||
Open inventory purchase commitments |
153,215 | 131,844 | ||||||
Open inventory sale commitments |
(56,903 | ) | (38,370 | ) | ||||
Margin sale commitments |
(19,356 | ) | (7,358 | ) | ||||
Premiums on open commitment positions |
(26 | ) | 32 | |||||
Inventory borrowed from suppliers |
(40,841 | ) | (15,100 | ) | ||||
Advances on industrial metals |
1,508 | 700 | ||||||
Inventories subject to price risk |
150,666 | 158,797 | ||||||
Inventories subject to derivative financial instruments: |
||||||||
Precious metals forwards contracts at market values |
49,985 | 27,731 | ||||||
Precious metals futures contracts at market values |
105,769 | 132,651 | ||||||
Total market value of derivative financial instruments |
155,754 | 160,382 | ||||||
Net inventories subject to price risk, Company
consolidated basis |
$ | (5,088 | ) | $ | (1,585 | ) | ||
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June 30, 2009 | ||||||||
June 30, 2010 | (in thousands) | |||||||
(in thousands) | As restated | |||||||
Effects of open related party transaction
between A-Mark and affiliates: |
||||||||
Net inventory subject to price risk,
Company consolidated basis |
$ | (5,088 | ) | $ | (1,585 | ) | ||
Open inventory purchase commitments
with affiliates |
4,981 | 1,088 | ||||||
Net inventory subject to price risk,
A-Mark stand-alone basis |
$ | (107 | ) | $ | (497 | ) | ||
At June 30, 2010, and 2009, the Company had outstanding purchase and sale commitments arising in
the normal course of business totaling $153,215,000 and $131,844,000 and $(56,903,000) and
$(38,370,000), respectively; purchase commitments related to open forward contracts totaling
$49,985,000, and $27,731,000; and purchase and sale commitments relating to open futures contracts
totaling $105,769,000, and $132,651,000, respectively. The Company uses forward contracts and
futures contracts to protect its inventories from market exposure.
The contract amounts of these forwards and futures contracts and the open purchase and sale orders
are not reflected in the accompanying consolidated balance sheets. The difference between the
market prices of the underlying metals or contracts and the trade amounts are recorded at fair
value. The Companys open purchase and sales commitments generally settle within 2 business days,
and for those commitments that do not have stated settlement dates, the Company has the right to
settle the positions upon demand. Futures and forwards contracts open at June 30, 2010, are
scheduled to settle within 90 days.
The Company is exposed to the risk of failure of the counter parties to its derivative contracts.
Significant judgment is applied by the Company when evaluating the fair value implications. The
Company regularly reviews the creditworthiness of its major counterparties and monitors its
exposure to concentrations. At June 30, 2010, the Company believes its risk of counterparty default
is mitigated as a result of such evaluation and the short-term duration of these arrangements.
13. RELATED PARTY TRANSACTIONS
As part of the A-Mark sale agreement dated July 15, 2005, the former owner was paid $93,000 and
$84,000 for his portion of income earned on a specific type of transaction for the years ended June
30, 2010 and 2009, respectively. The Trading segment accrued $93,000 and $84,000 in royalty
expenses for the years ended June 30, 2010, and 2009, respectively, which represented the total
amount due to the former owner as of June 30, 2010.
14. NON-CONTROLLING INTEREST
Minority interest represents Auctentias 20% share in the net assets and income of A-Mark and the
outside partners 50% interest in the net assets and income of the WGBV joint venture. As explained
in Note 2, the joint ventures original termination date is June 30, 2011. In May 2010, the
parties agreed to a partial distribution, whereby all remaining funds at the time, except for
$10,000, were distributed to the parties.
The Companys consolidated balance sheet includes the following non-controlling interests as of
June 30, 2010, and 2009:
June 30, 2010 | June 30, 2009 | |||||||
(in thousands) | (in thousands) | |||||||
Auctentia 20% interest in Spectrum PMI |
$ | 7,018 | $ | 9,167 | ||||
Winter Games Bullion Ventures, LLC 50% outside interest |
5 | 1,147 | ||||||
Total |
$ | 7,023 | $ | 10,314 | ||||
The Companys consolidated statements of operations for the year ended June 30, 2010, and 2009,
included the following non-controlling interest components:
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Year Ended | Year Ended | |||||||
June 30, 2010 | June 30, 2009 | |||||||
(in thousands) | (in thousands) | |||||||
Auctentia 20% interest in Spectrum PMI |
$ | 1,352 | $ | 3,346 | ||||
Winter Games Bullion Ventures, LLC 50% interest |
138 | 653 | ||||||
Total |
$ | 1,490 | $ | 3,999 | ||||
The following table summarizes the balance sheets of WGBV at June 30, 2010, and 2009:
June 30, 2010 | June 30, 2009 | |||||||
(in thousands) | (in thousands) | |||||||
Cash |
$ | 10 | $ | 154 | ||||
Receivables |
| 21 | ||||||
Inventories |
| 3,516 | ||||||
Total assets |
$ | 10 | $ | 3,691 | ||||
Accounts payable |
$ | | $ | 1,397 | ||||
Members equity |
10 | 2,294 | ||||||
Total liabilities and members equity |
$ | 10 | $ | 3,691 | ||||
The following table summarizes the statements of operations of WGBV for the years ended June 30,
2010 and 2009:
For the | For the | |||||||
year ended | year ended | |||||||
June 30, 2010 | June 30, 2009 | |||||||
(in thousands) | (in thousands) | |||||||
Sales |
$ | 26,818 | $ | 46,234 | ||||
Cost of products sold |
25,782 | 44,012 | ||||||
Gross profit |
1,036 | 2,222 | ||||||
Operating expenses |
759 | 916 | ||||||
Net income |
$ | 277 | $ | 1,306 | ||||
15. COMMITMENTS AND CONTINGENCIES
Litigation, Claims and Contingencies
The Company may become party to various legal actions that arise in the ordinary course of its
business. During the course of its operations, the Company is also subject to audit by tax
authorities for varying periods in various federal, state, local and foreign tax jurisdictions.
Disputes may arise during the course of such audits as to facts and matters of law. It is
impossible at this time to determine the ultimate liabilities that the Company may incur resulting
from any lawsuits, claims and proceedings, audits, commitments, contingencies and related matters
or the timing of these liabilities, if any. If these matters were to be ultimately resolved
unfavorably, an outcome not currently anticipated, it is possible that such outcome could have a
material adverse effect upon the Companys consolidated financial position or results of
operations. However, the Company believes that the ultimate resolution of such actions will not
have a material adverse affect on the Companys consolidated financial position, results of
operations, or liquidity.
Operating Leases
The Company leases its facilities and a portion of its equipment under operating leases that expire
at various dates through fiscal 2013. Some of the operating leases provide for increasing rents
over the terms of the leases. Total rent expense under these leases is recognized ratably over the
initial renewal period of each lease. The following table presents future lease commitments under
non-cancelable operating leases:
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Operating | ||||
Leases | ||||
For the years ending June 30: | (in thousands) | |||
2011 |
$ | 1,168 | ||
2012 |
363 | |||
2013 |
224 | |||
2014 |
| |||
2015 |
| |||
Total future minimum lease payments |
$ | 1,755 | ||
Total rent expense under operating leases in the Companys operations were approximately
$1,103,000, and $1,353,000, for the years ended June 30, 2010, and 2009, respectively.
Contractual Obligations
On April 9, 2008, in connection with the WGBV joint venture Agreement, A-Mark entered into a series
of agreements with a counter party to purchase a minimum amount of Bullion and Commemorative coins
in exchange for certain exclusive distribution rights.
On July 21, 2009, A-Mark signed an amendment with the Royal Canadian Mint to reduce its minimum
purchase commitment of Olympic Numismatic Coin Products. Under the terms of this agreement, as
amended, A-Mark is required to purchase 20,750 One Ounce Gold Bullion Coins and 150,000 One Ounce
Silver Bullion coins. A-Mark is also required to purchase $7,000,000 (Canadian Dollars) in
Commemorative Coins. A-Mark met these commitments by February 26, 2010.
Consulting, Employment and Non-Compete Agreements
The Company has entered into various consulting, employment and non-compete and/or non-solicitation
agreements with certain key executive officers and other key employees. The employment agreements
provide for minimum salary levels, incentive compensation and severance benefits, among other
items.
Employee Benefit Plans
The Company maintains an employee savings plan for United States employees under the Internal
Revenue Code Section 401(k). Employees are eligible to participate in the plan after one complete
calendar month of service and become fully vested after five years of service. Employee
contributions are discretionary to a maximum of 15% of compensation. For all plan members, the
Company contributed 10% of all eligible employees contributions to a maximum annual contribution
of $750 per employee. The Companys total contribution was approximately $73,000 and $41,000, for
the years ended June 30, 2010, and 2009, respectively.
Restricted Capital of Foreign Subsidiaries
Certain of the Companys foreign jurisdictions maintain nominal regulatory capital requirements.
Registration Rights
Shares of the Companys common stock owned by Auctentia carry demand registration rights. If a
demand is made by Auctentia, such registration rights are subject to commercial best efforts
without penalty if registration is not affected.
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Legal Proceedings
Ongoing Legal Proceedings Against Certain of the Companys Former Officers and Directors Relating
to the Companys Transactions with Afinsa
Spanish Criminal Investigation
In May 2006, Spanish judicial authorities shut down the operations of Afinsa and began an
investigation related to alleged criminal wrongdoing, including money laundering, fraud, tax
evasion and criminal insolvency. The Spanish criminal investigation initially focused on Afinsa and
certain of its executives and was later expanded to include several former officers and directors
of SGI and CdC, including (most recently) Messrs. Manning and Crawford. From June 2003, through May
2006, we supplied philatelic material to Afinsa, and we understand that Afinsa used the material in
connection with transactions between itself and its clients. According to the Afinsa Report (a
report issued by the Trustees appointed in the Afinsa insolvency process), investors would enter
into contracts with investors to sell purchase specified philatelic material from Afinsa. These
investors would deposit funds with Afinsa for a specified period of years, and at the end of an
agreed-upon contract term the investors would have the option of receiving either (i) the specified
stamps or other philatelic materials set forth in the contract, or (ii) the principal sum invested,
plus a contractually specified interest rate. In most cases, Afinsa maintained (at the investors
request) physical possession of the philatelic material until the end of the contract term.
The allegations against Afinsa and the certain named individuals relate to the central claim that
Afinsas business operations constituted a fraudulent Ponzi scheme, whereby funds received from
later investors were used to pay interest to earlier investors, and that the stamps that were the
subject of the investment contracts were highly overvalued. Spanish authorities have preliminarily
alleged that Messrs. Manning and Crawford knew Afinsas business, and aided and abetted in its
activity by, among other things, causing the Company to supply allegedly overvalued stamps to
Afinsa.
Several of our other former officers and directors, including Esteban Perez, formerly the Chairman
of our Board of Directors, Carlos de Figueiredo, formerly the Second Vice Chairman of our Board of
Directors (and the son of one of the founders of Afinsa), and Ramon Egurbide, formerly the head of
our European Operations, have testified as defendants in these proceedings. Spanish authorities are
also seeking the testimony of Messrs. Manning and Crawford as
defendants. The Company understands that, under Spanish law, after the end of the investigative stage, which is
expected to last for years, the Spanish Investigative Court will determine whether there are
grounds to bring formal charges and to continue to a trial or whether the proceedings should be
dismissed.
As the Company understands Spanish law, if any of these former officers or directors of SGI or CdC
is ultimately found guilty, then, under the principle of secondary civil liability, the corporation
could be held liable for certain associated penalties. However, neither SGI nor CdC is currently a
party to these criminal proceedings, and the effect, if any, on the Company cannot be determined at
this time. Accordingly, because there remains an uncertainty as to the ultimate impact on the
Company, the Companys consolidated financial statements do not include an accrual as a result of
this contingent liability.
Messrs. Manning and Crawford (and certain of the other former officers and directors of the Company
who are the subject of the Spanish criminal investigation) are entitled to receive advances from
the Company for their legal fees and expenses in connection with the Spanish criminal proceedings.
IRS and New York State Tax Audits
In February 2008, the IRS commenced an audit of SGIs tax returns for fiscal 2004, 2005 and 2006.
In March 2008, the New York State Department of Taxation and Finance began an audit of SGIs tax
returns for fiscal 2005, 2006 and 2007.
These audits are ongoing and the outcome cannot be determined at this time. Accordingly, because
there remains an uncertainty as to the ultimate impact should there be an adverse outcome as a
result of these audits, the Companys consolidated financial statements do not include an accrual
for these contingent liabilities.
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Tax Investigation in Spain
On November 17, 2005, the Spanish tax authorities commenced a tax examination of CdC. This
examination, which now covers all periods from fiscal 2001 through fiscal 2004 and subsequently
extended to fiscal year 2005 and 2006 is ongoing and the outcome cannot be determined at this time.
Accordingly, because there remains an uncertainty as to the ultimate impact should there be an
adverse outcome as a result of this inspection, the Companys consolidated financial statements do
not include an accrual for this contingent liability.
SEC Action
On March 23, 2009, the Company announced that it had reached a settlement with the SEC, which
resolved charges filed against the Company in connection with the SECs investigation into the
Companys historical transactions with Afinsa. Under the terms of the SEC Settlement, which was
approved by the U.S. District Court for the Southern District of New York on March 30, 2009, the
Company consented, without admitting or denying the allegations made in the SECs complaint to a
permanent injunction against any future violations of certain provisions of the federal securities
laws, including those requiring us to make all filings under the Exchange Act.
While the Company will endeavor to comply fully with the terms of the SEC Settlement, it is
possible that the SECs enforcement staff may take issue with our compliance, despite our efforts.
In particular, the Company is not currently in compliance with the requirement that the Company
make all necessary filings under the Exchange Act; the Company has not filed amended Reports on
Form 10-K for the years ended June 30, 2004 and 2005 (either separately or as part of a
comprehensive Report on Form 10-K); the Company has not filed Reports on Form 10-K for the fiscal
years ended June 30, 2008, 2007 and 2006; and the Company has not filed Reports on Form 10-Q (or
amended Reports on Form 10-Q, as the case may be) for any quarter during these fiscal years. The
reason the Company has not been able to file these Reports to date is that the Company faces two
major issues with completing its audit of the financial statements for its North American
Philatelic Division ,and therefore the audit of the Companys consolidated financial statements for
any year prior to June 30, 2008. First, many of the accounting records for that Division for the
prior periods specifically, the supporting analyses for balance sheet and statement of operations
are incomplete and need to be reconstructed. Second, the Company has experienced significant
turnover in its accounting and corporate personnel since 2006, which has adversely impacted the
Companys ability to reconstruct these financial data.
The failure by the Company to comply with the SEC Settlement, or any perception that it has failed
to comply with the SEC Settlement, could result in further enforcement actions by the SEC,
including the imposition of sanctions or fines. In addition, the SEC could commence proceedings to
suspend or revoke the registration of the Companys common stock under Section 12(j) of the
Exchange Act. The SEC could also seek to impose a trading halt in the Companys common stock for up
to ten trading days if it believes the public interest and the protection of investors requires it
to do so. Should the Companys common stock be de-registered, brokers, dealers and other market
participants would be prohibited from buying or selling, making a market in, or publishing
quotations or otherwise effecting transactions with respect to our common stock. As a result,
public trading of the Companys common stock would cease. This could have an adverse impact by
reducing the liquidity of the Companys common stock and prevent investors from buying or selling
its common stock in the public market.
Also on March 23, 2009, the SEC filed an action in the U.S. District Court for the Southern
District of New York against Messrs. Manning and Crawford in connection with its investigation. In
the action, the SEC seeks a permanent injunction against future violations of certain provisions of
the federal securities laws, and it also seeks disgorgement and civil monetary penalties in an
unspecified amount. The action against Mr. Manning was settled on August 23, 2010. The action
against Mr. Crawford has not been settled.
The Company terminated Mr. Mannings consulting arrangement with the Company for cause in April
2007, and Mr. Crawford left the Company in June 2006.
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The Company is continuing to advance fees and expenses to Mr. Crawford in connection with the SEC
action, and may be obligated to indemnify and reimburse Mr. Crawford for amounts paid by him in
connection with money judgments, penalties or settlements in the SEC action.
Greg Manning v. Spectrum Group International, Inc.
On or about August 7, 2007, Mr. Manning commenced arbitration against the Company before the
American Arbitration Association. Mr. Manning purported to assert claims for breach of contract
and defamation, based on his allegation that the Company wrongfully terminated his consultancy for
cause in April 2007. Mr. Manning sought damages of approximately $34.0 million, consisting of,
among other things, amounts that Mr. Manning claimed he was owed under his consulting agreement
with the Company, compensation for vacation and comp days, and damages allegedly resulting from
harm to his name and reputation.
On or about March 28, 2008, the Company filed counterclaims against Mr. Manning for breach of
contract, breach of fiduciary duty and unjust enrichment, based on Mr. Mannings breaches of his
contractual and fiduciary obligations in connection with the Companys transactions with Afinsa.
On July 8, 2010, the Company entered into a settlement agreement with Mr. Manning, pursuant to
which it agreed to pay approximately $2.7 million in cash to Mr. Manning, of which $300,000 was to
be placed into an escrow account to satisfy certain of the Companys continuing
advancement/indemnification obligations. The Company fully accrued for the settlement at June 30,
2010 and paid all amounts due under the settlement agreement in August 2010. The Company will
continue to have certain indemnification obligations to Mr. Manning. The fair value of this
indemnification obligation does not exceed the $300,000 that has been placed in escrow.
Securities Class Action and Shareholder Derivative Lawsuit
In May 2006, the Company and certain of its current and former officers were sued in connection
with the Companys transactions with Afinsa. In the derivative lawsuit, In re Escala Group, Inc.
Derivative Litigation, the plaintiffs generally made claims against the defendants for breach of
fiduciary duty, mismanagement, waste of corporate assets and unjust enrichment. In the securities
class action, In re Escala Group, Inc. Securities Litigation, the plaintiffs alleged that the
defendants participated in a scheme with Afinsa that caused the Companys reported revenues, gross
profit, net income and inventory to be materially overstated, and that the defendants made
materially false and misleading statements in the Companys publicly filed financial reports.
Both of these matters were settled in December 2008. Under the court-approved settlements, all
claims asserted in both actions were dismissed with prejudice and without any admission of
liability or wrongdoing.
In conjunction with the settlement agreements, the Company accrued a litigation settlement accrual
as of June 30, 2008, totaling $14,995,000, comprised of a $8,000,000 in minimum share
consideration, and $6,995,000 in cash consideration. The accrual totaled $6,556,000 or 3,278,000
shares at June 30, 2009, representing the minimum share consideration of $8,000,000 less the shares
issued as payment of court-approved legal fees in plaintiffs counsel in fiscal 2009 (as discussed
below) totaling $1,444,000. The Company has also recorded a litigation receivable from insurers
totaling $5,975,000 at June 30, 2008, which was received in full in fiscal 2009. Accordingly, the
Company has recorded a net charge of $9,020,000 to its consolidated statement of operations for the
year ended June 30, 2008.
As part of the settlement of the derivative lawsuit, the Company recovered $5.50 million from
insurers on behalf of certain of the named defendants in one or both proceedings. The Company also
agreed to adopt (and has since adopted) certain corporate governance policies and procedures
relating to revenue recognition, our internal audit function, codes of ethics, and board and
committee composition and continuing education, among other things. The Company also paid all of
plaintiffs court-approved attorneys fees of $925,000, together with approved expenses of $70,000.
The Companys insurer funded $475,000 of these amounts.
Under the settlement of the securities class action, SGI was required to contribute an aggregate of
$6 million in cash and 4 million newly issued shares of its stock to a settlement fund for the
benefit of the class members. During the fiscal year ended
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June 30, 2008, the Company contributed the full $6 million in cash to the fund, a substantial
portion of which was funded by insurers.
As part of its order relating to the securities class action, the court awarded attorneys fees to
plaintiffs counsel of $3.25 million, of which 44.5% was to be paid in common stock of the Company.
Accordingly, on January 14, 2009, the Company issued to plaintiffs counsel a total of 772,430
shares of the Companys common stock, based upon a value of $1.87 per share (the date of the
issuance of the shares and the calculation of the value of the shares to be issued was determined
in accordance with the settlement agreement), with an aggregate value of $1,444,000. Thereafter, in
February 2009, SGI repurchased those shares at a purchase price of $1.55 per share totaling
$1,197,000. The shares have since been cancelled and returned to the status of authorized but
unissued shares. No gain was recognized by the Company as a result of the repurchase.
On October 1, 2009, the Company issued the remaining 3,277,777 shares of common stock to the
settlement fund. The Company has no further obligation or liability under the settlement agreement.
Seymour Ehrenpreis v. Nutmeg Stamps, et al
In May 2009, Seymour Ehrenpreis commenced an action against a subsidiary of the Company and certain
of its officers for breach of contract and other matters, all based on allegations of failure to
fulfill oral commitments. The plaintiff seeks compensatory damages of at least $1.3 million and
punitive damages of at least $1.3 million. This action is in its early stages and the Company
cannot currently estimate the likelihood of an adverse outcome. The Company intends to assert a
vigorous defense against this action.
16. STOCKHOLDERS EQUITY
Stock Option Plan
In 1997, the Companys Board of Directors adopted and the Companys shareholders approved the 1997
Stock Incentive Plan, as amended (the 1997 Plan). Under the 1997 Plan, SGI has granted options
and other equity awards as a means of attracting and retaining officers, employees, non-employee
directors and consultants, to provide incentives to such persons, and to align the interests of
such persons with the interests of stockholders by providing compensation based on the value of
SGIs stock. Awards under the 1997 Plan may be granted in the form of non-qualified stock options,
stock appreciation rights (SARs), restricted stock, restricted stock units, dividend equivalent
rights and other stock-based awards (which may include outright grants of shares). The 1997 Plan
currently is administered by the Board of Directors, which may in its discretion select officers
and other employees, directors (including non-employee directors) and consultants to SGI and its
subsidiaries to receive grants or awards.
Under the 1997 Plan, the exercise price of options and the base price of SARs may be set at the
discretion of the Board, and stock options and SARs may have any term. The majority of the stock
options granted through June 30, 2010 under the 1997 Plan have been granted with an exercise price
equal to market value on the date of grant. The 1997 Plan limits the number of stock options and
SARs that may be granted to any one employee to 550,000 in any year. The 1997 Plan will terminate
when no shares remain available for issuance and no awards remain outstanding. At June 30, 2010,
there were 711,999 shares remaining available for future awards under the 1997 Plan.
Employee Stock Options. During the years ended June 30, 2010, and 2009, the Company recorded $0 and
$0, respectively, of expense in the consolidated statements of operations related to the vesting of
previously issued employee stock options. The Company made no grants during the years ended June
30, 2010, and 2009. The grants were fully expensed during the year ended June 30, 2008.
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The following table summarizes the stock option activity for the years ended June 30, 2010,
and 2009:
Weighted | ||||||||||||||||
Average | ||||||||||||||||
Weighted | per share | |||||||||||||||
Average | Intrinsic Value | Grant Date | ||||||||||||||
Options | Exercise Price | (in thousands) | Fair Value | |||||||||||||
Outstanding at June 30, 2008 |
613,325 | $ | 6.14 | $ | 114 | $ | 4.69 | |||||||||
Granted through stock option plan |
| | | | ||||||||||||
Exercised |
| | | | ||||||||||||
Expired |
| | | | ||||||||||||
Forfeited |
(9,000 | ) | $ | 9.57 | (10 | ) | $ | 8.68 | ||||||||
Outstanding at June 30, 2009 |
604,325 | $ | 6.09 | 104 | $ | 4.63 | ||||||||||
Granted through stock option plan |
| | | | ||||||||||||
Exercised |
| | | | ||||||||||||
Expired |
| | | | ||||||||||||
Forfeited |
| | | | ||||||||||||
Outstanding at June 30, 2010 |
604,325 | $ | 6.09 | $ | 104 | $ | 4.63 | |||||||||
Shares exercisable at June 30, 2009 |
604,325 | $ | 6.09 | $ | 104 | $ | 4.63 | |||||||||
Shares exercisable at June 30, 2010 |
604,325 | $ | 6.09 | $ | 104 | $ | 4.63 | |||||||||
Following is a summary of the status of stock options outstanding at June 30, 2010:
Options Outstanding | Options Exercisable | |||||||||||||||||||||||||||
Weighted | Weighted | Weighted | ||||||||||||||||||||||||||
Number of | Average | Average | Number of | Average | ||||||||||||||||||||||||
Exercise Price Ranges | Shares | Remaining | Exercise | Shares | Exercise | |||||||||||||||||||||||
From | To | Outstanding | Contractual Life | Price | Exercisable | Price | ||||||||||||||||||||||
$ | 1.00 | $ | 5.00 | 391,250 | 2.8 | $ | 2.28 | 391,250 | $ | 2.28 | ||||||||||||||||||
$ | 5.01 | $ | 10.00 | 26,200 | 3.3 | $ | 8.96 | 26,200 | $ | 8.96 | ||||||||||||||||||
$ | 10.01 | $ | 15.00 | 186,875 | 3.7 | $ | 13.65 | 186,875 | $ | 13.65 | ||||||||||||||||||
604,325 | 3.1 | $ | 6.09 | 604,325 | $ | 6.09 | ||||||||||||||||||||||
Restricted Stock Grants. The Company has issued restricted stock to certain members of management
and key employees. During the years ended June 30, 2010, and 2009, the Company issued 604,726 and
531,548, restricted shares at a weighted average issuance price of $2.53 and $2.51, respectively.
Such shares generally vest between one and three years from the date of grant. Total compensation
expense recorded for restricted shares for the years ended June 30, 2010, and 2009, was $1,843,000
and $1,114,000, respectively. The remaining stock compensation expense that will be recorded under
restricted stock grants for all outstanding grants as of June 30, 2010 totals $374,000 and will
amortized over 36 months.
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The following table summarizes the restricted stock grant activity for the years ended June 30,
2010, and 2009:
Weighted | ||||||||
Average share | ||||||||
Shares | price at grant date | |||||||
Outstanding as of June 30, 2008 |
279,892 | $ | 2.64 | |||||
Shares issued |
531,548 | $ | 2.51 | |||||
Shares exercised |
(99,838 | ) | $ | 2.66 | ||||
Shares forfeited |
| |||||||
Shares withheld for employee taxes |
(34,920 | ) | $ | 2.18 | ||||
Outstanding as of June 30, 2009 |
676,682 | $ | 2.54 | |||||
Shares issued |
604,726 | $ | 2.53 | |||||
Shares exercised |
(306,002 | ) | $ | 2.67 | ||||
Shares forfeited |
(34,334 | ) | $ | 2.05 | ||||
Shares withheld for employee taxes |
(64,011 | ) | $ | 2.66 | ||||
Outstanding at June 30, 2010 |
877,061 | $ | 2.51 | |||||
Vested but unissued at June 30, 2010 |
596,228 | |||||||
Stock Appreciation Rights. The Company, from time to time, enters into separate share-based payment
arrangements with certain key employees and executive officers. The number of shares to be received
under these awards ultimately depends on the appreciation in the Companys common stock over a
specified period of time, generally three years. At the end of the stated appreciation period, the
number of shares of common stock issued will be equal in value to the appreciation in the shares of
the Companys common stock, as measured from the stocks closing price on the date of grant to the
average price in the last month of the third year of vesting. As of June 30, 2010, and 2009, there
were approximately 37,500, and 37,500, stock appreciation rights outstanding with an exercise price
of $12.06, and $12.06, per share, respectively. At June 30, 2010, and 2009, there was no intrinsic
value associated with these arrangements. The Company recorded the awards as a component of equity
using the Black-Scholes valuation model. These awards are amortized on a straight-line basis over
the vesting period. For the years ended June 30, 2010, and 2009, the Company recognized
approximately $0, and $0, respectively, of pre-tax compensation expense related to these grants,
based on a weighted average risk free rate of 4.06%, and 4.06%, a volatility factor of 253%, and
253%, and a weighted average expected life of seven and seven years, respectively. The remaining
compensation expense that will be recorded in future fiscal years totals $0.
Certain Anti-Takeover Provisions
The Companys Certificate of Incorporation and By-laws contain certain anti-takeover provisions
that could have the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of the Company without negotiating
with its Board of Directors. Such provisions could limit the price that certain investors might be
willing to pay in the future for the Companys securities. Certain of such provisions provide for a
Board of Directors with staggered terms, allow the Company to issue preferred stock with rights
senior to those of the common stock, or impose various procedural and other requirements which
could make it more difficult for stockholders to effect certain corporate actions.
Dividends
On July 23, 2009, the Companys majority-owned subsidiary, Spectrum PMI, paid a $5.0 million
dividend. This resulted in a $4.0 million payment to the Company and a $1.0 million payment to
Afinsa.
On June 28, 2010, Spectrum PMI, the parent of A-Mark, declared a $12,500,000 dividend to
shareholders of record on June 1, 2010. This resulted in a $10,000,000 payment to SGI and a
$2,500,000 payment to Auctentia in July 2010.
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17. SEGMENT AND GEOGRAPHIC INFORMATION
The Companys operations are organized under two business segments Trading and Collectibles.
During the year ended June 30, 2006, the Company changed its operating segment structure to (1)
separately report the results of its A-Mark Precious Metals trading business as a result of
acquiring such business in the first quarter of that year, and (2) report corporate operating
expenses separately as a result of changes in the operating structure of the Company during that
year. As a result of forming a segregated corporate office and expense structure, the Company no
longer allocates certain corporate level operating expenses to its operating segments.
Segment information for the Company follows:
Year Ended June 30, | Year Ended June 30, | |||||||
2010 | 2009 | |||||||
(in thousands) | (in thousands) | |||||||
(as restated) | ||||||||
Revenues: |
||||||||
Trading |
$ | 5,834,712 | $ | 4,121,159 | ||||
Collectibles: |
||||||||
Numismatic |
156,174 | 132,070 | ||||||
Philatelic |
17,804 | 31,024 | ||||||
Other |
3,748 | 1,776 | ||||||
Total Collectibles |
177,726 | 164,870 | ||||||
$ | 6,012,438 | $ | 4,286,029 | |||||
Year Ended June 30, | Year Ended June 30, | |||||||
2010 | 2009 | |||||||
(in thousands) | (in thousands) | |||||||
(as restated) | ||||||||
Revenues by geographic region: |
||||||||
United States |
$ | 6,002,118 | $ | 4,271,725 | ||||
Europe |
9,232 | 9,680 | ||||||
Asia |
1,088 | 4,624 | ||||||
$ | 6,012,438 | $ | 4,286,029 | |||||
Year Ended June 30, | Year Ended June 30, | |||||||
2010 | 2009 | |||||||
(in thousands) | (in thousands) | |||||||
(as restated) | ||||||||
Operating income (loss): |
||||||||
Trading |
$ | 7,119 | $ | 26,244 | ||||
Collectibles |
(2,225 | ) | (7,594 | ) | ||||
Corporate |
(13,171 | ) | (10,294 | ) | ||||
$ | (8,277 | ) | $ | 8,356 | ||||
Year Ended June 30, | Year Ended June 30, | |||||||
2010 | 2009 | |||||||
(in thousands) | (in thousands) | |||||||
Depreciation and amortization: |
||||||||
Trading |
$ | 671 | $ | 997 | ||||
Collectibles |
1,009 | 802 | ||||||
Corporate |
19 | 8 | ||||||
$ | 1,699 | $ | 1,807 | |||||
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June 30, | June 30, | |||||||
2010 | 2009 | |||||||
(in thousands) | (in thousands) | |||||||
Inventories: |
||||||||
Trading: |
||||||||
United States |
$ | 113,752 | $ | 91,939 | ||||
Total Trading |
113,752 | 91,939 | ||||||
Collectibles: |
||||||||
United States |
23,489 | 22,256 | ||||||
Europe |
819 | 1,277 | ||||||
Asia |
17 | 182 | ||||||
Total Collectibles |
24,325 | 23,715 | ||||||
$ | 138,077 | $ | 115,654 | |||||
June 30, | June 30, | |||||||
2010 | 2009 | |||||||
(in thousands) | (in thousands) | |||||||
Total assets: |
||||||||
Trading: |
||||||||
United States |
$ | 171,507 | $ | 151,986 | ||||
Europe |
257 | | ||||||
Total Trading |
171,764 | $ | 151,986 | |||||
Collectibles: |
||||||||
United States |
40,541 | 38,485 | ||||||
Europe |
15,673 | 19,791 | ||||||
Asia |
906 | 1,398 | ||||||
Total Collectibles |
57,120 | 59,674 | ||||||
Corporate and Other |
7,851 | 6,489 | ||||||
$ | 236,735 | $ | 218,149 | |||||
June 30, | June 30, | |||||||
2010 | 2009 | |||||||
(in thousands) | (in thousands) | |||||||
Total long-term assets: |
||||||||
Trading: |
||||||||
United States |
$ | 10,017 | $ | 10,451 | ||||
Europe |
38 | | ||||||
Total Trading |
10,055 | 10,451 | ||||||
Collectibles: |
||||||||
United States |
2,334 | 4,733 | ||||||
Europe |
1,170 | 1,036 | ||||||
Asia |
142 | 152 | ||||||
Total Collectibles |
3,646 | 5,921 | ||||||
Corporate and Other |
5,843 | 4,505 | ||||||
$ | 19,544 | $ | 20,877 | |||||
18. Fair Value Measurements
ASC 820 Fair Value Measurements and Disclosures creates a single definition of fair value for
financial reporting. The new rules associated with ASC 820 state that valuation techniques
consistent with the market approach, income approach and/or
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cost approach should be used to estimate fair value. Selection of a valuation technique, or
multiple valuation techniques, depends on the nature of the asset or liability being valued, as
well as the availability of data.
ASC 820 had the following impact:
| Defined fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, and establishes a framework for measuring fair value; | ||
| Established a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date; | ||
| Nullified the guidance in Emerging Issues Task Force Issue 02-3, Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities, which required the deferral of profit at inception of a transaction involving a derivative financial instrument in the absence of observable data supporting the valuation technique; | ||
| Eliminated large position discounts for financial instruments quoted in active markets and requires consideration of the Companys creditworthiness when valuing liabilities; and | ||
| Expanded disclosures about instruments measured at fair value. |
Valuation Hierarchy
ASC 820 established a three-level valuation hierarchy for disclosure of fair value measurements.
The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or
liability as of the measurement date. The three levels are defined as follows:
| Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. | ||
| Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. | ||
| Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
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The following table presents information about the Companys assets and liabilities measured at
fair value on a recurring basis as of June 30, 2010, aggregated by the level in the fair value
hierarchy within which the measurements fall:
Assets and Liabilities Measured at Fair Value on a Recurring Basis
June 30, 2010 | ||||||||||||||||
Quoted Price in | ||||||||||||||||
Active Markets for | Significant | |||||||||||||||
Identical | Significant Other | Unobservable | ||||||||||||||
Instruments | Observable Inputs | Inputs | ||||||||||||||
(in thousands) | (Level 1) | (Level 2) | (Level 3) | Total Balance | ||||||||||||
Assets: |
||||||||||||||||
Commodities |
$ | 114,102 | $ | | $ | | $ | 114,102 | ||||||||
Derivative assets open sales and
purchase commitments |
| 1,698 | | 1,698 | ||||||||||||
Total assets valued at fair value: |
$ | 114,102 | $ | 1,698 | $ | | $ | 115,800 | ||||||||
Liabilities: |
||||||||||||||||
Liabilities on borrowed metals |
$ | (40,841 | ) | $ | | $ | | $ | (40,841 | ) | ||||||
Liabilities on margin accounts |
(10,530 | ) | | | (10,530 | ) | ||||||||||
Derivative liabilities forward contracts |
| (45 | ) | | (45 | ) | ||||||||||
Derivative liabilities future |
| (507 | ) | | (507 | ) | ||||||||||
Total liabilities valued at fair value: |
$ | (51,371 | ) | $ | (552 | ) | $ | | $ | (51,923 | ) | |||||
June 30, 2009 | ||||||||||||||||
Quoted Price in | ||||||||||||||||
Active Markets for | Significant | |||||||||||||||
Identical | Significant Other | Unobservable | ||||||||||||||
Instruments | Observable Inputs | Inputs | ||||||||||||||
(in thousands) | (Level 1) | (Level 2) | (Level 3) | Total Balance | ||||||||||||
Assets: |
||||||||||||||||
Commodities |
$ | 88,527 | $ | | $ | | $ | 88,527 | ||||||||
Marketable Securities |
914 | | | 914 | ||||||||||||
Derivative assets futures contracts |
| 10,875 | | 10,875 | ||||||||||||
Derivative assets forward contracts |
| 1,726 | | 1,726 | ||||||||||||
Total assets valued at fair value: |
$ | 89,441 | $ | 12,601 | $ | | $ | 102,042 | ||||||||
Liabilities: |
||||||||||||||||
Liabilities on borrowed metals |
$ | (15,100 | ) | $ | | $ | | $ | (15,100 | ) | ||||||
Liabilities on margin accounts |
(3,041 | ) | | | (3,041 | ) | ||||||||||
Derivative liabilities open sales
and purchased commitments |
| (5,356 | ) | | (5,356 | ) | ||||||||||
Total liabilities valued at fair value: |
$ | (18,141 | ) | $ | (5,356 | ) | $ | | $ | (23,497 | ) | |||||
The following is a description of the valuation methodologies used for instruments measured at fair
value, including the general classification of such instruments pursuant to the valuation
hierarchy:
Marketable Securities
Quoted prices of identical securities are available in an active market for the Companys
marketable securities. Such securities are classified in Level 1 of the valuation hierarchy.
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Commodities
Commodities consisting of the precious metals component of the Companys inventories are carried at
fair value. The commemorative coins inventory totaling $0, and $3,620,000, as of June 30, 2010, and
2009, respectively, was carried at cost and is thus excluded from the fair value disclosure. The
fair value for commodities inventory is determined primarily using pricing and data derived from
the markets on which the underlying commodities are traded. Precious metals commodities are
classified in Level 1 of the valuation hierarchy.
Derivatives
Futures contracts, forward contracts and open purchase and sales commitments are valued at their
intrinsic values, based on the difference between the quoted market price and the contractual
price, and are included within Level 2 of the valuation hierarchy.
Margin Liabilities
Margin liabilities, consisting of the Companys commodity obligations to margin customers, are
carried at fair value, determined primarily using pricing and data derived from the markets on
which the underlying commodities are traded. Margin liabilities are classified in Level 1 of the
valuation hierarchy.
Goodwill and Other Intangibles
The following table presents information about the Companys assets measured at fair value on a
non-recurring basis as of June 30, 2010, aggregated by the level in the fair value hierarchy within
which the measurements fall:
Assets Measured at Fair Value on a Non Recurring Basis
June 30, 2010 | ||||||||||||||||
Quoted Price in | ||||||||||||||||
Active Markets for | Significant | |||||||||||||||
Identical | Significant Other | Unobservable | ||||||||||||||
Instruments | Observable Inputs | Inputs | ||||||||||||||
(in thousands) | (Level 1) | (Level 2) | (Level 3) | Total Balance | ||||||||||||
Goodwill and other intangible assets: |
||||||||||||||||
Goodwill |
$ | | $ | | $ | 30 | $ | 30 | ||||||||
Trade names |
| | 668 | 668 | ||||||||||||
Customer relationships |
| | 369 | 369 | ||||||||||||
Total assets at fair value (after impairment): |
$ | | $ | | $ | 1,067 | $ | 1,067 | ||||||||
For fiscal year ending June 30, 2010, impairment charges included in the earnings for the period
were as follows goodwill $433,000, trade names $1,062,000 and customer relationships $766,000,
respectively.
Valuations were based on estimating future cash flows and discounting those cash flows to arrive at
fair value. To arrive at estimated cash flows the Company considered past operating trends,
working capital requirements, capital expenditures, depreciation and amortization, and current and
future economic conditions. Discount rates used ranged from 18% to 23%. The following is a
description of the valuation methodologies used for instruments measured at fair value, including
the general classification of such instruments pursuant to the valuation hierarchy.
Goodwill
The Discounted Cash Flow method was used to evaluate goodwill. In the discounted cash flow
analysis, future cash flows are discounted to present value using an appropriate discount rate or
rate of return. Cash flows are forecasted for a discrete period of years and then projected to
grow at a constant rate in perpetuity to arrive at fair value.
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Trade names
The Relief from Royalty and EBIT profit split analyses was used in appraising the trade names. In
the Relief from Royalty method, a royalty rate of 1.5 to 2.0 percent was estimated to be
appropriate based upon consideration of royalty market data and brand strength management regarding
brand strength. The royalty rate was tested for reasonableness against the assumed royalty rate in
the EBIT profit split method, based on 25 percent of the units projected EBIT margin.
Customer Relationships
Customer Relationships were valued using the Excess Earnings Income Approach based on attributable
forecasted revenue from the units originally acquired Customer Relationships. An annual revenue
attrition rate was selected based on a survivor curve analysis and historical performance. In the
survivor curve analysis, an historical client list was analyzed using methodologies presented in
Reilly & Schweihs Valuing Intangible Assets, leading to a concluded 17.8 percent annual attrition
rate. Asset charges are deducted against the Customer Relationships attributable cash flow, as
appropriate, to arrive at fair value.
19. SUBSEQUENT EVENTS
On June 28, 2010, Spectrum PMI, the parent of A-Mark, declared a $12,500,000 dividend to
shareholders of record on June 1, 2010. This resulted in a $10,000,000 payment to SGI and a
$2,500,000 payment to Auctentia in July 2010.
On July 8, 2010, the Company entered into a settlement agreement with Mr. Manning, pursuant to
which it agreed to pay approximately $2.7 million in cash to Mr. Manning of which $300,000 was to
be placed into an escrow account to satisfy certain of the Companys continuing
advancement/indemnification obligations. The Company paid all amounts due under the settlement
agreement in August 2010, (subject to certain continuing indemnification
obligation).
During July and August 2010, the Company awarded restricted stocks to certain key employees and
directors of the Company totaling approximately 284,000 shares. The awards vest between one to
three years with a weighted average price of $1.86.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We are responsible for maintaining disclosure controls and procedures designed to provide
reasonable assurance that information required to be disclosed in reports filed under the
Securities Exchange Act of 1934, as amended, (Exchange Act) is recorded, processed, summarized
and reported within the specified time periods and accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for
timely decisions regarding required disclosure.
Under the supervision and with the participation of management, including our Chief Executive
Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls
and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, at June 30, 2010.
Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that,
as of that date, our disclosure controls and procedures were not effective at a reasonable
assurance level due to material weaknesses existing in our internal controls as of June 30, 2009
(as described below in
Managements Report on Internal Control over Financial Reporting), which had not been fully
remediated as of June 30, 2010.
Managements Report on Internal Control over Financial Reporting
We are responsible for establishing and maintaining adequate internal control over financial
reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of consolidated
financial statements for external purposes in accordance with U.S. generally accepted accounting
principles.
Our internal control over financial reporting includes those policies and procedures that (a)
pertain to the maintenance of records that, in reasonable detail, accurately reflect our
transactions and dispositions of our assets, (b) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of consolidated financial statements in accordance with
U.S. generally accepted accounting principles, and that our receipts and expenditures are being
made only in accordance with authorizations of our management and directors and (c) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of our assets that could have a material effect on the consolidated financial
statements.
Under the supervision and with the participation of management, including our Chief Executive
Officer and Chief Financial Officer, we conducted an assessment of the effectiveness of internal
control over financial reporting at June 30, 2010 utilizing the criteria described in Internal
Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The objective of this assessment was to determine whether our internal control over
financial reporting was effective at June 30, 2010.
A material weakness is a deficiency, or combination of deficiencies, in internal control over
financial reporting such that there is a reasonable possibility that a material misstatement of our
annual or interim consolidated financial statements will not be prevented or detected on a timely
basis. In our assessment of the effectiveness of internal control over financial reporting at June
30, 2010, we identified the following material weaknesses:
Proper segregation of duties was not maintained over the accounting functions within our
Collectibles operations. This was the result of operating with a small accounting staff with
overlapping responsibilities within their subsidiaries that were deemed unavoidable. Accordingly,
individuals who had responsibility for reviewing and approving transactions also had the ability
to add new vendors, process vendor invoices, prepare cash disbursements, reconcile bank accounts
and serve as the primary preparers of the period-end financial statements.
Controls over period-end financial reporting were not operating effectively. This has resulted in a
significant number of adjustments to our consolidated financial statements. Specifically controls
were not effective to ensure that accounting estimates, and other adjustments were appropriately
analyzed and that certain transactions were adequately reviewed and reconciled among the divisions.
Additionally, the Company did not include all required footnote disclosures or had disclosures that
included inaccurate information.
Remediation of Previously Identified Material Weaknesses & Other Remediation Activities
As previously reported, there were nine material weaknesses in our internal controls over financial
reporting as of June 30, 2009. During Fiscal 2010, the Company remediated seven material weaknesses
and has taken substantial measures to remediate the remaining material weaknesses, described as
follows:
The Company operated with inadequate and insufficient accounting and finance resources to ensure
timely and reliable financial reporting within the North American stamp division of the
Collectibles segment. To improve procedures and controls at the subsidiary level, the Company hired
a Chief Financial Officer, Chief Accounting Officer, Corporate Controller, and Assistant Corporate
Controller, with appropriate knowledge and experience in accounting and financial reporting.
Additionally, our North American stamp divisions operations were winding down towards year-end as
the
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Company prepared for the subsidiarys intangible asset transfer to our European stamp division.
Because of this, the volume of year-end transactions were significantly reduced. The Company
considers this material weakness remediated.
The Company did not have adequate accounting policies that were formally and effectively
communicated to the Companys accounting and finance resources. Through a combination of new
policies and enhancements to current procedures, the Company has formally and effectively
communicated its accounting policies to its accounting and finance team. The Company considers this
material weakness remediated.
The Company did not design formal controls to ensure that the financial positions and results of
operations of divisions were effectively consolidated on a timely basis. The Company has
consolidated a number of locations onto a single accounting platform as well as automated the
consolidation process of financial reporting through a standard report writer, implemented a close
calendar to ensure timely processing and implemented a number of manual review controls to ensure
proper internal controls are designed and operating effectively. The Company considers this
material weakness remediated.
The Company did not consistently maintain documentation as evidence to verify that controls were
operating effectively. The Company implemented and enhanced controls entity-wide that include
procedures for requiring and maintaining transaction documentation. The Company considers this
material weakness remediated.
Transactions were not consistently approved by the appropriate level of management within the North
American stamp division of the Collectibles segment. To improve procedures and controls at the
subsidiary level, the Company hired a Chief Financial Officer, Chief Accounting Officer, Corporate
Controller, and Assistant Corporate Controller, with appropriate knowledge and experience in
accounting and financial reporting. Policies and procedures were implemented to ensure that
transactions were approved by the appropriate levels of management before being processed by
accounting. Additionally, our North American stamp divisions operations were winding down towards
year-end as the Company prepared for the subsidiarys intangible asset transfer to our European
stamp division. Because of this, the volume of year-end transactions were significantly reduced.
The Company considers this material weakness remediated.
Management of the North American stamp division has not designed controls to ensure the proper
accounting for inventory. To improve procedures and controls at the subsidiary level, the Company
hired a Chief Financial Officer, Chief Accounting Officer, Corporate Controller, and Assistant
Corporate Controller, with appropriate knowledge and experience in accounting and financial
reporting. Additionally, our North American stamp divisions operations were winding down towards
year-end as the Company prepared for the subsidiarys intangible asset transfer to our European
stamp division. Because of this, the volume of year-end transactions were significantly reduced.
Further, our North American stamp division had no purchases of inventory during the year and an
immaterial amount of inventory remaining at year-end. The Company considers this material weakness
remediated.
Management has not designed controls to ensure that the provision for income taxes is properly
prepared on a timely basis. The Company designed controls to ensure that the provision for income
taxes is properly prepared on a timely basis. The Company hired a new Chief Financial Officer with
extensive tax experience in addition to creating an income tax provision preparation and review
process, which it implemented both domestically and internationally. The Company considers this
material weakness remediated.
Proper segregation of duties was not maintained over the accounting functions within our
Collectibles operations. This is a typical issue of companies with limited accounting staff. The
Company notes segregation of duties issues within employee operational roles as well as in its
delegation of rights for users within systems. To address this, management has done the following:
| Added additional staff (Chief Financial Officer, Chief Accounting Officer, Corporate Controller, and Assistant Corporate Controller) which implemented manual review controls around journal entries, reconciliations, adjusting entries, and top-level entries, | ||
| Reviewed user access roles and removed users that did not require access to certain systems, | ||
| Implemented independent review at the subsidiary-level of journal entries and reconciliations, |
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Further remediation efforts to be addressed during Fiscal 2011 include:
| Cross training of subsidiary accounting staff and cross review of journal entries and account reconciliations, | ||
| Implementation of accounting shared services, | ||
| Further review of user access rights in systems and implementation of formal user groups. |
Controls over period-end financial reporting were not operating effectively. The Company hired a
Chief Financial Officer, Chief Accounting Officer, Corporate Controller, Assistant Corporate
Controller and a Director of Internal Controls, with appropriate knowledge and experience to
improve the quality of its financial reporting.
Period-end reporting procedures were redesigned during the third and fourth quarters to include
internal controls that would improve the reliability and timeliness of our financial reporting.
These controls were not fully implemented and effective by year-end. The Company will continue to
enhance our financial reporting controls while also improving our period-end accounting procedures.
The Company has made substantial progress and is continuing its efforts towards remediation of
these material weaknesses.
Based on our assessment and the material weaknesses described above, we have concluded that our
internal controls over financial reporting were not effective at June 30, 2010.
This Form 10-K does not include an attestation report of the Companys independent registered
public accounting firm regarding the internal control over financial reporting. Managements report
was not subject to attestation by the Companys independent registered public accounting firm
pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act which permanently
exempts nonaccelerated filers from the requirement to obtain an external audit on the effectiveness
of internal financial reporting controls provided in Section 404(b) of the Sarbanes-Oxley Act of
2002.
Changes in Internal Control over Financial Reporting
During Fiscal 2010, the Companys management initiated the steps outlined above under Remediation
of Previously Identified Material Weaknesses & Other Remediation Activities to improve the quality
of its Internal Control over Financial Reporting.
We believe that for the reasons described above, we will eventually be able to improve our internal
controls and remedy the remaining identified material weaknesses. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, will be or have been detected. Additionally,
controls can be circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the control. The design of any system of controls also is
based in part upon certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all potential future
conditions.
ITEM 9B. OTHER INFORMATION
On September 10, 2010, the Board of Directors of the Company, upon the recommendation of the
Compensation Committee of the Board of Directors, ratified and approved bonus payments for the year
ended June 30, 2010 to its executive officers, as follows: Greg Roberts, President and CEO:
$800,000; Antonio Arenas, Executive Chairman: $175,000; Paul Soth, Chief Financial Officer and
Executive Vice President: $50,000; Carol Meltzer, Chief Administrative Officer and Executive Vice
President: $100,000. All bonuses are payable in cash. At September 15, 2010, 75% of all amounts
due have been paid with the remaining 25% to be paid shortly.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Set forth below is information regarding the directors and executive officers of the Company as of
September 16, 2010.
Name | Age | Position(s) | ||||
Antonio Arenas
|
54 | Executive Chairman and Director | ||||
Gregory N. Roberts
|
48 | Chief Executive Officer, President and Director | ||||
Paul Soth
|
52 | Chief Financial Officer and Executive Vice President | ||||
Carol Meltzer
|
51 | Executive Vice President, General Counsel and Corporate Secretary | ||||
Jeffrey D. Benjamin
|
49 | Director | ||||
Jess M. Ravich
|
53 | Director | ||||
George Lumby
|
65 | Director | ||||
John U. Moorhead
|
58 | Director | ||||
Christopher W. Nolan, Sr.
|
45 | Director |
Antonio Arenas, a director since 2006, has served as our Executive Chairman since October 2007. Mr.
Arenas has been a Managing Director and the Chief Executive Officer of COALCA, S.A., a company
involved in the sale and distribution of consumer and pharmaceutical products, and land development
in the Canary Islands and mainland Spain, since 1994.
Gregory N. Roberts, a director since February 2000, has served as our President and Chief Executive
Officer since March 2008. Mr. Roberts previously served as the President of the Companys North
American coin division, which includes Spectrum Numismatics and A-Mark Precious Metals; Mr. Roberts
had been President of Spectrum Numismatics since the early 1990s. He is also a lifetime member of
the Professional Numismatics Guild.
Paul Soth has served as our Chief Financial Officer and Executive Vice President since April 2010.
Prior to that, Mr. Soth served as Director of Income Tax Processes and Systems for Harrahs
Entertainment, Inc. from August 2009, until April 2010, and as Corporate Controller and Tax Manager
for Fontainebleau Resorts from August 2006, to May 2009. Mr. Soth also served as Tax Manager of
Mandalay Resort Group from August 1999, to April 2005. Mr. Soth graduated from California State
University, San Marcos, with a B.S. in Business Administration Accounting, and holds a M.S. in
Accountancy from the University of Phoenix.
Carol Meltzer has served as our Chief Administrative Officer since March 2008, our Executive Vice
President since May 2006, and our General Counsel since 2004, and has provided legal services to
the Company since 1995. She previously practiced law at Stroock & Stroock & Lavan LLP and Kramer
Levin Naftalis & Frankel LLP.
Jeffrey D. Benjamin, a director since May 2009, has been a Senior Advisor to Cyrus Capital
Partners, L.P. since 2008, where he assists with distressed investments. Mr. Benjamin also serves
as a consultant to Apollo Management, L.P., a private investment fund, and from September 2002, to
June 2008, Mr. Benjamin served as a senior advisor to Apollo Management, where he was responsible
for a variety of investments in private equity, high yield and distressed securities. Mr. Benjamin
is also a member of the Boards of Directors of Harrahs Entertainment, Inc., EXCO Resources, Inc.
and Virgin Media Inc., and is a trustee of the American Numismatic Society.
Jess M. Ravich, a director since December 2009, is a Managing Director and Head of Capital Markets
of Houlihan, Lokey, Howard & Zukin, Inc., an international investment bank. From 1991, through
November 2009, Mr. Ravich founded and served as Chief Executive Officer of Libra Securities LLC, an
investment banking firm serving the middle market. Prior to founding Libra, Mr. Ravich was an
Executive Vice President of the fixed income department at Jefferies & Company, a Los Angeles based
brokerage firm. Prior to Jefferies, Mr. Ravich was a Senior Vice President at Drexel Burnham
Lambert, where he was also a member of the executive committee of the high-yield group and shared
responsibility for running high-yield trading from 1988, until 1990, when the firm closed. Mr.
Ravich is a graduate of the Wharton School at the University of
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Pennsylvania, summa cum laude, and Harvard Law School, magna cum laude and editor of Law Review.
Mr. Ravich serves on the Board of Directors of The Cherokee Group, Inc. (NASDAQ: CHKE).
George Lumby, a director since December 2006, served as a partner at PricewaterhouseCoopers, where
he acted as an auditor and a mergers and acquisitions specialist, until 2003. In 2003, Mr. Lumby
established his own firm in Spain, which provides consulting services to companies involved in
insolvency and reorganization situations. Mr. Lumby is currently a Fellow of the Institute of
Chartered Accountants in England & Wales, a member of the Spanish Institute of Chartered
Accountants (Instituto de Censores Jurados de Cuentas de España) and a member of the Spanish
Official Register of Auditors (Registro Official de Auditores de Cuentas ROAC).
John (Jay) U. Moorhead, a director since June 2007, has been Managing Director of Ewing Bemiss &
Co, an investment banking firm, since 2009. Prior to joining Ewing Bemiss, Mr. Moorhead was a
managing director at Westwood Capital and MillRock Partners boutique investment banking firms
serving private middle market and public growth companies. From 2001, to 2003, Mr. Moorhead was a
corporate finance partner at C.E. Unterberg, Towbin.
Christopher W. Nolan, Sr., a director since June 2007, has been a Managing Director in the Mergers
& Acquisitions group of Rabo Securities USA, Inc., an affiliate of Rabobank International, a Dutch
agribusiness bank with offices in New York, NY, since 2006, and was an Executive Director with the
Mergers & Acquisitions group of Rabobank International from 2002, through 2006. Mr. Nolan currently
serves on the Board of Directors, and as a member of the Audit Committee, of United-Guardian, Inc.
(NASDAQ: UG).
During the fiscal years ended June 30, 2010 and 2009, Thor Gjerdrum served as our Chief Financial
Officer and Executive Vice President. After resigning from this position in April 2010, Mr.
Gjerdrum returned to his role as Chief Financial Officer of A-Mark Precious Metals, Inc., a role he
has held since A-Marks acquisition by the Company in 2005.
During the fiscal years ended June 30, 2010, and 2009, James M. Davin also served on our Board of
Directors. Mr. Davin retired from our Board of Directors in December 2009.
During the fiscal year ended June 30, 2009, Irving Kagan also served on our Board of Directors. Mr.
Kagan retired from our Board of Directors in May 2009.
Compliance
Section 16(a) of the Exchange Act requires the Companys directors and executive officers, and
persons owning more than 10% of a registered class of the Companys equity securities, to file with
the SEC reports of their ownership of, and transactions in, the Companys common stock or other
equity securities. To the Companys knowledge, based solely on a review of copies of such reports
furnished to the Company, during the fiscal year ended June 30, 2010, all of such persons were in
compliance with all applicable Section 16(a) reporting requirements, except with respect to certain
Form 4 filings.
There are no family relationships among any of the Companys directors or executive officers.
Code of Ethics
The Audit Committee of the Companys Board of Directors has adopted a Code of Ethics for Senior
Financial and Other Officers (the Code of Ethics), which applies to the Companys Chief Executive
Officer, Chief Financial Officer, Chief Accounting Officer, Controller and heads of major
divisions, together with such other officers as the Audit Committee may from time to time
designate. A copy of the Code of Ethics is filed herewith as Exhibit 14.1. To view the Code of
Ethics, you may also go to our Internet website located at www.spectrumgi.com and click on
Governance Policies. You may also obtain a printed copy of the Code of Ethics, free of charge, by
contacting us at the following address:
Spectrum Group International, Inc.
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18061 Fitch
Irvine, California 92614
Telephone: (949) 955-1250
Irvine, California 92614
Telephone: (949) 955-1250
Audit Committee
The Company has a separately-designated standing Audit Committee established in accordance with
section 3(a)(58)(A) of the Exchange Act. The Audit Committee is comprised of three members:
Christopher W. Nolan, Sr. (Chairman), John U. Moorhead and Jess M. Ravich. The Companys Board of
Directors has determined that each member of the Audit Committee is independent (as that term is
currently defined in Rule 5605(c)(2) of the NASDAQ listing standards) and that Mr. Nolan qualifies
as an audit committee financial expert, as defined in accordance with applicable SEC rules
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the Companys Proxy Statement, to be filed within 120 days following
June 30, 2010.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
Incorporated by reference to the Companys Proxy Statement, to be filed within 120 days following
June 30, 2010.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Incorporated by reference to the Companys Proxy Statement, to be filed within 120 days following
June 30, 2010.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Incorporated by reference to the Companys Proxy Statement, to be filed within 120 days following
June 30, 2010.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
(a) | The following documents are filed as part of this report: |
1. | Financial Statements | ||
The information called for by this item is incorporated herein by reference to pages F-1 through F-45 of this report. | |||
2. | Financial Statements Schedules | ||
None | |||
3. | Exhibits required to be filed by Item 601 of Regulation S-K | ||
The information called for by this item is incorporated herein by reference to the Exhibit Index in this report. |
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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.
Date: September 16, 2010 | SPECTRUM GROUP INTERNATIONAL, INC. | |||||
By: | /s/ Gregory N. Roberts
|
|||||
Name: | Gregory N. Roberts | |||||
Title: | President and 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.
Signatures | Title(s) | Date | ||
/s/ Antonio Arenas
|
Chairman of the Board and Executive Chairman | September 16, 2010 | ||
/s/ Gregory N. Roberts
|
President, Chief Executive Officer and Director (Principal Executive Officer) |
September 16, 2010 | ||
/s/ Paul Soth
|
Chief Financial Officer and Executive Vice
President (Principal Financial Officer) |
September 16, 2010 | ||
/s/ Jeffrey D. Benjamin
|
Director | September 16, 2010 | ||
/s/ Jess M. Ravich
|
Director | September 16, 2010 | ||
/s/ John U. Moorhead
|
Director | September 16, 2010 | ||
/s/ George Lumby
|
Director | September 16, 2010 | ||
/s/ Christopher W. Nolan, Sr.
|
Director | September 16, 2010 |
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EXHIBIT INDEX
Regulation S-K | ||
Exhibit Table | ||
Item No. | Description of Exhibit | |
3.1.1
|
Articles of Incorporation of the Greg Manning Delaware, Inc. Filed herewith. | |
3.1.2
|
Certificate of Ownership and Merger of Greg Manning Auctions, Inc. into and with Greg Manning Delaware, Inc. Filed herewith. | |
3.1.3
|
Certificate of Ownership and Merger of Escala Group, Inc. into and with Greg Manning Auctions, Inc. Incorporated by reference to Exhibit 3.1 of the Companys Current Report on Form 8-K filed October 3, 2005, Commission File No. 1-11988. | |
3.1.4
|
Certificate of Ownership and Merger of Spectrum Group International, Inc. with and into Escala Group, Inc. Incorporated by reference to Exhibit 3.1 of the Companys Current Report on Form 8-K filed on May 29, 2009, Commission File No. 1-11988. | |
3.2
|
Bylaws of Registrant. Incorporated by reference to Exhibit 3.2 of the Companys Annual Report on Form 10-K filed on October 8, 2009, Commission File No. 1-11988. | |
10.1
|
1997 Stock Incentive Plan. Incorporated by reference to Exhibit 10.1 of the Companys Annual Report on Form 10-K filed on October 8, 2009, Commission File No. 1-11988. | |
10.2
|
Amended and Restated Employment Agreement between Registrant and Greg Roberts, dated as of May 13, 2010. Incorporated by reference to Exhibit 10.1 of the Companys Current Report on Form 8-K filed on May 14, 2010, Commission File No. 1-11988. * | |
10.3
|
Employment Agreement between A-Mark Precious Metals, Inc. and Rand LeShay, dated June 1, 2010. Filed herewith.* | |
10.4
|
Non-Employee Directors Compensation Policy. Filed herewith.* | |
10.5
|
Non-Employee Directors Equity Compensation Program. Filed herewith.* | |
10.6
|
Form of Restricted Stock Purchase Agreement for Employees under the 1997 Stock Incentive Plan. Incorporated by reference to Exhibit 10.7 of the Companys Annual Report on Form 10-K filed on October 8, 2009, Commission File No. 1-11988.* | |
10.7
|
Form of Restricted Stock Unit Agreement for Employees under the 1997 Stock Incentive Plan. Filed herewith.* | |
10.8
|
Registration Rights Agreement, dated as of September 8, 2003, between Registrant and Auctentia, S.L. Incorporated by reference to Appendix E to the Companys Definitive Proxy Statement filed August 13, 2003, Commission File No. 1-11988. | |
10.9
|
Consent of Escala Group, Inc. Incorporated by reference to Exhibit 10.1 of the Companys Current Report on Form 8-K filed March 25, 2009, Commission File No. 1-11988. | |
14
|
Code of Ethics for Senior Financial and Other Officers. Filed herewith. | |
21
|
Subsidiaries of the Registrant. Filed herewith. | |
31.1
|
Certification by the Chief Executive Officer. Filed herewith | |
31.2
|
Certification by the Chief Financial Officer. Filed herewith. | |
32.1
|
Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith. | |
32.2
|
Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith. |
* | Identifies Exhibit that consists of or includes a management contract or compensatory plan or arrangement. |
47