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EX-32.2 - CERTIFICATION OF THE CFO - SOX 906 - SPECTRUM GROUP INTERNATIONAL, INC.ex322spgz033111.htm
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EX-31.1 - CERTIFICATION OF THE CEO - SPECTRUM GROUP INTERNATIONAL, INC.ex311spgz033111.htm
EX-32.1 - CERTIFICATION OF THE CEO - SOX 906 - SPECTRUM GROUP INTERNATIONAL, INC.ex321spgz033111.htm
Table of Contents            

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
R
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2011
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
(State of Incorporation)
 
22-2365834
(IRS Employer I.D. No.)
18061 Fitch
Irvine, CA 92614
 
(Address of Principal Executive Offices) (Zip Code)
(949) 955-1250         
 
                     
Registrant’s Telephone Number, Including Area Code
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes. R     No. o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) 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:
Large accelerated filer o
Accelerated filer o 
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company R
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o     No R
Number of shares outstanding of each of the issuer’s classes of common stock as of May 8, 2011 :
32,471,796 shares of Common Stock, $.01 par value per share.

SPECTRUM GROUP INTERNATIONAL, INC.
FORM 10-Q
For the Quarter Ended March 31, 2011
 
Table of Contents
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
44 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exhibits
 
 
 
 
 
 
 
  Exhibits 31.1
Certification of Chief Executive Officer Under Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
 
 
 
Exhibits 31.2
Certification of Chief Financial Officer Under Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
 
 
 
Exhibits 32.1
Chief Executive Officer Certification Under Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
 
 
 
Exhibits 32.2
Chief Financial Officer Certification Under Section 906 of the Sarbanes-Oxley Act of 2002
 

2

Table of Contents            

PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
 
SPECTRUM GROUP INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
 
March 31,
 
June 30,
 
2011
 
2010 (1)
 
(Unaudited)
 
 
 
 
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
16,836
 
 
$
22,320
 
Short-term investments and marketable securities
2,467
 
 
6,433
 
Receivables and secured loans, net — trading operations
72,552
 
 
42,901
 
Accounts receivable and consignor advances, net — collectibles operations
27,662
 
 
5,717
 
Inventory, net
199,024
 
 
137,989
 
Prepaid expenses and other assets
4,451
 
 
1,309
 
Current assets of discontinued operations
447
 
 
522
 
Total current assets
323,439
 
 
217,191
 
Property and equipment, net
3,907
 
 
2,092
 
Goodwill
6,901
 
 
5,942
 
Other purchased intangibles, net
8,427
 
 
5,457
 
Other assets
552
 
 
248
 
Income tax receivables
5,221
 
 
4,974
 
Deferred tax assets
59
 
 
144
 
Non-current assets of discontinued operations
10
 
 
687
 
 
 
 
 
Total assets
$
348,516
 
 
$
236,735
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable, customer deposits and consignor payables
$
105,409
 
 
$
29,458
 
Liability on borrowed metals
12,585
 
 
40,841
 
Accrued expenses and other current liabilities
14,868
 
 
13,248
 
Accrued litigation settlement
 
 
2,697
 
Income taxes payable
974
 
 
825
 
Lines of credit
100,800
 
 
47,200
 
Deferred tax liability
934
 
 
934
 
Dividend payable to Auctentia
 
 
2,500
 
Other current liabilities
390
 
 
 
Current liabilities of discontinued operations
122
 
 
1,102
 
 
 
 
 
Total current liabilities
236,082
 
 
138,805
 
 
 
 
 
Deferred and other long term tax liabilities
8,548
 
 
7,794
 
Other long term liabilities
306
 
 
 
Total liabilities
244,936
 
 
146,599
 
 
 
 
 
Commitments, contingencies and subsequent events
 
 
 
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: 32,468 and 31,893 at March 31, 2011 and June 30, 2010, respectively
325
 
 
319
 
Additional paid-in capital
241,549
 
 
241,615
 
Accumulated other comprehensive income
8,811
 
 
3,529
 
Accumulated deficit
(159,211
)
 
(162,350
)
 
 
 
 
Total Spectrum Group International, Inc. stockholders’ equity
91,474
 
 
83,113
 
             Non-controlling interest
12,106
 
 
7,023
 
Total stockholders’ equity
103,580
 
 
90,136
 
Total liabilities and stockholders’ equity
$
348,516
 
 
$
236,735
 
                                                                                   
(1)
The Condensed Consolidated Balance Sheet as of June 30, 2010 is from the audited Consolidated Financial Statements included in the Company's 2010 Annual Report on Form 10-K, as adjusted for discontinued operations presentation of Greg Martin Auctions, Inc.
See accompanying notes to Condensed Consolidated Financial Statements
 

3

Table of Contents            

SPECTRUM GROUP INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
 
Three Months Ended
 
Three Months Ended
 
Nine Months Ended
 
Nine Months Ended
 
March 31, 2011
 
March 31, 2010
 
March 31, 2011
 
March 31, 2010
 
 
 
(as restated)
 
 
 
(as restated)
Revenues:
 
 
 
 
 
 
 
Sales of precious metals
$
1,542,653
 
 
$
1,334,979
 
 
$
4,648,820
 
 
$
3,928,155
 
Collectibles revenues:
 
 
 
 
 
 
 
Sales of inventory
59,089
 
 
31,706
 
 
147,775
 
 
109,373
 
Auction services
7,884
 
 
4,353
 
 
18,922
 
 
14,486
 
Total revenue
1,609,626
 
 
1,371,038
 
 
4,815,517
 
 
4,052,014
 
Cost of sales:
 
 
 
 
 
 
 
Cost of precious metals sold
1,534,249
 
 
1,330,560
 
 
4,630,469
 
 
3,913,274
 
Cost of collectibles sold
55,596
 
 
29,792
 
 
138,872
 
 
101,277
 
     Auction services expense
1,531
 
 
913
 
 
3,441
 
 
3,197
 
Total cost of sales
1,591,376
 
 
1,361,265
 
 
4,772,782
 
 
4,017,748
 
Gross profit
18,250
 
 
9,773
 
 
42,735
 
 
34,266
 
Operating expenses:
 
 
 
 
 
 
 
General and administrative
6,407
 
 
6,831
 
 
16,643
 
 
16,772
 
Salaries and wages
7,556
 
 
5,805
 
 
18,256
 
 
19,173
 
Depreciation and amortization
494
 
 
392
 
 
1,162
 
 
1,135
 
Total operating expenses
14,457
 
 
13,028
 
 
36,061
 
 
37,080
 
Operating income (loss)
3,793
 
 
(3,255
)
 
6,674
 
 
(2,814
)
Interest and other income (expense):
 
 
 
 
 
 
 
Interest income
2,617
 
 
1,782
 
 
6,696
 
 
4,902
 
Interest expense
(1,156
)
 
(472
)
 
(3,068
)
 
(1,511
)
Other (expense) income, net
(14
)
 
(7
)
 
(465
)
 
74
 
Unrealized (loss) gain on foreign exchange
(1,793
)
 
1,592
 
 
(3,869
)
 
1,059
 
Total interest, other (expense) income, foreign exchange gain (loss)
(346
)
 
2,895
 
 
(706
)
 
4,524
 
Income (loss) before provision for income taxes
3,447
 
 
(360
)
 
5,968
 
 
1,710
 
Provision for income taxes
448
 
 
2,510
 
 
771
 
 
579
 
Net income (loss) from continuing operations
2,999
 
 
(2,870
)
 
5,197
 
 
1,131
 
Loss from discontinued operations, net of tax
(152
)
 
(309
)
 
(966
)
 
(1,133
)
Net income (loss)
2,847
 
 
(3,179
)
 
4,231
 
 
(2
)
Less: Net income attributable to the non-controlling interests
(305
)
 
(339
)
 
(1,092
)
 
(1,234
)
Net income (loss) attributable to Spectrum Group International, Inc.
$
2,542
 
 
$
(3,518
)
 
$
3,139
 
 
$
(1,236
)
 
 
 
 
 
 
 
 
Basic and diluted income (loss) per share:
 
 
 
 
 
 
 
Basic - continuing operations
$
0.08
 
 
$
(0.10
)
 
$
0.13
 
 
$
 
Basic - discontinued operations
$
 
 
$
(0.01
)
 
$
(0.03
)
 
$
(0.04
)
Diluted - continuing operations
$
0.08
 
 
$
(0.10
)
 
$
0.12
 
 
$
 
Diluted - discontinued operations
$
 
 
$
(0.01
)
 
$
(0.03
)
 
$
(0.04
)
Basic - attributable to Spectrum Group International, Inc.
$
0.08
 
 
$
(0.11
)
 
$
0.10
 
 
$
(0.04
)
Diluted - attributable to Spectrum Group International, Inc.
$
0.08
 
 
$
(0.11
)
 
$
0.09
 
 
$
(0.04
)
 
 
 
 
 
 
 
 
Weighted average shares outstanding
 
 
 
 
 
 
 
Basic
32,468
 
 
31,985
 
 
32,422
 
 
31,895
 
Diluted
33,169
 
 
31,985
 
 
33,089
 
 
31,895
 
See accompanying notes to Condensed Consolidated Financial Statements

4

Table of Contents            

SPECTRUM GROUP INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
(Unaudited)
 
Common Stock in Shares
 
Common Stock in $
 
Additional Paid-in Capital
 
Accumulated Other Comprehensive Income
 
Accumulated Deficit
 
Total Spectrum Group International, Inc. Stockholders’ Equity
 
Noncontrolling Interests
 
Total Stockholders’ Equity
 
Comprehensive Income
Balance, June 30, 2010
31,893
 
 
$
319
 
 
$
241,615
 
 
$
3,529
 
 
$
(162,350
)
 
$
83,113
 
 
$
7,023
 
 
$
90,136
 
 
 
Net income
 
 
 
 
 
 
 
 
3,139
 
 
3,139
 
 
1,092
 
 
4,231
 
 
$
3,139
 
Change in cumulative foreign currency translation adjustment
 
 
 
 
 
 
5,282
 
 
 
 
5,282
 
 
 
 
5,282
 
 
5,282
 
Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
8,421
 
Taxes paid in exchange for cancellation of restricted shares
 
 
 
 
(151
)
 
 
 
 
 
(151
)
 
 
 
(151
)
 
 
Share based compensation
 
 
 
 
467
 
 
 
 
 
 
467
 
 
 
 
467
 
 
 
Issuance of common stock for restricted stock grants
575
 
 
6
 
 
(6
)
 
 
 
 
 
 
 
 
 
 
 
 
Purchase price accounting for the Stacks-Bowers Numismatics, LLC Joint Venture Acquisition
 
 
 
 
(376
)
 
 
 
 
 
(376
)
 
3,988
 
 
3,612
 
 
 
Other
 
 
 
 
 
 
 
 
 
 
 
 
 
3
 
 
3
 
 
 
Balance, March 31, 2011
32,468
 
 
$
325
 
 
$
241,549
 
 
$
8,811
 
 
$
(159,211
)
 
$
91,474
 
 
$
12,106
 
 
$
103,580
 
 
 
 
See accompanying notes to Condensed Consolidated Financial Statements.
 

5

SPECTRUM GROUP INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

 
Nine Months Ended
 
Nine Months Ended
 
March 31, 2011
 
March 31, 2010
 
 
 
(as restated)
Cash flows from operating activities:
 
 
 
Net income
$
4,231
 
 
$
(2
)
Loss from discontinued operations, net of tax
966
 
 
1,133
 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Unrealized loss on foreign currency
3,869
 
 
(1,059
)
Depreciation and amortization
1,131
 
 
1,135
 
Impairment of intangibles
30
 
 
 
Provision for bad debts
74
 
 
59
 
Provision for inventory reserve
270
 
 
310
 
Stock based compensation
467
 
 
1,229
 
Gain on sale of marketable securities
 
 
(135
)
Loss on abandonment of property and equipment
 
 
114
 
Changes in assets and liabilities:
 
 
 
Accounts receivable and consignor advances
(21,631
)
 
(110
)
Receivables and secured loans
(29,268
)
 
11,922
 
Inventory
(61,179
)
 
(13,178
)
Prepaid expenses and other assets
(2,448
)
 
(54
)
Liabilities on borrowed metals
(28,256
)
 
18,452
 
Accounts payable, accrued expenses and other liabilities
76,917
 
 
17,734
 
Income taxes
379
 
 
(443
)
Deferred taxes
105
 
 
184
 
Accrued litigation settlement
(2,697
)
 
 
Net cash (used in) provided by continuing operating activities
(57,040
)
 
37,291
 
Net cash (used in) provided by discontinued operating activities
(996
)
 
981
 
Net cash (used in) provided by operating activities
(58,036
)
 
38,272
 
Cash flows from investing activities:
 
 
 
Capital expenditures for property and equipment
(819
)
 
(714
)
Cash paid for acquisition, net of cash received
(2,760
)
 
(774
)
Cash paid for other intangibles
 
 
(20
)
Maturity of short term investments
4,711
 
 
6,049
 
Decrease in restricted cash
 
 
650
 
Sales of marketable securities
 
 
1,049
 
Net cash provided by continuing investing activities
1,132
 
 
6,240
 
Net cash provided by (used in) discontinued investing activities
125
 
 
(12
)
Net cash provided by investing activities
1,257
 
 
6,228
 
Cash flows from financing activities:
 
 
 
Borrowings (repayments) under lines of credit, net
53,600
 
 
(31,750
)
Taxes paid on behalf of employees with respect to vesting of restriced shares
(151
)
 
(133
)
Dividends paid to noncontrolling interest
(2,500
)
 
(1,000
)
Net cash provided by (used in) financing activities
50,949
 
 
(32,883
)
Effects of exchange rates on cash
346
 
 
(428
)
Net (decrease) increase in cash and cash equivalents
(5,484
)
 
11,189
 
Cash and cash equivalents, beginning of period
22,320
 
 
17,545
 
Cash and cash equivalents, end of period
$
16,836
 
 
$
28,734
 
 
 
 
 
 
 
 
 
 
 
 
 

6

SPECTRUM GROUP INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

 
 
 
 
 
 
 
 
 
Nine Months Ended
 
Nine Months Ended
 
March 31, 2011
 
March 31, 2010
 
 
 
(as restated)
Supplemental disclosures of cash flow information:
 
 
 
 
 
Cash paid during the period:
 
 
 
 
 
 
 
 
 
Interest expense
$
707
 
 
$
927
 
Income taxes
$
2,128
 
 
$
1,440
 
Non-cash items:
 
 
 
Accrued purchase consideration
$
302
 
 
$
 
Sale of Greg Martin Auctions, Inc.
$
200
 
 
$
 
Acquisition of Stack's Bowers Numismatics, LLC
$
3,498
 
 
$
 
 
See accompanying notes to Condensed Consolidated Financial Statements

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Table of Contents            

SPECTRUM GROUP INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 Financial Accounting Standard Board ("FASB") Accounting Standards Codification ("ASC") 280 Segment Reporting.
Unaudited Interim Financial Information
The accompanying interim condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. These interim condensed consolidated financial statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary to present fairly the Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Stockholders’ Equity, and Condensed Consolidated Statements of Cash Flows for the periods presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Operating results for the three and nine months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending June 30, 2011 or for any other interim period during such year. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted in accordance with the rules and regulations of the SEC. These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2010 (the “2010 Annual Report”), as adjusted for the discontinued operations presentation of Greg Martin Auctions, Inc. ("GMA"), as filed with the SEC. Amounts related to disclosure of June 30, 2010 balances within these interim condensed consolidated financial statements were derived from the aforementioned audited consolidated financial statements and notes thereto included in the 2010 Annual Report, as adjusted for the discontinued operations of GMA.
The condensed consolidated financial statements include the accounts of the Company and all of its wholly-owned and majority-owned subsidiaries. All significant inter-company accounts and transactions including inter-company profits and losses, and inter-company balances have been eliminated in consolidation.
The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the 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 Company's fair value determinations with respect to its financial instruments and precious metals materials. Actual results could materially differ from those estimates.
 
Discontinued Operations
 
Greg Martin Auctions, Inc.
Through January 2011, the Company's wholly owned subsidiary GMA operated as an auction house offering antique guns, and armor. On December 1, 2010, the Company executed an agreement to sell certain assets of GMA to a third party for $325,000. The transaction was closed on January 31, 2011 and according, the Company recorded a pre-tax gain on the sales in the amount of $143,000, refer to Note 2.
GMA generated revenue totaling $0.4 million and $1.2 million for the three and nine months ended March 31, 2011 and $1.4 million and $2.1 million for the three and nine months ended March 31, 2010. See Note 2 to the Notes to the Consolidated Financial Statements.
Correction of an Error
 
Correction of Errors in the Consolidated Statements of Operations
 
During the quarter ended December 31, 2009, the Company began efforts to develop an improved company-wide financial consolidation. The new process streamlined the preparation of the Company's consolidated financial statements and provided greater visibility into its divisional and consolidated results of operations and financial position. The application of the new reporting process identified certain errors in classification in the Company's Consolidated Statement of Operations. The nature and extent of such errors as they related to the nine month period ended March 31, 2010 were previously reported in the notes to the Company's Annual Report on Form 10-K for the period ended June 30, 2010 and have been provided again in the tables presented below.
During the quarter ended September 30, 2010, management of the Company identified certain errors in classification of expenses reflected in the Company's Consolidated Statements of Operations. Specifically, certain direct costs related to providing auction services and sales of collectible goods were improperly reflected as selling, general and administrative expenses and have been reclassified to auction service expense

8

Table of Contents            

and cost of collectibles sold, components of cost of sales. The need to adjust previously-reported amounts was identified principally as a result of the enhanced visibility provided by the detail of such related accounts.
Below are tables summarizing the nature and extent of such reclassifications to the Company's Consolidated Statements of Operations for the three and nine month period ended March 31, 2010:
 
Three Months ended March 31, 2010
in thousands
As Originally
Reported (1)
 
Adjustment (2)
 
 
As
Corrected
Revenue:
 
 
 
 
 
 
Sales of precious metals
$
1,334,979
 
 
$
 
 
 
$
1,334,979
 
Sales of inventory
31,706
 
 
 
 
 
31,706
 
Auction services
4,353
 
 
 
 
 
4,353
 
Total revenue
1,371,038
 
 
 
 
 
1,371,038
 
Cost of sales:
 
 
 
 
 
 
Cost of precious metals sold
1,330,560
 
 
 
 
 
1,330,560
 
Cost of collectibles sold
29,826
 
 
(34
)
A
 
29,792
 
Auction services expense
 
 
913
 
A
 
913
 
Total cost of sales
1,360,386
 
 
879
 
 
 
1,361,265
 
Gross profit
10,652
 
 
(879
)
 
 
9,773
 
Operating expenses:
 
 
 
 
 
 
General and administrative:
7,377
 
 
(546
)
A
 
6,831
 
Salaries and wages
6,138
 
 
(333
)
A
 
5,805
 
Depreciation and amortization
392
 
 
 
 
 
392
 
Total operating expenses
13,907
 
 
(879
)
 
 
13,028
 
Operating income
(3,255
)
 
 
 
 
(3,255
)
Interest and other income (loss):
 
 
 
 
 
 
Interest income
1,635
 
 
147
 
B
 
1,782
 
Interest expense
(325
)
 
(147
)
B
 
(472
)
Other income, net
(7
)
 
 
 
 
(7
)
Unrealized gain on foreign exchange
1,592
 
 
 
 
 
1,592
 
Interest and other income
2,895
 
 
 
 
 
2,895
 
(Loss) from continuing operations
(360
)
 
 
 
 
(360
)
Provision for taxes on continuing operations
2,510
 
 
 
 
 
2,510
 
(Loss) from continuing operations
(2,870
)
 
 
 
 
(2,870
)
Loss from discontinued operations, net of tax
(309
)
 
 
 
 
(309
)
Net (loss)
(3,179
)
 
 
 
 
(3,179
)
Less: Net income attributable to non-controlling interest
(339
)
 
 
 
 
(339
)
Net (loss) attributable to Spectrum Group International, Inc.
$
(3,518
)
 
$
 
 
 
$
(3,518
)
(1)
Adjusted to reflect Greg Martin Auctions, Inc. as discontinued operations.
(2)
For this filing, the Company made additional reclassification as noted above and explained below:
(A)
Represents certain direct costs related to providing auction services and sales of collectibles reclassified from selling, general and administrative and salaries and wages to auction service expense and cost of collectibles sold.
(B)
Reclassification of interest expense to properly breakout interest income and interest expense.
 
 

9

Table of Contents            

 
Nine Months ended March 31, 2010
in thousands
As Originally
Reported (1)
 
Adjustment (2)
 
 
As
Corrected
Revenue:
 
 
 
 
 
 
Sales of precious metals
$
3,928,155
 
 
$
 
 
 
$
3,928,155
 
Sales of inventory
109,373
 
 
 
 
 
109,373
 
Auction services
14,486
 
 
 
 
 
14,486
 
Total revenue
4,052,014
 
 
 
 
 
4,052,014
 
Cost of sales:
 
 
 
 
 
 
Cost of precious metals sold
3,913,274
 
 
 
 
 
3,913,274
 
Cost of collectibles sold
101,401
 
 
(124
)
A
 
101,277
 
Auction services expense
 
 
3,197
 
A
 
3,197
 
Total cost of sales
4,014,675
 
 
3,073
 
 
 
4,017,748
 
Gross profit
37,339
 
 
(3,073
)
 
 
34,266
 
Operating expenses:
 
 
 
 
 
 
General and administrative:
19,336
 
 
(2,564
)
A
 
16,772
 
Salaries and wages
19,682
 
 
(509
)
A
 
19,173
 
Depreciation and amortization
1,135
 
 
 
 
 
1,135
 
Total operating expenses
40,153
 
 
(3,073
)
 
 
37,080
 
Operating loss
(2,814
)
 
 
 
 
(2,814
)
Interest and other income (loss):
 
 
 
 
 
 
Interest income
4,504
 
 
398
 
B
 
4,902
 
Interest expense
(1,113
)
 
(398
)
B
 
(1,511
)
Other income, net
74
 
 
 
 
 
74
 
Unrealized (loss) on foreign exchange
1,059
 
 
 
 
 
1,059
 
Interest and other income
4,524
 
 
 
 
 
4,524
 
(Loss) income from continuing operations
1,710
 
 
 
 
 
1,710
 
Provision for taxes on continuing operations
579
 
 
 
 
 
579
 
Net income from continuing operations
1,131
 
 
 
 
 
1,131
 
(Loss) from discontinued operations, net of tax
(1,133
)
 
 
 
 
(1,133
)
Net (loss)
(2
)
 
 
 
 
(2
)
Less: Net income attributable to the non-controlling interests
(1,234
)
 
 
 
 
(1,234
)
Net (loss) attributable to Spectrum Group International Inc.
$
(1,236
)
 
$
 
 
 
$
(1,236
)
 
 
(1)
Adjusted to reflect Greg Martin Auctions, Inc. as discontinued operations
(2)
For this filing, the Company made additional reclassification as noted above and explained below:
(A)
Represents certain direct costs related to providing auction services and sales of collectibles reclassified from selling, general and administrative and salaries and wages to auction service expense and cost of collectibles sold.
(B)
Reclassification of interest expense to properly breakout interest income and interest expense.
   
 
 
 

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Correction of Errors in the Consolidated Statement of Cash Flows
During the fourth quarter ended June 30, 2010, the Company discovered that the 2009 Consolidated Statement of Cash Flows was incorrectly presented due to certain errors in classification. The nature and extent of the errors were described in the notes to the Company's Annual Report on Form 10-K for the year ended June 30, 2010. The table provided below reflects the effects of these adjustments on the Company's Consolidated Statement of Cash Flows for the nine month period ended March 31, 2010:
in thousands
As Originally Reported - Nine Months Ended March 31, 2010
 
Adjustment
 
As Corrected - Nine Months Ended March 31, 2010
 
 
 
 
 
 
Net cash provided by operating activities
$
20,879
 
 
$
17,393
 
 
$
38,272
 
Net cash provided by investing activities
6,228
 
 
 
 
6,228
 
Net cash (used in) financing activities
(14,431
)
 
(18,452
)
 
(32,883
)
Effects of exchange rates on cash
(1,487
)
 
1,059
 
 
(428
)
Net cash increase in cash and cash equivalents
11,189
 
 
 
 
11,189
 
Cash and cash equivalents, beginning of period
17,545
 
 
 
 
17,545
 
Cash and cash equivalents, end of period
$
28,734
 
 
$
 
 
$
28,734
 
Business Segments
Trading Segment
 
The Company's 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 Company's 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 Company's outstanding common stock at March 31, 2011. 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 Company's collectibles business operates as an integrated network of global companies concentrating on numismatic (coins and currencies) and philatelic (stamps) materials, rare and fine vintage wines and the Company's discontinued operations of 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 comprise 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.
Summary of Significant Accounting Policies
There have been no significant changes to the Company's significant accounting policies during the nine months ended March 31, 2011 other than the change discussed below. See Footnote 2 of the Company's consolidated financial statements included in the Company's 2010 Annual Report on Form 10-K for a comprehensive description of the Company's significant accounting policies.
Through September 30, 2010, the Company's Collectibles segment recognized revenue upon the receipt of cash. In the second and third quarters of Fiscal 2011, the Company made a number of operational changes which allowed it to revise the point in time when revenue is recognized for the Collectibles segment. Specifically, the Company's Collectibles segment improved its documentation and credit policies over customer acceptance, pervasive evidence of an arrangement, fixed or determinable sales prices and reasonable assurance of collectability, requirements under ASC 605 Revenue Recognition. As a result of the improvements above, effective January 1, 2011, for auctions of consigned product, revenue is recognized upon delivery of the related service elements. The first service element in the auction of consigned product consists of cataloging, appraising, preparation and performance of the auction. Revenue related to this element is recognized upon completion of the auction. The second service element relates to the processing, packaging and delivery of the consigned product and the collection of the sales consideration on behalf of the consignor. Revenue related to this element is recognized upon cash receipt from the purchaser, which generally coincides with delivery of the consigned product to the purchaser. Auction revenue accrued at the close of auction (buyer and seller commissions) which is in excess of the revenue recognized for the delivery of the first element is deferred until the second element is delivered. In accordance with ASC

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605, value has been assigned to each element based upon the estimated selling price of the element as a result of the lack of reliable vendor specific objective evidence or third-party evidence of the selling price. For auctions of owned product, revenue is recognized when title of the product passes to the customer which is generally upon shipment, which, based on Company operational policies, usually occurs when the sales consideration is collected. As a result of the improvements above, effective October 1, 2010, Spectrum Numismatics International (“SNI”), the wholesale component of the Collectible segment commenced recognition of revenue upon the transfer of title to the customer, which generally occurs upon shipment. See Management Discussion and Analysis to this Form 10-Q for discussion of the impact resulting from this change.
Comprehensive Income (Loss)
The components of our comprehensive income (loss) for the nine months ended March 31, 2011 and 2010 include net income, adjustments to stockholders’ equity for the foreign currency translation adjustments, and changes in net unrealized gain (loss) on available-for-sale securities. The foreign currency translation adjustment was due to exchange rate fluctuations in our foreign affiliates’ local currencies.
The following is our comprehensive income (loss) with the respective tax impacts for the nine month periods ending March 31, 2011 and 2010:
 
 
Nine Months Ended
 
Nine Months Ended
in thousands
 
March 31, 2011
 
March 31, 2010
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
4,231
 
 
$
(2
)
Other comprehensive income (loss), net of tax:
 
 
 
 
Changes in unrealized gain (loss) on marketable securities, net of tax
 
 
 
(183
)
Foreign currency translation adjustment
 
5,282
 
 
(1,487
)
Other comprehensive income (loss)
 
5,282
 
 
(1,670
)
Subtotal
 
9,513
 
 
(1,672
)
Less: Total comprehensive income attributable to non-controlling interests
 
(1,092
)
 
(1,234
)
Total comprehensive income (loss) attributable to Spectrum Group International, Inc.
 
$
8,421
 
 
$
(2,906
)
 
Foreign Currency Translation Gains (Losses)
The consolidated financial position and results of operations of the Company’s 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 period ended March 31, 2011 and 2010. Statements of operations accounts are translated at the average rate of exchange prevailing during the period. 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 three and nine months ended March 31, 2011 and 2010, the Company recognized unrealized gains (losses) of $(1.8) million and $(3.9) million and $1.6 million and $1.1 million, respectively, on foreign exchange in the consolidated statements of operations in connection with the translation adjustments of Euro denominated loans totaling $30.3 million and $25.0 million at March 31, 2011 and 2010, owed by SGI to certain of its subsidiaries included in its European Operations.
Income Taxes
As part of the process of preparing its condensed 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 the Income Taxes Topic of the FASB Accounting Standards Codification. 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 Company's 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 Company's condensed 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. The accrued liability relating to unrecognized tax benefits of $6.5 million is presented in the Condensed Consolidated Balance Sheet within deferred and other long-term tax liabilities.
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 realizability 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.

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Changes in recognized tax benefits and changes in valuation allowances could be material to the Company's results of operations for any period, but is not expected to be material to the Company's consolidated financial position.
The potential interest and/or penalties associated with an uncertain tax position are recorded in provision(benefit) for income taxes on the Condensed Consolidated Statement of Operations.
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. 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 Company's average share price for the period.
A reconciliation of shares used in calculating basic and diluted earnings per common shares follows. In computing diluted earnings per share for the three and nine months ended March 31, 2011, the Company excluded options to purchase 324,000 shares of common stock and 37,500 stock appreciation rights (“SARS”) where exercise prices were in excess of the quoted market price of the Company's common stock because inclusion would be anti-dilutive. In computing diluted earnings per share for the three and nine months ended March 31, 2010, the Company excluded options to purchase 0 shares of common stock and 37,500 SARS where exercise prices were in excess of the quoted market price of the Company's common stock because inclusion would be anti-dilutive. There is no dilutive effect of stock appreciation rights as such obligations are not settled and were out of the money at March 31, 2011 and 2010.
A reconciliation of basic and diluted shares is as follows:
 
Three Months Ended
 
Three Months Ended
 
Nine Months Ended
 
Nine Months Ended
in thousands
March 31, 2011
 
March 31, 2010
 
March 31, 2011
 
March 31, 2010
 
 
 
 
 
 
 
 
Basic weighted average shares outstanding (1) (2)
32,468
 
 
31,985
 
 
32,422
 
 
31,895
 
Effect of common stock equivalents — stock options and stock issuable under employee compensation plans
701
 
 
 
667
 
 
 
Diluted weighted average shares outstanding
33,169
 
 
31,985
 
 
33,089
 
 
31,895
 
 
(1)
Basic weighted average shares outstanding for March 31, 2010 include the full effect of 3,277,777 shares issued pursuant to the litigation settlement (see Note 15 of the Company's annual report filed on Form 10-K).
(2)
Basic weighted average shares, for the three and nine months ended March 31, 2011 and 2010 include the effect of vested but unissued restricted stock grants.
Recent Accounting Pronouncements
 
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 became effective for the Company on July 1, 2010. The adoption of this standard did not have any 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 became effective for the Company on July 1, 2010. The adoption of this standard did not have any material impact on the consolidated financial statements.
 

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2. DISCONTINUED OPERATIONS
 
On December 1, 2010 the Company executed an agreement to sell certain assets of its wholly owned subsidiary Greg Martin Auctions, Inc. ("GMA") for $325,000. The Company recorded an expense of $262,570 to write the net assets down to their net realizable value at December 31, 2010. The transaction closed on January 31, 2011. In accordance with the provisions of ASC 205 Presentation of Financial Statements, the results of GMA are now presented as discontinued operations for all periods presented in the consolidated financial statements. Below is the presentation of the GMA assets and liabilities as of March 31, 2011 and June 30, 2010.
 
Assets and liabilities of discontinued GMA are provided below:
In thousands
 
March 31, 2011
 
June 30, 2010
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
Accounts receivable and consignor advances, net
 
$
207
 
 
$
410
 
Inventory, net
 
32
 
 
88
 
Prepaid expenses and other assets
 
208
 
 
24
 
Total current assets
 
447
 
 
522
 
 
 
 
 
 
Property and equipment, net
 
 
 
186
 
Other purchased intangibles, net
 
 
 
491
 
Other assets
 
10
 
 
10
 
Total assets
 
$
457
 
 
$
1,209
 
 
 
 
 
 
Liabilities
 
 
 
 
Accounts payable, customer deposits and consignor payables
 
$
 
 
$
939
 
Accrued expenses and other current liabilities
 
122
 
 
163
 
Total liabilities
 
$
122
 
 
$
1,102
 
 
The following results of operations of GMA have been presented as discontinued operations in the Consolidated Statements of Operation.
 
Operating results of GMA discontinued operations are as follows:
 
 
Three Months Ended
 
Nine Months Ended
In thousands
 
March 31, 2011
 
 
March 31, 2010
 
March 31, 2011
 
 
March 31, 2010
 
Revenues
 
$
397
 
 
$
1,354
 
 
$
1,205
 
 
$
2,133
 
 
 
 
 
 
 
 
 
 
Loss from discontinued operations:
 
 
 
 
 
 
 
 
Gain on sales of assets, net of taxes of $9
 
$
134
 
 
$
 
 
$
134
 
 
$
 
(Loss) from discontinued operations, excluding taxes and gain on sales of assets
 
(296
)
 
(329
)
 
(1,163
)
 
(1,206
)
Benefit for income taxes
 
10
 
 
20
 
 
63
 
 
73
 
(Loss) from discontinued operations
 
$
(152
)
 
$
(309
)
 
$
(966
)
 
$
(1,133
)
 
 

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3.     CUSTOMER CONCENTRATIONS
Customers providing 10 percent or more of the Company's Trading segment revenues for the nine months ended March 31, 2011 and 2010 are listed below:
 
Three Months Ended
 
Three Months Ended
 
Nine Months Ended
 
Nine Months Ended
 
March 31, 2011
 
March 31, 2010
 
March 31, 2011
 
March 31, 2010
 
 
 
 
 
 
 
 
 
 
in thousands
in $’s
as a %
 
in $’s
as a %
 
in $’s
as a %
 
in $’s
as a %
Total Trading segment revenue
$
1,542,653
 
100.0
%
 
$
1,334,979
 
100.0
%
 
$
4,648,820
 
100.0
%
 
$
3,928,155
 
100.0
%
Trading segment customer concentrations
 
 
 
 
 
 
 
 
 
 
 
Customer A
$
324,405
 
21.0
%
 
$
158,771
 
11.9
%
 
$
1,142,364
 
24.6
%
 
$
401,804
 
10.2
%
Customer B
175,391
 
11.4
 
 
69,820
 
5.2
 
 
425,942
 
9.2
 
 
192,619
 
4.9
 
Customer C
14,874
 
1.0
 
 
289,569
 
21.7
 
 
318,245
 
6.8
 
 
1,031,505
 
26.3
 
Total
$
514,670
 
33.4
%
 
$
518,160
 
38.8
%
 
$
1,886,551
 
40.6
%
 
$
1,625,928
 
41.4
%
Customers providing 10 percent or more of the Company's Trading segment's accounts receivable, excluding $28.4 million and $22.7 million secured loans, as of March 31, 2011 and June 30, 2010, respectively, are listed below:
 
March 31, 2011
 
June 30, 2010
 
 
 
 
in thousands
in $’s
 
as a %
 
in $’s
 
as a %
Trading segment accounts receivable
$
34,609
 
 
100.0
%
 
$
18,615
 
 
100.0
%
Trading segment customer concentrations
 
 
 
 
 
 
 
Customer A
$
6,638
 
 
19.2
%
 
$
2,657
 
 
14.3
%
Customer B
4,314
 
 
12.5
 
 
 
 
 
     Customer C
2,292
 
 
6.6
 
 
3,101
 
 
16.7
 
Total
$
13,244
 
 
38.3
%
 
$
5,758
 
 
31.0
%
Customers providing 10 percent or more of the Company's Trading segment's secured loans as of March 31, 2011 and June 30, 2010, respectively, are listed below:
 
March 31, 2011
 
June 30, 2010
 
 
 
 
in thousands
in $’s
 
as a %
 
in $’s
 
as a %
Trading segment secured loans
$
28,354
 
 
100.0
%
 
$
22,690
 
 
100.0
%
Trading segment customer concentrations
 
 
 
 
 
 
 
Customer A
$
6,295
 
 
22.2
%
 
$
7,396
 
 
32.6
%
Customer B
3,243
 
 
11.4
 
 
 
 
 
Customer C
2,745
 
 
9.7
 
 
2,770
 
 
12.2
 
Customer D
 
 
 
 
2,511
 
 
11.1
 
Total
$
12,283
 
 
43.3
%
 
$
12,677
 
 
55.9
%
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 nine months ended March 31, 2011 and 2010 and as of March 31, 2011 and June 30, 2010, the Collectibles segment had no reportable concentrations.
 

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4.    RECEIVABLES
Receivables and secured loans from the Company's trading segment consist of the following as of March 31, 2011 and June 30, 2010:
in thousands
March 31, 2011
 
June 30, 2010
 
 
 
 
Customer trade receivables
$
3,467
 
 
$
6,077
 
Wholesale trade advances
13,389
 
 
5,407
 
Secured loans
28,354
 
 
22,690
 
Due from brokers and other
17,753
 
 
7,131
 
Subtotal
62,963
 
 
41,305
 
Less: allowance for doubtful accounts
(122
)
 
(102
)
Subtotal
62,841
 
 
41,203
 
Derivative assets — open purchase and sales commitments
9,711
 
 
1,698
 
Receivables, net
$
72,552
 
 
$
42,901
 
Customer trade receivables represent short-term, non-interest 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.
Wholesale trade advances represent advances of refined materials 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, non-interest bearing advances made to wholesale metals dealers and government mints.
Secured loans represent short term loans made to customers of CFC. Loans are fully secured by bullion, numismatic and semi-numismatic material which are held in safekeeping by CFC. As of March 31, 2011 and June 30, 2010, the loans carried an average effective interest rate of 9.0% and 9.6%, respectively. Due from brokers principally consists of the margin requirements held at brokers related to open futures contracts.
The Company's derivative liabilities (see Note 10) represent the net fair value of the difference between market value and trade value at trade date for open metals purchases and sales contracts, as adjusted on a daily basis for changes in market values of the underlying metals, until settled. The Company's derivative assets represent the net fair value of open metals forwards and futures contracts. The metals forwards and futures contracts are settled at the contract settlement date.
Accounts receivable and consignor advances from the Company's Collectibles segment consist of the following as of March 31, 2011 and June 30, 2010:
 in thousands
March 31, 2011
 
June 30, 2010
 
 
 
 
Auction and trade
$
28,067
 
 
$
6,100
 
Less: allowance for doubtful accounts
(405
)
 
(383
)
Accounts receivable from collectibles operations, net
$
27,662
 
 
$
5,717
 
The Company frequently extends trade credit in connection with its auction sales. The Company evaluates each customer's 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 Company's 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 March 31, 2011 and June 30, 2010 is adequate. However, actual write-offs could exceed the recorded allowance.
Activity in the total allowance for doubtful accounts for the Trading and Collectible segments as of March 31, 2011 and June 30, 2010 are as follows:
in thousands
 
 
 
Balance, June 30, 2010
$
(485
)
Provision for loss
(74
)
Charge off to reserve
93
 
Foreign currency exchange rate changes
(61
)
Ending balance, March 31, 2011
$
(527
)
 

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5.     INVENTORIES
The Trading segment's 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 March 31, 2011 and June 30, 2010 totaled $0.9 million and $1.0 million, respectively. For the three and nine months ended March 31, 2011 and 2010, the unrealized gains (loss) resulting from the difference between market value and cost of physical inventories totaled $(2.0) million, $6.4 million, $3.1 million, and $4.6 million, respectively. These unrealized gains are included as a reduction of the cost of products sold in the accompanying consolidated statements of operations. Such gains are generally offset by the results of hedging transactions, which have been reflected as a net gain on derivative instruments, which is a component of cost of products sold in the consolidated statements of operations.
The Trading segment's inventories include amounts borrowed from various suppliers under ongoing agreements totaling $12.6 million as of March 31, 2011 and $40.8 million as of June 30, 2010. A corresponding obligation related to metals borrowed is reflected on the consolidated balance sheets. The Trading Segment also protects substantially all of its physical inventories from market risk through commodity hedge transactions (See Note 10).
The Trading segment periodically loans metals to customers on a short-term consignment basis, charging interest fees based on the value of the metal loaned. Inventories loaned under consignment arrangements to customers as of March 31, 2011 and June 30, 2010 totaled $48.2 million and $19.0 million, respectively. Such inventory is removed at the time the customer elects to price and purchase the metals, and the Company records a corresponding sale and receivable. Substantially all inventory loaned under consignment arrangements is 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.
Inventories as of March 31, 2011 and June 30, 2010 consisted of the following:
in thousands
March 31, 2011
 
June 30, 2010
 
 
 
 
Trading segment inventory
$
166,193
 
 
$
114,102
 
Less: provision for loss
(25
)
 
(350
)
Trading, net
$
166,168
 
 
$
113,752
 
Collectibles segment inventory
$
33,772
 
 
$
25,151
 
Less: provision for loss
(916
)
 
(914
)
Collectibles, net
$
32,856
 
 
$
24,237
 
Total inventory, gross
$
199,965
 
 
$
139,253
 
Less: provision for loss
(941
)
 
(1,264
)
Net inventory
$
199,024
 
 
$
137,989
 
Activity in the allowance for inventory loss reserves for the nine months ended March 31, 2011 are as follows:
in thousands
 
Balance, June 30, 2010
$
(1,264
)
Provision for loss
(270
)
Charge off to reserve
526
 
Foreign currency exchange rate charges
67
 
Balance, March 31, 2011
$
(941
)
 
 
 

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6. GOODWILL AND OTHER PURCHASED INTANGIBLE ASSETS
The changes in the carrying values of goodwill by business segments for the nine months ended March 31, 2011 and the year ended June 30, 2010, are described below:
in thousands
                      June 30, 2010
 
 
Additions and
Adjustments
 
Impairments
 
                       March 31, 2011
 
Trading
$
4,884
 
 
$
 
 
$
 
 
$
4,884
 
Collectibles
1,058
 
 
959
 
 
 
 
2,017
 
 
$
5,942
 
 
$
959
 
 
$
 
 
$
6,901
 
in thousands
                      June 30, 2009
 
 
Additions and
Adjustments
 
Impairments
 
                         June 30, 2010
 
Trading
$
4,884
 
 
$
 
 
$
 
 
$
4,884
 
Collectibles
1,076
 
 
415
 
 
(433
)
 
1,058
 
 
$
5,960
 
 
$
415
 
 
$
(433
)
 
$
5,942
 
Cumulative goodwill impairment totaled $4.3 million as of March 31, 2011 and June 30, 2010. Please see not below regarding increases in goodwill related to the acquisition of Stack's, LLC. Additional increases in goodwill were related to foreign currency translation adjustments within our European operations.
The carrying value of other purchased intangibles as of March 31, 2011 and June 30, 2010 is as described below:
 
 
 
March 31, 2011
 
June 30, 2010
 
 
 
 
 
 
in thousands
Estimated Useful Lives (Years)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Impairment
 
Net Book Value
 
Gross Carrying Amount
 
Accumulated Amortization
 
Impairment
 
Net Book Value
Trademarks
Indefinite
 
$
3,248
 
 
$
 
 
$
(566
)
 
$
2,682
 
 
$
2,155
 
 
$
 
 
$
(798
)
 
$
1,357
 
Customer lists
5 - 15
 
$
9,326
 
 
$
(3,210
)
 
$
(419
)
 
$
5,697
 
 
$
7,326
 
 
$
(2,831
)
 
$
(419
)
 
$
4,076
 
Non-compete and other
4 - 15
 
2,321
 
 
(2,274
)
 
 
 
47
 
 
2,299
 
 
(2,275
)
 
 
 
24
 
Purchased intangibles subject to amortization
 
 
11,647
 
 
(5,484
)
 
(419
)
 
5,744
 
 
9,625
 
 
(5,106
)
 
(419
)
 
4,100
 
 
 
 
$
14,895
 
 
$
(5,484
)
 
$
(985
)
 
$
8,426
 
 
$
11,780
 
 
$
(5,106
)
 
$
(1,217
)
 
$
5,457
 
 
The Company's other purchased intangible assets are subject to amortization except for trademarks, which have an indefinite life. Amortization expense related to the Company's intangible assets for three and nine months ended March 31, 2011 and 2010 were $0.2 million, $0.4 million, $0.4 million, and $0.6 million. On November 23, 2010, Bowers and Merena Auctions, LLC ("B&M") purchased certain assets of Summit Rare Coins for $ 0.3 million which was reflected as an increase to customer lists.
 
On January 3, 2011, B&M, entered into two separate Contribution and Assumption Agreements (collectively, the “Contribution Agreements”) with Stack's-Bowers Numismatics, LLC, a Delaware limited liability company (“LLC”), and Stack's, LLC, a Delaware limited liability company (“Stack's”). See Note 20 Business Combination for further discussion. The results of operations of the LLC from January 1, 2011 through March 31, 2011, have been included in SGI's consolidated statement of operations for the three and nine months ended March 31, 2011.
 
The following below discloses the identified intangible assets and goodwill related to the acquisition (in thousands):
Identifiable assets
 
 
Customer relationship
 
$
1,690
 
Trade name - indefinite life
 
1,439
 
Favorable lease asset
 
32
 
Total fair value of identified intangibles
 
$
3,161
 
 
 
 
Goodwill
 
$
951
 
The allocation of the purchase price has not yet been finalized. The management team of SGI will finalize the allocation upon completion of its valuation of the fair value of the tangible and intangible assets contributed to LLC by Stack's.

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Estimated amortization expense on an annual basis for the succeeding five years is as follows (in thousands):
Period ending March 31, 2011:
 
 
2011 (remaining 3 months)
 
$
133
 
2012
 
626
 
2013
 
622
 
2014
 
569
 
2015
 
521
 
Thereafter
 
3,275
 
Total
 
$
5,745
 
 
7.     ACCOUNTS PAYABLE AND CONSIGNOR PAYABLES
Accounts payable consists of the following:
in thousands
March 31, 2011
 
June 30, 2010
 
 
 
 
Trade payable to customers and other accounts payable
$
18,263
 
 
$
5,920
 
Advances from customers
29,159
 
 
12,153
 
Net liability on margin accounts
40,481
 
 
10,530
 
Other accounts payable
464
 
 
303
 
Derivative liabilities — futures contracts
5,819
 
 
507
 
Derivative liabilities — forward contracts
11,223
 
 
45
 
 
$
105,409
 
 
$
29,458
 
 
8.     INCOME TAXES
 
The Company uses an estimated annual effective tax rate, which is based on expected annual income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which the Company operates, to determine its quarterly provision for income taxes. Certain significant or unusual items are separately recognized in the quarter in the which they occur and can be a source of variability in the effective tax rates from quarter to quarter.
 
Income tax provision on continuing operations for the nine months ended March 31, 2011 and 2010 consists of expense of $531,000 and $48,000 on earnings in tax jurisdictions outside the U.S. and a $240,000 and $531,000 related to U.S. federal and state jurisdictions respectively. Our effective rate was 12.9% and 33.9% for the nine months ended March 31, 2011 and 2010 respectively.
 
The Company records a valuation allowance against our deferred tax assets to reduce the net carrying value to an amount which is believed more likely than not to be realized. When the Company establishes or reduces the valuation allowance against our deferred tax assets, the provision for income taxes will increase or decrease, respectively, in the period such determination is made. The valuation allowance against deferred tax assets was $12.8 million and $12.7 million as of March 31, 2011 and 2010 respectively.
 
The Company is currently under examination by the Internal Revenue Service (IRS) for the years ended June 30, 2004, 2005, 2006 and 2007. 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. The Company's Spanish operations are also currently under examination. For our remaining foreign operations, either examinations have been completed by the tax authorities or the statute of limitations has expired for tax returns filed by the Company for the years through 2002.
 
As of March 31, 2011, the Company had $26.5 million of unrecognized tax benefits and $1.1 million relating to interest and penalties. Of the total unrecognized tax benefits, $6.5 million would reduce our effective tax rate, if recognized. Our continuing practice is to recognize interest and penalties related to income tax matters in income tax expense. The Company accrued additional interest and penalties of $0.1 million and $0.2 million during the three and nine months ended March 31, 2011. Final determination of a significant portion of the Company's global unrecognized tax benefits that will be effectively settled remains subject to ongoing examination by various taxing authorities, including the 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 expects to resolve this issue within the next nine months; however the Company is unable to predict the outcome at this time.
 
9.     FINANCING AGREEMENTS
A-Mark has a borrowing facility (“Trading Credit Facility”) with a group of financial institutions under an inter-creditor agreement, which provides for lines of credit of up to $135.0 million including a facility for letters of credit up to a maximum of $135.0 million. A-Mark routinely

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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 One Month LIBOR rate was approximately 0.26% and 0.35% as of March 31, 2011 and June 30, 2010, respectively. Borrowings are due on demand and totaled $97.3 million and $45.2 million for lines of credit and $7.0 million and $4.8 million for letters of credit at March 31, 2011 and at June 30, 2010, respectively. Amounts borrowed under the Trading Credit Facility are secured by A-Mark’s receivables and inventories. The amounts available under the Trading Credit Facility are formula based and totaled $30.7 million and $65.0 million at March 31, 2011 and June 30, 2010 respectively. The Trading Credit Facility also limits A-Mark's ability to pay dividends to SGI. The Trading Credit Facility is cancelable by written notice from the financial institutions.
A-Mark’s 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-Mark’s and SGI’s tangible net worth as of March 31, 2011 were $34.0 million and $71.4 million , respectively. The Company's 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 borrowed metals or cash. A-Mark's inventories included borrowed metals with market values totaling $12.6 million and $40.8 million as of March 31, 2011 and June 30, 2010, respectively. Certain of these metals are secured by letters of credit issued under the Trading Credit Facility, which totaled $7.0 million and $4.8 million million as of March 31, 2011 and June 30, 2010, respectively.
 
Interest expense related to A-Mark’s borrowing arrangements totaled $0.9 million and $2.3 million and $0.3 million and $1.1 million for the three and nine months ended March 31, 2011 and 2010, respectively.
 
In May 2010, the Company and its wholly-owned numismatic subsidiaries, SNI, B&M, and Teletrade, Inc. ("Teletrade"), entered into a borrowing facility with a lender, providing for a line-of-credit (the "Collectible Credit Facility") up to a maximum of $7.5 million. Amounts outstanding under the Collectibles Credit Facility are secured by the assets of SNI, B&M and Teletrade, and are further guaranteed by the Company. The Company's obligations under the guaranty are secured by the pledge of SNI shares owned by it. The Collectibles Credit Facility is due on demand, and interest on the outstanding amounts accrued at the lender's base rate (3.25% as of March 31, 2011, which is subject to change), plus a margin. As of March 31, 2011 and June 30, 2010 borrowings are due on demand and totaled $3.5 million million and $2.0 million
 
Separately, A-Mark, the Company's precious metals trading subsidiary, has a line of credit with this lender totaling $15.0 million, which is a component of A-Mark's Trading Credit Facility. Total borrowing capacity between SNI and A-Mark cannot exceed $17.5 million with respect to this lender. As of March 31, 2011, the total amount borrowed with this lender was $17.0 million, $13.5 million by A-Mark and $3.5 million by SNI. Amounts available for borrowing under this Collectible Credit Facility as of March 31, 2011 were $0.5 million. As of June 30, 2010 the total amount borrowed with this lender was $7.7 million, $2.0 million by SNI and $5.7 million by A-Mark.
 
Interest expense related to SNI's borrowing arrangements totaled $0.18 million and $0.25 million and $0.03 million and $0.10 million for the three and nine months ended March 31, 2011 and 2010, respectively.
 
 
10.    DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
The Company manages the value of certain specific assets and liabilities of its trading business, including trading inventories (see Note 5), by employing a variety of strategies. These strategies include the management of exposure to changes in the market values of the Company's trading inventories through the purchase and sale of a variety of derivative products such as metals forwards and futures.
The Company's trading inventories and purchase and sale transactions consist primarily of precious metal bearing products. The value of these assets and liabilities are linked to the prevailing price of the underlying precious metals. The Company's 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 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 Company's 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 forward 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 Company's global hedging strategy, the Company is not using hedge accounting as defined under ASC 815, Derivatives and Hedging. Gains or losses resulting from the Company's futures and forward contracts are reported as unrealized gains or losses on commodity contracts with the related unrealized amounts due from or to counterparties reflected as a derivative asset or liability (see Notes 3 and 6). Gains or losses resulting from the termination of hedge contracts are reported as realized gains or losses on commodity- contracts. Realized and unrealized net gains (losses) on derivative instruments in the consolidated statements of operations for the three and nine months ended March 31, 2011 and 2010 were $(18.2) million, $(53.4) million, $6.8 million, and $(10.3) million, respectively.
The Company’s 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

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parties may engage in from time to time.
A summary of the market values of the Company’s physical inventory positions, purchase and sale commitments, and its outstanding forwards and futures contracts is as follows at March 31, 2011 and at June 30, 2010