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v2.4.0.6
Investments in Marketable and NonMarketable Securities
12 Months Ended
Jun. 30, 2011
Notes to Financial Statements  
Investments in Marketable and NonMarketable Securities

3. INVESTMENTS IN MARKETABLE SECURITIES AND NONMARKETABLE SECURITIES

 

The Company had investments and advances in certain marketable and non-marketable securities at June 30, 2011 and 2010, as follows:

 

    June 30,  
    2011     2010  
             
Broadcaster, Inc., - at cost   $ 2,724.0     $ 2,724.0  
Unrealized loss on marketable securities     (2,603.3 )     (2,543.4 )
Realized losses on marketable securities          (0.5)          
Access Propeller Holdings, Inc. - at cost     300.0       300.0  
Less: allowance for impairment     (300.0 )     (300.0 )
                 
    $ 120.2     $ 180.6  

 

Until August 2007 the shares of Broadcaster, Inc. owned were "restricted securities" as defined in Rule 144 under the Securities Act of 1933. Under Rule 144, the Company could publicly sell, within any three month period, a number of shares not to exceed one percent of Broadcaster, Inc.'s then outstanding shares of common stock. In the event that Broadcaster, Inc. became listed on the NASDAQ or on a national securities exchange, the maximum amount that could be sold was the greater of one percent of the outstanding shares and the average weekly trading volume of Broadcaster, Inc.'s common stock for the four weeks preceding the Company's filing of a notice of sale with the SEC. Since these shares were restricted, the shares, which could be sold within one year, were classified as a current asset and the balance of the shares were classified in other assets, as non-current, on the balance sheet.

 

In August 2007, that restriction was removed after the departure of Bruce Galloway in May 2007, a former director and significant shareholder of the Company from the Board of Directors of Broadcaster. Accordingly, the restriction as to the balance sheet classification of these shares was also removed and classified as current assets.

 

Under  GAAP  fair value is the price that would be received for an investment in a current sale, which assumes an orderly transaction between market participants on the measurement date. GAAP requires the Company to assume that the portfolio investment is sold in principal market to market participants, or in the absence of a principal market, the most advantageous market, which may be a hypothetical market.

 

Market participants are defined as buyers and sellers in the principal or most advantageous market that are independent, knowledgeable, and willing and able to transact. In accordance with GAAP, the Company has considered its principal market as the market in which the Company exits its portfolio investments with the greatest volume and level of activity. GAAP has established a framework for measuring fair value which specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. In accordance with GAAP, these inputs are summarized in the three broad levels listed below:

 

Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

 

Level 2 – Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

 

Level 3 – Valuations based on inputs that are unobservable and significant in the overall fair value measurement.

 

In addition to using the above inputs in investment valuations, we continue to employ the valuation policy approved by our board of directors that is consistent with GAAP (see Note 1).  Consistent with our valuation policy, we

evaluate the source of inputs, including any markets in which our investments are trading (or any markets in which securities with similar attributes are trading), in determining fair value.

 

Our valuation policy considers the fact that  because there is not a readily available market value for most of the investments in our portfolio, the fair value of the investments must typically be determined using unobservable inputs.

 

Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may fluctuate from period to period. Additionally, the fair value of our investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values that we may ultimately realize.   Further, such investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we may realize significantly less than the value at which we have previously recorded it.

 

In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the valuations currently assigned.

 

The following table presents fair value measurements of investments as of June 30, 2011 (dollars in thousands):

 

          Fair Value Measurements Using  
    Total     Level 1     Level 2     Level 3  
Investments   $ 120.2     $ -     $ 120.2     $ -  
                                 

 

The following table’s present changes in investments that use Level 2 inputs for the year ended June  30, 2010:

 

   

Year ended

June 30, 2011 

(in thousands)

 
Balance as of June 30, 2009   $ 180.6  
Net unrealized losses         (59.9)  
Net purchases, sales or redemptions     (.5)  
Net transfers in and/or out of Level 2     -  
Balance as of  June 30, 2010   $ 120.2  

 

As of June 30, 2011, the net unrealized loss on the investments that use Level 2 inputs was $2,603,300

 

 Several of the officers, directors and significant shareholders of Broadcaster were defendants in an action captionedPaul Goodman v. Spelling, et al in New York State Supreme Court. On January 16, 2008, Mr. Goodman commenced an action in New York State Supreme Court against Broadcaster and certain of its officers, directors, and shareholders, seeking monetary damages “in an amount to be determined but not less than $10 million plus other special, punitive and compensatory damages” for alleged defamation contained in a Company filing with the SEC. Mr. Goodman sought and obtained an ex parte temporary restraining order, which was vacated by the Court upon hearing argument from the defendants. This action had been removed and transferred to the Federal District

 

Court for the Southern District of New York and then transferred to United States District Court for the Central District of California. Management of Broadcaster believes that the action is without merit.

 

On December 14, 2009 Broadcaster,. announced  the settlement, of the derivative lawsuit brought by Baytree Capital Associates, LLC in February 2008. Broadcaster and Baytree agreed to a dismissal of the lawsuit with prejudice with no payment being made by either the plaintiff or any of the defendants. As is required when a derivative action is settled and dismissed, the Court found that the settlement was fair, adequate and reasonable to Broadcaster and its shareholders and not a product of collusion.

 

At the same time, Nolan Quan, a Broadcaster shareholder and former officer, and Michael Gardner, the owner of Baytree Capital Associates, both agreed to surrender for cancellation their shares of Broadcaster Common Stock that they own or control and that had been issued as "earnout" shares in connection with the Broadcaster—Access Media transaction completed in 2006. The total number of shares surrendered and cancelled was 18,375,000,  representing approximately 32.93% of the outstanding shares of common stock of Broadcaster, computed immediately prior to the surrender of the shares.

 

The result of the surrender and cancellation of these shares increases the Company’s ownership in  Broadcaster from 5.4% to 9.0 %.

 

A total of  200,000 shares of Broadcaster. common stock secures the Company's 15% $325,000 Promissory Note to Multi Mag Corporation and approximately 373,845 shares of Broadcaster, Inc. common stock secures the $345,000 Notes to investors.. Due to the recent decline in the price of shares of Broadcaster, the Notes are now under-collateralized.

 

The Company has sold 149,500 shares of Broadcaster. from July 1, 2008 through June 30, 2011. The proceeds of approximately $22,400 have been used for general working capital purposes.

 

From time to time, the Company may continue to sell a certain amount of its holdings in Broadcaster The proceeds of these sales are anticipated to be principally used by the Company for general working capital purposes.