SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2005 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from__________ to ___________ Commission file number 1-11988 GREG MANNING AUCTIONS, INC. (Name of Registrant as specified in its Charter) Delaware 22-2365834 -------- ---------- (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 775 Passaic Avenue, West Caldwell, New Jersey 07006 - --------------------------------------------- -------- (Address of Principal Executive Offices) (Zip code) Registrant's telephone number, including area code: (973) 882-0004 -------------- Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange on Which Registered Title of each class ----------------------------------------- - ------------------- The NASDAQ National Market Common Stock, $.01 par value Securities registered pursuant to Section 12(g) of the Act: None Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Check if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ]. Check if the issuer is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes X No The aggregate market value of the common stock held by non-affiliates of the Issuer as of June 30, 2005 (based on the closing sale price of $11.95 per share as reported on NASDAQ), was $74,961,478. As of September 12, 2005, the Issuer had 27,671,521 shares of its Common Stock outstanding. Portions of the Registrant's definitive proxy statement, which will be filed within 120 days of June 30, 2005, are incorporated by reference into Part III. 2 2 Greg Manning Auctions, Inc. Annual Report on Form 10-K/A For the year ended June 30, 2005 EXPLANATORY NOTE Reference is made to the Company's Annual Report on Form 10-K for the year ended June 30, 2005 (the "10-K"). The purpose of this amendment to the Form 10-K is to (a) correct certain formatting errors in the "Consolidated Statements of Earnings Data" on page 10 of the 10-K; and (b) to replace Exhibits 31.1, 31.2, 32.1 and 32.2, the certifications of the Chief Executive Officer and the Chief Financial Officer of the Company required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, which contained inadvertent errors. This amendment contains no other changes to the Form 10-K. This amendment does not reflect events occurring after the original filing of the Form 10-K or modify or update those disclosures in Form 10-K, except to reflect the amendment described above. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2005 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from________ to________ Commission file number 1-11988 GREG MANNING AUCTIONS, INC. (Name of Registrant as specified in its Charter) Delaware 22-2365834 -------- ---------- (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 775 Passaic Avenue West Caldwell, New Jersey 07006 - -------------------------------------------- ----- (Address of Principal Executive Offices) (Zip code) Registrant's telephone number, including area code: (973) 882-0004 -------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of Each Exchange on Which Registered - ------------------- ----------------------------------------- Common Stock, $.01 par value The NASDAQ National Market Securities registered pursuant to Section 12(g) of the Act: None Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Check if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ]. Check if the issuer is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes X No The aggregate market value of the common stock held by non-affiliates of the Issuer as of June 30, 2005 (based on the closing sale price of $11.95 per share as reported on NASDAQ), was $74,961,478. As of September 12, 2005, the Issuer had 27,671,521 shares of its Common Stock outstanding. Portions of the Registrant's definitive proxy statement, which will be filed within 120 days of June 30, 2005, are incorporated by reference into Part III. 1 Greg Manning Auctions, Inc. Index Page ---- PART I - ------ Item 1. Description of Business...............................................3 Item 2. Description of Property...............................................7 Item 3. Legal Proceedings.....................................................7 Item 4. Submission of Matters to a Vote of Security Holders...................7 PART II - ------- Item 5. Market For Common Equity, Related Stockholder Matters and Issuer Repurchases of Equity Securities.....................................8 Item 6. Selected Consolidated Financial Data.................................9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................12 Item 7A Quantitative and Qualitative Disclosures about Market Risk..........27 Item 8. Financial Statements and Supplementary Data.........................28 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................61 Item 9A Controls and Procedures.............................................61 Item 9B Other Information ..................................................62 PART III - -------- Item 10 Directors and Executive Officers....................................63 Item 11 Executive Compensation..............................................63 Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters..........................63 Item 13 Certain Relationships and Related Transactions......................63 Item 14 Principal Accountant Fees and Services .............................63 PART IV - ------- Item 15 Exhibits, Financial Statement Schedules and Reports on Form 8-K.....64 PART I ------ 2 Item 1. DESCRIPTION OF BUSINESS GENERAL ------- Greg Manning Auctions, Inc. (GMAI or the Company) is a global integrated network of leading companies in the collectibles market with operations in North America, Europe and Asia as well as on the Internet. The Company operates through a number of subsidiaries that specialize in various sectors of the collectibles markets. The Company was created in September 2003 when Greg Manning Auctions, Inc., a leading stamp and coin auction house, and Auctentia, S.L. of Spain (Auctentia) effectively integrated their auction businesses, creating a global collectibles network. GMAI businesses now include Auctions, Merchant/Dealer Operations and Trading Operations. Auctentia is the wholly owned subsidiary of Afinsa Bienes Tangibles, S.A. (Afinsa), the Company's major customer. Afinsa and Auctentia collectively own approximately 68% of GMAI's outstanding common stock. GMAI's North American auction subsidiaries are: H.R Harmer, Greg Manning Galleries, Teletrade, Greg Manning Nutmeg Auctions (d/b/a Nutmeg Stamp Sales), Ivy & Manning (formerly Ivy & Mader), Kensington Associates, North American Certified Trading, Superior Sports Auctions, Bowers and Merena Auctions and Kingswood Coin Auctions. The Company also operates auction divisions under the names Greg Manning Auctions and Spectrum Numismatic Auctions. H.R. Harmer, whose assets the Company acquired in July 2004, typically conducts high-end philatelic auctions of rare single stamps and collections targeted to individual collectors as well as dealers, while Greg Manning Galleries focuses on smaller, less expensive and mid-range individual stamp collections. The Greg Manning Auctions division conducts auctions of stamp collections and accumulations generally targeted to philatelic dealers, and Ivy & Manning specializes in the sale of higher-end individual stamps to collectors. Nutmeg Stamp Sales, whose assets the Company acquired in February 2004, is engaged in the sale of primarily owned philatelic inventory to mid- and upper-end collectors. In February 2004, the Company, through its subsidiary Spectrum Numismatics, acquired the business assets of Bowers and Merena Auctions and Kingswood Coin Auctions, which are engaged in the acquisition (by purchase and consignment) and sale (by auction and otherwise) of collectible coins, as well as Superior Sports Auctions, which is engaged in the acquisition (by purchase and consignment) and sale (by auction and otherwise) of collectible sports cards and other sports memorabilia. Spectrum also owns Teletrade, which conducts internet and telephonic auctions of coins at the low and mid-price range. GMAI's European auction subsidiaries, which were among the companies acquired by the Company in September 2003 from Auctentia, include Auctentia Subastas of Madrid, Spain (operating under the name "Afinsa Auctions"); Corinphila Auktionen (Corinphila) of Zurich, Switzerland; and the Kohler group of auction companies of Berlin (66.67% owned by GMAI) and Wiesbaden, Germany. Auctentia Subastas/Afinsa Auctions was formed in 2003 to conduct the philatelic business previously carried out by a division of Auctentia, and focuses on high-level philately. It generally conducts between three to five auctions each year in Spain and Portugal. Corinphila is a long-standing auction house specializing in rarities, specialized collections and other high-end philatelics, and generally conducts two or three auctions per year. Kohler Berliner specializes in post-1945 German and old Communist Eastern Bloc countries' philately, and typically conducts two or three auctions per year. Kohler Wiesbaden, formed in 2000 (after having conducted business as a sole proprietorship since 1913), is the largest philatelic auction house in Germany, and holds three auctions per year. In addition, John Bull Auctions, which the Company acquired in February 2005, specializes in both single-owner sales of advanced collections and general auction sales of primarily Asian stamps and postal history. John Bull currently conducts between six to eight auctions per year. The Company's merchant/dealer operations are conducted through Spectrum Numismatics, one of the leading coin wholesalers in the United States, as well as through GMAI Auctentia Central de Compras (CdC) of Madrid, Spain, which, together with GMAI, acts as exclusive supplier of collectibles - primarily stamps and coins - on a worldwide basis to Afinsa. In July 2005, the Company and Afinsa acquired all of the outstanding stock of A-Mark Precious Metals, Inc., one of the largest private sellers of bullion coins and bullion gold, silver, platinum and palladium to the wholesale marketplace. A-Mark Precious Metals was acquired by a newly formed corporation, whose outstanding common stock is owned 80% by Spectrum and 20% by Auctentia, a wholly-owned subsidiary of Afinsa. The Company's trading operations are conducted through A-Mark. Effective July 31, 2005, the Company, which had owned 65% of the equity interest in Corinphila Auktionen AG, purchased the remaining 35% equity interest in that company, or 4,970 shares, with the result that the Company now owns 100% of the outstanding share capital of Corinphila. The exercise price was 1.600.000 CHF (approximately U.S.$1,270,000), of which 1.000.000 CHF was paid on July 30, 2005 and 600.000 CHF will be paid by September 31, 2005. The sellers of the equity interest, Mr. Beat Vollenwieder and Mr. Martin Mader, are officers of Corinphila. The option to purchase this 35% interest, and the terms of such purchase, were set forth in a Share Purchase Agreement, dated September 19, 2002, between the sellers and Auctentia. Under the terms of the Share Purchase Agreement, Auctentia was able to designate the Company as the entity to exercise the option. For the year ended June 30, 2005, the Company's revenues attributable to its United States, European and Asian operations were approximately $105,539,000, $134,071, 000 and $704,000, respectively. For the year ended June 30, 2004, the Company's revenues attributable to its United States, European and Asian operations were approximately $97,000,000, $114,400,000 and $1,500,000, respectively. GMAI is a Delaware corporation and was established in 1981. It made its initial public offering in 1993. Our corporate internet address is www.gregmanning.com. On this website, we include a "real time" link to all our electronic filings with the Securities and Exchange 3 Commission so that they are available as soon as reasonably practicable after filing, including our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934. All such filings are available free of charge. Our principal corporate offices are located in West Caldwell, New Jersey. Our common stock is listed on the Nasdaq National Market under the symbol "GMAI." In addition, GMAI and its subsidiaries operate 13 global websites: www.teletrade.com, www.amark.com, www.spectrumnumismatics.com, www.hrharmer.com, www.kingswoodcoin.com, www.nactcoin.com, www.nutmegstamp.com, www.superiorsports.com, www.bowersandmerena.com, www.afinsa-auctions.com, www.corinphila.com, www.heinrich-koehler.de. and www.heinrich-koehler-berlin.de. As used herein, the "Company", "we", "us" and similar terms include Greg Manning Auctions, Inc. and its subsidiaries, unless the context indicates otherwise. The following describes each of the Company's three business areas - Auctions, Merchant/Dealer Operations and Trading Operations in more detail. AUCTIONS -------- Based on its knowledge of the collectibles markets, the Company believes that it is one of the world's largest (measured by aggregate sales) auctioneers of stamps, and a leading auctioneer of rare coins, sports trading cards and memorabilia. Its auctions are targeted to both collectors and dealers, and feature offerings spanning the modest to ultra-high end price spectrum. The Company conducts primarily traditional "live" auctions featuring full electronic capabilities. Certain of its subsidiaries offer mail-only auctions (with electronic capability) and telephonic/Internet-only auctions. In all cases, commissions are typically charged from the seller of 0% to 15% and from the buyer of 12.5% to 15%. "Traditional auctions" are live, in-person auctions conducted by a licensed auctioneer. The Company holds approximately 25 traditional 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 electronic catalogs and most are augmented by one or more forms of electronic bidding. The Company's traditional auctions are based on a "full service" auction model in which the Company takes physical possession of all items offered for sale in its auctions, inspects and describes all offerings, receives all sums due, remits sale proceeds to the seller, and professionally packs and ships items sold to the buyer. In the Company's 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 the Company 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 buyer's 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 place of the auction. 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 and storing the items to be offered for sale, catalog creation, printing and mailing, insurance, transportation, auction advertising, auction venue site rental fees, security, temporary personnel and expenses of certain additional auction-related accounting and shipping functions. The Company operates "Internet auctions" through its Teletrade subsidiary. Internet auctions are auctions wherein there is no live, natural-person auctioneer and no bidders in a single physical location orally making bids as in a "traditional auction." Rather, all bids are made electronically via the Internet or telephone, and a computer system processes the bids and determines the highest bidder. Consistent with the Company's full service traditional auction business model and its commitment to customer service, the Company's Internet auctions feature many of the same full service amenities as its traditional auctions. Specifically, unless otherwise noted in a particular sale's terms and conditions, the Company takes physical possession of all items offered for sale prior to the sale, guarantees the genuineness of all items offered, describes the items, collects all sums due, remits the sale proceeds to the seller, and professionally packs and ships the items sold to the buyer. Additionally, because the buyer in an Internet auction usually has not had an opportunity to personally view the item offered, the Company also offers buyers a 100% Satisfaction Guarantee. Costs involved in conducting the Company's Internet auctions include, among other things, the cost of inspecting, describing, imaging and storing the items to be offered for sale. Other costs include technology development and maintenance, computer and Internet hardware procurement and maintenance, advertising, and expenses of certain additional auction-related accounting and shipping functions. The technology operating the Company's Internet/telephone auctions conducted on the Company's www.teletrade.com web site is known as Interphonic(TM), a Company owned and developed technology, which permits bidders to participate in electronic auctions either by touch-tone telephone or via the Internet. 4 The Company also offers mail-only auctions through its Nutmeg, Kingswood and Superior subsidiaries. Consignor Advances Frequently, an owner consigning property to the Company will request a cash advance at the time the property is delivered to the Company, 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. The Company is a secured party with respect to the collateral, holds a security interest in the collateral and maintains possession of the collateral until it is sold. The ability to offer cash advances is often critical to the Company's ability to obtain consignments of desirable property. In the case of property sold at an auction, an owner may have to wait up to 45 days after the auction sale date for settlement and payment of the owner's portion of the sales proceeds. In many instances, an owner's motivation to consign property for sale may include a need for cash on an immediate basis. Offering cash advances allow the Company to attract owners who desire immediate liquidity while preserving the opportunity to sell at auction at the highest available price. The Company believes that its ability to make consignor advances on a consistent basis has enabled it 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 the Company's estimate of the value of the property when sold at auction. Collectibles Auction Competition The auction market, both traditional and Internet, for the collectibles offered by the Company is highly competitive and dynamic. With the exception of the low-end and consumer-to-consumer segments of the Internet auction market wherein eBay, Inc. has secured a dominant market position, no clear market leader exists. Among the Company's primary competitors in the domestic and worldwide philatelic auction business are Matthew Bennett, Inc., Charles Shreve Galleries, Inc. and Robert A. Siegel Auction Galleries, Inc. In the sports trading card auction business, the Company's primary competitors are Mastro Fine Sports Auctions, Sports Trading Cards Plus, LLC and Sales OnLine Direct, Inc. (d/b/a Rotman Auctions). The Company's principal coin auction competitors are Heritage Rare Coin Galleries, Inc., Stacks Rare Coins, Superior Coin Galleries of Beverly Hills and American Numismatic Rarities, LLC. A number of companies offer business-to-business and business-to-consumer auctions of collectibles, including eBay, Inc., Yahoo! Inc., Amazon.com, Inc., Overstock.com Inc., Interactive Collector, Inc. (d/b/a iCollector.com) and Sothebys.com, Inc. Additionally, several companies host consumer-to-consumer auctions of collectibles. While the Company is not in the consumer-to-consumer auction business, these companies' services provide collectors the option to sell or buy their collectibles themselves. Consumer-to-consumer auction sites selling collectibles include eBay, Inc., Overstock.com Inc., Yahoo! Inc. and Amazon.com, Inc. MERCHANT/DEALER --------------- Afinsa Supply Contracts GMAI and CdC are parties to separate agreements with Afinsa, dated August 1, 2003, as amended, pursuant to which GMAI and CdC act as exclusive suppliers of collectibles - primarily stamps and coins - for Afinsa on a worldwide basis, with GMAI acting in the United States, Hong Kong and South America, and CdC acting in all other geographic locations. Afinsa is engaged, among other things, in commercial and trading activities involving tangible investment products throughout Europe, and has business relationships with a number of long-term clients, the ultimate purchasers of the goods provided by the Company. The supply agreements have a ten-year term, terminable by either party upon six months' notice. In addition to paying the purchase price for the goods sold under the contracts, Afinsa pays to the Company an amount equal to 10% of the aggregate purchase price of all such goods sold. No collectibles sold to Afinsa by GMAI under the agreements are purchased from Afinsa, Auctentia or their affiliates. Rather, all such material is purchased from third parties: from stamp and coin dealers, by auction, or from collectors. In September 2003 the Company purchased all of Auctentia's equity interest in CdC, whose sole assets consisted of an inventory of certain philatelic and art assets. CdC has and will continue to use the inventory owned by it to sell at various auctions run by other subsidiaries of GMAI. Such inventory has not and will not be resold to Auctentia, Afinsa or their affiliates. Spectrum Numismatics The Spectrum wholesale coin business complements the Company's auction and merchant/dealer businesses by providing a supply of favorably priced coin offerings for its auctions and fixed price sales venues. The majority of Spectrum's revenue is generated from wholesale 5 sales of coins and from sales of coins to retailers and auction houses. Additionally, Spectrum sells directly to a limited number of select private collectors. Based on its knowledge of the market, Spectrum believes that it is one of the largest wholesalers of rare coins in the United States. Complementary Merchant/Dealer Operations; Private Sales In order to complement and enhance the Company's auction business, the Company frequently buys collectibles in its own name and resells them as a merchant/dealer. 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, the Company uses its knowledge of the markets and products to make what the Company calls "opportunistic purchases." In most instances, collectibles purchased in this manner are resold within 180 days either in one of the Company's 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, it is most profitably sold over a period of time, the collectibles purchased are held in the Company's inventory and resold after 180 days. In addition to these "opportunistic purchases," the Company continually searches the collectibles markets for favorable buying opportunities and buys individual pieces and collections to re-sell to a particular collector pursuant to a specific purchase request, to fill a need for one of its auctions to make that auction more attractive to the targeted audience, or to take advantage of what the Company believes is a favorable price and buying opportunity. In these circumstances, items purchased are generally resold in less than 180 days. The Company earns a profit or incurs a loss on the sale of owned inventory to the extent the sale price exceeds or is less than the purchase price paid by the Company. The Company seeks to sell its owned inventory as quickly and efficiently as possible, thereby promoting a high level of inventory turnover and maintaining maximum liquidity. In a private sale, the Company contacts known collectors and sells specific, usually high or ultra-high end items, to such collectors at a privately negotiated price. When such sales are conducted of Company-owned items, the Company earns a profit based upon the sale price paid by the private buyer. The Company also conducts private sales of consigned items. In such instances, the Company earns a fee for its services. Generally, the fee is a percentage of the sale price; however, in some circumstances the Company 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 the entire purchase price at the time of sale. 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, providing increased liquidity for the seller. For the Company, private treaty sales provide an opportunity to realize increased revenues because such sales involve fewer costs than auction sales, primarily because there are minimal expenses associated with such sales. Merchant/Dealer Competition Competition among dealers and merchants of the collectibles sold by the Company is intense. The market is comprised of thousands of merchant/dealers, as well as 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 no large dominant competitor exists. Additionally, most competitors are focused on a single collectible category and do not have a multi-category presence similar to the Company's. Among the Company's primary competitors in the domestic and worldwide philatelic merchant/dealer business are Mystic Stamp Company, Superior Galleries, and Regency Stamps, Ltd. The Company's principal coin competitors are Heritage Rare Coin Galleries, Inc., Superior Coin Galleries of Beverly Hills, David Lawrence Rare Coins and Stack's Rare Coins. In the sports trading card and memorabilia business, the Company's primary competitors are Sports Cards Plus, Piedmont Cards and Goodwin & Company. TRADING OPERATIONS A-Mark Precious Metals, Inc. (APM), which was acquired by the Company and Afinsa in July 2005 (See Recent Expansion), is a full service metals trading company engaged primarily in the wholesale purchase and sale of gold, silver, platinum and palladium. As one of only six U.S. Mint authorized purchasers of gold, silver and platinum Eagle coinage in the world, A-Mark sources these products directly from the U.S. Mint to A-Mark's wholesale clientele. In addition to the U.S. Mint, APM also has distributorships with other countries' mints, including Canada, Australia and China. Clients of APM include coin dealers, banks, financial institutions, jewelers, collectors, investors, manufacturers, as well as other mints and mines. APM also provides a range of collateralized financing products and trading services related to precious metals. APM is owned by Spectrum PMI, Inc., a corporation whose stock is owned 80% by Spectrum Numismatics International and 20% by Auctentia. 6 REGULATORY MATTERS ------------------ Regulation of the auction business varies from jurisdiction to jurisdiction, and to the best of management's knowledge and belief, the Company is in compliance with all material and significant regulations governing its business activities. EMPLOYEES --------- At June 30, 2005, the Company had 168 full-time employees: 102 located in the United States and 66 located in Europe. RECENT EXPANSION ---------------- A-Mark Precious Metals On July 15, 2005, the Company and its majority shareholder Afinsa acquired all of the issued and outstanding capital stock of A-Mark Precious Metals, Inc., an indirect subsidiary of A-Mark Financial Corporation. The buyer was Spectrum PMI, Inc., a newly formed acquisition entity owned 80% by Spectrum Numismatics International, Inc., a wholly-owned subsidiary of GMAI, and 20% by Auctentia, a wholly-owned subsidiary of Afinsa. APM is a full service metals trading company engaged primarily in the wholesale purchase and sale of precious medals including gold, silver, platinum and palladium. APM also provides a range of collateralized financing products and trading services related to precious metals. Pursuant to the Stock Purchase Agreement, dated as of July 15, 2005, by and between Spectrum PMI, on the one hand, and A-Mark Holding, Inc. and Steven C. Markoff, on the other hand (the "Stock Purchase Agreement") and the Noncompetition Agreement, dated July 15, 2005, between Spectrum PMI, APM and Steven C. Markoff, the purchase price was approximately $20 million cash, which was determined by negotiation between the parties. Pursuant to the Stock Purchase Agreement, the purchase price is subject to post-closing adjustment based on the difference, if any, between the estimated and actual net book value of APM on the closing date. The sellers may also be entitled to future payments based on (i) certain new business of APM and (ii) certain tax savings to GMAI resulting from the transaction. The purchase price was funded 80% from internal working capital and 20% from Afinsa. Item 2. DESCRIPTION OF PROPERTY The Company's headquarters are located in space consisting of approximately 18,600 square feet of office and warehouse facilities located at 775 Passaic Avenue, West Caldwell, New Jersey. The Company leased this space through December 2004 at an annual rental of approximately $155,000; in December 2004 the Company exercised its right to purchase the property at a price of approximately $1.7 million. Nutmeg leases 3,700 square feet of office space in Danbury, CT at an annual cost of $58,000. The Company also leases approximately 7,500 square feet of office space in Santa Ana, California for its Spectrum subsidiary at an annual rental of approximately $213,500, 2,168 square feet for its Teletrade subsidiary at an annual rental of approximately $61,900 and 3,514 square feet for its Bowers & Merena subsidiary at an annual rental of approximately $73,800. Effective July 15, 2005, the Company's A-Mark facility operated in a 2,239 square feet facility in Santa Monica, CA at an annual cost of $132,000. The Company leases approximately 5,200 square feet of office space at an annual rental of approximately $103,253 in Wiesbaden, Germany for its subsidiary, Heinrich Kohler Auktionhaus, and approximately 2,500 square feet at an annual rental of approximately $60,032 in Berlin, Germany for Heinrich Kohler Berliner Briefmarken-Auktionen. The Company leases office space at 3 locations in Madrid, Spain: Approximately 3,466 square feet is leased at an annual rental of $32,000; 3,000 square feet is leased at an annual rental of $130,375; and approximately 5,800 square feet is leased from Afinsa (a related party) at an annual rate of $139,000. The latter lease will terminate in December 2005, at which time, CdC will move its operations to an 18,000 square feet facility in Madrid with an annual rental rate of $252,000. The Company also leases approximately 2,700 square feet of office space at an annual rental of approximately $100,000 in Zurich, Switzerland for its Corinphila operations. Item 3. LEGAL PROCEEDINGS The Company is not a party to any litigation material to the Company's financial position or results of operations nor, to the knowledge of the Company, is any litigation of a material nature threatened. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of the fiscal year covered by this report, no matter was submitted to a vote of security holders of the Company. 7 PART II ------- Item 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER REPURCHASES OF EQUITY SECURITIES Market Price of and Dividends on Common Stock and Related Stockholder Matters The Company's Common Stock is listed on NASDAQ National Market ("NASDAQ") under the symbol "GMAI". According to American Stock Transfer & Trust and ADP Proxy Services, the holders of record of the Company's Common Stock totaled 974 and beneficial owners of record totaled 2,773 at June 30, 2005. The Company has not paid any dividends. The Company expects that a substantial portion of the Company's future earnings will be retained for expansion or development of the Company's business. However, the Company intends, to the extent that earnings are available, consistent with the above objectives, to consider paying cash dividends on its Common Stock in the future. The amount of any such dividend payments could be restricted by the covenants or other terms of any loan agreements to which the Company is then a party. The quarterly high and low bid ranges on the NASDAQ for the Common Stock of the Company for the years ended June 30, 2005 and 2004 are shown in the following schedule: For the years ended June 30, ----------------------------------------- 2005 2004 ----------------------------------------- (Quarter) High Low High Low - --------- ------ ------ ------ ------ First $16.33 $10.63 $ 7.75 $ 2.24 Second $12.55 $ 8.85 $12.84 $ 6.42 Third $12.48 $ 9.51 $15.00 $ 9.54 Fourth $12.04 $ 8.97 $17.25 $10.11 The quotations shown above reflect inter-dealer prices, without retail mark-up, markdown or commission, and may not represent actual transactions. Equity Compensation Plan Information The following table provides information as of June 30, 2005 with respect to the shares of GMAI's common stock that may be issued under GMAI's existing equity compensation plans. Plan category - ------------- (c) Number of securities (a) (b) remaining available for Number of securities Weighted average future issuance under to be issued upon exercise price of equity compensation exercise of outstanding options, plans (excluding outstanding options, warrants and securities reflected in warrants and rights rights ($) column (a)) ------------------- ------------------- ----------------------- Equity compensation plans approved by security holders(1).......................... 1,813,865 $5.46 745,737 Equity compensation plans not approved by security holders............................. -- -- -- (1) Consists of the 1993 Stock Option Plan, as amended, and the 1997 Stock Incentive Plan, as amended. Purchases of Equity Securities by the Issuer and Affiliated Purchasers - ---------------------------------------------------------------------- The Company has not made any repurchases of its equity securities during the quarter ended June 30, 2005 8 Item 6. SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with, and are qualified by reference to, the Consolidated Financial Statements and Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this report. The consolidated Statement of Earnings and the consolidated balance sheet data for the years ended June 30, 2005, 2004, 2003, 2002 and 2001, are derived from, and are qualified by reference to, the audited consolidated financial statements of Greg Manning Auctions, Inc. In August 2003, GMAI and CdC entered into supply agreements with Afinsa, pursuant to which GMAI and CdC are acting as exclusive suppliers of collectibles for Afinsa on a worldwide basis. Transactions under these contracts represented a significant portion of the Company's aggregate sales, revenues and gross profit for the years ended June 30, 2005 and June 30, 2004. Accordingly, the historical results of operations presented herein, to the extent they relate to periods prior to the effectiveness of these contracts, are unlikely to be indicative of future results. 9 Greg Manning Auctions Inc. Years Ended June 30, (In Thousands, except per share data) Consolidated Statements of Earnings Data: 2005 2004 2003 2002 2001 ---------- ---------- --------- --------- --------- Sales of inventory $ 99,309 $ 97,688 $ 89,268 $ 76,616 $ 62,333 Sales of inventory - related party 123,348 102,215 7,654 -- -- Commissions earned 17,657 12,987 4,269 4,161 5,063 --------- --------- --------- --------- --------- Total Revenues 240,314 212,890 101,191 80,777 67,396 Cost of merchandise sold 91,515 86,249 81,960 71,966 62,354 Cost of merchandise sold- Related Party 58,830 65,150 4,712 -- -- --------- --------- --------- --------- --------- Gross profit 89,969 61,491 14,519 8,811 5,042 General, administrative, and all other operating expenses 29,643 23,788 10,632 10,041 10,536 Sales and marketing expenses 4,282 2,981 1,561 1,578 1,879 Intangible impairment -- -- -- 4,741 2,158 Depreciation and Amortization 1,187 915 557 1,416 1,564 Other Expense -- -- -- 6 340 Acquisition and merger costs -- -- -- -- 205 --------- --------- --------- --------- --------- Total operating expenses 35,111 27,684 12,750 17,782 16,682 --------- --------- --------- --------- --------- Income (loss) from operations 54,857 33,807 1,769 (8,971) (11,640) Interest and other expense (net) (559) (687) (702) (1,136) (713) Loss on sale of marketable securities and investments (4) -- (87) -- -- Gain on sale of equity method investee -- -- 2,035 -- -- Impairment of investment in investee -- (500) -- -- -- Loss from operations of investee -- -- -- (250) (4,951) --------- --------- --------- --------- --------- Income (loss) before income taxes 54,294 32,620 3,015 (9,934) (17,727) Provision for (benefit from) income taxes 16,019 3,254 3,243 192 (1,404) --------- --------- --------- --------- --------- Net income (loss) $ 38,275 $ 29,366 $ 2,823 $ (13,177) $ (16,323) ========= ========= ========= ========= ========= Earnings (Loss) per Share: Basic $ 1.40 $ 1.22 $ 0.22 $ (1.06) $ (1.58) ========= ========= ========= ========= ========= Diluted $ 1.33 $ 1.14 $ 0.22 $ (1.06) $ (1.58) ========= ========= ========= ========= ========= Weighted average shares: Basic 27,423 23,985 12,739 12,469 10,299 ========= ========= ========= ========= ========= Diluted 28,688 25,787 12,816 12,469 10,299 ========= ========= ========= ========= ========= Consolidated Balance Sheet Data: Cash and cash equivalents $ 54,250 $ 16,263 $ 2,250 $ 2,169 $ 2,158 ========= ========= ========= ========= ========= Total Current Assets 132,507 107,366 32,615 22,117 25,971 ========= ========= ========= ========= ========= Total Assets $ 158,450 $ 130,684 $ 37,907 $ 27,348 $ 40,452 ========= ========= ========= ========= ========= Total Current Liabilities $ 37,930 $ 58,962 $ 22,670 $ 15,576 $ 16,885 ========= ========= ========= ========= ========= Total Long-Term Liabilities 9,181 -- 43 116 168 ========= ========= ========= ========= ========= Total Liabilities 47,111 58,962 22,713 15,692 17,053 ========= ========= ========= ========= ========= Total Stockholders' Equity 111,339 71,722 15,194 11,656 23,399 ========= ========= ========= ========= ========= Total Liabilities and Stockholders' Equity $ 158,450 $ 130,684 $ 37,907 $ 27,348 $ 40,452 ========= ========= ========= ========= ========= 10 (In thousands except per share amounts) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total - ------------------------------------------------------------------------------------------------------------------------- 2005 - ------------------------------------------------------------------------------------------------------------------------- Sales of inventory $ 22,970 $ 28,012 $ 25,185 $ 23,142 $ 99,309 Sales of inventory - related party 21,618 27,499 26,027 48,204 123,348 Commissions earned 3,502 3,429 4,500 6,226 17,657 --------- --------- --------- --------- --------- Total Revenues 48,090 58,940 55,712 77,572 240,314 Cost of merchandise sold 20,788 26,639 23,168 20,920 91,515 Cost of merchandise sold- related party 10,140 12,860 10,868 24,962 58,830 --------- --------- --------- --------- --------- Gross profit 17,162 19,441 21,676 31,690 89,969 General, administrative, and all other operating expenses 6,974 5,591 6,928 10,150 29,643 Sales and marketing expenses 799 917 1,062 1,504 4,282 Depreciation and Amortization 276 281 299 331 1,187 --------- --------- --------- --------- --------- Total operating expense 8,049 6,789 8,289 11,985 35,112 --------- --------- --------- --------- --------- Income from operations 9,113 12,652 13,387 19,705 54,857 Interest and other expense (net) (46) (216) (236) (65) (563) --------- --------- --------- --------- --------- Income before income taxes 9,067 12,436 13,151 19,640 54,294 Provision for income taxes 3,933 4,781 4,963 2,342 16,019 --------- --------- --------- --------- --------- Net income $ 5,134 $ 7,655 $ 8,188 $ 17,298 $ 38,275 ========= ========= ========= ========= ========= Earnings per Share: Basic $ 0.19 $ 0.28 $ 0.30 $ 0.63 $ 1.40 ========= ========= ========= ========= ========= Diluted $ 0.18 $ 0.27 $ 0.29 $ 0.60 $ 1.33 ========= ========= ========= ========= ========= (In thousands except per share amounts) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total - ------------------------------------------------------------------------------------------------------------------------- 2004 - ------------------------------------------------------------------------------------------------------------------------- Sales of inventory $ 21,523 $ 30,885 $ 25,977 $ 19,303 $ 97,688 Sales of inventory - related party 10,678 19,967 34,883 36,687 102,215 Commissions earned 2,286 2,363 3,645 4,693 12,987 --------- --------- --------- --------- --------- Total Revenues 34,487 53,215 64,505 60,683 212,890 Cost of merchandise sold 7,392 13,512 23,780 20,466 65,150 Cost of merchandise sold- related party 19,633 26,311 23,724 16,581 86,249 --------- --------- --------- --------- --------- Gross profit 7,462 13,392 17,001 23,636 61,491 General, administrative, and all other operating expenses 3,898 5,419 7,160 7,311 23,788 Sales and marketing expenses 379 560 670 1,372 2,981 Depreciation and Amortization 144 226 224 321 915 --------- --------- --------- --------- --------- Total operating expenses 4,421 6,205 8,054 9,004 27,684 --------- --------- --------- --------- --------- Income from operations 3,041 7,187 8,947 14,633 33,808 Interest and other expense (net) (177) (91) (141) (278) (687) Impairment of investment in investee -- (500) -- -- (500) --------- --------- --------- --------- --------- Income before income taxes 2,864 6,596 8,806 14,355 32,621 Provision for (benefit) income taxes 406 2,538 2,287 (1,977) 3,254 --------- --------- --------- --------- --------- Net income $ 2,458 $ 4,058 $ 6,519 $ 16,331 $ 29,366 ========= ========= ========= ========= ========= Earnings per Share: Basic $ 0.15 $ 0.15 $ 0.25 $ 0.60 $ 1.22 ========= ========= ========= ========= ========= Diluted $ 0.14 $ 0.14 $ 0.23 $ 0.57 $ 1.14 ========= ========= ========= ========= ========= 11 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW - -------- The following section presents a discussion and analysis of the Company's results and operations during the past three fiscal years, and its financial condition at fiscal year end. Statements that relate to the Company's future performance, anticipated financial position, or results of operations for any other future period, are forward-looking statements within the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995. Such statements which are generally indicated by words or phrases such as "plan," "estimate," "project," "anticipate," "the Company believes," "management expects," "currently anticipates," "remains optimistic," and similar phrases are based on current expectations and involve risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual future results could differ materially from those anticipated, projected or estimated. The factors that could cause or contribute to such differences include, but are not limited to, those discussed in this section, particularly in "Results of Operations," and "Liquidity and Capital Resources." The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The following discussion and analysis should be read with the Consolidated Financial Statements and Notes to Consolidated Financial Statements contained in this report. (Dollars in thousands except as noted or per share information.) GENERAL - ------- During the year ended June 30, 2005, the Company operated in one segment consisting of various types of collectibles, including philatelics and numismatics. The Company's aggregate sales are generated by the sale of owned and consigned property at auction and by the non-auction sale of inventory through its merchant/dealer operations, consisting of sales by Spectrum and sales under the exclusive supply contracts between the Company and Afinsa (a related party.) (The Company's trading operations were acquired subsequent to June 30, 2005 and accordingly are not reflected in the following discussion.) Aggregate sales consist of the total proceeds realized from the sale of property and include the Company's commissions when applicable. The aggregate sales for the Company for the years ended June 30, 2005, 2004 and 2003, are shown for the respective years subdivided by source and collectible type. For the Years Ended June 30, ------------------------------------------------------------------------------- (In Thousands, except for percentages) Percentages 2005 2004 2003 2005 2004 2003 -------- -------- -------- --------- --------- -------- Aggregate Sales $313,244 $258,383 $118,232 100% 100% 100% ======== ======== ======== ======== ======== ======== By Source: Auction $104,393 $ 58,480 $ 21,310 33% 23% 18% Merchant/Dealer Sales of Inventory 85,503 97,688 89,268 27% 38% 76% Related Party 123,348 102,215 7,654 39% 40% 6% -------- -------- -------- -------- -------- -------- $313,244 $258,383 $118,232 100% 100% 100% ======== ======== ======== ======== ======== ======== By Collectible Type: Philatelics $185,140 $151,176 $ 23,397 59% 59% 20% Numismatics 126,865 104,328 91,894 41% 40% 78% Sports Collectibles 1,070 2,153 2,796 0% 1% 2% Art 169 226 50 0% 0% 0% Other Collectibles -- 500 95 0% 0% 0% -------- -------- -------- -------- -------- -------- $313,244 $258,383 $118,232 100% 100% 100% ======== ======== ======== ======== ======== ======== 12 Total revenues included in the Consolidated Statements of Earnings are comprised of (1) revenues from Merchant/Dealer Operations, that is: (a) sales of inventory owned by the Company to Afinsa (a related party), under the exclusive supply contracts, and (b) sales of inventory owned by the Company exclusive of sales to Afinsa, consisting primarily of sales by Spectrum Numismatics, and (2) revenues from Auction Operations, that is, the portion of sale proceeds from auction (or private treaty) that the Company is entitled to retain after remitting the sellers' share, consisting primarily of commissions paid by sellers and buyers. Generally, the Company earns a commission from the seller of 0% to 15% and a commission of 12.5% to 15% from the buyers. Only revenues and not aggregate sales are included in the accompanying Consolidated Statements of Earnings since aggregate sales are not recognized in accordance with accounting principles generally accepted in the United States. The following table sets forth, for the periods presented certain data from our consolidated Statements of Earnings as a percentage of net revenues. The information contained in the table below should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere in this report. Amounts Stated in %s Fiscal Year 2005 2004 2003 ----- ---- ----- Net Revenues 100.0 % 100.0 % 100.0 % Gross Profit 37.4 28.9 14.3 Operating Expenses General and Administrative 6.9 6.4 5.1 Salaries and Wages 5.5 4.8 5.4 Marketing 1.8 1.4 1.5 Depreciation and Amortization 0.5 0.4 0.6 ----- ----- ----- Total Operating Expenses 14.7 13.0 12.6 ----- ----- ----- Earnings (Loss) from operations 22.7 15.9 1.7 Gain on sale of investee - - 2.0 Interest Income and Expense (net) (0.1) (0.4) (0.7) Other Income and Expense (net) - - - Impairment of investment in investee - (0.2) - ----- ----- ----- Earnings (Loss) before income taxes 22.6 15.3 3.0 ----- ----- ----- Provision for (Benefit from) income taxes 6.7 1.5 0.2 Net Income (Loss) 15.9 % 13.8 % 2.8 % ===== ===== ===== Sales of inventory to Afinsa (a related party) represented a significant portion of the Company's aggregate sales, revenue and gross profit for the years ended June 30, 2005 and 2004. 13 Results of Operations Years ended June 30, 2005 and 2004 (Dollars in thousands except as noted or per share information) Year Ended June 30, 2005 Year Ended June 30, 2004 ------------------------------------------------------------------------------------ Cost of Cost of Goods Gross Gross Goods Gross Gross Revenues Sold Profit Profit % Revenues Sold Profit Profit % ------------------------------------------------------------------------------------ Sales of inventory $ 99,309 $ 91,515 $ 7,794 8% $ 97,688 $86,249 $11,439 12% Sales of inventory- Related Party 123,348 58,830 64,518 52% 102,215 65,150 37,065 36% Auction Commissions 17,657 -- 17,657 100% 12,987 -- 12,987 100% ------------------------------------------------------------------------------------ $240,314 $150,345 $89,969 37% $212,890 $151,399 $61,491 29% ==================================================================================== Revenues The Company recorded an increase in total revenues of approximately $27,424 (13%), to approximately $240,314 for the year ended June 30, 2005 from approximately $212,890 for the year ended June 30, 2004. For the year ended June 30, 2005, the total revenue of approximately $240,314 comprised approximately $222,657 of revenue from sales of owned inventory and approximately $17,657 of commissions resulting from sales of consigned materials. This was an increase of $22,754 (or 11%) in sales of owned inventory and an increases of $4,670 (or 36%) in commissions resulting from sales of consigned materials. Revenues under the exclusive supply contracts with Afinsa (a related party) were $123,348 for the year ended June 30, 2005, an increase of $21,133 (or 21%) from $102,215 for the year ended June 30, 2004. The revenue attributable to transactions under the exclusive supply contracts with Afinsa includes the 10% fee provided for under the contracts. The variation in any year in the composition of total revenues (as between revenues resulting from inventory sales and commissions resulting from consignment sales) is largely a function of availability, market demand and conditions. Gross Profit Gross profit increased approximately $28,478 (or 46%), to approximately $89,969 for the year ended June 30, 2005 from approximately $61,491 for the year ended June 30, 2004. The increase in gross profit was the result of an increase in revenue of $27,424, coupled with an increase in gross profit percentage from 29% for the year ended June 30, 2004 to 37% for the year ended June 30, 2005. The largest contributing factor to the increase in gross profit percentage was $123,348 in direct sales to Afinsa (a related party) in the year ended June 30, 2005 under the exclusive supply contracts. Gross profit on related party sales increased from 36% in the year ended June 30, 2004 to 52% for the year ended June 30, 2005. This increase in gross profit was largely attributable to the mix of philatelic material sold to Afinsa during the period. Exclusive of sales to Afinsa, the gross profit percentage stayed consistent at 22% for the years ended June 30, 2005 and 2004. Gross profit on sales of inventory, exclusive of sales to Afinsa, decreased from 12% for the year ended June 30, 2004 to 8% for the year ended June 30, 2005. However, revenues from auction commissions increased $4,670 (or 36%) to $17, 657 for the year ended June 30, 2005. There is no corresponding cost of sales on commission revenue. The gross profit percentage for sales to Afinsa (a related party) and otherwise will vary depending on market demand, market conditions and buying opportunities relative to each type of product being sold, as well as on the proportion of the revenue mix between sales of merchandise (where the gross profit will be less than 100%) and commissions earned (where there is no cost of goods sold and therefore where the gross profit percentage will be 100%.) 14 Operating Expenses: Variance 2005 2004 Variance % ------------------------------------------ General & Administrative $16,501 $13,517 $ 2,984 22% Salaries 13,142 10,271 2,871 28% Marketing 4,282 2,981 1,301 44% Depreciation & Amortization 1,187 915 272 30% ------------------------------------------ $35,112 $27,684 $ 7,428 27% ========================================== The Company's operating expenses increased approximately $7,428 (27%) during the year ended June 30, 2005 as compared to the year ended June 30, 2004. General and administrative expenses increased $2,984 (22%) during the year ended June 30, 2005 as compared to the year ended June 30, 2004. Costs incurred associated with the implementation and administration of the Sarbanes-Oxley Act ("SOX") requirements accounted for approximately $2.0 million of this increase. It is expected that SOX-related costs will not exceed $800 in fiscal 2006. The remaining $1 million of the fiscal year 2005 increase over fiscal year 2004 were the inclusion of a full year's expenses associated with the acquisition of Bowers & Merena, Superior Sports and Nutmeg during the third and fourth quarters of fiscal year 2004, and the H.R Harmer Company in July 2004. Salaries and wages increased $2,871 (28%) during the year ended June 30, 2005 as compared to the year ended June 30, 2004. Approximately $1,900 of the increase was attributable to the inclusion of a full year's salary expense for the Bowers & Merena, Superior Sports and Nutmeg acquisitions made during the third and fourth quarters of 2004 and the H.R. Harmer acquisition in July 2005. The remainder of the increase, $1,000, was attributable to additional personnel and normal salary increases to support additional revenues. Marketing expenses increased $1,301 (44%) to $4,282 for the year ended June 30, 2005. This increase is primarily associated with new marketing programs in place for fiscal 2005 related to the subsidiaries newly acquired in the third and fourth quarter of fiscal 2004 and the first quarter of 2005. Depreciation and amortization increased $272 (30%) during the year ended June 30, 2005 as compared to the year ended June 30, 2004. Operating costs as a percentage of operating revenue were 15% for the fiscal year ended June 30, 2005 and 13% for the fiscal year ended June 30, 2004. As compared to aggregate sales, the operating costs remained at 11% for both fiscal years ended June 30, 2004 and 2005. Interest income and expense: Interest expense (net of interest income) for the year ended June 30, 2005 decreased approximately $429 from the fiscal year ended June 30, 2004, from approximately $687 to approximately $258, primarily due to increased interest income on consignor advances. Provision for Income Taxes: The Company's effective tax rates for the years ended June 30, 2005 and 2004 were approximately 30% and 10%, respectively. The rate is based on a blended rate consisting of U.S. Federal, state and foreign statutory income tax rates. The rates have been reduced by the utilization of a large percentage of the available net operating loss carry forwards for U.S Federal income tax purposes. Future blended tax rates should be higher based on the reduced remaining net operating loss carry forwards. Our effective tax rate could be adversely affected by several factors, many of which are outside of our control. Our effective tax rate is directly affected by the relative proportions of revenue and income before taxes in the various domestic and international jurisdictions in which we operate. We are also subject to changing tax laws, regulations and interpretations in multiple jurisdictions in which we operate. Our effective tax rate can also be influenced by the tax effects of purchase accounting for acquisitions and non-recurring charges, which may cause fluctuations between reporting periods. 15 The realization of the Company's remaining deferred tax assets is dependent on generating sufficient taxable income in the future to offset the deductibility of temporary differences generating the deferred tax assets. Accordingly, the Company believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize certain deferred tax assets. In fiscal year 2005, the Company recorded a deferred tax asset net of allowance of approximately $4,500 due to the gift of a certain art collection; it is expected that the Company will be able to utilize this asset over the next five years. In fiscal year 2004, the Company reduced its valuation allowance against these deferred tax assets which were provided for in prior years. As a result the Company recorded a deferred tax benefit of approximately $4,880. Recent New Jersey tax legislation provided for the utilization of a portion of net operating losses for fiscal year 2005 and thereafter. During the fourth quarter of fiscal 2005, the Company made a charitable contribution of an art collection with a de minimis carrying value that had been held for investment purposes. The Company obtained a qualified appraisal of the collection, which concluded that it had a value of approximately $21 million, resulting in a charitable contribution deduction with a tax benefit of approximately $7.1 million. This charitable contribution deduction will be limited to 10% of the Company's Federal taxable income (as computed with certain adjustments) each year and will expire in the year 2010 to the extent not utilized. Because of the uncertainty of whether future Federal taxable income will be sufficient to realize the entire benefit, the Company has established a valuation allowance of approximately $2.6 million. In addition, although not required to do so, the Company has determined to seek additional verification of the value of the collection. As a result of this or other factors, the tax benefit to the Company may be adjusted. Net Income: The Company's increase in gross profit of approximately $28,478 for the year ended June 30, 2005 was partially offset by an increase in operating expenses of $7,428 and an increase in income tax expense of $12,765. Gross profit on sales of inventory to Afinsa (a related party) was primarily responsible for the increase in gross profit in the year ended June 30, 2005. Results of Operations Years ended June 30, 2004 and 2003 (Dollars in thousands except as noted or per share information) Year Ended June 30, 2004 Year Ended June 30, 2003 ------------------------------------------------------------------------------------- Cost of Cost of Goods Gross Gross Goods Gross Gross Revenues Sold Profit Profit % Revenues Sold Profit Profit % ------------------------------------------------------------------------------------- Sales of inventory $ 97,688 $ 86,249 $ 11,439 12% $ 89,268 $81,960 $ 7,308 8% Sales of inventory- Related Party 102,215 65,150 37,065 36% 7,654 4,712 2,942 38% Auction Commissions 12,987 -- 12,987 100% 4,269 -- 4,269 100% ----------------------------------------------------------------------------------- $212,890 $151,399 $ 61,491 29% $101,191 $86,672 $14,519 14% =================================================================================== Revenues The Company recorded an increase in total revenues of approximately $111,699 (or 110%), to approximately $212,890 for the year ended June 30, 2004 from approximately $101,191 for the year ended June 30, 2003. For the year ended June 30, 2004, the total revenue of approximately $212,890 comprised approximately $199,903 of revenue from sales of owned inventory and approximately $12,987 of commissions resulting from sales of consigned materials. This was an increase of $102,981 (or 106%) in sales of owned inventory and an increase of $8,718 (or 204%) in commissions resulting from sales of consigned materials. Revenues under the exclusive supply contracts with Afinsa (a related party) were $102,215 for the year ended June 30, 2004, an increase of $94,561 (or 1235%) from $7,654 for the year ended June 30, 2003. The revenue attributable to transactions under the exclusive supply contracts with Afinsa includes the 10% fee provided for under the contracts. 16 Gross Profit Gross profit increased approximately $46,972 (or 324%), to approximately $61,491 for the year ended June 30, 2004 from approximately $14,519 for the year ended June 30, 2003. The increased gross profit was the result of an increase in revenue of $111,699, coupled with an increase in gross profit percentage from 14% for the year ended June 30, 2003 to 29% for the year ended June 30, 2004. The largest contributing factor to the increase in gross profit percentage was $102,215 in direct sales to Afinsa (a related party) in the year ended June 30, 2004 under the exclusive supply contracts. Gross profit on related party sales decreased from 38% in the year ended June 30, 2003 to 36% for the year ended June 30, 2004. However, the volume of sales to related party had a positive effect on overall gross profit. Exclusive of sales to Afinsa, the gross profit percentage increased from 12% for the year ended June 30, 2003 to 22% for the year ended June 30, 2004. The increase, exclusive of sales to Afinsa, was the result of higher gross profit margins on auction sales of owned stamp inventory, which reflects an improvement in the quality and pricing of stamp purchases by the Company, as well as, to a lesser extent, revenue attributable to the operations of the seven European and four U.S. subsidiaries acquired by the Company during the year ended June 30, 2004; this revenue consisted almost entirely of commissions, with respect to which there is no corresponding cost of goods sold. Operating Expenses: Variance 2004 2003 Variance % ------------------------------------------ General & Administrative $13,517 $ 5,175 $ 8,342 161% Salaries 10,271 5,457 4,814 88% Marketing 2,981 1,561 1,420 91% Depreciation & Amortization 915 557 358 64% ------------------------------------------ $27,684 $12,750 $14,934 117% ========================================== The Company's operating expenses increased approximately $14,934 (117%) during the year ended June 30, 2004 as compared to the year ended June 30, 2003. General and administrative expenses increased $8,342 (161%) during the year ended June 30, 2004 as compared to the year ended June 30, 2003. Of the total increase, $6,263 was attributable to expenses incurred by the eleven subsidiaries (seven European subsidiaries and four U.S. subsidiaries) acquired during the year ended June 30, 2004. Other increases include the following: additional bad debt expense of approximately $400, $230 relating to the charges for stock options for services to Afinsa (related party), payments to board members in the amount of $98, an increase in professional fees in the amount of $618 (largely due to the acquisitions that were made during the fiscal year as well as additional costs associated with compliance with the Sarbanes-Oxley Act of 2002), an increase in shareholder's expenses of $149, increased insurance costs of $40, and expenditures relating to the relocation of a subsidiary's operations from New York to California, including overlapping expenses and additional travel costs. Salaries and wages increased $4,814 (88%) during the year ended June 30, 2004 as compared to the year ended June 30, 2003. Of the total increase, $3,400 was attributable to expenses incurred by the eleven subsidiaries acquired during the year ended June 30, 2004. Executive bonuses (which are based on profitability) increased $725 from the $75 accrued for in the year ended June 30, 2003, to the aggregate amount of $800 for the year ended June 30, 2004. There was also an increase in general salaries of $689 resulting from an increase in employees to support increased revenues; severance payments relating to the relocation of a subsidiary from New York to California; and overlapping salary payments during the transition. Marketing expenses increased $1,420 (91%) to 2,981 for the year ended June 30, 2004. The increase was due to additional marketing expenses for the eleven acquired subsidiaries, as well as, expenses related to an additional auction in the year ended June 30, 2004, as well as higher catalog costs during the year (attributable primarily to the stamp auction held in November 2003.) Depreciation and amortization increased $358 (64%) for the year ended June 30, 2004. Depreciation and amortization attributable to the eleven acquired subsidiaries were $461. Depreciation and amortization from existing operations decreased by approximately $103 (18%), as capitalized costs for the development of the Company `s web site were fully depreciated during the period. 17 Increased costs for the year ended June 30, 2004 were offset by revenue increases during the period, holding operating costs as a percentage of operating revenue at 13% for the fiscal year ended June 30, 2004, the same percentage as in the fiscal year ended June 30, 2003. As compared to aggregate sales, the operating costs remained at 11% for both fiscal years ended June 30, 2003 and 2004. Interest income and expense: Interest expense (net of interest income) for the year ended June 30, 2004 decreased approximately $15 from the fiscal year ended June 30, 2003, from approximately $702 to approximately $687. The decrease in net interest expense was due to increased funding of operations by profits, cash from sale of common stock to Afinsa (related party) and the attaining of financing at lower interest rates. Provision for Income Taxes: The Company's effective tax rates for the years ended June 30, 2004 and 2003 were approximately 10% and 6%, respectively. The rate is based on a blended rate consisting of U.S. Federal, state and foreign statutory income tax rates. The rates have been reduced by the utilization of a large percentage of the available net operating loss carry forwards for U.S Federal income tax purposes. Future blended tax rates should be higher based on the reduced remaining net operating loss carry forwards. Our effective tax rate could be adversely affected by several factors, many of which are outside of our control. Our effective tax rate is directly affected by the relative proportions of revenue and income before taxes in the various domestic and international jurisdictions in which we operate. We are also subject to changing tax laws, regulations and interpretations in multiple jurisdictions in which we operate. Our effective tax rate can also be influenced by the tax effects of purchase accounting for acquisitions and non-recurring charges, which may cause fluctuations between reporting periods. The realization of the Company's remaining deferred tax assets is dependent on generating sufficient taxable income in the future to offset the deductibility of temporary differences generating the deferred tax assets. Accordingly, the Company believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize certain deferred tax assets. The Company reduced its valuation allowance against these deferred tax assets which were provided for in prior years. As a result the Company recorded a deferred tax benefit of approximately $4,880. There was no net deferred tax expense (benefit) for 2003. Recent New Jersey tax legislation will provide for the utilization of a portion of net operating losses for fiscal year 2005 and thereafter. Net Income (Loss): The Company's increase in gross profit of approximately $46,972 for the year ended June 30, 2004 was offset by an increase in operating expenses of $14,934, a $500 impairment of an investment in GMAI-Asia and income tax expense of $3,254. Offset by a gain of $2,035 from the sale of investee-related party in the third quarter of fiscal 2003, there was a net gain of approximately $26,543 for the year ended June 30, 2004 from the year ended June 30, 2003. EUROPEAN MONETARY UNION - ----------------------- The European Monetary Unit (the "euro") was introduced on January 1, 1999 as a wholesale currency. The eleven participating European Monetary Union member countries established fixed conversion rates between their existing currencies and the euro. The currencies that existed January 1, 1999 continued to be used as legal tender through January 1, 2002; on July 1, 2002, the existing currencies were cancelled and euro bills and coins are currently being used for cash transactions in the participating countries. OFF-BALANCE SHEET ARRANGEMENTS - ------------------------------ The Company has no off-balance sheet arrangement that has or is reasonably likely to have a current or future effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Working Capital - --------------- At June 30, 2005, the Company's working capital position was approximately $94,577, compared to approximately $48,404 as of June 30, 2004. The net increase of approximately $46,173 was primarily due to increases in cash as a result of strong earnings 18 for the year generating net income of $38,275 and improvement in collections of accounts receivables. In addition, accounts payables decreased by $6,594 to $14,011 from $20,605. Operating Activities: - --------------------- The Company experienced a positive cash flow from operating activities of approximately $42,237 for the year ended June 30, 2005 as compared to a positive cash flow of approximately $2,913 for 2004, an increase of approximately $39,324. Inventory purchases resulted in a increase in cash flow of $156 in 2005 and a decrease of $22,153 in 2004. The large increase in 2004 was primarily due to major purchases of philatelic material to fill the requirements of the exclusive supplier agreement with Afinsa - related party as well as upcoming philatelic auctions. Accounts receivable - related party also resulted in an increase in cash flow of $18,893 in fiscal 2005 and a decrease of $26,967 in fiscal 2004, resulting in a net increase of $45,860 from fiscal 2004 to fiscal 2005. Investing Activities: - --------------------- The Company experienced a net decrease in cash flow from investing activities for the year ended June 30, 2005 of approximately of $2,703. This was primarily the result of the purchase of the Company's leased facilities in West Caldwell, NJ for approximately $1,740 and other capital expenditures totaling $465 (See Notes 2 and 7 to Notes to Consolidated Financial Statements) and the purchase of goodwill and other intangible assets associated with the acquisitions made in fiscal year 2005 ($644). The Company experienced a decrease in cash flow from investing activities for the year ended June 30, 2004 of approximately $4,534. This was the result of purchases of goodwill and other intangible assets due to acquisitions in the amount of $3,797. (See notes 2 and 7 to notes to Consolidated Financial Statements) and the purchases of property and equipment in the amount of $737. Financing Activities: - --------------------- The Company had a net decrease in cash flow from financing activities in fiscal 2005 of $1,446 primarily as a result of paying down its demand loans. In the fiscal year ended June 30, 2004 the Company had a positive cash flow of $13,703 from financing activities, a net gain of $11,634 from the gain of $2,069 for the fiscal year ended June 30, 2003. Increases in cash flow were from proceeds from the exercise of options of $2,843, proceeds from issuance of stock of $5,536 and $6,000 from demand notes payable. On September 8, 2003 the Company exchanged stock for cash ($5,536), in one of the three transactions with Auctentia (See Note 2 to Notes to Consolidated Financial Statements). Borrowings under line of credit agreement with PNC Bank (see Credit and Financing Facilities, below) were $6,000 as of June 30, 2004. Our future cash flows from the exercise of stock options are difficult to project as such amounts are a function of both our stock price and the decisions by employees to exercise stock options. In general, we expect proceeds from stock option exercises to increase during periods in which our stock price has increased. Credit and Financing Facilities: - -------------------------------- The Company's Credit and Financing Facilities, which are included in the above discussion, consist of the following: During the year ended June 30, 2002, the Company obtained a secured loan from a privately held capital fund in the amount of $4,000. The loan is collateralized by inventory and bears interest at the rate of 10% per annum. The loan was due on June 30, 2005 and paid off prior to that date and the facility closed. On April 17, 2003, the Company entered into a revolving credit agreement with Banco Santander Central Hispano, S.A., providing for a credit facility of up to $2,500. Borrowings under this facility bore interest at a rate of prime plus ..25% per annum. The Company's obligations under the agreement were guaranteed by Afinsa. The agreement contained other financial agreements and covenants, including the requirement that Auctentia maintain at least 43% of all of the authorized issued and outstanding shares of voting stock of the Company. As extended, the facility expired on April 12, 2005. The loan was repaid prior to the facility's expiration. On May 28, 2004, the Company entered into an agreement with PNC Bank for a line of credit not to exceed $10,000. The loan is 19 collaterized by accounts receivable, consignor advances and inventory, subject to certain limitations. Borrowings under the line bear interest at the "prime" rate; provided that the Company has the right, subject to certain conditions, to borrow at a rate equal to LIBOR plus 2.5% per annum. The agreement contains other financial agreements and covenants. The credit line, which would otherwise have expired on May 27, 2005, was extended to August 31, 2005. At June 30, 2005, the Company had borrowed $8,000 under the facility. Subsequent to June 30, 2005, the line was renewed for a two-year period expiring on August 31, 2007 and the amount of the facility increased to $12,500. On July 1, 2004, one of the minority shareholders of Corinphila Auktionen made a loan to that company in the aggregate amount of $1,200. This loan bears interest at the rate of 4% per annum and is repayable on demand, upon six months' notice (related party). At June 30, 2005, the Company owed $506 on this facility. On December 22, 2004, the Company obtained a mortgage from PNC Bank, N.A., to finance the purchase of its corporate headquarters. The mortgage provides for 59 principal payments of $7 with a final payment of $882 due on January 1, 2010. Under the financing agreements, the bank may call the mortgage loan at any time, in which case the mortgage loan will be due and payable one year and one day following the exercise of such call option. Further, if the Company terminates its line of credit with the bank, the mortgage loan will be payable one year and one day following such termination. At June 30, 2005, the Company owed $1,269 on this facility. The remaining notes payable consist of capital leases and loans payable for the purchase of equipment bearing interest at rates ranging from 5% to 21%. Total borrowings outstanding under the leases were $73 and $90 as of June 30, 2005 and 2004, respectively. As of June 30, 2005, the Company had an aggregate of $9,848 of debt outstanding under the above credit and financing facilities. NEED FOR FUTURE LIQUIDITY - ------------------------- The Company's need for liquidity and working capital may increase as a result of its continuing business expansion activities. In addition to the need for such capital to enhance the Company's ability to offer cash advances to a larger number of potential consignors of property (which is an important aspect of the marketing of an auction business), the Company may require additional working capital in the future in order to acquire collectibles for sale in the Company's business, to expand into sales of other collectibles and to initiate any other new business activities. CONTRACTUAL OBLIGATIONS - ----------------------- Our contractual obligations related to non-cancelable operating and capital leases at June 30, 2005 were as follows: Payment due by period ------------------------------------------------------------ Less than 1 to 3 3 to 5 More than Total 1 year years years 5 years ------------------------------------------------------------ Notes Payable $ 8,000 $ -- $ 8,000 $ -- $ -- Mortgage 1,269 88 175 1,006 -- Capital Lease and Other Debt Obligations 579 579 -- -- -- Operating Lease Obligations 5,311 1,116 1,048 627 2,520 ------------------------------------------------------------ Total $15,159 $ 1,783 $ 9,223 $ 1,633 $ 2,520 ============================================================ AUCTION CYCLES - -------------- A buyer of auctioned property may be permitted to take possession of the property before payment is made. Most accounts receivable are collected within 30 to 60 days, which is consistent with business practice in the collectible markets. For the year ended June 30, 2005, the Company had a bad debt recovery of approximately $175, and for the year ended June 30, 2004 expense relating to bad debt was approximately $1,620. For the years ended June 30, 2005 and 2004 the Company's history of bad debts has been less than 1% of revenue. Because of the nature of the auction business of the Company, there is a relationship between accounts receivable, advances to consignors, and payable to consignors. Depending upon the relationship of the balance sheet date to a given auction sale date and a settlement date for a given auction, these balances could change substantially from one balance sheet date to another. 20 In the cycle of any single auction, the effect on the balance sheet and on the Company's cash flows is significant when compared to the total assets of the Company. The cycle for a single auction begins with consignors contracting with the Company to sell their property at auction. Typically these contracts are signed from 8 to 16 weeks in advance of the auction sale date. No entry is made on the balance sheet of the Company when the Company receives the property for auction or when a contract for the consignment to the auction is signed. Since the contract for the sale of the property is for services not yet rendered, there is no financial statement impact. At the time of the consignment, or any time thereafter until the auction sale date, the consignor may request a cash advance which is a prepaid portion of the prices to be realized of the property irrevocably committed to be sold in the auction. The cash advance takes the form of a self-liquidating, secured loan to the consignor, using the property consigned as collateral. Cash advances to consignors are often used as a marketing tool in order to obtain property for a sale. When the cash advance is made, there is an increase of the accounts of the Company in cash advances to consignors, and simultaneously, there is a corresponding decrease in cash. Approximately 6 weeks after the auction date, often referred to as the settlement date, the payables to consignors decrease to zero as all the consignors are paid and the Company withholds a portion of the amounts due the consignor for the sale of the property as an offset to repay the principal amount and the accrued interest on the cash advances to consignors (or loans to consignors), and there is a decrease in cash, corresponding to the net amount paid to the consignors. The entire cycle for a single auction typically is about 14 to 22 weeks in duration. Because of the high level of activity in the Company, single auction cycles do not occur in series, with the next cycle beginning immediately after the previous cycle ends. Rather, single auction cycles occur in parallel. For example, when a certain cycle ends, a second cycle may be at the midpoint, while yet a third cycle is just beginning. Depending upon the relative values of the property consigned to each sale in the three cycles in this example, and depending upon the demand for auction advances in each of the cycles, the cumulative effect on the balance sheet, and particularly the current assets and current liabilities and the Company's cash flows, is very significant. INFLATION - --------- The effect of inflation on the Company has not been significant during the last three fiscal years. CRITICAL ACCOUNTING POLICIES - ---------------------------- The Company's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company believes that the estimates, judgments and assumptions upon which the Company relies are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. To the extent there are material differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected. The significant accounting policies that the Company believes are the most critical to aid in fully understanding and evaluating our reported financial results include the following: o Revenue Recognition o Allowances for Doubtful Accounts and Sales Returns o Inventory Valuation and Classification o Goodwill and Intangible Assets o Accounting for Income Taxes In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management's judgment in its application. There are also areas in which management's judgment in selecting among available alternatives would not produce a materially different result. Our senior management has reviewed the Company's critical accounting policies and related disclosures with our Audit Committee. See Notes to Consolidated Financial Statements, which contain additional information regarding our accounting policies and other disclosures required by GAAP. 21 REVENUE RECOGNITION - ------------------- The Company derives revenues from two primary sources: 1. Merchant/Dealer Operations: Revenues from Merchant/Dealer Operations consist of revenues from the non-auction sale of inventory owned by the Company. These sales consist of sales by Spectrum, sales by the Company to Afinsa and other non-auction sales of owned inventory, including private treaty sales. Revenue with respect to Merchant/Dealer Operations is recognized when the goods are delivered or released to the customer for acceptance or to a common carrier for delivery. Such amounts of revenue are recorded as sales of merchandise, net of returns. Sales returns have not been material. 2. Auction Revenue: Revenues from Auction Operations consist of the portion of sale proceeds from auction (or private treaty, if the goods sold are consigned) that the Company is entitled to retain after remitting the sellers' share, consisting primarily of commissions paid by sellers and buyers. Revenue is recognized when collectibles are sold at auction and is represented by an auction commission received from the buyer and seller. Auction commissions represent a percentage of the hammer price at auction sales as paid by the buyer and the seller. Such amounts of revenue are recorded on a net basis as commission revenue. The Company also sells its own inventory at auction. Revenue of owned inventory is recognized when sold at auction. Such amounts of revenue are recorded on a gross basis as sales of merchandise. Additionally, the Company is entitled to auction commissions 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 auction. Each lot is sold as genuine and as described by the Company in the catalogue. When however, in the opinion of a competent authority mutually acceptable to the Company and the purchaser, a lot is declared otherwise, the purchase price will be refunded in full if the lot is returned to the Company within a specified period. In such event, the Company will return such lot to the consignor before a settlement payment has been made to such consignor for the lot in question. To date, returns have not been material. Large collections are generally sold on an "as is" basis. ALLOWANCES FOR DOUBTFUL ACCOUNTS AND SALES RETURNS - -------------------------------------------------- The Company makes judgments as to our 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 known. The Company frequently extends trade credit in connection with its auction sales, which are held throughout the United States. The Company evaluates each customer's creditworthiness on a case-by-case basis; generally the customers who receive trade credit are professional dealers who have regularly purchased property at the Company's auctions or whose reputation within the industry is known and respected by the Company. In situations where trade credit is extended, the purchaser generally takes possession of the property before payment is made by the purchaser to the Company, and the Company is liable to the consignor for the net sales proceeds (auction hammer price less commission to the Company). The Company pays the consignor generally no later than the 45th day after the sale, and when trade credit is extended, the Company assumes all risk of loss associated with the trade credit, and the responsibility of collection of the trade credit amount from the purchaser. Losses to date under these situations have not been material. Certain sales of inventory owned by the Company are made with extended payment terms (up to twelve months). Certain assets held by the Company collateralize these receivables. If the historical data the Company uses to calculate the allowance provided for doubtful accounts does not reflect the future ability to collect outstanding receivables, additional provisions for doubtful accounts may be needed and the future results of operations could be materially affected. In recording any additional allowances, a respective charge against income is reflected in the general and administrative expenses, and would reduce our operating results in the period in which the increase is recorded. 22 INVENTORY VALUATION AND CLASSIFICATION - -------------------------------------- Inventories are stated at the lower of cost or market ("LCM"), which reflects management's estimates of net realizable value. Inventories are accounted for under the specific identification method. In instances where bulk purchases are made, the cost allocation is based on the estimated 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 a percentage of the inventory aging by category type, unless the Company implores a marketing strategy to sell goods over time. If actual market conditions are less favorable than those projected by management and the Company's estimates prove to be inaccurate, additional write-downs or adjustments to recognize additional cost of sales may be required. Increases in write-downs and adjustments are recorded in the period in which they are identified and a resulting charge to cost of merchandise sold is recorded which would reduce our operating results in the period in which the increase is recorded. In certain instances, the Company holds inventory for a period of time in excess of one year, which is generally based on a marketing strategy to sell collectibles over time in order to avoid flooding the marketplace. Inventories, which are not expected to be sold within one year, are classified with other Non-Current Assets in the Consolidated Balance Sheets in the accompanying consolidated financial statements. INTANGIBLE ASSETS - ----------------- Goodwill - -------- Goodwill primarily includes the excess purchase price paid over the fair value of net assets acquired. Effective July 1, 2002, the Company adopted Statement of Financial Accounting Standards ("SFAS"), No. 142, "Goodwill and Other Intangible Assets". Under SFAS 142, the Company ceased amortization of goodwill and tests its goodwill on an annual basis using a two-step fair value based test. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, the second step of the goodwill impairment test must be performed to measure the amount of the impairment loss, if any. Management has determined that it operates as one reporting unit and therefore assesses goodwill for impairment on an enterprise -wide basis. Management evaluates the recoverability of goodwill using the Company's market capitalization, which determines if the carrying value of goodwill is impaired. If impairment is determined, the Company will recognize additional charges to operating expenses in the period in which they are identified, which would result in a reduction of operating results and a reduction in the amount of goodwill. Prior to the adoption of SFAS 142 on July 1, 2002, the Company amortized goodwill over its estimated useful life and evaluated goodwill for impairment in conjunction with its other long-lived assets. Other Intangible Assets - ----------------------- Other purchased intangibles consisting of trademarks and customer lists, purchased as part of business acquisitions are presented net of related accumulated amortization and are being amortized on a straight-line basis over the remaining useful lives. The Company records impairment losses on other intangible assets when events and circumstances indicate that such assets might be impaired and the estimated fair value of the asset is less than its recorded amount in accordance with SFAS No 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The Company reviews the value of its long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Conditions that would necessitate an impairment assessment include material adverse changes in operations, significant adverse differences in actual results in comparison with initial valuation forecasts prepared at the time of acquisition, a decision to abandon certain acquired products, services or marketplaces, or other significant adverse changes that would indicate the carrying amount of the recorded asset might not be recoverable. Annually, the Company performs this analysis with assistance from an independent valuation expert. The Company evaluates the recoverability of other purchased intangibles using undiscounted cash flows whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In performing these analyses uses the best information available in the circumstances including reasonable and supportable assumptions and projections. 23 INCOME TAXES - ------------ As part of the process of preparing consolidated financial statements, the Company is required to estimate income taxes in each of the jurisdictions in which it operates. Significant judgment is required in determining the income tax expense provision. The Company recognizes deferred tax assets and liabilities based on differences between the financial reporting and tax bases of assets and liabilities using the enacted tax rates and laws that are expected to be in effect when the differences are expected to be recovered. The Company assesses the likelihood of our deferred tax assets being recovered from future taxable income. The Company then provides a valuation allowance for deferred tax assets for which the Company does not consider realization of such assets to be more likely than not. While the Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the valuation allowance, there is no assurance that the valuation allowance would not need to be increased in the future to cover additional deferred tax assets that may not be realizable. Any change in the valuation allowance could have a material impact on net income in the period in which such determination is made. New Accounting Pronouncements - ----------------------------- Refer to Note 1 in the accompanying consolidated financial statements. Safe Harbor Statement - --------------------- From time to time, information provided by the Company, including but not limited to statements in this report, or other statements made by or on behalf of the Company, may contain "forward-looking" information within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such statements involve a number of risks and uncertainties. The Company's actual results could differ materially from those discussed in the forward-looking statements. The cautionary statements set forth below identify important factors that could cause actual results to differ materially from those in any forward-looking statements made by or on behalf of the Company: o Although the Company's results of operations for the years ended June 30, 2004 and 2005 reflect a material improvement over the results of prior periods, a significant portion of the Company's aggregate sales, revenue and gross profit for such periods was attributable to sales to Afinsa (a related party). There is no assurance that such sales, revenues and gross profit will continue at these levels. A decrease in the level of sales to Afinsa, or the termination of the supply agreements with Afinsa could have a material adverse effect on the Company. There is no minimum level of sales provided for under the supply agreements with Afinsa, and the agreements may be terminated upon six month's notice by either party. o Our recent acquisitions of companies, in particular those which operate outside the United States, have provided us with challenges in implementing the required processes and procedures in our those operations. We, therefore, have devoted substantial time and have incurred and will continue to incur substantial costs to ensure ongoing compliance. In addition, in the course of our ongoing evaluation of internal controls over financial reporting, we have identified areas of our internal controls requiring improvement and are in the process of designing enhanced processes and controls to address those issues. As a result, we expect to incur additional expenses and diversion of management's time, any of which could materially increase our operating expenses and accordingly reduce our net income or increase our net losses. And, we cannot be certain that our efforts will be effective or sufficient for us to issue reports in the future. Any such events could adversely affect our financial results and/or may result in a negative reaction in the stock market. o Subsequent to the year ended June 30, 2005, the Company and its majority shareholder Afinsa acquired all of the issued and outstanding capital stock of A-Mark Precious Metals, Inc. (APM), which is a metals trading company engaged primarily in the wholesale purchase and sale of precious metals,, including gold, silver and platinum and palladium. APM's precious metals inventories are subject to market value changes created by changes in the underlying commodity markets. In addition, open purchase and sale commitments are subject to changes in value between the time the purchase or sale is fixed and the time metal is delivered. APM 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. APM's policy is to remain substantially hedged as to its inventory position and as to its purchase and sale commitments, and APM's 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 APM's business activities. o During the fourth quarter of fiscal 2005, the Company made a charitable contribution of an art collection with a de minimis carrying value that had been held for investment purposes. The Company obtained a 24 qualified appraisal of the collection, which concluded that it had a value of approximately $21 million, resulting in a charitable contribution deduction with a tax benefit of approximately $7.1 million. This charitable contribution deduction will be limited to 10% of the Company's Federal taxable income (as computed with certain adjustments) each year and will expire in the year 2010 to the extent not utilized. Because of the uncertainty of whether future Federal taxable income will be sufficient to realize the entire benefit, the Company has established a valuation allowance of approximately $2.6 million. In addition, although not required to do so, the Company has determined to seek additional verification of the value of the collection. As a result of this or other factors, the tax benefit to the Company may be adjusted. o At times there may be a limited supply of collectibles available for sale by the Company. Such supply historically has varied from time to time. While the Company has not generally experienced a lack of collectibles that has prevented it from conducting appropriately sized auctions on an acceptable schedule, no assurance can be given that the Company will be able to obtain consignments of suitable quantities of collectibles in order to conduct auctions of the size, and at the times, the Company may desire in the future. The inability to do so would have a material adverse effect on the Company. Furthermore, the popularity of collectibles could decline. This could affect the market value of inventory that GMAI currently holds, including the inventory acquired under the inventory purchase agreement, or inventory it or its subsidiaries may acquire in the future. o The business of selling stamps, coins, and other collectibles at auction and in retail sales is highly competitive. The Company competes with a number of auction houses and collectibles companies throughout the North America, Europe and the rest of the world. While the Company believes that there is no dominant company in the stamp auction or collectibles business in which it operates, there can be no assurances that other companies with greater financial and other resources and name recognition will not enter the market. Among the Company's primary competitors in the domestic and worldwide philatelic auction business are Matthew Bennett, Inc., Charles Shreve Galleries, Inc. and Robert A. Siegel Auction Galleries, Inc. In the sports trading card auction business, the Company's primary competitors are Mastro Fine Sports Auctions, Sports Trading Cards Plus, LLC and Sales OnLine Direct, Inc. (d/b/a Rotman Auctions). The Company's principal coin auction competitors are Heritage Rare Coin Galleries, Inc., Stacks Rare Coins, Superior Coin Galleries of Beverly Hills and American Numismatic Rarities, LLC. o Auctentia and Afinsa currently beneficially own approximately 68% of the issued and outstanding shares of the Company's common stock. This represents a substantial dilution in the current voting power of non-Auctentia related stockholders of the Company. As a result, Auctentia and its affiliates are able to elect the entire board of directors of GMAI. Auctentia and its affiliates also may be able to approve other actions as a stockholder without obtaining the votes of other stockholders of the Company or impede transactions that may be desirable for other stockholders. In addition, this concentration of ownership, which is not subject to any voting restrictions, could limit the price that investors might be willing to pay for the Company's common stock. o The Company and Auctentia have signed a registration rights agreement pursuant to which Auctentia may request that 18,435,886 shares of the Company's common stock beneficially owned by it be registered by the Company at the Company's expense. All such registerable Company common stock owned by Auctentia will be freely tradable immediately after any registration. o The Company has acquired 13 businesses within the last two years, including eight in Europe and one in Hong Kong. Integration of these operations have presented and will continue to present challenges to management, including with respect to the integration of the operations, product lines, technologies and personnel of the Company and its subsidiaries. These acquisitions also pose special risks, including possible unanticipated liabilities, unanticipated costs and diversion of management attention. In addition, there can be no assurance that the combined businesses will achieve increased sales levels, profitability, efficiencies or synergies, or result in increased earnings for the combined companies in any future period. The difficulties of combining the operations of GMAI and the European subsidiaries are also complicated by the necessity of coordinating geographically separated organizations. o The Company's business will be adversely affected if use of the Internet by consumers, particularly purchasers of collectibles, does not continue to grow. A number of factors may inhibit consumers from using the Internet. These include inadequate network infrastructure, security concerns, inconsistent quality of service and a lack of cost-effective high-speed service. Even if Internet use grows, the Internet's 25 infrastructure may not be able to support the demands placed on it by this growth and its performance and reliability may decline. In addition, many web sites have experienced service interruptions as a result of outages and other delays occurring throughout the Internet infrastructure. If these outages or delays occur frequently in the future, use of the Internet, as well as use of our web sites, could grow more slowly or decline. o Some local telephone carriers claim that the increasing popularity of the Internet has burdened the existing telecommunications infrastructure and that many areas with high Internet use are experiencing interruptions in telephone service. These carriers have petitioned the U.S. Federal Communications Commission to impose access fees on Internet service providers. If these access fees are imposed, the cost of communicating on the Internet could increase, and this could decrease the demand for our services and increase our cost of doing business. o The Company holds rights to various web domain names. Governmental agencies typically regulate domain names. These regulations are subject to change. GMAI may not be able to acquire or maintain appropriate domain names in all countries in which it or its affiliates do business. Furthermore, regulations governing domain names may not protect the Company's trademarks and similar proprietary rights. The Company may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon or diminish the value of its trademarks and other proprietary rights. o Due to difficulty anticipating levels or values of consignments at any given time, the stamp auction business is susceptible to significant fluctuations in operating results and revenue shortfalls, which could adversely affect the Company's business. In addition, the Company's operating results in the coin business are dependent upon product availability over the short and long term, which cannot be predicted with any certainty. Future fluctuations in operating results or revenue shortfalls of the Company could adversely affect the success of the Company. If revenue fails to offset operating expenses in the future, the Company may be required to fund future operations through the sale of additional common stock, which could cause the market price of its stock to decline, as well as have a dilutive effect on the value of its common stock currently outstanding. o The market price of the Company's common stock has fluctuated and may continue to fluctuate significantly due to a number of factors, some of which may be beyond the Company's control, including: sales of the Company's common stock by stockholders; actual or anticipated fluctuations in the Company's operating results; the operating and stock price performance of other comparable companies; developments and publicity regarding the Company's industry; 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 Company's common stock, regardless of the Company's actual performance, and could enhance the effect of any fluctuations that do relate to its operating results. o The Company may be adversely affected by the costs and other effects associated with (i) legal and administrative cases and proceedings; (ii) settlements, investigations, claims and changes in those items; and (iii) adoption of new, or changes in, accounting policies and practices and the application of such policies and practices. o The Company's future results of operations could be adversely affected by changes in accounting standards promulgated by the Financial Accounting Standards Board, the Securities and Exchange Commission, and the American Institute of Certified Public Accountants. o Our effective tax rate could be adversely affected by several factors, many of which are outside of our control. Our effective tax rate is directly affected by the relative proportions of revenue and income before taxes in the various domestic and international jurisdictions in which we operate. We are also subject to changing tax laws, regulations and interpretations in multiple jurisdictions in which we operate. Our effective tax rate can also be influenced by the tax effects of purchase accounting for acquisitions and non-recurring charges, which may cause fluctuations between reporting periods. This list should not be considered an exhaustive statement of all potential risks and uncertainties. 26 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk represents the risk of loss that may impact the financial position, results of operations or cash flows of the Company due to adverse changes in financial market prices, including interest rate risk, foreign currency exchange rate risk, investment risk, commodity price risk and other relevant market rate or price risks. Interest Rate Risks Interest rates on the Company's credit facilities are market-based. (See Note 12 to Notes to Consolidated Financial Statements.) Accordingly, the Company is exposed to certain interest rate risks caused by fluctuations in interest rates. If, for example, the LIBOR and the "prime" rates were to increase by 1% for any given year, our interest expense would increase by approximately $100 for the period (assuming that all amounts available under such credit facilities - that is, $10,000 - are drawn down.) There can be no assurance that interest rates will not increase over the next fiscal year. However, because we do not believe that our exposure to interest rate risk is significant, we have not undertaken specific steps to reduce or eliminate this risk. Foreign Currency Risks Business transactions originating from our United States and Asian operations are denominated in U.S. dollars. Transactions from our European operations, which in fiscal 2005 accounted for approximately 35% of total net revenues, are denominated in Euros. The average Euro to dollar exchange rate during fiscal 2005 was $1.27 U.S. dollar to $1.00 Euro. As a result of this exchange rate, the company enjoyed a favorable exchange rate advantage equal to $2.6 million in fiscal 2005. A 5% change in the Euro to dollar exchange rate would have had a effect on the company's net profits in fiscal 2005 of $476,000. The Company does not believe it is exposed to material foreign currency risks. As a result, we do not enter into any hedging activities to minimize such risk. Other Market Risks The Company maintains investments in equity instruments of public and privately held companies for business and strategic purposes. These investments are included in marketable securities and other long-term assets and are accounted for under the cost method when ownership is less than 20% and the Company does not have the ability to exercise significant influence over operations. For these investments, the Company's policy is to regularly review the assumptions underlying the operating performance and cash flow forecasts in assessing the carrying values. The Company identifies and records impairment losses on long-lived assets when events and circumstances indicate that such assets might be impaired. Subsequent to the year ended June 30, 2005, the Company and its majority shareholder Afinsa acquired all of the issued and outstanding capital stock of A-Mark Precious Metals, Inc. (APM). APM is a metals trading company engaged primarily in the wholesale purchase and sale of precious metals, including gold, silver, platinum and palladium. APM's precious metals inventories are subject to market value changes created by changes in the underlying commodity markets, and open purchase and sale commitments are subject to changes in value between the time the purchase or sale is fixed and the time metal is delivered. APM 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. APM's policy is to remain substantially hedged as to its inventory position and as to its purchase and sale commitments, and APM's management monitors its hedged exposure daily. The Company historically has not experienced any significant commodity price risks. The Company does not generally allow speculation in derivative instruments. We do not intend to use financial instruments for speculative purposes. The Company will assess the significance of interest rate, exchange rate and other market risks on a periodic basis and will implement strategies to manage risk as appropriate. 27 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Financial Statements of the Company, together with the report of the Independent Registered Public Accounting Firm thereon, are presented under this Item 8: INDEX Page ---- Report of Independent Registered Public Accounting Firm................30 Consolidated Statements of Earnings - Years ended June 30, 2005, 2004 and 2003.........................................31 Consolidated Balance Sheets - June 30, 2005 and 2004...................32 Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss) - July 1, 2002 to June 30, 2005..........33 Consolidated Statements of Cash Flows - Years ended June 30, 2005, 2004 and 2003..................................................35 Notes to Consolidated Financial Statements.............................36 28 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Greg Manning Auctions, Inc. We have audited the consolidated balance sheets of Greg Manning Auctions, Inc., and subsidiaries as of June 30, 2005 and 2004, and the related consolidated statements of earnings, stockholders' equity and comprehensive income (loss), and cash flows for each of the three years in the period ended June 30, 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Greg Manning Auctions, Inc. and its Subsidiaries as of June 30, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2005, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board of the United States of America, the effectiveness of the internal control over financial reporting of Greg Manning Auctions, Inc. and subsidiaries as of June 30, 2005, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated September 8, 2005 expressed an unqualified opinion. We have also audited the consolidated financial statement schedule listed in the Index at Item 15(a), Schedule II for each of the three years in the period ended June 30, 2004. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Amper, Politziner & Mattia P.C. September 8, 2005 Edison, New Jersey 29 GREG MANNING AUCTIONS, INC. Consolidated Statements of Earnings For the Years Ended June 30, (amounts in thousands except per share data) 2005 2004 2003 --------- --------- --------- Operating revenues Sales of inventory $ 99,309 $ 97,688 $ 89,268 Sales of inventory - related party 123,348 102,215 7,654 Commissions earned 17,657 12,987 4,269 --------- --------- --------- Total revenues 240,314 212,890 101,191 Cost of merchandise sold Cost of merchandise sold 91,515 86,249 81,960 Cost of merchandise sold- related party 58,830 65,150 4,712 --------- --------- --------- Gross profit 89,969 61,491 14,519 Operating expenses General and administrative 16,501 13,517 5,175 Salaries and wages 13,142 10,271 5,457 Marketing 4,282 2,981 1,561 Depreciation and amortization 1,187 915 557 --------- --------- --------- Total operating expenses 35,112 27,684 12,750 --------- --------- --------- Operating income 54,857 33,807 1,769 Other income (expense) Gain on sale of investee - related party -- -- 2,035 Realized loss on sale of marketable securities (4) -- (87) Interest income 973 259 172 Interest expense (1,231) (946) (874) Impairment from investment in investee -- (500) -- Other income/expense (301) -- -- --------- --------- --------- Earnings before income taxes 54,294 32,620 3,015 Provision for income taxes 16,019 3,254 192 --------- --------- --------- Net income $ 38,275 $ 29,366 $ 2,823 ========= ========= ========= Basic earnings per share: Weighted average shares outstanding 27,423 23,985 12,739 ========= ========= ========= Basic earnings per share $ 1.40 $ 1.22 $ 0.22 ========= ========= ========= Diluted earnings per share: Weighted average shares outstanding 28,688 25,787 12,816 ========= ========= ========= Diluted earnings per share $ 1.33 $ 1.14 $ 0.22 ========= ========= ========= See accompanying notes to consolidated financial statements 30 GREG MANNING AUCTIONS, INC. Consolidated Balance Sheets June 30, (amounts in thousands except per share data) 2005 2004 --------- --------- Assets ------ Current Assets Cash and Cash Equivalents $ 54,250 $ 16,263 Accounts Receivable, Net; Auctions and Trade 17,497 14,086 Related Party 8,781 27,674 Advances to Consignors 4,370 4,032 Inventory 41,830 40,816 Deferred Tax Asset 3,292 3,821 Prepaid Expenses and Other 2,487 674 --------- --------- Total Current Assets 132,507 107,366 Property and Equipment, Net 3,295 1,936 Goodwill, Net 9,427 9,163 Other Purchased Intangibles, Net 1,937 1,898 Marketable Securities 118 186 Other Non-Current Assets Loans Receivable Related Party, Net 400 600 Inventory 6,166 7,336 Deferred Tax Asset 3,662 1,959 Other 938 240 --------- --------- Total Assets $ 158,450 $ 130,684 ========= ========= Liabilities and Stockholders' Equity ------------------------------------ Current Liabilities Notes Payable and Capital Leases $ 667 $ 12,590 Payable to Third Party Consignors 12,458 10,387 Accounts Payable 14,011 20,605 Accrued Expenses and Other Current Liabilities 2,654 4,170 Income Taxes Payable 8,140 7,743 Advances Payable - Related Party -- 3,467 --------- --------- Total Current Liabilities 37,930 58,962 Notes Payable and Capital Leases - Long Term 9,181 -- --------- --------- Total Liabilities 47,111 58,962 Commitments and contingencies -- -- Stockholders' Equity Preferred Stock, $.01 par value. Authorized 10,000 shares; none issued -- -- Common Stock, $.01 par value Authorized: 40,000 shares Issued June 30, 2005 - 27,667 shares, Outstanding - 27,667 shares 276 277 Issued June 30, 2004 - 27,716 shares, Outstanding - 27,348 shares Additional paid in capital 70,245 71,431 Accumulated Other Comprehensive Income 1,813 1,832 Retained Earnings 39,005 730 Treasury stock, at cost 0 and 368 shares at June 30, 2005 and 2004 -- (2,548) --------- --------- Total Stockholders' Equity 111,339 71,722 --------- --------- Total Liabilities and Stockholders' Equity $ 158,450 $ 130,684 ========= ========= See accompanying notes to consolidated financial statements 31 GREG MANNING AUCTIONS, INC. Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss) July 1, 2002 to June 30, 2005 (amounts in thousands except per share data) Accumulated Retained Common Stock Additional Other Earnings Total ----------------------- Paid- In Comprehensive (Accumulated Treasury Shareholders' Shares $ Capital Income (Loss) Deficit) Stock Equity ----------------------- ---------- ------------- ------------ --------- ------------ Balance, July 1, 2002 13,072 $ 130 $ 45,842 $ (309) $(31,459) $ (2,548) $ 11,656 Exercise of stock options 102 1 141 142 Stock issued in connection with investment in GMAI- Asia.com 243 3 497 500 Unrealized loss from marketable securities 73 73 Net Income- June 30, 2003 2,823 2,823 --------------------- -------- -------- -------- -------- -------- Balance, June 30, 2003 13,417 134 46,480 (236) (28,636) (2,548) 15,194 Shares Issued for acquisition of Auctentia 13,000 130 20,992 21,122 Exercise of stock options 1,299 13 2,829 2,842 Deferred Tax Asset- Reduction in Valuation Allowance 900 900 Translation adjustment 1,931 1,931 Options issued for services - Afinsa (Note 12) 230 230 Unrealized loss from marketable securities 137 137 Net Income- June 30, 2004 29,366 29,366 --------------------- -------- -------- -------- -------- -------- Balance, June 30, 2004 27,716 $ 277 $ 71,431 $ 1,832 $ 730 $ (2,548) $ 71,722 ===================== ======== ======== ======== ======== ======== See accompanying notes to consolidated financial statements 32 GREG MANNING AUCTIONS, INC. Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss) July 1, 2002 to June 30, 2005 (amounts in thousands except per share data) Accumulated Retained Common Stock Additional Other Earnings Total ----------------------- Paid- In Comprehensive (Accumulated Treasury Shareholders' Shares $ Capital Income (Loss) Deficit) Stock Equity ----------------------- ---------- ------------- ------------ --------- ------------ Balance, July 1, 2004 27,716 $ 277 $ 71,431 $ 1,832 $ 730 $ (2,548) $ 71,722 Exercise of stock options 329 3 656 659 Translation adjustment (101) (101) Options issued for services - Afinsa (Note 12) 65 65 Unrealized loss from marketable securities 82 82 Retirement of treasury stock (368) (4) (2,544) 2,548 -- Contribution of capital- related party 637 637 Net Income- June 30, 2005 38,275 38,275 --------------------- -------- -------- -------- -------- -------- Balance, June 30, 2005 27,677 $ 276 $ 70,245 $ 1,813 $ 39,005 -- $111,339 ===================== ======== ======== ======== ======== ======== See accompanying notes to consolidated financial statements 33 Greg Manning Auctions, Inc. Consolidated Statement of Cash Flows For the years ended June 30, (amounts in thousands except for per share data) 2005 2004 2003 -------- -------- -------- Cash flows from operating activities: Net Income $ 38,275 $ 29,366 $ 2,823 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 1,187 915 557 Provision for (recovery of) bad debts (175) 942 172 Provision for inventory reserve 1,350 774 -- Options issued for services - related party 65 230 -- Realized Loss on sale of marketable securities 4 -- 87 Impairment of investment in investee -- 500 -- Gains from sale of investee-related party -- (2,035) Deferred tax benefit (1,174) (4,880) -- (Increase) decrease in assets: (net of acquisition amounts) Accounts receivable - Trade (3,236) (1,339) (1,140) Accounts receivable - Related Party 18,893 (26,967) (4,588) Advances to consignors (338) (3,251) 383 Inventory (1,194) (22,153) (3,895) Prepaid expenses and deposits (1,613) 192 (798) Other assets (698) (131) 135 Increase (decrease) in liabilities: (net of acquisition amounts) Payable to third-party consignors 2,071 7,918 (477) Accounts payable (6,594) 9,688 5,679 Accrued expenses and other liabilities (1,516) 726 1,100 Advances payable - related party (3,467) 3,467 -- Advances Payable -- (827) 827 Income taxes payable 397 7,743 -- -------- -------- -------- 42,237 2,913 (1,170) Cash flows used in investing activities: Capital expenditures for property and equipment (2,205) (737) (231) Purchase of Intangible Assets - Acquisitions (644) (3,797) -- Loans Receivable Related Party -- -- (600) Proceeds from sale of marketable securities 146 -- 13 -------- -------- -------- (2,703) (4,534) (818) Cash flows from (used in) financing activities: Net proceeds from (repayment of) notes payable (3,248) 5,324 2,500 Proceeds from demand notes payable - related party 506 -- 635 Net proceeds from (repayment of) loans and loans payable -- -- (73) Proceeds from exercise of options 659 2,843 142 Proceeds from issuance of stock - Afinsa -- 5,536 -- Proceeds from the contribution of capital- related party 637 -- -- -------- -------- -------- (1,446) 13,703 3,204 Effect of exchange rates (101) 1,931 -- Net change in cash and cash equivalents 37,987 14,013 1,216 Cash and cash equivalents: Beginning of period 16,263 2,250 2,169 -------- -------- -------- End of period $ 54,250 $ 16,263 $ 3,385 ======== ======== ======== See accompanying notes to consolidated financial statements 34 Greg Manning Auctions, Inc. Notes to Consolidated Financial Statements ($ in Thousands Except for Per Share Amounts or as noted) (1) Description of Business and Summary of Significant Accounting Policies Description of Business - ----------------------- Greg Manning Auctions, Inc. (GMAI), together with its operating subsidiaries (wholly owned unless otherwise indicated), Ivy and Manning (formerly Mader) Philatelic Auctions, Greg Manning Galleries, Greg Manning Nutmeg Auctions, (d/b/a Nutmeg Stamp Sales), Teletrade, Spectrum Numismatics International, North American Certified Trading, Kensington Associates, Superior Sports Auctions, Bowers and Merena Auctions, Kingswood Coin Auctions, Corinphila Auktionen, Heinrich Kohler Berliner Briefmarken-Auktionen (66.67% owned by GMAI), Heinrich Kohler Auktionshaus, Heinrich Kohler Briefmarkenhandel, Heinrich Kohler Verwaltungs, Auctentia Deutschland, Auctentia Subastas and GMAI Auctentia Central de Compras (CdC) (collectively, "the Company"), is a global integrated network of companies in the collectibles market with operations in North America, Europe and Asia as well as on the Internet. For the year ended June 30, 2005, GMAI businesses included Auctions and Merchant/Dealer Operations. Afinsa Bienes Tangibles, S.A. (Afinsa) owns 100% of the outstanding stock of Auctentia, S.L. (Auctentia). At both June 30, 2005 and 2004, Afinsa and Auctentia collectively beneficially owned approximately 68% of the Company's outstanding common stock. The Company is a party to separate supply agreements with Afinsa, dated August 1, 2003, as amended, pursuant to which the Company and CdC act as exclusive suppliers of collectibles - primarily stamps and coins - for Afinsa on a worldwide basis, with GMAI acting in the United States and Hong Kong, and CdC acting in all other geographic locations. Afinsa is engaged, among other things, in commercial and trading activities involving tangible investment products throughout Europe. As amended, the supply agreements have a ten-year term, terminable by either party upon six months' notice. In addition to paying the purchase price for the goods sold under the contracts, Afinsa pays to the Company an amount equal to 10% of the aggregate purchase price of all such goods sold. Transactions under the supply contracts are part of the Company's Merchant/Dealer Operations. As a result of transactions under the supply agreements, for the years ended June 30, 2005 and 2004, Afinsa was the Company's significant customer, accounting for $123,348 and $102,215, or 51% and 48% of revenues, repectively, for the periods then ended. Transactions under the supply agreements have had a significant effect on the business, financial condition and results of operations of the Company. See Notes 2 and 12 for additional information. Principles of Consolidation - --------------------------- The consolidated financial statements of the Company include the accounts of its wholly and majority owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Minority interest is not material to the consolidated financial statements. Revenue Recognition - ------------------- The Company accounts for revenue recognition in accordance with Staff Accounting Bulletin No. 101 and No. 104, ("SAB No.'s 101/104"), which provides guidance on the recognition, presentation and disclosure of revenue in financial statements, and Emerging Issues Task Force ("EITF") Issue No. 99-19 "Reporting Revenue Gross as a Principal vs. Net as an Agent" which provides guidance on the recognition of revenue gross as a principal versus net as an agent. The Company derives revenues from two primary sources: 1. Merchant/Dealer Operations: Revenues from Merchant/Dealer Operations consist of revenues from the non-auction sale of inventory owned by the Company. These sales consist of sales by Spectrum, sales by the Company to Afinsa and other non-auction sales of owned inventory, including private treaty sales. Revenue with respect to Merchant/Dealer Operations is recognized when the goods are delivered or released to the customer for acceptance or to a common carrier for delivery. Such amounts of revenue are recorded as sales of merchandise, net of returns. Sales returns have not been material. 35 Greg Manning Auctions, Inc. Notes to Consolidated Financial Statements ($ in Thousands Except for Per Share Amounts or as noted) 2. Auction Revenue: Revenue is recognized when the collectibles are sold at auction and is represented by an auction commission received from the buyer and seller. Auction commissions represent a percentage of the hammer price at auction sales as paid by the buyer and the seller. Such amounts of revenue are recorded on a net basis as commission revenue. The Company also sells its own inventory at auction. Revenue of owned inventory is recognized when sold at auction. Such amounts of revenue are recorded on a gross basis as sales of merchandise. Additionally, the Company is entitled to auction commissions 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 auction. Each lot is sold as genuine and as described by the Company in the catalogue. When however, in the opinion of a competent authority mutually acceptable to the Company and the purchaser, a lot is declared otherwise, the purchase price will be refunded in full if the lot is returned to the Company within a specified period. In such event, the Company will return such lot to the consignor before a settlement payment has been made to such consignor for the lot in question. To date, returns have not been material. Large collections are generally sold on an "as is" basis. Use of Estimates - ---------------- The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Concentration of Credit Risk - ---------------------------- The Company frequently extends trade credit in connection with its auction sales, which are held throughout the United States. The Company evaluates each customer's creditworthiness on a case-by-case basis; generally the customers who receive trade credit are professional dealers who 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 known. In situations where trade credit is extended, the purchaser generally takes possession of the property before payment is made by the purchaser to the Company, and the Company is liable to the consignor for the net sales proceeds (auction hammer price less commission to the Company). The Company pays the consignor generally no later than the 45th day after the sale, and when trade credit is extended, the Company assumes all risk of loss associated with the trade credit, and the responsibility of collection of the trade credit amount from the purchaser. Losses to date under these situations have not been material. Certain sales of inventory owned by the Company are made with extended payment terms (up to twelve months). Certain assets held by the Company collateralize these receivables. Foreign Currency Translation and Transactions - --------------------------------------------- The functional currency of the Company's foreign operations is the applicable local currency. The foreign subsidiaries' assets and liabilities are translated into United States dollars using exchange rates in effect at the balance sheet date and their operations are translated using the average exchange rates prevailing during the year. The resulting translation adjustments are recorded as a component of other comprehensive income (loss). Foreign currency transaction gains and losses are included in the accompanying Statements of Earnings. Cash Equivalents and Concentration of Cash - ------------------------------------------ The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The Company maintains its cash with high quality financial institutions, located primarily in the United States and Spain. To the 36 Greg Manning Auctions, Inc. Notes to Consolidated Financial Statements ($ in Thousands Except for Per Share Amounts or as noted) extent that such cash exceeds the maximum insurance levels, the Company is uninsured. The Company has not experienced any losses in such accounts. Inventories - ----------- Inventories are stated at the lower of cost or market ("LCM"), which reflects management's estimates of net realizable value. Inventories 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 a percentage of the inventory aging by category type, unless the Company implores a marketing strategy to sell goods over time. If actual market conditions are less favorable than those projected by management and the Company's estimates prove to be inaccurate, additional write-downs or adjustments to recognize additional cost of sales may be required. In certain instances, the Company holds inventory for a period of time in excess of one year, which is generally based on a marketing strategy to sell collectibles over time in order to avoid flooding the marketplace. Inventories, which are not expected to be sold within one year, are classified with other Non-Current Assets in the Consolidated Balance Sheets in the accompanying consolidated financial statements. The non-current inventory represents an estimate of inventory for which there is a specific plan in place for their sale beyond one year after purchase. The classification as long-term is based on the expected period in which the Company expects to sell this inventory, if greater than a year from the balance sheet date. Once the selling period is identified, the non-current amounts are classified to current. The Company has agreements with certain suppliers to share the net profits or losses attributable to the sale of specific items of inventory. The Company reports the sale of this inventory as revenue because the Company purchases this inventory from the supplier and ultimately sells it to the end user. During this process the Company acts as the principal in these transactions; in other words, the Company takes title to the inventory and bears all the risks relating to loss, collections, delivery and returns. The company and not the supplier, determines the selling price of the end user. As of June 30, 2005 and 2004 the amount of inventories subject to these arrangements was approximately $7,459 and $9,144, respectively, which is included in Inventory in the accompanying Consolidated Balance Sheets. Property and Equipment - ---------------------- Property and equipment are carried at cost. Depreciation is computed using the straight-line method. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in results of operations for the period. Buildings are amortized over an estimated life of 15 years. Leasehold improvements are amortized over the shorter of the estimated useful lives or the remaining life of the lease, which is generally 5 years. Equipment, furniture and fixtures, and vehicles are amortized over a period of generally 5 years or less. Properties under capital leases are amortized over the life of the lease, which are normally three to five years. The cost of repairs and maintenance is charged to operations as incurred. Acquisitions - ------------ The Company completed two acquisitions in the year ended June 30, 2005 and three acquisitions in the year ended June 30, 2004, as further described in Note 2. In these acquisitions, the purchase price of the acquired business was allocated to the assets acquired and liabilities assumed at their fair values on the date of the acquisition. The fair values of these items were based upon management's estimates. Certain of the acquired assets were intangible in nature, including trademarks and customer lists. The excess purchase price over the amounts allocated to the assets is recorded as goodwill. All such valuation methodologies, including the determination of subsequent amortization periods, involve significant judgments and estimates. Different assumptions and subsequent actual events could yield materially different results. Goodwill - -------- Goodwill primarily includes the excess purchase price paid over the fair value of net assets acquired and is accounted for in accordance with Statement of Financial Accounting Standards ("SFAS"), No. 142, "Goodwill and Other Intangible Assets". Under 37 Greg Manning Auctions, Inc. Notes to Consolidated Financial Statements ($ in Thousands Except for Per Share Amounts or as noted) SFAS 142, the Company ceased amortization of goodwill and tests its goodwill on an annual basis using a two-step fair value based test. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, the second step of the goodwill impairment test must be performed to measure the amount of the impairment loss, if any. Management has determined that it operates as one reporting unit and therefore assesses goodwill for impairment on an enterprise -wide basis. Management evaluates the recoverability of goodwill using the Company's market capitalization, which determines if the carrying value of goodwill is impaired. If impairment is determined, the Company will recognize additional charges to operating expenses in the period in which they are identified, which would result in a reduction of operating results and a reduction in the amount of goodwill. Other Intangible Assets - ----------------------- Other purchased intangibles consisting of trademarks and customer lists purchased as part of business acquisitions are presented net of related accumulated amortization and are being amortized on a straight-line basis over the remaining useful lives. (The Company records impairment losses on other intangible assets when events and circumstances indicate that such assets might be impaired and the estimated fair value of the asset is less than its recorded amount in accordance with SFAS No 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The Company reviews the value of its long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Conditions that would necessitate an impairment assessment include material adverse changes in operations, significant adverse differences in actual results in comparison with initial valuation forecasts prepared at the time of acquisition, a decision to abandon certain acquired products, services or marketplaces, or other significant adverse changes that would indicate the carrying amount of the recorded asset might not be recoverable. Annually, the Company performs this analysis with assistance from an independent valuation expert. The Company evaluates the recoverability of other purchased intangibles using undiscounted cash flows whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In performing these analyses, the Company uses the best information available in the circumstances including reasonable and supportable assumptions and projections. Investments in Marketable Securities - ------------------------------------ The Company accounts for marketable securities pursuant to the SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Under this Statement, the Company's marketable securities with a readily determinable fair value have been classified as available for sale and are carried at fair value with an offsetting adjustment to Stockholders' Equity. Net unrealized gains and losses on marketable securities are credited or charged to a separate component of Stockholders' Equity, net of tax. Investments in Investee - ----------------------- The Company accounts for all investments in investees under the cost method of accounting when such investment ownership is less than 20%. The Company accounts for investments in investees under the equity method of accounting when the Company owns more than 20% of the entity, but less than majority owned and not otherwise controlled by the Company. For the years ended June 30, 2005, 2004 and 2003 the Company's investments were accounted for under the cost method of accounting. Payable to Third Party Consigners - --------------------------------- Amounts payable to third party consigners represent amounts due the third party for the sale of their consigned inventory by the company. Advances Payable - ---------------- Advances payable are cash advances on inventory consigned to a third party for sale by the third party at a later date at which time the advance will be deducted from the proceeds. 38 Greg Manning Auctions, Inc. Notes to Consolidated Financial Statements ($ in Thousands Except for Per Share Amounts or as noted) Financial Instruments - --------------------- The carrying amounts of financial instruments, including cash and cash equivalents, accounts receivable and accounts payable approximated fair value as of June 30, 2005 and 2004 because of the relative short maturity of these instruments. The carrying value of loan receivable, demand notes payable to bank and loans payable approximated fair value at June 30, 2005 and 2004 based upon quoted market prices for the same or similar instruments. Stock-Based Compensation - ------------------------ The Company accounts for stock options in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," ("SFAS 123"), which allows companies an option to either record compensation expense based on the fair value of stock options granted, as determined by using an option valuation model, or to continue following the accounting guidance of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for its stock options and other stock-based employee awards. Because the Company has elected this treatment, Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS No. 123") and Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation Transition and Disclosure," ("SFAS No. 148") require disclosure of pro forma information which provides the effects on net income and net income per share as if the Company had accounted for its employee stock awards under the fair value method prescribed by SFAS 123. Under APB No. 25, compensation cost for stock options is measured as the excess, if any, of the market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. No stock-based employee compensation cost is reflected in net income , as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. In accordance with SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," the effect on net income and net income per share if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation is as follows (in thousands, except per-share information): June 30, ----------------------------------------------- 2005 2004 2003 Net income as reported $ 38,275 $ 29,366 $ 2,823 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (1,975) (2,214) (1,333) ----------- --------- --------- Pro forma net income $ 36,300 $ 27,152 $ 1,490 =========== ========= ========= Net income per share: Basic earnings per share - as reported $ 1.40 $ 1.22 $ 0.22 =========== ========= ========= Basic earnings per share - proforma $ 1.32 $ 1.13 $ 0.12 =========== ========= ========= Net income per share: Diluted earnings per share - as reported $ 1.33 $ 1.14 $ 0.22 =========== ========= ========= Diluted earnings per share - proforma $ 1.27 $ 1.05 $ 0.12 =========== ========= ========= The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2005, 2004 and 2003, respectively; risk-free interest rates of 4.2%, 4.0% and 5.1%; dividend yields of 0%; volatility factors of the expected market price of the Company's common stock of 76%, 76% and 74% for 2005, 2004 and 2003, respectively; and 39 Greg Manning Auctions, Inc. Notes to Consolidated Financial Statements ($ in Thousands Except for Per Share Amounts or as noted) weighted-average expected life of the option of five years for 2005, 2004 and 2003. There was no compensation expense recorded from employee stock options for the years ended June 30, 2005, 2004 and 2003. On January 10, 2005, the Compensation Committee of the Company's Board of Directors approved the acceleration of the unvested portion of all options to purchase shares of the Company's Common Stock awarded under the Company's Stock Incentive Plan of 1997, as amended, having an exercise price greater than the closing price at December 31, 2004 of $12.40 per share. This acceleration was effective as of December 31, 2004 and relates to 312,500 options that were granted on June 30, 2004 to executive officers and directors of the Company. The new vest date applies to the unvested one-half of the shares in the original grants. The acceleration eliminates future compensation expense the Company would otherwise recognize in its income statement with respect to these options once FASB Statement No. 123R (Share-Based Payment) becomes effective on July 1, 2005. The future expense that is eliminated is approximately $2.0 million. This amount has been reflected in pro forma footnote disclosure to the financial statements. This footnote treatment is permitted under the transition guidance provided by the FASB. The impact on the year ended June 30, 2006 will be approximately $900. The Company accounts for stock issued to non-employees in accordance with the provisions of SFAS No. 123 and the EITF Issue No. 96-18, "Accounting for Equity Instruments that are Issued to other than Employees for Acquiring, or in Conjunction with Selling Goods or Services". Advertising Costs - ----------------- Advertising and catalogue costs are included in marketing costs and are expensed as incurred, which occurs in the same quarter that the related auction takes place. As a result, assets of the Company do not include any of these costs. Such expenses for the years ended June 30, 2005, 2004 and 2003 were approximately $3,629, $3,037 and $1,166, respectively. Income Taxes - ------------ The Company recognizes deferred tax assets and liabilities based on differences between the financial reporting and tax bases of assets and liabilities using the enacted tax rates and laws that are expected to be in effect when the differences are expected to be recovered. The Company provides a valuation allowance for deferred tax assets for which it does not consider realization of such assets to be more likely than not. Earnings per share - ------------------ Basic earnings per share are computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. The dilutive effect of the outstanding options would be reflected in diluted earnings per share by application of the treasury stock method. The following table sets forth the computations of basic earnings per share and diluted earnings per share: 2005 2004 2003 ------- ------- ------- BASIC EARNINGS PER SHARE: Numerator: Earnings available to common stockholders $38,275 $29,366 $ 2,823 Denominator: Weighted average common shares outstanding 27,423 23,985 12,739 ------- ------- ------- Net earnings per share - Basic $ 1.40 $ 1.22 $ 0.22 ======= ======= ======= 40 Greg Manning Auctions, Inc. Notes to Consolidated Financial Statements ($ in Thousands Except for Per Share Amounts or as noted) DILUTED EARNINGS PER SHARE: Numerator: Earnings available to common stockholders $38,275 $29,366 $ 2,823 Denominator: Weighted average common shares outstanding 27,423 23,985 12,739 Effect of dilutive securities - stock options 1,265 1,802 77 ------- ------- ------- Weighted average common shares - assuming dilution 28,688 25,787 12,816 ------- ------- ------- Net earnings per share - Diluted $ 1.33 $ 1.14 $ 0.22 ======= ======= ======= Common share equivalents consist of employee stock options using the treasury stock method. For the years ended June 30, 2005 and 2004, 625,250 and 357,000 employee stock options, respectively, were excluded from the computation of diluted net income per share because the exercise price of these options was greater than the average market price of the Company's common stock during the period, and therefore the effect is antidilutive. Comprehensive income (loss) - --------------------------- Comprehensive income as defined includes all changes in equity (net assets) during a period from non-owner sources. Accumulated other comprehensive income, as presented on the accompanying Consolidated Balance Sheets consist of the net unrealized gains (losses) on securities, net of tax and the impact of unrealized foreign currency translation adjustments net of tax. Segment Information - ------------------- The Company operates principally in one segment consisting of various collectibles. All of the Company's sales and identifiable assets are located in the United States and Europe. For the years ended June 30, 2005 and 2004, there was one significant customer, Afinsa, which accounted for 51% and 48% of the revenue for those years respectively. There was one major customer other than Afinsa, for the year ended June 30, 2003, which accounted for 12% of the revenue for that year. Major customers are those that accounted for more than 10% of revenues. Reclassifications - ----------------- Certain reclassifications have been made to prior year's consolidated balance sheet to conform to current year's presentation. New Accounting Pronouncements - ----------------------------- In May 2005, the FASB issued SFAS No 154 "Accounting Changes and Error Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No. 3." This Statement requires retrospective application to prior periods' financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. This Statement does not change the guidance for reporting the correction of an error in previously issued financial statements or a change in accounting estimate. The provisions of this Statement shall be effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We are not able to assess at this time the future impact of this Statement on our consolidated financial position or results of operations. In December 2004, the FASB issued Statement No 153. "Exchanges of Nonmonetary Assets, an Amendment of APB Opinion No. 29" ("Statement No. 153"). Statement No. 153 is effective for nonmonetary asset exchanges occurring in our fiscal year beginning July 1, 2005. Statement No. 153 requires that exchanges of productive assets be accounted for at fair value unless fair value cannot be reasonably determined or the transaction lacks commercial substance. Statement No. 153 is not expected to have a material impact on our financial statements. 41 Greg Manning Auctions, Inc. Notes to Consolidated Financial Statements ($ in Thousands Except for Per Share Amounts or as noted) In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment," which is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS 123(R) requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. The compensation cost will be measured based on the fair value of the equity or liability instruments issued. The Statement is effective as of July 1, 2005. We do not yet know the impact that any future share-based payment transactions will have on our financial position or results of operations. In November 2004, the FASB issued SFAS No. 151, "Inventory Costs." SFAS 151 amends ARB No. 43, "Inventory Pricing," to clarify the accounting for certain costs as period expense. The Statement is effective for fiscal years beginning after June 15, 2005, however, early adoption of this Statement is permitted. The Company does not anticipate an impact from the adoption of this statement. (2) Acquisitions Auctentia, S.L. - --------------- On September 8, 2003, the Company consummated three separate transactions with Auctentia, S.L. ("Auctentia"), a wholly owned subsidiary of Afinsa Bienes Tangibles, S.A. ("Afinsa"), pursuant to agreements executed on January 23, 2003. In connection with these transactions, the Company issued an aggregate of 13 million shares of its common stock to Auctentia. The three transactions are described below. Share Purchase Agreement The Company issued to Auctentia 3,729,226 shares of its common stock in exchange for all of Auctentia's equity interests in seven of its European-based operating subsidiaries. These entities are engaged in the business of providing intermediation for high-level collectors, with auctions and sales in primarily philatelic assets. The acquisition was accounted for under the purchase method of accounting, and accordingly the consolidated financial statements include the operations of these subsidiaries from the date of acquisition, September 8, 2003. The aggregate purchase price was approximately $6,004 (3,729,226 at $1.61 per common share) plus acquisition costs of approximately $1,100. The price per share of $1.61 was based on the average market price per share from January 21, 2003 through January 27, 2003, two days before and after January 23, 2003, the date the transaction agreements were entered into. The purchase price allocation of assets purchased less liabilities assumed was $1,717 based upon management's estimate of the fair value at the date of acquisition. In accordance with SFAS 141, Business Combinations, the excess of the purchase price over the net assets acquired was assigned to goodwill. Tangible and intangible assets acquired: Auctentia, S.L - -------------- Current assets $3,164 Property and equipment, net 642 Goodwill 4,287 ------ Total tangible and intangible assets acquired 8,093 ------ Less liabilities assumed: Current liabilities 2,089 Non-Current liabilities -- ------ Total liabilities assumed 2,089 ------ Total purchase price $6,004 ====== 42 Greg Manning Auctions, Inc. Notes to Consolidated Financial Statements ($ in Thousands Except for Per Share Amounts or as noted) In addition the Company incurred acquisition costs of $1,100 which increased the goodwill total for this acquisition to $5,387. The following unaudited pro forma consolidated results of operations for the period assumes the acquisition of the subsidiaries had occurred as of July 1, 2002, giving effect to purchase accounting adjustments. The proforma data is for informational purposes only and may not necessarily reflect the results of operations had those companies been operated as part of the Company since July 1, 2002. (Unaudited) Years Ended June 30, 2004 2003 ------------------------- Net revenues $ 213,779 $ 107,636 Net income 28,913 2,491 Basic earnings per share - Proforma $ 1.17 0.15 Diluted earnings per share - Proforma $ 1.09 $ 0.15 Inventory Purchase Agreement The Company issued to Auctentia 6,444,318 shares of its common stock in exchange for Auctentia's 100% equity interest in a newly formed subsidiary, GMAI Auctentia Central de Compras, S.L. ("CdC"), whose sole assets consisted of an inventory of certain philatelic and art assets. Prior to the consummation of this transaction, CdC did not have any business operations. CdC is engaged in the sale, marketing, brokering, distribution, promotion and production of owned and third party collectibles, with an emphasis on specialized philatelic material. The value of the inventory was recorded based upon the closing trading price of the Company's common stock on the NASDAQ National Market on January 23, 2003, which is the date on which the agreement was entered into, which was $1.57; as such, the fair value of the inventory is approximately $10,118 (based upon 6,444,318 shares at $1.57 per share). Subscription Agreement Pursuant to the subscription agreement, the Company issued to Auctentia 2,826,456 shares of its common stock for a purchase price equal to the Euro equivalent of $5,000 based on the Euro/US dollar exchange rate as of the close of business on the business day immediately preceding the closing date. The proceeds received by the Company pursuant to the subscription agreement were used to purchase inventory, fund auction advances and for other working capital purposes of CdC. Prior to the consummation of these transactions, Auctentia and Afinsa collectively owned approximately 43% of the Company's common stock. As a result of the transactions, Auctentia and Afinsa increased their ownership to 72% of the Company's outstanding common stock. The percentage of outstanding common stock owned by Auctentia and Afinsa decreased to 69% as of June 30, 2004 as a result of the exercise of employee stock options during the year. The financial results of the above transactions are included in the Company's consolidated financial statements from and after September 8, 2003. In addition, Greg Manning Auctions, Inc. and CdC are parties to separate agreements with Afinsa, each dated August 1, 2003, pursuant to which GMAI and CdC have agreed to act as exclusive suppliers of collectibles for Afinsa, on a worldwide basis. See Note 1. 43 Greg Manning Auctions, Inc. Notes to Consolidated Financial Statements ($ in Thousands Except for Per Share Amounts or as noted) Nutmeg Stamp Sales, - ------------------- On February 11, 2004, GMAI acquired the business assets of Nutmeg Stamp Sales of Danbury, Connecticut, which is engaged in the sale of primarily owned inventory to mid- and upper-end collectors. The purchase price for the assets was $1,093, which was paid at closing. The business will be operated through a recently formed subsidiary, Greg Manning Nutmeg Auctions, Inc., d/b/a Nutmeg Stamp Sales, Inc. Tangible and intangible assets acquired: Current assets $ 93 Property and equipment, net 50 Intangible Assets 450 Goodwill 500 ------ Total tangible and intangible assets acquired, purchase price $1,093 ====== Bowers and Merena Galleries, Kingswood Coin Auctions and Superior Sports Auctions On February 19, 2004, Spectrum Numismatics International, Inc. ("Spectrum"), a wholly owned subsidiary of GMAI, acquired the business assets of Bowers and Merena Galleries, Kingswood Coin Auctions and Superior Sports Auctions from Collectors Universe, Inc. ("CUI"), which had previously operated such businesses through separate divisions. Bowers and Merena Auctions (as it is now known) and Kingswood Coin Auctions are engaged in the acquisition (by purchase and consignment) and sale (by auction and otherwise) of collectible coins, and Superior Sports Auctions is engaged in the acquisition (by purchase and consignment) and sale (by auction and otherwise) of collectible sports cards and other sports memorabilia. Pursuant to an Asset Purchase Agreement, dated February 19, 2004 (the "Asset Purchase Agreement"), by and between Spectrum and CUI, Spectrum acquired certain business assets, consisting primarily of trade names and other intangible assets and furniture and equipment but excluding accounts receivable and inventory, for an aggregate purchase price of $2,510. Pursuant to the Asset Purchase Agreement, $1,025 of the purchase price was paid at the closing, and the balance is to be paid in installments over the next 12 months. Payment of those installments has been guaranteed by GMAI. As of June 30, 2004 the remaining amount of the purchase price to be paid is $460. Such amount is included in accrued expenses and other current liabilities in the accompanying Consolidated Balance Sheets. As of June 30, 2005 the remaining balance is $0. Tangible and intangible assets acquired: Property and equipment, net $ 150 Intangible Assets 600 Goodwill 1,760 ------ Total tangible and intangible assets acquired, purchase price $2,510 ====== H.R. Harmer - ----------- On July 30, 2004, GMAI acquired the business assets of H.R. Harmer, LLC of New York, New York, which is engaged in the sale of primarily owned inventory to mid- and upper-end collectors. The purchase price for the assets was $351, which was paid at closing. The business will be operated through a recently formed subsidiary, H.R. Harmer, Inc. Tangible and intangible assets acquired: H.R. Harmer, Inc. - ----------------- Current assets $ - Intangible Assets 151 Goodwill 200 ------ Total tangible and intangible assets acquired, purchase price $ 351 ====== 44 Greg Manning Auctions, Inc. Notes to Consolidated Financial Statements ($ in Thousands Except for Per Share Amounts or as noted) John Bull Stamp Auctions, Ltd - ----------------------------- In March 2005, the Company acquired all of the outstanding capital stock of John Bull Stamp Auctions, Ltd., located in Hong Kong, for an aggregate purchase price of HK$1,500 (approximately U.S. $194), all of which was paid at closing. Tangible and intangible assets acquired: John Bull Stamp Auctions, Ltd - ----------------------------- Current assets $ - Intangible Assets 130 Goodwill 64 ------- Total tangible and intangible assets acquired, purchase price $ 194 ====== (3) Accounts Receivable Accounts receivable consists of auction or trade receivables and consignor advances. Auction or trade receivables represent sales made to customers for which short-term credit extensions are granted, which generally are not extended beyond 90 days. Advances to consignors represent advance payments, or loans, to the consignor prior to the auction sale, collateralized by the items received and held by the Company for the auction sale and the proceeds from such sale. Interest on such amounts is generally charged at an annual rate of 12%. Such advances generally are not outstanding for more than six months from the date of the note. As of June 30, 2005 and June 30, 2004, the allowance for doubtful accounts included in auction receivables was approximately $357 and $1,095, respectively. (4) Marketable Securities Investments available for sale in marketable securities as of June 30: Market Unrealized Cost Value Gain ------ ------- ---------- Common Stock - 2005 $ 135 $ 118 $ 17 ====== ====== ====== Common Stock - 2004 $ 285 $ 186 $ 99 ====== ====== ====== 45 Greg Manning Auctions, Inc. Notes to Consolidated Financial Statements ($ in Thousands Except for Per Share Amounts or as noted) The unrealized loss is classified as a separate component of stockholders' equity, net of tax, as of June 30, 2005 and 2004, respectively. In connection with its ownership of this common stock, the Company was granted stock options for 21,000 shares of common stock under the terms of a nonqualified stock option agreement. The options are exercisable on April 1, 2006 at $5 per share. During the year ended June 30, 2005 the Company sold 7,500 shares for approximately $146, resulting in a pretax loss of marketable securities of approximately $4. (5) Inventories Inventories as of June 30, 2005 consisted of the following: Current Non-current Total --------- ----------- -------- Stamps $ 26,686 $ 6,166 $ 32,852 Coins 13,859 - 13,859 Sports Collectibles 1,285 - 1,285 --------- -------- -------- $ 41,830 6,166 47,996 ========= ======== ======== Inventories as of June 30, 2004 consisted of the following: Current Non-current Total --------- ----------- -------- Stamps $ 28,774 $ 7,111 $ 35,885 Coins 11,555 - 11,555 Sports 484 - 484 Collectibles Other 3 225 228 --------- --------- -------- $ 40,816 $ 7,336 $ 48,152 ========= ========= ======== The above inventory amounts reflect net realizable (LCM) allowances of approximately $1,972 and $1,439 at June 30, 2005 and June 30, 2004 respectively. The non-current inventory represents an estimate of inventory for which there is a specific plan in place for their sale beyond one year after purchase. The classification as long-term is based on the expected period in which the Company expects to sell this inventory, if greater than a year from the balance sheet date. Once the selling period is identified, the non-current amounts are classified to current. Inventories are stated at the lower of cost or market. In instances where bulk purchases are made, the cost allocation is based on the relative market values of the respective goods. The Company has agreements with certain suppliers to share the net profits or losses attributable to the sale of specific items of inventory. The Company reports the sale of this inventory as revenue because the Company purchases this inventory from the supplier and ultimately sells it to the end user. During this process the Company acts as the principal in these transactions; in other words, the Company takes title to the inventory and bear all the risks relating to loss, collections, delivery and returns. The Company, and not the supplier, determines the selling price to the end user. 6) Property and Equipment June 30, June 30, 2005 2004 ------- ------- Land $ 591 - Buildings 1,153 - Equipment 5,591 5,418 Furniture and fixtures 1,397 1,310 Vehicles 126 84 46 Greg Manning Auctions, Inc. Notes to Consolidated Financial Statements ($ in Thousands Except for Per Share Amounts or as noted) Property under capital leases (computers and office equipment) 186 186 Leasehold improvements 534 534 -------- ------- 9,578 7,532 Less: accumulated depreciation and amortization 6,283 5,596 -------- ------- Net property and equipment $ 3,295 $ 1,936 ======== ======= On December 22, 2004 the Company purchased its premises located in West Caldwell, New Jersey for a purchase price of approximately $1,744. Depreciation and amortization expense for the years ended June 30, 2005, 2004, and 2003 was approximately $846, $746, and $435 respectively. (7) Intangible Assets Goodwill - -------- The changes in the carrying value of goodwill for the years ended June 30, 2004 and 2005 are as follows: Balance - July 1, 2003 $ 1,516 Purchased Goodwill - Auctentia 5,387 Purchased Goodwill - Nutmeg Stamp 500 Purchased Goodwill - Bowers & Merena 1,760 -------- Balance - June 30, 2004 $ 9,163 ======== Balance - July 1, 2004 $ 9,163 Purchased Goodwill - HR Harmer, Inc. 200 Purchased Goodwill - John Bull 64 -------- Balance - June 30, 2005 $ 9,427 ======== There were no goodwill impairment charges for the years ended June 30, 2005, 2004 and 2003. Other Purchased Intangibles At June 30, 2005 and 2004, acquired intangible assets were comprised of the following (in thousands): June 30, 2005 Estimated Useful Gross Accumulated Net Book Lives Carrying (Years) Amount Amortizatio Value - ---------------------------------------------------------------------- Trademarks 5 - 16 $ 3,630 $ (2,343) $ 1,287 Customer Lists 3 - 5 1,980 (1,330) 650 ------- --------- -------- $ 5,610 (3,673) 1,937 ======= ========= ======== 47 Greg Manning Auctions, Inc. Notes to Consolidated Financial Statements ($ in Thousands Except for Per Share Amounts or as noted) June 30, 2004 Estimated Useful Gross Lives Carrying Accumulated Net Book (Years) Amount Amortization Value - ------------------------------------------------------------------------- Trademarks 5 - 16 $ 3,500 $ (2,172) $ 1,328 Customer Lists 3 - 5 1,730 (1,160) 570 -------- -------- ------- $ 5,230 $ (3,332) $ 1,898 ======== ======== ======= All of the Company's intangible assets are subject to amortization. Amortization expense (exclusive of impairment charges) for acquired intangible assets for the year ended June 30, 2005, 2004, and 2003 were approximately $341, $169, and $122 respectively. There were no impairment charges for other purchased intangibles for the years ended June 30, 2005, 2004, and 2003. Estimated amortization expense on an annual basis for the succeeding five years is as follows (in thousands): For The Fiscal Years Ended June 30, Amount 2006 $ 373 2007 354 2008 348 2009 278 2010 91 Thereafter 493 ------- Total $ 1,937 ======= (8) Investment in Investee In March 1999, the Company, along with other investors, formed GMAI-Asia.com, Inc., a Delaware corporation ("GMAI-Asia"), with the intent to expand the Company's philatelic and collectible auction and merchant/dealer businesses into China and South-East Asia through the Internet. The Company's original investment in this investee was approximately $5,300 and the Company maintained an original equity ownership percentage (on an undiluted basis) in GMAI-Asia of 48%. During May 2001, the Company sold 500,000 shares of its GMAI-Asia common shares, which reduced the Company's investment from 48% to 45%. The Company accounted for this investment under the equity method of accounting. The Company's accumulated losses for GMAI-Asia at June 30, 2001 were approximately $11,200. The Company's portion of these accumulated losses exceeded its total investment. As a result, the investment in this investee was reduced to $0 at June 30, 2001. During 2002, the Company increased its investment by $250 by issuing additional GMAI common stock. Since the Company's portion of this entity's accumulated losses continued to exceed its total investment, this amount was recorded in the accompanying Statement of Earnings as Loss from Operations of Investee. During March 2003, the Company sold all of its interest in GMAI-Asia, which it then held, consisting of approximately 8,140,000 shares of GMAI-Asia.com, to Afinsa Bienes Tangibles, S.A. ("Afinsa"), a related party, for $2,035. Such amount is included in the accompanying consolidated Statement of Earnings as Gain on Sale of Investee-Related Party (See Note 12). 48 Greg Manning Auctions, Inc. Notes to Consolidated Financial Statements ($ in Thousands Except for Per Share Amounts or as noted) During May 2003, the Company purchased 2,707,239 shares of GMAI-Asia stock in exchange for 243,718 shares of GMAI common stock valued at approximately $500 (See Note 14). As of June 30, 2003 and 2004, the Company now owns approximately 3% of GMAI-Asia and as such accounts for this investment under the cost method of accounting. During the year ended June 30, 2004 the Company recorded an impairment charge of its investment in investee of $500 after the Company's review of this investee's financial prospects for the future. As of June 30, 2005 the Company's investment in GMAI- Asia is $0. (9) Income Taxes Deferred tax attributes resulting from differences between financial accounting amounts and tax basis of assets and liabilities at June 30, 2005 and June 30, 2004 are as follows: 2005 2004 ------- ------- Current assets and liabilities Allowance for doubtful accounts $ 89 $ 160 Inventory valuation reserve 945 522 Inventory uniform capitalization 734 352 Net federal, state operating loss carry-forwards -- 2,787 Charitable contribution carryforward 1,524 -- ------- ------- Net current deferred tax asset $ 3,292 $ 3,821 ======= ======= Non-current assets and liabilities Goodwill and intangible amortization and impairment $ 1,401 $ 1,611 Depreciation 65 100 Net state operating and capital loss carry-forwards 1,668 1,746 Charitable contribution carryforward 4,571 -- Investments in equity-method investees 204 204 Investments in marketable securities 67 40 ------- ------- 7,976 3,701 Valuation allowance, provision for income taxes (4,314) (1,742) ------- ------- Net non-current deferred tax asset $ 3,662 $ 1,959 ======= ======= During the fourth quarter of fiscal 2005, the Company made a charitable contribution of an art collection with a de minimis carrying value that had been held for investment purposes. The Company obtained a qualified appraisal of the collection, which concluded that it had a value of approximately $21 million, resulting in a charitable contribution deduction with a tax benefit of approximately $7.1 million. This charitable contribution deduction will be limited to 10% of the Company's Federal taxable income (as computed with certain adjustments) each year and will expire in the year 2010 to the extent not utilized. Because of the uncertainty of whether future Federal taxable income will be sufficient to realize the entire benefit, the Company has established a valuation allowance of approximately $2.6 million. In addition, although not required to do so, the Company has determined to seek additional verification of the value of the collection. As a result of this or other factors, the tax benefit to the Company may be adjusted. The realization of the above deferred tax assets is dependent on generating sufficient taxable income in the future to offset the deductibility of temporary differences generating the deferred tax assets. During the period ended June 30, 2005, the Company continues to believe that it is more likely than not that the results of future operations will generate sufficient taxable income to 49 Greg Manning Auctions, Inc. Notes to Consolidated Financial Statements ($ in Thousands Except for Per Share Amounts or as noted) realize certain deferred tax assets. However, the Company still believed uncertainty exists regarding the realizability of certain deferred tax assets, and accordingly established a valuation allowance, based on management's estimates, against these specific deferred tax assets. During 2002, both the State of New Jersey and California passed tax legislation, which, among other things, requires the suspension of the use of state net operating loss carry-forwards "NOL's" for two years. As a result, there was no utilization of these state NOL's in the provision for state income taxes for the year ended June 30, 2004. In order to compensate for the suspension of the state net operating losses, the period of availability has been extended by two years. During the year ended June 30, 2005, approximately $14,000 of the New Jersey NOL was utilized. The Company has remaining available net operating loss carry forwards for state tax purposes of approximately $11,000 expiring at various times beginning in the fiscal years ending 2008 through 2012 The provision for income taxes for the twelve months ended June 30, 2005 and 2004 consist of the following: 2005 2004 2003 --------- --------- -------- Current tax expense $ 17,193 $ 8,134 $ 192 Deferred tax expense (3,746) 4,292 888 Net change in valuation allowance 2,572 (9,172) (888) --------- --------- ------- $ 16,019 $ 3,254 $ 192 ========= ========= ======= The above is further comprised of the following: Current tax expense Federal $ 9,199 $ 1,245 $ - State 2,149 2,339 192 Foreign 5,845 4,550 - --------- --------- ------- $ 17,193 $ 8,134 $ 192 ========= ========= ======= Deferred tax expense - net of change in valuation allowance Federal $ (4,637) $ (4,209) $ - State 891 (671) - --------- --------- ------- $ (3,746) $ (4,880) $ - ========= ========= ======= 50 Greg Manning Auctions, Inc. Notes to Consolidated Financial Statements ($ in Thousands Except for Per Share Amounts or as noted) The effective tax rate (benefit) varied from the statutory rate as follows: 2005 2004 2003 ---- ---- ---- Statutory federal and foreign income tax rate 35 % 34 % 34 % State income taxes, net of federal benefit 4 5 4 Certain non-deductible expenses - 1 - Tax benefit included in current tax provision derived from art donation (14) - - Tax benefit included in current tax provision derived from Gain on sale of equity method investee resulting in income tax capital loss - - (30) Change in valuation allowance 5 (28) - Other - (2) (2) ------ ------ ------ 30 % 10 % 6 % ====== ====== ====== Our effective tax rate could be adversely affected by several factors, many of which are outside of our control. Our effective tax rate is directly affected by the relative proportions of revenue and income before taxes in the various domestic and international jurisdictions in which we operate. Our effective tax rate can also be influenced by the tax effects of purchase accounting for acquisitions and non-recurring charges, which may cause fluctuations between reporting periods. As a result of an increase in stock ownership of the Company by Afinsa (a related party), as discussed in Note 2, the Company was deemed to have a change of ownership for federal income tax purposes. As a result there was a limitation on the amount of federal net operating loss carry forwards that could be used in the current year to offset federal taxable income. The tax expense for the years ended June 30, 2005 and 2004 was reduced by approximately $2,000 and $4,000, respectively, as a result of utilizing the available federal net operating loss carry forwards after this limitation. Beginning in fiscal 2006, the Company will begin to remit its share of undistributed earnings of its foreign subsidiaries. There will be no material tax effect because of the available use of various tax credits. 51 Greg Manning Auctions, Inc. Notes to Consolidated Financial Statements ($ in Thousands Except for Per Share Amounts or as noted) (10) Debt Notes Payable and Capital Leases - -------------------------------- 2005 2004 ---- ---- The Company has an agreement with PNC Bank for a line of credit to exceed $12,500, as amended in August 2005. Available borrowings are based on certain limitations as set forth in the agreement, and are reduced by any outstanding letters of credit. The loan is collaterized by accounts receivable, consignor advances and inventory. Borrowings under the line bear interest at the "prime" rate; provided that the Company has the right, subject to certain conditions, to borrow at a rate equal to LIBOR plus 2.5% per annum. The credit line in place at June 30, 2004 originally was to expire on May 27, 2005 but was extended until August 31, 2005. Subsequent to June 30, 2005, the line was amended to expire on August 31, 2007 and the line of credit increased to $12,500. The agreement contains certain financial covenants; which include a limit on total debt and capital expenditures; debt to earnings before depreciation and amortization, interest, and taxes; fixed charge coverage; and minimum liquidity; as further defined in the debt agreement $ 8,000 $ 6,000 On April 17, 2003, the Company entered into a revolving credit agreement with Banco Santander Central Hispano, S.A., providing for a credit facility of up to $2,500. Borrowings under this facility bore interest at a rate of prime plus ..25% per annum. The Company's obligations under the agreement were guaranteed by Afinsa. The loan was repaid prior to the facility's expiration on April 12, 2005. - 2,500 On December 22, 2004, the Company obtained a mortgage from PNC Bank, N.A., to finance the purchase of its corporate headquarters. The mortgage provides for 59 principal payments of $7 with a final payment of $882 due on January 1, 2010. Under the financing agreements, the bank may call the mortgage loan at any time, in which case the mortgage loan will be due and payable one year and one day following the exercise of such call option. Further, if the Company terminates its line of credit with the bank, the mortgage loan will be payable one year and one day following such termination. $ 1,269 $ - The Company obtained a secured loan from a privately held capital coin fund which expires June 30, 2005. This loan is collateralized by certain inventories and bears interest at a rate of 10% per annum. - 4,000 On July 1, 2004, one of the minority shareholders of Corinphila Auktionen made a loan to that company in the aggregate amount of $1,200. This loan bears interest at the rate of 4% per annum and is repayable on demand, upon six months' notice (related party). 506 - Other 73 90 ------ ------- Total Notes Payable 9,848 12,590 Less: current portion 667 12,590 ------ ------- Notes Payable - Long-term Portion 9,181 - ====== ======= 52 Greg Manning Auctions, Inc. Notes to Consolidated Financial Statements ($ in Thousands Except for Per Share Amounts or as noted) In accordance with Statement of Financial Accounting Standards ("SFAS") No. 6 "Classification of Short Term Obligations Expected to be Refinanced," the note payable to PNC bank outstanding at June 30, 2005 has been classified in accordance with the terms of the new credit agreement. The aggregrage amount of all maturities for the years ended June 30 are as follows: 2006 $ 667 2007 88 2008 8,087 2009 84 2010 922 ------ $9,848 ====== (11) Leases The Company conducts its business in premises leased in various locations under leases that expire through the year 2009. The Company utilizes property and equipment under both operating and capital leases. Future minimum lease payments under non-cancelable leases in effect at June 30, 2005 are set forth below: Operating Capital Total ------------------------------ 2006 $ 1,116 $ 73 $ 1,189 2007 656 - 656 2008 392 - 392 2009 375 - 375 2010 252 - 252 Thereafter 2,520 - 2,520 ------- ------ ------- Total future minimum lease payments $ 5,311 $ 73 $ 5,384 ======= ====== ======= Rent expense was approximately $1,175, $1,041 and $571 for 2005, 2004 and 2003, respectively. Interest expense associated with these capital leases was approximately $3, $11 and $25 for fiscal years 2005, 2004 and 2003, respectively. (12) Related-party Transactions Afinsa and Auctentia - -------------------- At June 30, 2005 and 2004, Afinsa and Auctentia collectively beneficially owned approximately 69% and 72%, respectively, of the Company's outstanding common stock. Esteban Perez, Chairman of the Board of Directors and Chief Corporate Strategy Officer for the Company, is Chairman of the Board of Directors and Chief Executive Officer of Auctentia. Carlos de Figueiredo, the Second Vice Chairman of the Board of the Company and the sole director of CdC, is also director of Afinsa and an immediate family member of a 50% stockholder of common stock of Afinsa. Emilio Ballester, a director of the Company, is Global Strategic Investment Officer of Afinsa. Ramon Egurbide, CEO of European Operations for the Company, is Managing Director of Auctentia. On September 8, 2003, the Company consummated three transactions with Auctentia (see Note 2). In addition, in August 2003, GMAI and CdC entered into separate supply agreements with Afinsa, pursuant to which GMAI and CdC act as exclusive suppliers of collectibles for Afinsa on a worldwide basis (see Note 1) Under an agreement dated March 15, 2003, GMAI sold all of its then outstanding interest in GMAI-Asia to Afinsa for $2,035, consisting of 8,140,000 shares of GMAI-Asia.com common stock. The proceeds from the sale were used to pay off all amounts outstanding under GMAI's revolving line of credit with Afinsa. Such amount is included in the accompanying Consolidated Statement of Earnings as Gain on sale of investee (see Note 8). On April 17, 2003, the Company entered into a revolving credit agreement with Banco Santander Central Hispano, S.A. The agreement was guaranteed by Afinsa and required that Auctentia maintain ownership of at least 43% of all of authorized, issued and outstanding shares of voting stock of the Company. This revolving credit facility was repaid prior to the facility's expiration in April 2005. (See Note 10.) At June 30, 2005 and 2004, the Company had outstanding accounts receivable balances from Afinsa of approximately $8,781 and $27,674, respectively, and such amounts are included in the accompanying Consolidated Balance Sheets as Accounts Receivable-related party. During the year ended June 30, 2005 and 2004, sales to Afinsa were approximately $123,348 and 53 Greg Manning Auctions, Inc. Notes to Consolidated Financial Statements ($ in Thousands Except for Per Share Amounts or as noted) $102,215, respectively, and are included in the accompanying Consolidated Statements of Earnings as Sales of Inventory - Related Party. During the year ended June 30, 2005, the Company had certain sales and purchases with affiliates of a Afinsa, a related party. Amounts realized in these transactions of $637 are reflected as additional paid-in capital. At June 30, 2004 Afinsa had advanced $3,467 to the Company for the purchase of product relating to the supply contracts referred to above. Such amount is included in the accompanying Consolidated Balance Sheet as Advances Payable - related party. The amount was repaid in full during the year ended June 30, 2005. On October 1, 2004, GMAI Auctentia Central de Compras (CdC), a wholly-owned subsidiary of the company, entered into an agreement with Filatelia Soler, a Spanish company, to provide certain consulting and advisory services to CdC. The cost of these services is based on a per diem rate of (euro)750 (approximately $1). The estimated annual cost of the consulting agreement is $200. The services are provided primarily by an individual who is also a principal in a Spanish company, Filasyl, that provides philatelic materials to CdC. Purchases of philatelic material from Filasyl from October 1, 2004 through June 30, 2005 were $10,139, or approximately 21.3% of total philatelic purchases during this period. DooCollect, S.L., a subsidiary of Afinsa, acts as agent of CdC to sell material owned by CdC to third parties through various channels, including through the Internet. Sales through DooCollect in the twelve months ended June 30, 2005 and June 30, 2004 were $454 and $132, respectively. CdC has sold and expects to continue to sell certain art inventory through an art gallery (known as Metta Gallery) operated by Mundimer, S.L. which is a subsidiary of Afinsa. Sales through the Metta Gallery in the twelve months ended June 30, 2005 and June 30, 2004 were $169 and $283 respectively. CdC also sells art material through Finarte Casa D'aste Espana, S.A. (Finarte), a subsidiary of Afinsa, which operates as an auction house. Sales of art through Finarte in the twelve month period ended June 30, 2005 were $46. There were no sales through Finarte in fiscal 2004. During the years ended June 30, 2005 and 2004, the Company granted options to certain employees of Afinsa for services. For fiscal years ended June 30, 2005 and 2004, such amounts were recorded at fair value, which amounted to $65 and $130, repectively. Also during the year ended June 30, 2004, Afinsa granted stock that they owned in the Company to certain employees of the Company. The Company recorded the stock granted to these employees at fair value which amounted to $100 in accordance with Accounting Interpretations of APB Opinion No. 25 ("AIN-APB 25") which requires stock awards granted by a principal stockholder to employees of a Company to be recorded at fair value. The Company leases office space from Afinsa in Madrid, Spain, of approximately 2,700 square feet at an annual rental of approximately $139. The lease is for a five-year term commencing September 8, 2003. Other On June 17, 2002, the Company entered into an amendment to the employment agreement (Note 15) with Mr. Roberts, a director of the Company. In connection with the amendment, the Company made available to Mr. Roberts a non-interest bearing loan in the amount of $600. The loan is required to be repaid on an annual basis in three equal installments commencing February 18, 2006; provided that if Mr. Roberts is employed by the Company on the date that an installment is due, that installment payment will be forgiven, and that if his employment is terminated for death, disability, without cause or by Mr. Roberts with good reason (as defined), then the entire loan will be forgiven at the date of termination. If Mr. Robert's employment terminates for cause or by Mr. Roberts without good reason, then the outstanding amount of the loan will accelerate and be due and payable within 30 days of termination. An aggregate of $600 has been disbursed under the loan agreement. The current portion of $200 is included in Prepaid expenses and Other at June 30, 2005. Scott Rosenblum, a director of the Company, is a partner of the law firm Kramer, Levin, Naftalis & Frankel, LLP, which provides legal services to the Company. Anthony L. Bongiovanni, Jr., also a director of the Company, is president of Micro Strategies, Incorporated, which provides computer services to the Company. In relation to Kramer, Levin, Naftalis & Frankel, expenditures for services rendered were approximately $497, $401 and $688, respectively, of which approximately $450, $177 and $223 was charged to operations for the years ended June 2005, 2004 and 2003. In relation to Micro Strategies, expenditures for services rendered were approximately $280, $271 and $169, respectively, of which approximately $280, $180 and $166 was charged to operations for the years ended June 2005, 2004 and 2003. 54 Greg Manning Auctions, Inc. Notes to Consolidated Financial Statements ($ in Thousands Except for Per Share Amounts or as noted) On July 1, 2004, one of the former minority shareholders of Corinphila Auktionen made a loan to that company in the aggregate amount of $1,200. This loan bears interest at the rate of 4% per annum and is repayable on demand, upon six month's notice. As of June 30, 2005 the loan balance was $506 (Note 10). The Company has engaged in certain transactions with Andrew Levitt, a director of the Company's Nutmeg subsidiary. For the year ended June 30, 2005, the Company purchased $140 of inventory from Levitt, paid Levitt finders' fees of $38, and earned commissions of $320 for the sale of inventory consigned by Levitt to the Company as contemplated by the acquisition agreement. For the year ended June 30, 2004, the Company paid Levitt finders' fees of $1 and earned commissions of $17 for the sale of inventory consigned by Levitt to the Company. The Company did not purchase any inventory from Levitt during that period. (13) Commitments and Contingencies As part of the purchase of the Bowers and Merena Galleries, Kingswood Coin Auctions and Superior Sports Auctions (see Note 2), the Company is required to pay additional amounts for a period of time through 2006 if certain milestones are met. In the event, during each of the two (2) twelve (12) month periods subsequent to the acquisition date (which was February 19, 2004) that aggregate sales for these entities exceed a certain amount as further defined in the agreement, the Company will be obligated to pay a stated percentage above the aggregate sales threshold. As of June 30, 2005 and 2004 such milestones were not met and as such there was no additional payments or accruals for the potential future payments. As part of the purchase of the Ivy & Mader Philatelic Auctions, Inc. (now known as Ivy & Manning Philatelic Auctions, Inc.) ("Ivy") in 1993, the Company is required to pay additional amounts for a period of time through 2009 based on the financial performance of Ivy. These additional amounts were approximately $0, $27, and $18 for the years ended June 30, 2005, 2004 and 2003, respectively. For the years ended June 30, 2005, 2004 and 2003 the payments were charged to operating expenses. (14) Stockholders' Equity Preferred Stock - --------------- The Company's Certificate of Incorporation authorizes a total of 10 million shares of preferred stock. Common Stock - ------------ The Company's Certificate of Incorporation authorizes a total of 40 million shares of common stock. Private Placement and Other Equity Transactions - ----------------------------------------------- On May 20, 2003, the Company issued to Tail Wind 243,239 shares of stock of the Company in exchange for 2,707,718 shares of stock of GMAI-Asia.com, Inc. owned by Tail Wind. This transaction was entered into in accordance with the Purchase Agreement. The shares of stock of the Company were valued at $2.06 per share in accordance with the terms of the Purchase Agreement (see Note 8). The shares of stock of the Company issued to Tail Wind are subject to certain registration rights under the Purchase Agreement and a Registration Rights Agreement between the Company and Tail Wind, among others, dated as of January 25, 2000. On September 8, 2003, the Company consummated three transactions with Auctentia, pursuant to which the Company issued an aggregate of 13 million shares of its common stock. See Notes 2 and 12. Auctentia has the right to cause these securities to be registered under the Securities Act of 1933, as amended, subject to certain conditions. Cancellation of Treasury Stock Certificates - --------------- --------------------------- During the year ended June 30, 2005, the Company cancelled the certificates representing 368,200 shares of common stock that it had previously purchased in the open market as part of its repurchase program. Stock Option Plan - ----------------- In 1997, GMAI's, board of directors adopted and GMAI's shareholders approved the 1997 Stock Incentive Plan, as amended (the "1997 plan"). Awards under the 1997 plan may be made in the form of (1) incentive stock options, (2) non-qualified stock options, (3) stock appreciation rights, (4) restricted stock, (5) restricted stock units, (6) dividend equivalent rights and (7) other stock-based awards. Awards may be made to such directors, officers and other employees of GMAI and its subsidiaries 55 Greg Manning Auctions, Inc. Notes to Consolidated Financial Statements ($ in Thousands Except for Per Share Amounts or as noted) (including employees who are directors and prospective employees who become employees), and to such consultants to GMAI and its subsidiaries, as the stock option committee of GMAI's board of directors in its discretion selects. As a result of subsequent amendments adopted by GMAI's board of directors and approved by GMAI's shareholders, the aggregate number authorized to be issued under the plan is currently 5,000,000 in the aggregate. The 1997 Plan allows the Company to grant to an individual in any given year options representing an aggregate of 500,000 shares of common stock. The option exercise price is determined by the stock option committee in its sole discretion; provided, however, that generally, the exercise price of an option shall be not be less than the fair market value (as defined) of a share of common stock on the date of grant. Options granted have a maximum ten-year term and, unless otherwise determined by the stock option committee, vest in substantially equal installments over a four-year period. All options granted through June 30, 2005 have been granted with exercise price equal to market value on the date of grant. The following table summarizes information about options outstanding and exercisable as of June 30, 2003, 2004 and 2005: 2003 2004 2005 ------------------------------ ------------------------- -------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ------------------------------ ------------------------- -------------------------- Outstanding- beginning 2,509,750 $ 6.92 2,705,500 $ 2.06 2,445,565 $ 6.19 Granted through stock option plan 1,901,875 1.95 1,122,500 7.58 15,250 11.51 Exercised (102,500) 1.38 (1,298,623) 2.19 (329,325) 2.07 Forfeited (1,603,625) 6.83 (83,812) 3.08 (318,875) 15.30 ----------- ---------- ----------- Outstanding- end of year 2,705,500 $ 2.06 2,445,565 $ 6.19 1,812,615 $ 5.46 =========== ========== =========== Exercisable- end of year 1,179,563 $ 2.14 1,201,440 $ 7.57 1,432,615 $ 5.51 =========== ========== =========== The weighted average fair value of options granted during 2003, 2004 and 2005 was $1.95, $7.58, and $11.51 respectively. Following is a summary of the status of stock options outstanding at June 30, 2005: - --------------------------------------------------------------- ----------------------- Options Outstanding Options Exercisable - --------------------------------------------------------------- ----------------------- Weighted Exercise Price Average Weighted Weighted Ranges Number of Remaining Average Number of Average - ------------------------- Shares Contractual Exercise Shares Exercise From To Outstanding Life Price Exercisable Price - --------------------------------------------------------------- ----------------------- $ 1.00 $ 5.00 1,309,950 6.6 $ 2.75 1,050,950 $ 2.70 5.01 10.00 109,915 6.6 8.19 48,540 7.62 10.01 25.00 394,000 5.6 13.7 333,125 14.08 --------- --------- 1,813,865 1,432,615 ========= ========= 56 Greg Manning Auctions, Inc. Notes to Consolidated Financial Statements ($ in Thousands Except for Per Share Amounts or as noted) Stock Option Exchange Offer - --------------------------- On July 2, 2002, the Company commenced a tender offer to certain eligible employees to exchange outstanding options to purchase shares of the Company's common stock granted under the GMAI 1997 Stock Incentive Plan that had an exercise price of $2.00 or more, for new options to purchase shares of the Company's common stock to be granted under the 1997 Plan on or about February 4, 2003. The offer expired on July 30, 2002. Pursuant to the terms and conditions of the offer, the Company accepted for exchange on July 31, 2002 tendered old options exercisable for a total of 1,380,375 shares of common stock and canceled all such old options. Subject to the terms and conditions of the offer, the Company granted new options to purchase a total of 1,380,375 shares of common stock on February 4, 2003. The exercise price of the new options was $2.00, which was the closing price of the Company's common stock as reported on the NASDAQ National Market on the date of grant. There was no effect on the consolidated financial statements of the Company as a result of this exchange offer. Certain Anti-Takeover Provisions - -------------------------------- The Company's 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 Company's 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. (15) Significant Agreements Employment Agreements - --------------------- The Company is a party to an employment agreement with Mr. Greg Manning, as amended, which provides for his services as President and Chief Executive Officer. Under the most recent amendment, which is effective July 1, 2002 and terminated on June 30, 2005, Mr. Manning is entitled to receive an annual salary of $400 beginning July 1, 2002, $450 beginning July 1, 2003 and $500 beginning July 1, 2004, plus an annual cash bonus equal to 10% of the Company's pre-tax income (as defined in the agreement), but not to exceed $750. Mr. Manning is continuing to receive the salary and benefits provided for under the agreement. On February 4, 2003, Mr. Manning was granted an additional 225,000 stock options, exercisable at $2.00 per share and vesting 50% on the date of grant and 25% on each of the first and second anniversaries of the date of grant. The Company has entered into an employment agreement with Mr. Larry Crawford to serve as Chief Financial Officer, effective April 23, 2001. The agreement provides for a salary of $150 per annum, plus a quarterly bonus of $12 in the event the Company's pre-tax income (as defined) equals or exceeds $50. In October 2002, the Company entered into an amendment to the employment agreement with Mr. Crawford, which extended the term through June 30, 2006. Mr. Crawford's base salary will increase to $160 on May 1, 2003; to $175 on May 1, 2004; and to $190 on May 1, 2005. Mr. Crawford was also granted an additional 75,000 stock options on October 23, 2002 at an exercise price of $1.35 per share, the fair market value on the date of grant. These options vest 33 1/3 % on the date of grant and 33 1/3% on each of the first and second anniversaries of the date of grant. Mr. Greg Roberts has entered into an employment agreement providing for his services as President of Spectrum, which was to terminate on February 18, 2005. The agreement provides for a salary of $300 per annum, increasing to $400 per annum effective February 18, 2004. In June 2002, the Company entered into an amendment to the employment agreement with Mr. Roberts. Under the terms of the amendment, the employment term has been extended for an additional three years, to February 18, 2008; Mr. Roberts is entitled to receive a salary of $500 for the sixth year, $550 for the seventh year, and $600 for the eighth year; and Mr. Roberts was granted an additional 500,000 stock options, which were exercisable at $2.00 per share and vested over four years. Mr. Roberts also received a loan in the amount of $600 the repayment of which can be forgiven under certain circumstances (Note 12). (16) Geographic Information Geographic net sales based on customer location were as follows: 57 Greg Manning Auctions, Inc. Notes to Consolidated Financial Statements ($ in Thousands Except for Per Share Amounts or as noted) June 30, 2005 2004 2003 --------- ---------- -------- United States $ 105,539 $ 96,868 $ 93,537 Spain 123,625 110,630 7,654 Asia Pacific 704 1,552 -- Europe 10,446 3,840 -- --------- --------- -------- $ 240,314 $ 212,890 $101,191 ========= ========= ======== Net property, plant and equipment by geographic area was as follows: June 30, 2005 2004 --------- -------- United States $ 2,369 $ 861 Spain 894 950 Other Europe 32 125 --- ----- -------- $ 3,295 $ 1,936 ========= ======== (17) Retirement 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 $500 per employee. The Company's total contribution was approximately $22, $10 and $12 for the years ended June 30, 2005, 2004 and 2003, respectively. (18) Supplementary Cash Flow Information Following is a summary of supplementary cash flow information: Years Ended June 30, (In Thousands) 2005 2004 2003 ------- ----- ------ Interest paid $ 1,258 $ 937 $ 855 Income taxes paid 16,414 399 - Summary of significant non-cash transactions: - Common stock issued for inventory - 10,118 - Common stock issued for acquisition of Auctentia subsidiaries - 6,004 - Sale of investee to a related party and reduction of demand notes payable - - 2,035 Common stock issued in connection with investment in investee - - 500 58 Greg Manning Auctions, Inc. Notes to Consolidated Financial Statements ($ in Thousands Except for Per Share Amounts or as noted) (19) Selected Quarterly Financial Data (unaudited) 2005 ------------------------------------------------------------------------- 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter Total ------------------------------------------------------------------------- Revenues $ 48,090 $ 58,940 $ 55,712 $ 77,572 $240,314 Gross Profit 17,162 19,441 21,676 31,690 89,969 Income from operations 9,113 12,652 13,387 19,705 54,857 Net Income 5,134 7,655 8,188 17,298 38,275 Earnings per share, basic 0.19 0.28 0.30 0.63 1.40 Earnings per share, diluted 0.18 0.27 0.29 0.60 1.33 2004 ------------------------------------------------------------------------- 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter Total ------------------------------------------------------------------------- Revenues $ 34,487 $ 53,215 $ 64,505 $ 60,683 $212,890 Gross Profit 7,462 13,392 17,001 23,636 61,491 Income (Loss) from operations 3,041 7,187 8,947 14,632 33,807 Net Income (Loss) 2,458 4,058 6,519 16,331 29,366 Earnings (Loss) per share, basic 0.15 0.15 0.25 0.60 1.22 Earnings (Loss) per share, diluted 0.14 0.14 0.23 0.57 1.14 (20) Other Major Customers (Excluding Afinsa) The Company had no other major customers for the year ended June 30, 2005 and 2004, respectively. There was one major customer other than Afinsa for the year ended June 30, 2003, which accounted for 12% of revenue. Major customers (other than Afinsa) are those that accounted for more than 10% of sales. (21) Subsequent Event On July 15, 2005, the Company and its majority shareholder Afinsa acquired all of the issued and outstanding capital stock of A-Mark Precious Metals, Inc. ("APM"), an indirect subsidiary of A-Mark Financial Corporation. The buyer was Spectrum PMI, Inc., a newly formed acquisition entity owned 80% by Spectrum Numismatics International, Inc., a wholly-owned subsidiary of GMAI, and 20% by Auctentia, a wholly-owned subsidiary of Afinsa. APM is a full service metals trading company engaged The financial results of the above transaction will be included in the Company's consolidated financial statements from and after July 15, 2005. Effective July 31, 2005, the Company, which had owned 65% of the equity interest in Corinphila Auktionen AG, purchased the remaining 35% equity interest in that company, or 4,970 shares, with the result that the Company now owns 100% of the outstanding share capital of Corinphila. The exercise price was 1.600.000 CHF (approximately U.S.$1,270,000), of which 1.000.000 CHF was paid on July 30, 2005 and 600.000 CHF will be paid by September 31, 2005. The sellers of the equity interest, Mr. Beat Vollenwieder and Mr. Martin Mader, are officers of Corinphila. The option to purchase this 35% interest, and the terms of such purchase, were set forth in a Share Purchase Agreement, dated September 19, 2002, between the sellers and Auctentia. Under the terms of the Share Purchase Agreement, Auctentia was able to designate the Company as the entity to exercise the option. 59 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. ITEM 9A. CONTROLS AND PROCEDURES Disclosure Controls and Procedures As of June 30, 2005, the Company has carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures. Disclosure Controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 (Exchange Act), such as this Report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's (SEC) rules and forms. Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officers have concluded that the Company's disclosure controls and procedures (as defined in Exchange Act Rule 13a-15 (e)) were effective as of June 30, 2005. Management's Report on Internal Control over Financial Reporting The Company management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principle financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control - Integrated Framework, our management concluded that our internal control over financial reporting was effective as of June 30, 2005. The Company's independent registered public accounting firm Amper, Politziner & Mattia, P.C., has audited the effectiveness of the Company's internal control over financial reporting and management's assessment of the effectiveness of the Company's internal control over financial reporting as of June 30, 2005 and concluded that it is effective. Changes in Internal Control over Financial Reporting There was no change in the Company's internal control over financial reporting that occurred during the quarter ended June 30, 2005 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 60 Report of Independent Registered Public Accounting Firm We have audited management's assessment, included in the accompanying Management's 2005 Annual Report on Internal Controls, that Greg Manning Auctions, Inc. and Subsidiaries (the Company) maintained effective internal control over financial reporting as of June 30, 2005, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment, and an opinion on the effectiveness of the company's internal control over financial reporting based on our audit. We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that the Company maintained effective internal control over financial reporting as of June 30, 2005, is fairly stated, in all material respects, based on control criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2005, based on the criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Greg Manning Auctions, Inc. and Subsidiaries as of June 30, 2005 and the related consolidated statements of earnings, stockholders' equity and comprehensive income (loss) and cash flows for the year ended June 30, 2005 in our report dated September 8, 2005, in which we expressed an unqualified opinion. /s/ Amper, Politziner, & Mattia, P.C. September 8, 2005 Edison, New Jersey 61 PART III -------- Item 9B. OTHER INFORMATION Not applicable. Item 10. DIRECTORS AND EXECUTIVE OFFICERS The information regarding our directors and executive officers will be in the definitive proxy statement of the Company to be filed within 120 days of June 30, 2005 (the "Proxy Statement") and is incorporated herein by reference. The information required by Item 405 of Regulation S-K will be included under "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement and is incorporated herein by reference. The information required by Item 406 of Regulation S-K will be included under "Code of Business Conduct and Ethics" in the Proxy Statement and is incorporated herein by reference. Item 11. EXECUTIVE COMPENSATION Information regarding Executive Compensation will be in the Proxy Statement and is incorporated herein by reference. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information regarding Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters will be in the Proxy Statement and is incorporated herein by reference. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding Certain Relationships and Transactions will be in the Proxy Statement and is incorporated herein by reference. Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information regarding Principal Accountant Fees and Services will be in the Proxy Statement and is incorporated herein by reference. 62 PART IV ------- Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) All Financial Statements of the Company for the years ended June 30, 2005 and 2004 are filed herewith. See Item 8 of this Report for a list of such financial statements. (2) Financial Statement Schedules: Schedule: II - Valuation and Qualifying Accounts All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. (3) Exhibits -- See response to paragraph (c) below. (b) Reports on Form 8-K (1) Report on Form 8-K filed on September 13, 2004, relating to the issuance of a press release containing non-public financial information and containing non-GAAP financial measures. (2) Report on Form 8-K filed on November 9, 2004, relating to the issuance of a press release containing non-public financial information and containing non-GAAP financial measures. (3) Report on Form 8-K filed on January 20, 2005, relating to the acceleration of the vesting of certain of the Company's stock options. (4) Report on Form 8-K filed on February 3, 2005, relating to the Company's issuance of a press release announcing the execution of a definitive agreement to acquire John Bull Stamp Auctions, Ltd. (5) Report on Form 8-K filed on May 27, 2005, relating to the extension by PNC Bank, National Association, of the Company's credit facility to August 31, 2005. (c) Exhibits 3.1 Restated Certificate of Incorporation of Registrant, as amended. Incorporated by reference to Exhibit 3(a) to the Company's Report on Form 8-K filed February 27, 2001. 3.2 Amendment to Certificate of Incorporation of Registrant, filed with the Delaware Secretary of State on April 25, 2002. * 3.3 By-laws, as amended, of Registrant. Incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended June 30, 2003, as filed with the SEC on September 12, 2003. 10.1 Employment Agreement between Greg Manning and Registrant dated as of May 14, 1993. Incorporated by reference to Exhibit 10(b) to the Form SB-2 and incorporated by reference to Exhibit 4.1 to Form 10-QSB of the Company for the period ended December 31,1995, dated February 13, 1996, as amended. 10.2 Second Amendment to Employment Agreement between Greg Manning and Registrant, dated as of September 11, 1997. Incorporated by reference to Exhibit 10.3 to Form 10-KSB of the Company for the period ended June 30, 1997. 10.3 Third Amendment to Employment Agreement between Greg Manning and Company, effective as of July 1, 1999. Incorporated by reference to Exhibit 10.4 to Form 10-K of the Company for the period ended June 30, 2001. 10.4 Fourth Amendment to Employment Agreement between Greg Manning and Company, effective as of July 1, 2000. Incorporated by reference to Exhibit 10.5 to Form 10-K of the Company for the period ended June 30, 2001. 10.5 Fifth Amendment to Employment Agreement between Greg Manning and Company, effective as of July 1, 2002. Incorporated by reference to Exhibit 10. 6 to the Company's Annual Report on Form 10-K for the year ended June 30, 2003, as filed with the SEC on September 12, 2003. 63 10.6 Employment Agreement between the Company, Spectrum Numismatics International, Inc. and Gregory N. Roberts. Incorporated by reference to the Company's Proxy Statement dated January 14, 2000. 10.7 Amendment to Employment Agreement between the Company, Spectrum Numismatics International, Inc. and Gregory N. Roberts. 10.8 Employment Agreement between the Company and Larry Crawford, effective as of April 23, 2001. Incorporated by reference to Exhibit 10. 9 to the Company's Annual Report on Form 10-K for the year ended June 30, 2003, as filed with the SEC on September 12, 2003. 10.9 Amendment to Employment Agreement between the Company and Larry Crawford, effective as of October 23, 2002. Incorporated by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year ended June 30, 2003, as filed with the SEC on September 12, 2003. 10.10 1997 Stock Option Plan, as amended. Incorporated by reference to Exhibit A to the Proxy Statement of the Company dated October 28, 1997, to the Proxy Statement of the Company dated January 14, 2000; to the Proxy Statement of the Company dated October 26, 2001; and to the Proxy Statement of the Company dated August 15, 2003. 10.11 1993 Stock Option Plan. Incorporated by reference to Exhibit 10(a) to the 1993 Form SB-2 and incorporated by reference to Exhibit A to the Proxy Statement of the Company dated January 31, 1994. 10.12 Share Purchase Agreement, dated as of January 23, 2003, between the Company and Auctentia, S.L. Incorporated by reference to Appendix A to Company's Definitive Proxy Statement filed with the SEC on August 13, 2003. 10.13 Inventory Purchase Agreement, dated as of January 23, 2003, between the Company and Auctentia, S.L. Incorporated by reference to Appendix B to Company's Definitive Proxy Statement filed with the SEC on August 13, 2003. 10.14 Subscription Agreement, dated as of January 23, 2003, between the Company and Auctentia, S.L. Incorporated by reference to Appendix C to Company's Definitive Proxy Statement filed with the SEC on August 13, 2003. 10.15 Registration Rights Agreement, dated as of September 8, 2003, between the Company and Auctentia, S.L. Incorporated by reference to Appendix E to the Company's Definitive Proxy Statement filed with the SEC on August 13, 2003. 10.16 Asset Purchase Agreement dated February 19, 2004, between Spectrum Numismatics International, Inc and Collectors' Universe, Inc. Incorporated by reference to the Company's Report on Form 8-K filed on March 5, 2004. 10.17 Non-Competition Agreement dated February 19, 2004, between Spectrum Numismatics International, Inc. and Collectors' Universe, Inc. Incorporated by reference to the Company's Report on Form 8-K filed on March 5, 2004. 10.18 Loan Agreement, dated as of May 28, 2004 between Greg Manning Auctions, Inc. as the Borrower, and PNC Bank, National Association, as the Bank. Incorporated by reference to the Company's Report on Form 8-K filed on June 3, 2004. 10.19 Restated Second Amendment to Loan Agreement, dated as of August 10, 2005 by and among Greg Manning Auctions, Inc., Greg Manning Auctions Real Estate, LLC and PNC Bank, National Association. Incorporated by reference to the Company's Report on Form 8-K filed on August 17, 2005. 10.20 Employment Agreement, dated May 17, 2005 and effective February 1, 2005, between Esteban Perez and GMAI-Auctentia Central de Compras, S.L.. * 10.21 Employment Agreement, dated May 17, 2005 and effective February 1,2005, between Ramon Egurbide and GMAI-Auctentia Central de Compras, S.L.* 64 10.22 Stock Purchase Agreement, dated as of July 15, 2005, by and between Spectrum PMI, Inc., on the one hand, and A-Mark Holding, Inc. and Steven C. Markoff, on the other hand. Incorporated by reference to the Company's report on Form 8-K filed on July 21, 2005. 10.23 Noncompetition Agreement, dated July 15, 2005, among Spectrum PMI, Inc., A-Mark Precious Metals, Inc. and Steven C. Markoff. Incorporated by reference to the Company's Report on Form 8-K filed on July 21, 2005. 14. Code of Ethics. Incorporated by reference to Exhibit 14 to the Company's Annual Report on Form 10-K for the year ended June 30, 2003, as filed with the SEC on September 12, 2003. 21. Subsidiaries of the Registrant* 23.1 Consent of Independent Accountants. * 31 Rule 13a-14(a)/15d-14(a) Certifications * 32 Section 1350 Certifications * * Filed herewith 65 SIGNATURES Dated: September 15, 2005 /s/ Greg Manning --------------------------------- Greg Manning Chairman of the Board Chief Executive Officer & Director In accordance with 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 below. Dated: September 15, 2005 /s/ Greg Manning ---------------------------------- Greg Manning Chief Executive Officer and Director (Principal Executive Officer) /s/ Larry Crawford ---------------------------------- Larry Crawford Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) /s/ Esteban Perez ---------------------------------- Esteban Perez Director /s/ Carlos de Figueiredo ---------------------------------- Carlos de Figueiredo Director /s/ Emilio Ballester ---------------------------------- Emilio Ballester Director /s/ Jose Miguel Herrero ---------------------------------- Jose Miguel Herrero Director /s/ Anthony Bongiovanni ---------------------------------- Anthony Bongiovanni Director /s/ James Davin ---------------------------------- James Davin Director /s/ Scott S. Rosenblum ---------------------------------- Scott S. Rosenblum Director /s/ Greg Roberts ---------------------------------- Greg Roberts Director /s/ Mark Segall ---------------------------------- Mark Segall Director