Escala to Restate Financial Statements, Discloses Results of Internal Investigation

Business Wire, Dec 19, 2006

NEW YORK -- Escala Group (Nasdaq: ESCL) announced today that the Company will restate its previously reported financial statements for its fiscal years ended June 30, 2003; June 30, 2004; June 30, 2005; and for the first three quarters of the fiscal year ended June 30, 2006.

The Company previously reported that its Board of Directors had directed the Audit Committee to review the transactions between the Company and the Company's majority shareholder, Afinsa Bienes Tangibles, S.A. ("Afinsa").

The Audit Committee's investigation is complete, and based on the findings of that investigation and after consultation with the acting Chief Executive Officer, the Company's Board of Directors and Audit Committee have determined to restate the Company's financial statements. The Company is considering the precise extent of the restatement, but expects that the restatement will relate primarily to the reporting of certain of the transactions between the Company and Afinsa, the totality of which had been reported in its financial statements as "related-party sales" and which are now part of the Company's discontinued operations, as described below. Specifically, certain archival sales for which the cash consideration received from Afinsa was recognized entirely as revenue from a related party should have been recorded as a combination of revenue from a related party and additional paid-in capital. Archival sales refer to cash sales to Afinsa of large and unique collections of archival material for which, in most cases, there was no substantial sales history. These sales represented a significant portion of the Company's previously reported revenues for the years ended June 30, 2006, 2005 and 2004. The Company currently estimates that such archival sales comprised approximately $73 million of the $417 million in total sales to Afinsa over the time period in question, but such sales accounted for a larger percentage contribution to the gross profits recorded during the period.

As previously disclosed, the Company has ceased its global stamp and supply operations with designated sales to Afinsa. The Company has identified its separable and material business operations that were affected (and subsequently shut down as a result), and has classified them as discontinued operations in accordance with Statement of Financial Accounting Standard No. 144. As a result of this reclassification of the Company's global supply operations as discontinued operations, any restatement is not expected to materially affect the results from continuing operations. Rather, the Company believes that any such restatement will be largely contained within discontinued operations and would be evidenced by decreased revenues from discontinued operations, decreased net income and decreased retained earnings, the latter of which would be offset by an identical increase in additional paid-in capital, with the net result being no overall change to the Company's total stockholders' equity and cash position, when viewed cumulatively over the time period in question.

Although it is possible that other aspects of the Company's previously reported financial statements will be restated, the Company is not currently aware of any other issues that would necessitate restatement. The Company has discussed the matters described above with its independent outside auditors, Amper, Politziner & Mattia, P.C., and is filing a Form 8-K with the SEC in connection with its restatement decision. This 8-K will address, among other things, the impact of the restatement on the Company's assessments of the effectiveness of its internal control over financial reporting as of the applicable periods.

Results of Audit Committee Investigation

On December 15, 2006, the Audit Committee presented to the Company's Board of Directors the results of its investigation into the Company's transactions with Afinsa.

During the course of its investigation, the Audit Committee retained the independent law firm of Kirkland & Ellis LLP, which in turn engaged independent accounting consultants, to investigate and report to the Audit Committee. With its advisors, the Committee examined the business transactions that the Company had entered into with Afinsa between June 2003 (the time of the first significant sale to Afinsa) and May 2006 (when Spanish authorities closed Afinsa's operations), including various major sales of inventory to Afinsa.

The Audit Committee's conclusions presented to the Board included the following:

-- Based on the evidence available to it, the Committee found no evidence that the Company had attempted either to defraud Afinsa or to collude with Afinsa in attempting to defraud Afinsa's customers or the Company's investors.

-- Based on the evidence available to it, the Committee concluded that the transactions between the Company and Afinsa were valid; in other words, the Company delivered to Afinsa authentic philatelic materials and Afinsa made payment to the Company in accordance with the terms of the documents that described the transactions.