Escala Group and Its North American Philatelic Division Report Strong 'Stamp Auction Week' Sales

Business Wire, Oct 11, 2006

In addition, the Company faces substantial uncertainty as a result of recent events surrounding Afinsa. In particular, readers should note the following: (1) Since May 9, 2006, Afinsa and certain of its executives have been the subject of a criminal investigation in Spain. The Company has not been informed by the Spanish authorities as to whether the Company or any of its subsidiaries, including CdC, or any of their respective executives, is a target of the investigation in Spain or will be the subject of any criminal charges in the future.

The Company is aware that the Spanish authorities are seeking to obtain information from the SEC that it has regarding the Company (as a result of the SEC's formal investigation of the Company or otherwise), including copies of certain specified documents (primarily relating to the Company's transactions with Afinsa) that we have previously provided to the SEC in response to various document requests. (2) In addition to the Audit Committee's internal review, on or about June 5, 2006, the Company received notification of a formal order of investigation from the SEC. Although the order is not confined to a particular subject matter, the Company believes that the matters being investigated relate primarily to the Company's transactions with Afinsa. Both the Audit Committee and SEC inquiries are continuing, and the outcome of either cannot be determined at this time. (3) Afinsa is currently involved in insolvency proceedings before a commercial court in Madrid. The court has appointed three trustees to oversee the operations of Afinsa. The Company believes, based on its understanding of Spanish insolvency law, that there are two possible outcomes of Afinsa's bankruptcy: (a) a settlement with the creditors is reached, which assumes Afinsa can resume operations under a reorganization plan, or (b) all of Afinsa's assets are liquidated in order to pay off its debts. The effect of Afinsa's bankruptcy proceedings on the Company, approximately 67% of whose stock is owned collectively by Afinsa and its wholly owned subsidiary, Auctentia, S.L., cannot be determined at this time. (4) As a result of the events of May 9, 2006, Escala and certain of its officers and directors have been named in eight putative class action lawsuits (now consolidated) and two shareholder derivative actions (now consolidated). We do not know what the outcome of these proceedings will be, and if we do not prevail in the class actions, we may be required to pay substantial damages or settlement amounts. Further, regardless of the outcome, we may incur significant defense costs. If we are ultimately required to pay significant defense costs, damages or settlement amounts, such payments could materially and adversely affect our liquidity and results of operations. (5) The Company has incurred significant expenses in connection with the SEC and Audit Committee investigations and the class actions and derivative lawsuits and is expected to continue to incur significant additional expenses to the extent these matters are not settled and otherwise resolved. The Company also expects to incur legal fees in connection with matters relating to Afinsa, including making a claim in Afinsa's bankruptcy proceedings. Responding to these inquiries and proceedings has in the past diverted, and is likely to continue to diver, the time and attention of our management from regular business operations. (6) The Company faces substantial business and financial risks and uncertainties as a result of the loss of Afinsa as its major customer. (7) As a result of the failure to file, the Company is not in compliance with the continued listing requirements of the Nasdaq Stock Market and has received a delisting determination letter from Nasdaq. If the Company does not make all required filings prior to a negative determination from a Nasdaq Hearing Panel, or prior to the expiration of any conditional listing exception the Company is able to obtain from a Nasdaq Hearing Panel, the Company's securities will be delisted from the Nasdaq Stock Market. Delisting, or potential delisting, of the Company's securities may have a material adverse effect on the liquidity and/or trading price of the Company's common stock and the Company's ability to access capital markets.