UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
| (Mark One) | |
ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the fiscal year ended June 30, 2003 | |
| OR | |
| q | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] |
| For the transition period from _______ to _____ | |
| Commission file number 0-27887 | |
 COLLECTORS UNIVERSE, INC. (Exact name of Registrant as specified in its charter) | |
| Delaware | 33-0846191 |
| (State or other jurisdiction of | (I.R.S. Employer Identification No.) |
| Incorporation or organization) | |
| 1921 E. Alton Avenue, Santa Ana, California | 92705 |
| (Address of principal executive offices) | (Zip Code) |
(949) 567-1375
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.001 per share
Indicate, by check mark, whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate, by check mark, if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not 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 ]
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Securities Exchange Act
Rule 12b-2). Yes [ ] NO [X]
Rule 12b-2). Yes [ ] NO [X]
As of December 31, 2002, the aggregate market value of the Common Stock held by non-affiliates was approximately $14,171,000.
As of September 23, 2003, a total of 6,186,907 shares of Registrant's Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Except as otherwise stated therein, Items 10, 11, 12 and 13 in Part III of the Form 10-K are incorporated by reference from Registrant's Definitive Proxy Statement, for its Annual Meeting which is expected to be filed with the Securities and Exchange Commission on or before October 28, 2003, for its Annual Meeting of Stockholders to be held on December 4, 2003.
EXPLANATORY NOTE
This Amendment to the Annual Report on Form 10-K for Collectors Universe, Inc. for its fiscal year ended June 30, 2003 (the "Report") supplements the Report by revising certain figures contained in the table under the heading "Quarterly Results of Operations and Seasonality" in Item 7 and also attaches Exhibits 31.1 and 31.2.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the "Selected Consolidated Financial Data" and the Company’s consolidated financial statements and related notes included elsewhere herein.
Critical Accounting Policies and Estimates
General. In accordance with accounting principles generally accepted in the United States of America ("GAAP"), we record our assets at the lower of cost or fair value. In determining the fair value of some of our assets, principally accounts receivable, inventories, deferred income taxes, and goodwill, we must make judgments, estimates and assumptions regarding future events and circumstances that could effect the value of those assets, such as future economic conditions that will affect our ability to collect our accounts receivable or sell our inventories in future periods. Those judgments, estimates and assumptions are based on current information available to us at the time they are made. Many of those events and circumstances, however, are outside of our control and if changes in those circumstances or unanticipated events occur thereafter, GAAP may require us to adjust our earlier estimates that are affected by those changes. Any downward adjustments are commonly referred to as "write-downs" of the assets involved.
It is our practice in certain cases to establish reserves or allowances to record any downward adjustments or "write-downs" in the carrying value of assets such as these. Examples include reserves or allowances established for uncollectible accounts receivable (sometimes referred to as "bad debt reserves") and reserves for slow moving inventory. Write-downs are charged against these reserves or allowances and those reserves are replenished following such write downs, or increased to take account of changed conditions or events, by charges to income or increases in expense in our statement of operations in the periods when those reserves or allowances are replenished or increased. With respect to other assets, such as goodwill, we write down their carrying value directly in the event of an impa irment as a charge to income. As a result, our judgments, estimates and assumptions about future events can and will affect not only the amounts at which we record these assets on our balance sheet, but also our results of operations.
The decisions of when adjustments or write downs of this nature should be made also require subjective judgments involving an assessment or prediction abut the effects and duration of events or changes in circumstances. For example, it is not easy to predict whether events, such as occurred on September 11, 2001 or increases in interest rates or economic slowdowns, will have short or longer term consequences for a particular business and it is not uncommon for it to take some time, after the occurrence of an event or the onset of changes in economic circumstances, for the full effects of such events or changes to be recognized. Under GAAP, most businesses also must make estimates or judgments regarding the periods during which, and also regarding the amounts at which, sales are recorded. Those estimates and judgments will depend on such factors as the circumstances under which customers may be entitled to return the products or reject or adjust the payment for the services provided to them. Additionally, in the case of a company that grants its customers contractual rights to return products sold to them, GAAP generally will require that the company establish a reserve or allowance for product returns by means of a reduction in the amount at which its sales are recorded, based primarily on the nature, extensiveness and duration of those rights and its historical product return experience.
In making our estimates and assumptions we follow GAAP and accounting practices applicable to our business that we believe will enable us to make fair and consistent estimates of the fair value of those assets and establish adequate reserves or allowances. Set forth below is a summary of the accounting policies that we believe are material to an understanding of our financial condition and results of operations that are discussed below.
Revenue Recognition Policies.
Grading and Authentication Services. Our grading customers generally prepay our grading and authentication fees when they submit their collectible coins and trading cards to us for grading and authentication. We record those prepayments as deferred revenue. Upon grading of the collectible and its shipment back to the customer, we record the revenue from the grading and authentication services rendered and deduct this amount from deferred revenue. For certain dealers to whom we extend open account privileges, we record revenue at the time of shipment.
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Auction Sales of Collectibles. At our auctions we sell collectibles that we own and collectibles that are consigned to us by dealers and collectors. In the case of auction sales of the collectibles that we own, we record revenues at the successful bidder amount, or "hammer," as revenues from merchandise sold and a buyer’s fee charged to the winning bidder as commissions earned. We also record the cost of the merchandise sold as cost of revenues. In the case of consigned collectibles, we record, as commissions earned, the amounts of a buyer’s fee charged to the winning bidder and a seller’s fee that is charged to the consignor. Depending upon the type of co llectibles auction, the buyer’s fee ranges from 10% to 15% and the seller’s or "consignor’s" fee ranges from 5% to 15%. On some large or important consignments, we may negotiate a reduced consignor commission or even pay a fee to the consignor. In each case, we record our auction sales revenues at the time the collectible that has been sold at auction is either shipped or delivered in-person to the successful bidder. Shipment or delivery generally takes place after payment is received from the successful bidder, which can be as long as 60 days after completion of the auction. As a result, revenues from sales made at auctions conducted in the second half of a fiscal quarter usually will not be recorded until the subsequent quarter. However, for certain repeat bidders we ship or deliver in-person the collectibles at the close of an auction and allow them to pay up to 60 days following the auction. Those sales are also recorded at the time of delivery or shipment. We also offer extended payment t erms to certain collectors or dealers.
Return Rights. We sometimes provide our customers with limited rights to return items sold. We establish an allowance for estimated returns, which reduces the amounts of our reported revenues, based on historical returns experience.
Accounts Receivable and the Allowance for Doubtful Accounts. In the normal course of business, we extend payment terms to larger, more creditworthy collectibles dealers. We regularly review their accounts and estimate the amount of and establish an allowance for uncollectible amounts in each reporting period. The amount of that allowance is based on several factors, including the age of unpaid amounts, a review of significant past due accounts, and economic conditions that may affect the ability of dealers to keep their accounts current. Estimates of uncollectible amounts are reviewed each period and, based on that review, are revised to reflect changed circumstances or conditio ns and those changes are recorded in the period they become known. For example, if the financial condition of certain dealers or economic conditions were to deteriorate, adversely affecting the ability of those dealers to make payments on their accounts, increases in the allowance may be required. Since the allowance is created by recording a charge against income that is reflected in selling, general and administrative expenses, an increase in the allowance will cause a decline in our operating results in the period when the increase is recorded.
Inventory Valuation Reserve. Inventories are valued at the lower of cost or market and are reduced by an inventory valuation allowance to provide for declines in the value of our inventory, which consists of collectible coins, sportscards and other collectibles. The amount of the allowance is determined on the basis of historical experience, estimates concerning future economic conditions and estimates of future sales. If there is an economic downturn or a decline in sales, causing inventories of some collectibles to accumulate, it may become necessary to increase the allowance. Increases in this allowance will cause a decline in operating results as such increases are effectuat ed by charges against income. Additionally, due to the relative uniqueness of some of the collectibles included in our inventory, valuation of such inventory often involves judgments that are more subjective than is the case with raw materials and other items maintained by most other types of businesses. As a result, there may be some instances when we are not able to identify a decline in the value of some collectibles until they are sold.
Long-Lived Assets and Goodwill. Long-lived assets such as property and equipment, and goodwill and intangible assets are reviewed for impairment when events or circumstances indicate that the carrying value may not be recoverable. Prior to fiscal 2003, estimated undiscounted future cash flows were used to determine if an asset was impaired and, if such a determination was made, the carrying value of the asset would be reduced to fair value. Any resulting impairment was recorded as a charge against income in the period in which the impairment was recorded. However, under a new standard established by Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets, that became applicable in fiscal 2003, we are required to make goodwill impairment determinations on the basis of the fair values of the assets of our reporting units, as defined in SFAS No. 142, rather than on the basis of undiscounted cash flows.
SFAS No. 142 required us to perform a transitional goodwill impairment test as of the beginning of fiscal 2003, the year of adoption of that new standard. Accordingly, we conducted that test at a "reporting unit" level and compared each reporting unit's fair value to its carrying value. We first determined that Collectors Universe’s reporting units were sub-units of its reportable segments. We then measured the value for each reporting unit on the basis of a
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weighted combination of valuation approaches, including discounted cash flows and multiples of sales and earnings before interest, taxes, depreciation and amortization (EBITDA). On the basis of that valuation, we concluded that a substantial portion of our goodwill was impaired, and we recorded a non-cash after-tax charge of $8,973,000 or $1.45 per share, as a cumulative effect of an accounting change, in the first quarter of fiscal 2003, that ended on September 30, 2002.
We conducted an additional impairment test, in accordance with SFAS 142 at June 30, 2003 and concluded that all of our remaining goodwill was impaired and, as a result, we recorded an additional non-cash impairment charge of $1,477,000 in the quarter ended June 30, 2003, in that case as an operating expense rather than as a transitional charge for an accounting change. See "Results of Operations – Goodwill Impairment" below.
Grading Warranty Costs. We offer a warranty covering the coins and sportscards we authenticate and grade. Under the warranty, if any coin or sportscard originally graded by us, which is later submitted to us for re-grading in the same tamper resistant holder in which it was placed at the time we last graded it, receives a lower grade upon that resubmittal, we will offer either to purchase the coin or sportscard or pay the difference in value of the item at its original grade as compared with its lower grade. Similarly, any coin or sportscard originally graded by us, which subsequently is determined to be not authentic, obligates us to purchase the coin or sportscard. We accrue f or estimated warranty costs based on historical trends and related experience. To date our reserves have proved to be adequate. However, if warranty claims were to exceed those reserves, we would incur additional charges that would adversely affect our operating results. To date our reserves have proved to be adequate.
Overview
Our Business. Collectors Universe provides grading and authentication services for sportscards, rare coins, vintage stamps and authentication services for autographs and sports memorabilia. We also sell rare coins and rare currencies, sportscards, sports and entertainment memorabilia and other collectibles through auctions and direct sales channels. Most of our collectibles auctions are conducted utilizing a "multi-venue" format that may include in-person, Internet, mail-in, and telephone bidding options. This multi-venue format allows bidders to enter auction bids at any time and from any place in the manner that is most convenient for them. We also sell rare coins, sportscards , sports memorabilia and autographs through shows, catalogs, Internet and direct sales.
Factors that Can Affect our Revenues and Cash Flows. Our auctions are held periodically throughout the fiscal year. The number, scheduling, and size of the auctions we conduct vary from quarter to quarter, depending largely on the volume, value and timing of the collectibles consignments that we receive for our auctions. For this reason, our auction revenue can vary, sometimes significantly, from quarter to quarter. Additionally, under our revenue recognition policies, we do not recognize auction revenues until the items sold at an auction are either shipped based on agreement with the customer or delivered in-person to the winning bidders. Since those items generally are not sh ipped to the winning bidders until payment is received from them, which can take up to 60 days after completion of an auction, revenue generated from auctions conducted near the end of a fiscal period often cannot be reported until the succeeding fiscal period, which contributes to the period-to-period variability in our auction revenues. These circumstances also make it difficult to forecast, on a quarterly basis, revenue that will be attributable to our auction business.
Our cash flow is also affected by the number and timing of the auctions we conduct. Generally, we pay consignors of collectibles to our auctions the cash price at which their collectibles were sold, less the seller’s commissions earned by us, approximately 45 days after completion of the auction. However, many of the payments for those collectibles from the winning bidders are not received until 60 days after an auction is completed. As a result, we experience significant cash outflows within the first 45 days, and cash inflows beginning 60 days, following completion of a large auction. Therefore, the amount of cash that we have at the end of any fiscal period can vary widely, depending on the number and timing of the auctions conducted during that fiscal period.
Factors Affecting our Gross Profit Margins. The gross margin on sales of consigned collectibles is significantly higher than the gross margin on sales of owned collectibles because we realize commissions on sales of consigned collectibles without having to incur any significant associated costs. By contrast, upon the sale of owned collectibles, we record the costs of acquiring those collectibles, which are usually a significant percentage of the selling price. As a result, the sale of owned collectibles reduces our overall auction margins to a level that is significantly below that realized for authentication and grading services. Additionally, to a lesser extent, the gross prof it margins on grading submissions can be affected by the mix of submissions between vintage or "classic" coins and sportscards, on the one
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hand, and modern coins and sportscards, on the other hand. Generally, our prices for grading services vary depending on the "turn-around" time requested by submitting dealers and collectors, who are willing to pay more for faster turn-around of the coins and sportscards they submit for grading. As a general rule, dealers and collectors request faster turn-around for vintage or classic coins and sportscards than they do for modern submissions. Consequently, our gross margin depends, not only upon the mix of grading revenues and auction revenues, but also upon the mix of consigned and owned collectibles sold at our auctions and the mix of vintage and modern collectibles submitted for grading and authentication.
Impact of Economic Conditions on Financial Performance. We generate substantially all of our revenues from the collectibles market segment, which primarily relies on discretionary consumer spending. As a result, our revenues sometimes decline and our operating result can be adversely affected by recessionary economic conditions, which often result in a decline in sales of collectibles which, in turn, can lead to a decline in grading submissions and a reduction in the auction sales. On the other hand, conditions such as these, as well as declines or volatility in the stock market, often lead investors to increase their purchases of precious metals, which also lead to increased pu rchases of collectible coins and in submissions of such collectibles for grading. We believe that these market factors contributed to the increase in our revenues in fiscal 2003. By contrast, we believe that the advent of the recession in fiscal 2001 and its continuation into fiscal 2002 contributed to the decline in our revenues in those years.
Results of Operations
The following table sets forth, for the periods indicated, certain financial data expressed as a percentage of net revenues:
| Fiscal Years Ended June 30, | ||||||||||
| 2003 | 2002 | 2001 | ||||||||
Net revenues. | 100.0 | % | 100.0 | % | 100.0 | % | ||||
Cost of revenues. | 63.4 | % | 59.2 | % | 58.4 | % | ||||
Gross profit. | 36.6 | % | 40.8 | % | 41.6 | % | ||||
| Operating expenses: | ||||||||||
Selling, general & administrative. | 41.3 | % | 46.7 | % | 38.1 | % | ||||
Impairment of goodwill. | 2.8 | % | 0.1 | % | 1.8 | % | ||||
Amortization of goodwill. | - | 3.7 | % | 3.4 | % | |||||
Total operating expenses. | 44.1 | % | 50.5 | % | 43.3 | % | ||||
Operating loss. | (7.5 | %) | (9.7 | %) | (1.7 | %) | ||||
Interest income, net. | 0.6 | % | 0.8 | % | 1.6 | % | ||||
Other, net. | - | 0.1 | % | - | ||||||
Loss before provision (benefit) for income taxes. | (6.9 | %) | (8.8 | %) | (0.1 | %) | ||||
Provision (benefit) for income taxes. | (4.1 | %) | (3.2 | %) | 1.1 | % | ||||
| Net loss before cumulative effect of accounting change | (2.8 | %) | (5.6 | %) | (1.2 | %) | ||||
Cumulative effect of accounting change (net of tax) | (17.2 | %) | - | - | ||||||
Net loss. | (20.0 | %) | (5.6 | %) | (1.2 | %) | ||||
Net Revenues. Net revenues include fees generated from the grading and authentication of sportscards, coins, autographs and stamps; the sales prices of owned collectibles sold in our auctions and directly to collectors; commissions earned on sales of consigned collectibles at our auctions; and revenue from the publication of collectibles magazines. Net revenues are determined net of discounts and allowances, product returns, and commissions paid to consignors on sales of their collectibles.
Net revenues increased 17% to $52,265,000 in fiscal 2003 from $44,781,000 in the prior year. Collectible sales revenue increased 21% to $31,999,000 in fiscal 2003 from $26,454,000 in the prior fiscal year, while grading and authentication revenues increased by 11% to $20,266,000 in the current fiscal year from $18,327,000 in fiscal 2002. Collectible sales revenue represented 61% and 59% of total revenues, while grading and authentication revenues represented 39% and 41% of total revenues for fiscal 2003 and 2002, respectively. We believe that this increase was fueled, at least in part, by an increase in purchases of precious metals and collectibles by investors in response to continued uncertainties and volatility in the securities markets and an increase in consumer confidence, particularly i n the first half of fiscal 2003. The 11% increase in grading and authentication revenues in fiscal 2003 occurred primarily
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as a result of increases in coin and sportscard grading submissions of 24% and 10%, respectively. However, the increase in sportscard submissions was offset somewhat by a 24% decline in the average price for sportscard grading, that wasprimarily attributable to an increase in "bulk" grading submissions by sportscard manufacturers of newly manufactured sportscards and a reduction in the number of "vintage" sportscard submissions, which tend to use a higher priced grading service rate because of the value of the sportscards.
In fiscal 2002, net revenues decreased 15% to $44,781,000 from $52,384,000 in fiscal 2001. Collectible sales revenues decreased 16% to $26,454,000 in fiscal 2002 from $31,422,000 in the prior fiscal year, while grading and authentication revenues declined by 13% to $18,327,000 in fiscal year 2002 from $20,962,000 in fiscal 2001. Collectible sales revenue represented 59% and 60% of total revenues, while grading and authentication revenue represented 41% and 40% of total revenues, for fiscal 2002 and 2001, respectively. The 13% decrease in grading and authentication revenues in fiscal 2002 occurred primarily because of a 30% decrease in sportscard submissions. On the other hand, coin grading submissions increased 47% in fiscal 2002 from fiscal 2001. However, that increase in coin grading submiss ions only partially offset the decline in revenues from sportscard grading submissions because the average price for coin grading declined from the prior year. The reduction in sportscard submissions in fiscal 2002 was caused by several factors, including (i) reduced submissions by sportscard manufacturers for "bulk" grading; and (ii) a reduction in resale prices of modern sportscards, which reduced the economic incentive to have these cards graded and sold. In addition, sportscard grading revenue was negatively impacted by a decline in "vintage" sportscard submissions, which tend to use a higher priced grading service rate because of the value of these sportscards. The decline in the average price for coin grading in fiscal 2002 was primarily due to a higher proportion of modern coin submittals versus vintage submittals. Grading fees for modern coins are generally lower than grading fees for vintage coins, and this causes the average selling price to decline. For fiscal 2002, the average grading fee for coi ns declined approximately 15%.
The 16% decrease in collectibles sales revenues in fiscal 2002 was due to several diverse factors, including (i) a continued decline, which began in fiscal 2001, in the demand for sportscards that we sell at auctions and in our direct sales channels, and (ii) a reduction in consignments by dealers and collectors to our premium Bowers and Merena Coin Auctions and to our Lyn Knight Currency Auctions which we believe was primarily due to concerns about the prices that could be realized for their coins and currency due to the economic recession.
Gross Profit. Gross profit is calculated by subtracting the cost of revenues from net revenues. Cost of revenues consist primarily of labor to grade and authenticate coins and sportscards, production costs, printing, credit cards fees, warranty expense and the cost of owned collectibles sold in our auctions. Gross profit margin is gross profit stated as a percent of net revenues.
Our gross margin (gross profits as a percentage of revenues) declined to 36.6% in fiscal 2003 from 40.8% in the prior fiscal year. The decline was due primarily to (i) a decision, in the second half of the year to liquidate older inventories of collectibles at bargain sales prices, (ii) an increase in gold bullion sales, which were made as an accommodation to collectibles sales customers at prices close to our cost of those sales, and (iii) charges to cost of sales, increasing our inventory reserves for those items in inventory with carrying cost in excess of current market value. The gross profit for grading and authentication in fiscal 2003 did not change from the prior fiscal year.
Our gross profit margin declined to 40.8% in fiscal 2002 from 41.6% in the prior fiscal year. That decline was due primarily to (i) the decline in net sales which affected gross profit margins because a significant portion of our costs of sales are fixed and, therefore, cannot be reduced directly in proportion to decreases in our revenues; and (ii) lower gross profit margins on grading activities because we received a higher proportion of modern sportscards for grading. As previously discussed, collectors and dealers submitting modern sportscards generally elect lower cost grading services than with respect to vintage sportscards.
Selling, General and Administrative. Selling, general and administrative (SG&A) expenses primarily include wages and payroll-related expenses, advertising and promotional expenses, facility and security expenses, outside service charges, travel-related expenses and other general administrative expenses. As a percentage of revenues SG&A expense decreased to 41.3% in fiscal 2003 from 46.7% in fiscal 2002. That improvement was due primarily to reductions in overhead personnel and related expenses which, however, were substantially offset by the costs of relocating our Bowers and Merena division from New Hampshire to Louisiana. In fiscal year 2003, general and administrative expenses also included a $235,000 charge for services rendered in 2003 by Deloitte & Touche in assisting us to secure $671,000 in State Enterprise Zone tax credits.
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In fiscal 2002, overall SG&A expense increased 5.0% to $20,911,000 from $19,954,000 in the prior fiscal year. That increase was due primarily to (i) costs of implementing the Company’s new enterprise computer management system, including integration of that system with the Company’s existing grading software, and (ii) costs associated with changes in management and severance costs resulting from staff reductions that occurred in fiscal 2002. As a percentage of total net revenue, SG&A expenses increased to 47% in fiscal 2002 year from 38% in fiscal 2001, primarily because revenues decreased 15%, while SG&A was increasing.
Amortization of Goodwill. We adopted SFAS No. 142, Goodwill and Other Intangible Assets, effective as of July 1, 2002. In accordance with SFAS 142, we ceased amortizing goodwill recorded in past business combinations effective as of July 1, 2002. As a result, there is no charge for goodwill amortization expense contained in our statement of operations for the fiscal year ended June 30, 2003; whereas our statements of operations for fiscal 2002 and 2001 do contain charges for goodwill amortization expense.
For fiscal years prior to 2003, amortization of goodwill consists of goodwill charges relating to our acquisitions of businesses and amortization charges for non-competition agreements that we obtained from the sellers in those acquisitions. We amortized goodwill over periods of 5 to 15 years and non-competition agreements over the respective terms of those agreements, which range from 3 to 5 years. Amortization expense for fiscal 2002 was $1,649,000.
Goodwill Impairment. Effective as of the July 1, 2002, which was the beginning of fiscal 2003, we adopted SFAS No. 142, which requires us (as well as other companies) to assess goodwill for impairment annually, or more frequently if circumstances indicate potential impairment. SFAS No. 142 requires that a determination be made of the fair value of the recorded goodwill of a company’s assets, in a manner similar to a purchase price allocation in a business combination, and that a goodwill impairment charge be recorded if the carrying amount of the goodwill is found to exceed the fair value of the recorded goodwill on the books of the company. In accordance with SFAS 142, we conducted a goodwill impairment test at June 30, 2003 and concluded that all of our remaining goodwill was impaired. As a result, we recorded a non-cash goodwill impairment charge of $1,477,000 as an operating expense. That charge is in addition to a previously reported non-cash goodwill impairment charge taken in the first quarter of fiscal 2003, as a cumulative effect of a change in accounting principle. See "Results of Operations - Cumulative Effect of Change in Accounting Principle" below.
At June 30, 2002, we determined that the goodwill associated with Professional Stamp Experts ("PSE") was partially impaired. This impairment resulted from a reduction in the projected revenues of PSE over the next several years. Accordingly, we incurred a goodwill impairment charge of $51,000 in fiscal 2002 to reduce the carrying value of the PSE goodwill to $89,000.
During fiscal 2001, we determined that the goodwill associated with our 1999 acquisition of Internet Universe, LLC, which conducted our Internet operations, had become impaired. This determination resulted primarily from a change in our projected revenue for Internet advertising on our website www.collectors.com, due to industry-wide reductions in the viability of banner advertising and the rates that could be charged for this type of Internet advertising. Accordingly, we incurred a charge of $906,000 in fiscal 2001 to reduce the carrying value of the Internet Universe, LLC goodwill to zero.
Interest Income. Interest income is generated on cash balances that we invest primarily in a highly liquid money market account, short-term bank certificates of deposit and commercial paper instruments. Interest income was $295,000 in fiscal 2003, compared with $379,000 in fiscal 2002 and $855,000 in fiscal 2001. The decrease was primarily due to reductions in market rates of interest earned on cash balances during 2003 as compared to 2002. The decrease in interest income in fiscal 2002, from fiscal 2001, was the result of a reduction in average invested cash balances.
Income Taxes. A tax benefit of $2,161,000 was recorded for fiscal year 2003, reflecting the loss incurred for the year and the recognition of state tax credits related to California Enterprise Zone Credits. A tax benefit of $1,435,000 was recorded for fiscal year 2002, reflecting the loss incurred for the year. For fiscal 2001, the provision for income taxes was $593,000, despite a loss from operations before income taxes. This provision for income taxes resulted from the non-deductibility, for income tax purposes, of certain goodwill amortization expenses and other permanent tax differences.
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Cumulative Effect of Change in Accounting Principle. SFAS No. 142 required us to perform a transitional goodwill impairment test as of the beginning of fiscal 2003, the year of adoption of that new standard. Accordingly, we conducted that test at a "reporting unit" level and compared each reporting unit's fair value to its carrying value. We first determined that our reporting units were sub-units of its reportable segments. We then measured the value for each reporting unit on the basis of a weighted combination of valuation approaches, including discounted cash flows and multiples of sales and earnings before interest, taxes, depreciation and amortization (EBITDA). On the basi s of that valuation, we concluded that a substantial portion our goodwill was impaired, and we recorded a non-cash after-tax charge of $8,973,000 or $1.45 per share, as a cumulative effect of an accounting change, in the first quarter of fiscal 2003, that ended on September 30, 2002. This charge, along with the goodwill impairment charge taken as an operating expense in the fourth quarter of fiscal 2003, increased our net loss for fiscal 2003 and reduced our stockholders’ equity at June 30, 2003; but did not affect our tangible net worth and is not expected to adversely affect our business operations or cash flows. See Note to our Consolidated Financial Statements included later in this Report.
Quarterly Results of Operations and Seasonality
The following table presents unaudited quarterly financial information for each of the eight quarters beginning September 30, 2001 and ending on June 30, 2003. The information has been derived from our unaudited quarterly financial statements, which have been prepared by us on a basis consistent with our audited financial statements appearing elsewhere in this Form 10-K. The information includes all necessary adjustments, consisting only of normal recurring adjustments, that management considers necessary for a fair presentation of the unaudited quarterly results when read in conjunction with the consolidated financial statements and the notes thereto appearing elsewhere in this Form 10-K. These operating results are not necessarily indicative of results that may be expected for any subsequent periods. We expect our operating results to fluctuate in the future due to a number of factors which are outside of our control. See "Overview" above in this Section of this Report for a discussion of those factors.
| Fiscal Quarters Ended | |||||||||||||||||||||||||
Sept. 30, 2001 | Dec. 31, 2001 | Mar. 31, 2002 | June 30, 2002 | Sept. 30, 2002 | Dec. 31, 2002 | Mar. 31, 2003 | June 30, 2003 | ||||||||||||||||||
| Net revenues | $ | 9,329 | $ | 10,615 | $ | 12,856 | $ | 11,981 | $ | 12,593 | $ | 11,312 | $ | 15,604 | $ | 12,756 | |||||||||
| Cost of revenues | 5,917 | 6,254 | 8,036 | 6,310 | 7,119 | 7,144 | 10,519 | 8,330 | |||||||||||||||||
| Gross profit | 3,412 | 4,361 | 4,820 | 5,671 | 5,474 | 4,168 | 5,085 | 4,426 | |||||||||||||||||
| SG&A | 5,218 | 5,138 | 5,282 | 5,273 | 5,040 | 5,693 | 5,265 | 5,622 | |||||||||||||||||
| Amortization of goodwill | 411 | 412 | 412 | 414 | - | - | - | - | |||||||||||||||||
| Impairment of goodwill | - | - | - | 51 | - | - | - | 1,477 | |||||||||||||||||
| Total operating expenses | 5,629 | 5,550 | 5,694 | 5,738 | 5,040 | 5,693 | 5,265 | 7,099 | |||||||||||||||||
| Operating income (loss) | (2,217 | ) | (1,189 | ) | (874 | ) | (67 | ) | 434 | (1,525 | ) | (180 | ) | (2,673 | ) | ||||||||||
| Interest income, net | 88 | 38 | 107 | 146 | 79 | 100 | 69 | 47 | |||||||||||||||||
| Other income (expense) | 8 | 7 | 4 | 4 | (1 | ) | 9 | 34 | (20 | ) | |||||||||||||||
| Income (loss) before income taxes | (2,121 | ) | (1,144 | ) | (763 | ) | 83 | 512 | (1,416 | ) | (77 | ) | (2,646 | ) | |||||||||||
| Provision (benefit) for incometaxes | (1,035 | ) | (43 | ) | (292 | ) | (65 | ) | 216 | (967 | ) | (52 | ) | (1,358 | ) | ||||||||||
Income (loss) before changein accounting principle | (1,086 | ) | (1,101 | ) | (471 | ) | 148 | 296 | (449 | ) | (25 | ) | (1,288 | ) | |||||||||||
Cumulative effect of change in accounting principle (net of tax) | 8,973 | - | - | - | |||||||||||||||||||||
| Net income (loss) | $ | (1,086 | ) | $ | (1,101 | ) | $ | (471 | ) | $ | 148 | $ | (8,677 | ) | $ | (449 | ) | $ | (25 | ) | $ | (1,288 | ) | ||
Income (loss) per share before cumulative effect of accountingchange - basic | $ | (0.17 | ) | $ | (0.18 | ) | $ | (0.08 | ) | $ | 0.02 | $ | 0.05 | $ | (0.07 | ) | $ | - | $ | (0.21 | ) | ||||
Income (loss) per share beforecumulative effect of accounting change - diluted | $ | (0.17 | ) | $ | (0.18 | ) | $ | (0.08 | ) | $ | 0.02 | $ | 0.05 | $ | (0.07 | ) | $ | - | $ | (0.21 | ) | ||||
| Weighted average shares outstanding: | |||||||||||||||||||||||||
Basic | 6,249 | 6,249 | 6,253 | 6,380 | 6,193 | 6,129 | 6,131 | 6,131 | |||||||||||||||||
Diluted | 6,249 | 6,249 | 6,253 | 6,603 | 6,288 | 6,129 | 6,131 | 6,131 | |||||||||||||||||
| 8 | ||
Liquidity and Capital Resources
At June 30, 2003, we had cash and cash equivalents of $4,482,000 compared to cash and cash equivalents of $4,947,000 at June 30, 2002. The decrease in cash and cash equivalents since the end of the prior fiscal year primarily resulted from the operating loss in fiscal 2003, partially offset by a reduction in accounts receivables.
Because of the variability of the timing, the size and collectible content of our auctions is an inherent feature of our business, we expect that our cash and cash equivalent balances, and outstanding consignor payables, will be subject to significant fluctuations in subsequent reporting periods.
Cash used by operating activities was $167,000 for fiscal 2003, compared to cash provided by operating activities of $933,000 in fiscal 2002. In fiscal 2003, a reduction in accounts receivable, caused by enhanced credit management, provided $1,724,000 of cash for operations, which was more than offset, however, by a $1,132,000 increase in inventories and a net cash outflow of $1,848,000 from consignment advances and consignment receivables. In addition, in fiscal year 2003, we incurred non-cash charges totaling $11,188,000, which were attributable to a goodwill impairment charge recorded as a change in accounting principle, a goodwill impairment charge recorded as an operating expense and depreciation and amortization expense.
Investing activities, consisting primarily of the purchase of property and equipment, used net cash of $314,000 in fiscal 2003, compared to net cash used in investing activities of $1,927,000 in fiscal 2002 primarily to fund an acquisition of a business and capital expenditures primarily for computer software and hardware.
Exercises of stock options accounted for $16,000 of net cash from financing activities in fiscal 2003 and $67,000 of net cash from financing activities in fiscal 2002.
We believe that our existing cash balances and internally-generated funds will be sufficient to finance our operations and financing requirements, and we do not expect any material changes in the sources of cash to fund our operations during the next twelve months. We anticipate that, during fiscal 2004, we will be making capital expenditures of less than $100,000.
However, our capital requirements during the next 12 months could change as a result of any of a number of factors, including the level of sales that we are able to generate during fiscal 2004, which will depend both on the size of and the value of the collectibles we are able to sell at our auctions, and on grading submission rates and our growth rates. In addition, as part of our business strategy, we will continue to seek out opportunities to expand our business, both through internal growth and by acquisition, which could require significant cash expenditures. Depending upon these and other factors, we may require additional financing in the future through equity or debt offerings, which may or may not be available or may be dilutive to our shareholders. Our ability to obtain additional ca pital will depend upon our operating results, financial condition, future business prospects and conditions then prevailing in the relevant capital markets.
Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS No. 141 also requires that the Company recognize acquired intangible assets, apart from goodwill, if the acquired intangible assets meet certain criteria. SFAS No. 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. The Company accounted for the acquisition of Collectible Properties, Inc. (CPI), which was consummated subsequent to June 30, 2001, in accordance with SFAS No. 141.
The Financial Accounting Standards Board ("FASB") issued SFAS No. 143, Accounting for Asset Retirement Obligations, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after September 15, 2002. The Company does not expect that the adoption of this standard will have a material impact on its financial position, cash flows or results of operations.
Effective July 1, 2002, the Company adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, effective for fiscal years beginning after December 15, 2001. The new rules on asset impairment
supersede SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and provide a single accounting model for long-lived assets to be disposed of. The adoption of SFAS No. 144 did not have an impact on the Company’s earnings or financial position.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses significant issues regarding the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities. SFAS No. 146 also addresses recognition of certain costs related t terminating a contract that is not a capital lease, costs to consolidate facilities or relocate employees, and termination benefits provided to employees that are involuntarily terminated under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. In March 2003, the Company decided to relocate the operations of its Bowers and Merena Galleries division to Louisiana following a change in the division’s management (Note 6).
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, effective for fiscal years ending after December 15, 2002. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition to SFAS No. 123’s fair value method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 and APB Opinion No. 28, Interim Financial Reporting, to require disclosure in the summary of significant accounting policies of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. The Company has adopted SFAS No. 148 as of June 30, 2003 and has complied with the new disclosure requirements.
In November 2002, the FASB issued FASB Interpretation No. ("FIN") 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others, an interpretation of FASB Statements No. 5, 57 and 107, and rescission of FASB Interpretation No. 34, Disclosure of Indirect Guarantees of Indebtedness of Others. FIN 45 also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002; while, the disclosure requirements are effective for financial statements for interim a nd annual periods ending after December 15, 2002. The Company’s disclosure of guarantees and indemnities is included in Note 13. There were no guarantees issued after December 31, 2002.
In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin ("ARB") No. 51. FIN 46 requires that variable interest entities be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns or both. FIN 46 also requires disclosures about variable interest entities that companies are not required to consolidate but in which a company has a significant variable interest. The consolidation requirements of FIN 46 apply immediately to variable interest entities prior to January 31, 2003 in the first year or interim period beginning after June 15, 2003. The disclosure requirem ents apply in all financial statements issued after January 31, 2003. Management believes the adoption of such interpretation will not have an impact on its results of operations of financial position. At June 30, 2003, the Company did not have any interests in variable interest entities.
.
| | ||
| 9 | ||
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| COLLECTORS UNIVERSE, INC. | ||
| Date: October 1, 2003 | By: | /s/MICHAEL J. LEWIS |
| Chief Financial Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature | Title | Date |
/s/ A. CLINTON ALLEN * A. Clinton Allen | Chairman/Director | October 1, 2003 |
/s/ MICHAEL R. HAYNES * Michael R. Haynes | Chief Executive Officer | October 1, 2003 |
/s/ DAVID HALL * David G. Hall | President and Director | October 1, 2003 |
/s/ MICHAEL J. LEWIS Michael J. Lewis | Chief Financial Officer (Principal Financial and Primary Accounting Officer) | October 1, 2003 |
/s/ BEN A. FRYDMAN * Ben A. Frydman | Director/Secretary | October 1, 2003 |
/s/ VAN D. SIMMONS * Van D. Simmons | Director | October 1, 2003 |
/s/ A.J. BERT MOYER * A.J. Bert Moyer | Director | October 1, 2003 |
*By:/s/ MICHAEL J. LEWIS Michael J. Lewis (Attorney-in-Fact) | ||
S-1 | ||
| ExhibitNo. | INDEX TO EXHIBITS Description | |
| 1.1 | Form of Underwriting Agreement.* | |
| 3.2 | Form of Amended and Restated Certificate of Incorporation of Collectors Universe, as currently in effect.* | |
| 3.3 | Amended and Restated Bylaws of Collectors Universe, as adopted September 1, 1999.* | |
| 4.1 | Registration Rights Agreement.* | |
| 4.2 | Form of Registration Rights Agreement for Stockholders pursuant to private placement.* | |
| 5.1 | Opinion of Stradling Yocca Carlson & Rauth, a Professional Corporation.* | |
| 10.1 | Collectors Universe 1999 Stock Incentive Plan.* | |
| 10.2 | Form of Stock Option Agreement for the Collectors Universe 1999 Plan.* | |
| 10.4 | PCGS 1999 Stock Incentive Plan.* | |
| 10.5 | Form of Stock Option Agreement for the PCGS 1999 Plan.* | |
| 10.6 | Employee Stock Purchase Plan.* | |
| 10.7 | Form of indemnification Agreement.* | |
| 10.8 | Asset Acquisition Agreement dated January 25, 1999 between Professional Coin Grading Service, Inc., Info Exchange, Inc. and Brent Gutekunst.* | |
| 10.9 | Collectors Universe/eBay Mutual Services Term Sheet dated February 10, 1999, between the Company and eBay, Inc.* | |
| 10.10 | Net Lease between Orix Searls Santa Ana Venture and Collectors Universe, dated June, 1999.* | |
| 10.11 | Agreement for the Sale of Goods and Services dated March 31, 1999, between the Company and DNA Technologies, * | |
| 10.12 | Contribution and Acquisition Agreement dated February 3, 1999, between the Company and Hugh Sconyers.* | |
| 10.13 | Contribution and Acquisition Agreement dated February 3, 1999, between the Company and BJ Searls.* | |
| 10.14 | Contribution and Acquisition Agreement dated February 3, 1999, between the Company and Greg Bussineau.* | |
| 10.15 | Contribution and Acquisition Agreement dated February 3, 1999, between the Company and Lyn F. Knight Rare Coins* | |
| 10.16 | Contribution and Acquisition Agreement dated February 3, 1999, between the Company, Kingswood Coin Auction, LLC and the Members of Kingswood.* | |
| 10.17 | Contribution and Acquisition Agreement dated February 3, 1999, between the Company and Professional Coin Grading Service, Inc.* | |
| 10.18 | Employment Agreement dated March 1999, between Superior Sportscard Auctions, LLC and Greg Bussineau.* | |
| 10.19 | Employment Agreement dated March 5, 1999, between Lyn F. Knight, Lyn Knight Currency Auctions, Inc. and Collectors Universe.* | |
| 10.24 | Asset Purchase Agreements between Collectors Universe, Inc. and Auctions by Bowers and Merena, Inc., Bowers and Merena Galleries, Inc. and Bowers and Merena Research, Inc. (Incorporated by reference to Exhibit 10-1 to Registrant’s Current Report on Form 8-K, dated March 21, 2000).* | |
| 21.1 | Subsidiaries of the Company.** | |
| 23.1 | Independent Auditors' Consent.** | |
| 31.1 | Certifications of CEO Under Section 302 Of The Sarbanes-Oxley Act. | |
| 31.2 | Certifications of CFO Under Section 302 Of The Sarbanes-Oxley Act. | |
| 32.1 | CEO Certification of Periodic Report Under Section 906 of the Sarbanes-Oxley Act.** | |
| 32.2 | CFO Certification of Periodic Report Under Section 906 of the Sarbanes-Oxley Act.** |
* Incorporated by reference to the same numbered exhibit to the Company’s Registration Statement (No. 333-86449) on Form S-1 filed with the
Commission on September 2, 1999.
** Incorporated by reference to the same numbered exhibit to the Company’s annual report on Form 10-K for the period ended June 30, 2003 filed
with the Commission on September 29, 2003.
E-1