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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 2001
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: 0-27887
COLLECTORS UNIVERSE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0846191
(STATE OR OTHER (I.R.S. EMPLOYER
JURISDICTION IDENTIFICATION NUMBER)
OF INCORPORATION)
1921 E. ALTON AVENUE, SANTA ANA, CALIFORNIA 92705
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 567-1234
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 THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
CLASS OUTSTANDING AT OCTOBER 26, 2001:
----- --------------------------------
COMMON STOCK $.001 PAR VALUE. 24,995,740
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COLLECTORS UNIVERSE, INC.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 2001 and June 30, 2001 (unaudited)........................ 3
Condensed Consolidated Statements of Operations three months ended
September 30, 2001 and September 30, 2000 (unaudited)................... 4
Condensed Consolidated Statements of Cash Flows three months ended
September 30, 2001 and September 30, 2000 (unaudited)................... 5
Notes to Condensed Consolidated Financial Statements (unaudited)............ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk................. 20
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K and Exhibits.............................. 21
SIGNATURES ............................................................................ S-1
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2001 AND JUNE 30, 2001
(in thousands, except share and per share data)
(unaudited)
SEPTEMBER 30, JUNE 30,
2001 2001
------------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 3,302 $ 5,874
Accounts receivable, net 5,487 8,162
Auction consignment advances 1,660 1,897
Inventories, net 9,208 9,088
Prepaid expenses and other 937 1,023
Refundable income taxes 1,934 892
Deferred taxes 645 645
-------- --------
Total current assets 23,173 27,581
Property and equipment, net 2,067 1,898
Other assets 488 440
Goodwill, net 15,751 16,146
Deferred taxes 803 803
-------- --------
$ 42,282 $ 46,868
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 263 $ 452
Consignor payable 84 4,265
Accrued liabilities 1,060 917
Accrued compensation and benefits 1,063 650
Deferred revenue 1,057 812
-------- --------
Total current liabilities 3,527 7,096
Deferred rent 239 222
Commitments and contingencies (note 8)
Stockholders' equity:
Preferred stock, $.001 par value; 3,000 shares authorized; -- --
no shares issued or outstanding
Common stock, $.001 par value; 30,000 shares authorized; issued
25,496 at September 30, 2001 and 25,470 at June 30, 2001 26 26
Additional paid-in capital 41,212 41,160
Accumulated deficit (1,701) (615)
Treasury stock, at cost (500 shares) (1,021) (1,021)
-------- --------
Total stockholders' equity 38,516 39,550
-------- --------
$ 42,282 $ 46,868
======== ========
See accompanying notes to condensed consolidated financial statements
3
COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
THREE MONTHS ENDED
-----------------------------
SEPTEMBER 30, SEPTEMBER 30,
2001 2000
------------- ------------
Net revenues $ 9,329 $ 12,588
Cost of revenues 5,917 6,913
-------- --------
Gross profit 3,412 5,675
Selling, general and administrative expenses 5,205 4,987
Amortization of goodwill and intangibles 411 487
Stock-based compensation 13 12
-------- --------
Total operating expenses 5,629 5,486
Operating income (loss) (2,217) 189
Interest income, net 88 313
Other income 8 --
-------- --------
Income (loss) before income taxes (2,121) 502
Provision (benefit) for income taxes (1,035) 234
-------- --------
Net income (loss) $ (1,086) $ 268
======== ========
Net income (loss) per share:
Basic $ (0.04) $ 0.01
======== ========
Diluted $ (0.04) $ 0.01
======== ========
Weighted average shares outstanding:
Basic 24,995 25,428
Diluted 24,995 26,329
See accompanying notes to condensed consolidated financial statements
4
COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share and per share data)
(unaudited)
THREE MONTHS ENDED
------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2001 2000
------------ -------------
OPERATING ACTIVITIES:
Net income (loss) $ (1,086) $ 268
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 611 653
Stock-based compensation 13 12
Changes in assets and liabilities:
Accounts receivable 2,675 3,513
Auction consignment advances 237 681
Inventories (120) (1,743)
Prepaid expenses and other assets 207 5
Refundable income taxes (1,042) --
Accounts payable and accrued liabilities (3,797) (11,510)
Deferred revenue 245 (41)
Income tax payable -- 234
-------- --------
Net cash used in operating activities (2,057) (7,928)
INVESTING ACTIVITIES:
Capital expenditures (369) (293)
Net cash paid for acquired businesses -- (794)
Advances for pending acquisition (100) --
Advances on notes receivable from related party (85) --
-------- --------
Net cash used in investing activities (554) (1,087)
FINANCING ACTIVITIES:
Proceeds from employee stock purchase plan 39 --
Purchase of company common stock -- (38)
-------- --------
Net cash provided by (used in) financing activities 39 (38)
Net decrease in cash and cash equivalents (2,572) (9,053)
Cash and cash equivalents at beginning of period 5,874 14,580
-------- --------
Cash and cash equivalents at end of period $ 3,302 $ 5,527
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ -- $ --
Income taxes paid $ 8 $ --
SUPPLEMENTAL DISCLOSURE ON NON-CASH TRANSACTIONS:
During the three-month period ended September 30, 2000, the
Company acquired a business, as follows:
Fair value of assets acquired -- $ (25)
Cash paid in acquisition, net of cash acquired -- 794
Liabilities assumed -- 68
--------
Goodwill -- $ 837
========
See accompanying notes to condensed consolidated financial statements
5
COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying interim condensed consolidated financial
statements as of and for the three-month period ended September 30, 2001
include the accounts of Collectors Universe, Inc. and its subsidiaries
(the "Company"). On July 14, 2000, the Company acquired Odyssey
Publications, Inc. ("Odyssey") and, accordingly the accompanying
condensed consolidated financial statements as of and for the
three-month period ended September 30, 2000 include the accounts of the
Company and of Odyssey from the date of its acquisition by the Company.
Unaudited Interim Financial Information
The accompanying interim condensed consolidated financial
statements have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission (the "SEC") for
interim financial reporting. These interim condensed consolidated
financial statements are unaudited and, in the opinion of management,
include all adjustments (consisting of normal recurring adjustments and
accruals) necessary to present fairly the consolidated balance sheets,
consolidated operating results, and consolidated cash flows for the
periods presented in accordance with accounting principles generally
accepted in the United States of America ("GAAP"). Operating results for
the three-month period ended September 30, 2001, are not necessarily
indicative of the results that may be expected for the year ending June
30, 2002. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with GAAP have been
omitted in accordance with the rules and regulations of the SEC. These
interim condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes
thereto contained in the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 2001. Certain prior period amounts have been
reclassified to conform to the current period presentation.
Use of Estimates
The preparation of financial statements in conformity 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 at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates, and
such differences may be material to the consolidated financial
statements.
6
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB)
issued SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. The Company adopted SFAS No. 133 effective for the first
quarter of its fiscal year that began July 1, 2000. SFAS No. 133
requires that the Company record all derivatives on the balance sheets
at fair value. The Company does not have any derivative instruments nor
does the Company engage in hedging activities. Therefore, the adoption
of SFAS No. 133 had no impact on the Company's financial statements.
In March 2000, the FASB issued Interpretation No. 44, Accounting
for Certain Transactions Involving Stock Compensation, an interpretation
of APB Opinion No. 25 (FIN 44). FIN 44 clarifies, among other issues,
(a) the definition of an employee for purposes of applying APB Opinion
No. 25; (b) the criteria for determining whether a plan qualifies as a
non-compensatory plan; (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award;
and (d) the accounting for an exchange of stock compensation awards in a
business combination. FIN 44 was effective July 1, 2000. The adoption of
FIN 44 had no effect on the Company's financial statements.
In July 2001, the FASB issued FASB Statements No. 141, Business
Combinations (SFAS 141), and No. 142, Goodwill and Other Intangible
Assets (SFAS 142). 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. It also requires that
the Company reclassify the carrying amounts of intangible assets and
goodwill based on the criteria in SFAS No. 141 effective as of the date
on which the Company adopts SFAS 142 (which is discussed below).
SFAS No. 142, which the Company will adopt on July 2, 2002,
requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS No. 142 requires that companies identify reporting units
for the purposes of assessing potential future impairments of goodwill,
reassess the useful lives of other existing recognized intangible
assets, and cease amortization of intangible assets with an indefinite
useful life. An intangible asset with an indefinite useful life should
be tested for impairment in accordance with the guidance in SFAS No.
142. SFAS No. 142 is required to be applied in fiscal years beginning
after December 15, 2001 to all goodwill and other intangible assets
recognized at that date, regardless of when those assets were initially
recognized. SFAS No. 142 requires the Company to complete a transitional
goodwill impairment test by January 2, 2002, six months from the date of
the Company's adoption of SFAS 142. The Company is also required to
reassess the useful lives of other intangible assets within the first
interim quarter after adoption of SFAS No. 142.
The Company's previous business combinations were accounted for
using the purchase method. As of September 30, 2001 and June 30, 2001,
the net carrying amount of goodwill was $15,751 and $16,146,
respectively. Amortization expense for the three-month periods ended
September 30, 2001 and 2000 was $411 and $487, respectively. Currently,
the Company is assessing, but has not yet determined, how the adoption
of SFAS No. 142 will impact its financial statements.
7
COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except per share data)
(unaudited)
2. Inventories
Inventories consist of the following:
SEPTEMBER 30, JUNE 30,
2001 2001
------------ --------
Coins and currency $ 5,946 $ 5,791
Sportscards and memorabilia 3,365 3,210
Records 207 371
Other collectibles 28 28
------- -------
9,546 9,400
Less inventory reserve (338) (312)
------- -------
Inventories, net $ 9,208 $ 9,088
======= =======
3. Property and Equipment
Property and equipment consist of the following:
SEPTEMBER 30, JUNE 30,
2001 2001
------------ ---------
Grading reference sets $ 13 $ 13
Computer hardware and equipment 1,622 1,608
Computer software 690 690
Equipment 1,198 1,198
Furniture and office equipment 796 796
Leasehold improvements 379 379
Construction in progress 536 189
------- -------
5,234 4,873
Less accumulated depreciation and amortization (3,167) (2,975)
------- -------
Property and equipment, net $ 2,067 $ 1,898
======= =======
4. Goodwill
Goodwill arises from business acquisitions and represents the excess of
the purchase price paid over the fair value of net assets acquired and
is amortized using the straight-line method over periods ranging from
five to fifteen years. The Company periodically evaluates the
recoverability of goodwill by determining whether the amortization of
the balances over their remaining useful lives can be recovered through
projected undiscounted future operating cash flows. Based on our most
recent analysis, we believe no impairment exists at September 30, 2001.
Goodwill was $15,751 net of accumulated amortization of $3,004, as of
September 30, 2001. Goodwill was $16,146, net of accumulated
amortization of $2,609, as of June 30, 2001.
8
5. Net Income (Loss) Per Share
Net income (loss) per share is determined in accordance with Statement
of Financial Accounting Standards No. 128, "Earnings Per Share." Net
income (loss) per share for the three-month periods ended September 30,
2001 and September 30, 2000, is computed, as follows:
SEPTEMBER 30, SEPTEMBER 30,
2001 2000
------------ ------------
Net income (loss) applicable to common
stockholders $ (1,086) $ 268
======== ========
Net income (loss) per share:
Weighted average shares outstanding used in
computation of net income (loss) per share:
Basic 24,995 25,428
Effects of dilutive stock options -- 901
-------- --------
Diluted 24,995 26,329
======== ========
Net income (loss) per share:
Basic $ (0.04) $ 0.01
======== ========
Diluted $ (0.04) $ 0.01
======== ========
6. Stock Compensation Expense
Stock-based compensation is composed of stock-based charges related to
the grant of stock options after June 30, 1999 and prior to our initial
public offering at an exercise price that was lower than the initial
public offering price.
7. Business Segments
We operate principally in two segments: 1) sales of collectibles through
auctions and direct sales; and 2) authentication and grading of
collectibles. Effective April 1, 2001, we changed the description of our
"Auction" business segment to "Collectible Sales" to more accurately
reflect the business activity of this business segment. Accordingly, the
description of the business segments for the three-month period ended
September 30, 2000 has been changed to conform to the presentation for
the three-month period ended September 30, 2001. We allocate operating
expenses to each business segment based upon activity levels. We do not
allocate specific assets to these service segments. All of our revenues
and identifiable assets are located in the Unites States.
THREE MONTHS ENDED SEPTEMBER 30, 2001
--------------------------------------
Collectible Grading and
Sales Authentication Total
------------ -------------- -------
Net revenues $ 5,249 $ 4,080 $ 9,329
======= ======= =======
Operating income (loss) $ (944) $ 175 $ (769)
Unallocated operating expenses (1,448)
-------
Operating loss, consolidated $(2,217)
=======
9
THREE MONTHS ENDED SEPTEMBER 30, 2000
-----------------------------------------
Collectible Grading and
Sales Authentication Total
----------- -------------- --------
Net revenues $ 7,117 $ 5,471 $12,588
======= ======= =======
Operating income (loss) $ (402) $ 1,091 $ 689
Unallocated operating expenses (500)
-------
Operating income, consolidated $ 189
=======
8. Commitments and Contingencies
The Company has agreed to acquire the assets of Collectible Properties,
Inc. ("CPI") for a purchase price of $375,000 upon execution of a
definitive asset purchase agreement. CPI is wholly owned by Lyn F.
Knight, an employee of the Company, and the former sole owner of Lyn F.
Knight Rare Coins, Inc. ("Lyn Knight"). The Company acquired the
currency auction business of Lyn Knight in February 1999. Pursuant to
the pending acquisition of CPI, the Company advanced $100,000 toward the
purchase price during the first quarter of the current fiscal year. This
advance is included in other assets in the accompanying balance sheet
for the quarter ended September 30, 2001. The Company anticipates
consummating this transaction during the second fiscal quarter ending
December 29, 2001.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The discussion in this Item 2 and in Item 3 of this Quarterly Report on
Form 10-Q includes "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. That Act provides a "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information about themselves so long as they identify these
statements as forward-looking and provide meaningful, cautionary statements
identifying important factors that could cause actual results to differ from the
projected results. Other than statements of historical fact, all statements in
this Report and, in particular, any projections of or statements as to our
expectations or beliefs concerning our future financial performance or financial
position or as to future trends in our business or in our markets, are
forward-looking statements. Forward-looking statements reflect our current
expectations and our actual results in future periods may differ significantly
from those expectations. The sections below entitled Overview -- "Factors
Affecting Revenues and Margins" and "Additional Factors That May Affect Future
Operating Results" describe some, but not all, of the factors that could cause
these differences, and readers of this Report are urged to read those sections
in their entirety and the Company's Annual Report on Form 10-K for its fiscal
year ended June 30, 2001, which contains additional information regarding
factors that could affect our future financial performance.
Due to these and other possible uncertainties and risks, readers are
cautioned not to place undue reliance on the forward-looking statements
contained in this Report, which speak only as of the date of this Report, or to
make predictions based solely on historical financial performance. We also
disclaim any obligation to update forward-looking statements contained in this
Report or in our Annual Report on Form 10-K referred to above.
OVERVIEW
Factors Affecting Revenues and Margins
Our Business - Collectors Universe provides grading and authentication
services for sportscards, rare coins, vintage stamps and authentication services
for autographs. We also sell collectibles through auctions and direct sales
channels. We conduct auctions of vintage coins and currency, sportscards and
sports memorabilia and entertainment memorabilia, including vintage records. Our
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 and
direct sales.
Revenue Recognition Policies - Historically, grading fees have generally
been prepaid, although we have offered open account privileges to numerous
larger dealers. In order to improve our competitive position, we expanded open
account privileges to smaller dealers throughout fiscal 2001. When the
collectibles market began to soften in the latter part of fiscal 2001, some of
our customers experienced cash flow difficulties, and our accounts receivable
delinquency rate increased. In the first quarter of fiscal 2002, we re-evaluated
our credit policies and restricted open account privileges to that part of our
dealer customer base that is comprised of larger dealers with good credit
histories.
We record, as deferred revenue, all prepaid grading submissions until
the items are graded and returned to the submitter. Upon shipment, we record the
revenue from grading and deduct this amount
11
from deferred revenue. For dealers who have open account status, we record
revenue at the time of shipment. For auctions, we record revenue at the time the
collectible is delivered to the successful bidder. For certain repeat bidders,
we deliver the collectibles at the close of an auction and allow them to pay up
to 45 days following the auction. In certain limited circumstances, we offer
extended payments to certain collectors or dealers. For collectibles that we own
and sell at auction, we record the successful bidder amount, or "hammer," as the
sale of the merchandise and record the buyer's fee as commission earned. We also
record the cost of the merchandise sold as cost of revenues. For collectibles
that are consigned to us for auction, we record, as commission earned, the
amount of the buyer's and seller's fees. Depending upon the type of collectible
auction, we charge successful bidders a 10% to 15% commission and generally
charge consignors a 5% to 15% selling commission. On some large or important
consignments, we may negotiate a reduced consignor commission.
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. 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.
Our auctions are held periodically throughout the fiscal year. The
number and size of the auctions we conduct vary from quarter to quarter,
depending largely on the volume, value and timing of the 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 shipped or delivered to the winning bidders. Since
those items generally are not shipped to the winning bidders until payment is
received from them, which can take up to 45 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, cash payments from the winning bidders for the items sold
at an auction are collected during the 45 days following its completion. Then,
at the end of that 45-day period, we generally pay cash to the consignors for
the items sold at the auction, less the seller's commissions earned by us. As a
result, we generally have significant cash inflows during the 45 days following
completion of a large auction and significant cash outflow thereafter until this
auction cycle resumes.
The Company generates substantially all of its revenues from the
collectibles market segment, which primarily relies on discretionary consumer
spending. During the last quarter of fiscal year 2001, which ended on June 30,
2001, and through the first quarter of the current fiscal year, which ended on
September 30, 2001, the Company experienced lower revenues from grading
submissions, the sale of owned collectibles and fees earned on the sale of
consigned collectibles. The Company believes these lower revenues reflect, at
least in part, the impact of recent unfavorable economic conditions on consumer
spending. If these unfavorable economic conditions persist, it is likely that
they will adversely affect the Company's operating results and financial
condition in future periods, as well.
In addition, because of terrorist attacks on the World Trade Center and
Pentagon on September 11, 2001, the Company cancelled an auction scheduled for
the latter part of September 2001 and rescheduled it for the second fiscal
quarter ending December 29, 2001. This scheduling change was one
12
of the factors that contributed to the decline in our revenues in the quarter
ended September 30, 2001 as compared to the quarter ended September 30, 2000.
Recent Acquisitions
On July 14, 2000, we acquired the business of Odyssey Publications, Inc.
("Odyssey") for $814,000 in cash. The operations of Odyssey have been included
in our operating results from the date of its acquisition. Consequently, our
operating results for the quarter ended September 30, 2001 include the
operations of Odyssey for the entire quarter, whereas our operating results for
the quarter ended September 30, 2000 include approximately eleven weeks of the
operations of Odyssey.
RESULTS OF OPERATIONS
NET REVENUES
THREE MONTHS ENDED
------------------------------------------
SEPTEMBER 30, 2001 SEPTEMBER 30, 2000
------------------ ------------------
Net revenues $9,329,000 $12,588,000
Net revenues include fees generated from the grading and authentication
of sportscards, coins, autographs and stamps; the sales of 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 collectible magazines. Net revenues for the first fiscal quarter
ended September 30, 2001 decreased by 26% to $9,329,000 from $12,588,000
recorded for the prior year's first fiscal quarter. Revenues from the sales of
collectibles decreased by 26% to $5,249,000 in the current fiscal period from
$7,117,000 in the prior year's comparable quarter; while grading and
authentication revenues declined by 25% to $4,080,000 in the current fiscal
quarter from $5,471,000 in fiscal 2001. The decline in collectible sales
occurred because of lower direct sales of owned collectibles and reduced auction
activity in the current fiscal period. The reduced auction activity for the
current quarter was exacerbated because one auction scheduled for the latter
part of September was cancelled as a result of the September 11, 2001 terrorist
attacks. This auction has been rescheduled for the second fiscal quarter of the
current year.
Grading revenue declined 25% in the current quarter primarily because of
a sharp decline in sportscard grading submissions that was partially offset by
stable coin grading submissions and higher average grading fees for coins
graded. Sportscard submissions, particularly for modern sportscards, began to
decline noticeably in the fourth quarter of the prior fiscal year and that
softening continued throughout the current quarter. In addition, during the
current quarter, the quantity of newly manufactured sportscards submitted by
sportscard manufacturers to us for grading and authentication declined
approximately 65% as compared to the prior year's first quarter, which
negatively impacted revenues.
13
GROSS PROFIT
THREE MONTHS ENDED
--------------------------------------------
SEPTEMBER 30, 2001 SEPTEMBER 30, 2000
------------------ ------------------
Gross profit $3,412,000 $5,675,000
Gross profit margin 36.6% 45.1%
Gross profit is calculated by subtracting the cost of revenues from net
revenues. Cost of revenues consist 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. Gross profit decreased by 40%
in the current quarter to $3,412,000 from $5,675,000 in the prior year. Gross
profit margin declined to 36.6% for the first quarter compared to 45.1% for the
comparable prior year quarter. The decline in our gross profit margin occurred
because of several factors, including (i) lower gross profit margins on grading
activities, because operating expenses attributable to grading operations
declined at a lesser rate than did our grading revenues; (ii) the gross profit
margin on the sales of owned collectibles declined to 19.7% for the current
period from 23.0% for the prior year; and (iii) commissions earned on auctions
declined by 60% without a corresponding reduction in operating expenses
attributable to auction activities.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
THREE MONTHS ENDED
--------------------------------------------
SEPTEMBER 30, 2001 SEPTEMBER 30, 2000
------------------ ------------------
SG&A $5,205,000 $4,987,000
Percent of net revenues 55.8% 39.6%
Selling, general and administration ("SG&A") expenses primarily include
advertising and sales promotional expenses, wages and payroll-related expenses,
professional and consulting expenses, travel and entertainment, facility-related
expenses and security charges. SG&A expenses, in absolute dollars, increased in
the quarter ended September 30, 2001 to $5,005,000 from $4,987,000 in the same
quarter of the prior year. However, because such expenses increased at the same
time that net revenues were declining, SG&A increased as a percentage of net
revenues to 55.8% in the first quarter of the current fiscal year from 39.6% in
the same quarter of fiscal 2001. Higher expenses were recorded for severance,
implementation expenses associated with a new enterprise software system,
facility expenses and settlement of a business dispute, partially offset by
lower expenses related to wages, advertising and auction catalog production
expenses.
14
AMORTIZATION OF GOODWILL AND INTANGIBLES
THREE MONTHS ENDED
------------------------------------------
SEPTEMBER 30, 2001 SEPTEMBER 30, 2000
------------------ ------------------
Amortization of goodwill
and intangibles $411,000 $487,000
Percent of net revenues 4.4% 3.9%
Amortization of goodwill and intangibles consist of goodwill charges
relating to acquisitions by the Company and amortization charges for
non-competition agreements that we obtained from the sellers in those
acquisitions. We amortize goodwill over periods of 5 to 15 years and the
non-competition agreements over 3 years, the term of the agreements.
Amortization expense for the first quarter was $411,000 as compared to $487,000
last year. This reduction results from a charge for the impairment of goodwill
that was recorded in the second quarter of the prior fiscal year, which reduced
subsequent quarterly amortization charges for goodwill.
STOCK-BASED COMPENSATION
Stock-based compensation relates to stock-based charges from the grant
of stock options after June 30, 1999 and prior to the Company's initial public
offering at a price that was lower than the price at which shares were sold in
that public offering.
INTEREST INCOME
THREE MONTHS ENDED
-------------------------------------------
SEPTEMBER 30, 2001 SEPTEMBER 30, 2000
------------------ ------------------
Interest income, net $88,000 $313,000
Percentage of net revenues 0.9% 2.5%
Interest income for the current quarter was lower than the prior year
because of lower cash and cash equivalent balances, lower short-term interest
rates and a $22,000 charge in the current period for interest expense resulting
from a sales tax audit. Our cash balances fluctuate because of the variability
in the timing and size of our auctions, and accordingly it is anticipated that
interest income will fluctuate on a quarter-to-quarter basis (see "Overview --
Factors Affecting Revenues and Margins" above in this section).
INCOME TAXES
Income tax benefit was provided for at a 48.8% rate in the first quarter
ended September 30, 2001, which reflects the statutory rate for a
California-based company of 40.8% and the non-deductibility of certain goodwill
amortization charges and other permanent tax differences. In the first quarter
of the prior fiscal year, income tax expense was provided for at a 46.6% rate.
Due primarily to the non-deductibility of certain goodwill amortization charges
and other permanent tax differences, we expect our tax rate to remain at
approximately the current rate for the remainder of this fiscal year.
15
PRO FORMA OPERATING RESULTS, EXCLUDING AMORTIZATION OF GOODWILL AND INTANGIBLES
AND STOCK-BASED COMPENSATION
The following pro forma operating data exclude non-cash charges for
amortization of goodwill and intangibles, stock-based compensation, and
impairment of goodwill and assume 42.8% and 41.9% effective tax rates for the
periods ended September 30, 2001 and 2000, respectively. The pro forma
information is not a presentation made in accordance with accounting principles
generally accepted in the United States of America. The pro forma information
should not be considered in isolation or as a substitute for operating income
(loss), income (loss) before income tax, net income (loss), net income (loss)
per share or cash flows presented in accordance with accounting principles
generally accepted in the United States of America. While the pro forma
information is used as a measure of operations, it is not necessarily comparable
to other similarly titled captions of other companies due to differences in
methods of calculations and also should not be considered an indicator of the
Company's future financial performance.
The calculations of pro forma operating income (loss), pro forma income
(loss) before income tax, pro forma net income (loss), and pro forma net income
(loss) per share are shown below:
THREE MONTHS ENDED
-------------------------------
SEPT. 30, SEPT. 30
2001 2000
----------- -----------
Operating income (loss) as reported $(2,217,000) $ 189,000
Amortization of goodwill and
intangibles 411,000 487,000
Stock-based compensation 13,000 12,000
----------- -----------
Pro forma operating income (loss) (1,793,000) 688,000
Interest income, net 88,000 313,000
Other income 8,000 --
----------- -----------
Pro forma income (loss) before income
tax (1,697,000) 1,001,000
Pro forma income tax expense (benefit) (726,000) 419,000
----------- -----------
Pro forma net income (loss) $ (971,000) $ 582,000
=========== ===========
Pro forma net income (loss) per share:
Basic $ (0.04) $ 0.02
=========== ===========
Diluted $ (0.04) $ 0.02
=========== ===========
Weighted average shares outstanding:
Basic 24,995,000 25,428,000
Diluted 24,995,000 26,329,000
16
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2001, we had cash and cash equivalents of $3,302,000
compared to cash and cash equivalents of $5,874,000 at June 30, 2001. The
decrease in cash since fiscal year-end resulted, in part, from the
period-to-period variability or fluctuations in the timing of our collectibles
auctions and, to a lesser extent, the loss on operations for the quarter ended
September 30, 2001. We generally pay consignors to our auctions on the 45th day
following the close of an auction. Between the close of an auction and the
payment to consignors, we collect amounts due from the successful bidders, which
causes our cash and cash equivalent balances to increase. Depending on the
number of auctions held in any fiscal period, the relative size of those
auctions in terms of the number and value of the items sold and the timing of
each auction, this auction "cycle" can cause significant fluctuations in our
cash balances. Because the variability in the timing, number and size of our
auctions is an inherent feature of our business, we expect that our cash and
cash equivalent balances will be subject to continuing fluctuations in
subsequent reporting periods.
Historically, we have relied on internally generated funds, rather than
borrowings, as our primary source of funds to support operations. Our grading
and authentication services provide us with a relatively steady source of cash,
because, in most instances, our customers prepay for services at the time they
submit their collectibles for authentication and grading. Our auction activities
experience significant fluctuations in cash flows depending upon each individual
auction cycle and size of the auctions. We do not have a credit facility.
Net cash used in operating activities was $2,057,000 for the three-month
period ended September 30, 2001 as compared to $7,928,000 for the three-month
period ended September 30, 2000. During the fiscal quarter ended September 30,
2001, cash was used to fund the net operating loss for the period, to pay
consignors to auctions and to fund an increase in income taxes refundable. Cash
was provided by non-cash charges for amortization of goodwill and depreciation
and lower inventory levels.
Net cash used in investing activities was $554,000 for the three-month
period ended September 30, 2001 and consisted of expenditures for fixed assets,
primarily for software costs associated with a new enterprise software system
and related computer servers, and for an advance made to a related party. In
addition, during the current quarter, $100,000 was advanced against the $375,000
purchase price of a business to be acquired by the Company, as more fully
described in note 8 to the interim condensed consolidated financial statements
included in Item 1 of this Report.
Net cash provided by financing activities for the three-month period
ended September 30, 2001, was $39,000 and consisted solely of the proceeds from
our Employee Stock Purchase Plan that allows employees to purchase stock at a
formula discount at six-month intervals.
We believe that our existing cash balances and internally generated
funds will be sufficient to finance our operations and financing requirements
for at least the next twelve months. However, our capital requirements will
depend on several factors, including our ability to achieve and maintain
operating profitability, the need to increase inventory of collectibles for
auction, capital expenditures for our new enterprise software system and various
other factors. Depending on our profitability and working capital requirements,
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
17
obtain additional capital 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 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The
Company adopted SFAS No. 133 effective for the first quarter of its fiscal year
that began July 1, 2000. SFAS No. 133 requires that the Company record all
derivatives on the balance sheets at fair value. The Company does not have any
derivative instruments nor does the Company engage in hedging activities.
Therefore, the adoption of SFAS No. 133 had no impact on the Company's financial
statements.
In March 2000, the FASB issued Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation, an interpretation of APB
Opinion No. 25 (FIN 44). FIN 44 clarifies, among other issues, (a) the
definition of an employee for purposes of applying APB Opinion No. 25; (b) the
criteria for determining whether a plan qualifies as a non-compensatory plan;
(c) the accounting consequence of various modifications to the terms of a
previously fixed stock option or award; and (d) the accounting for an exchange
of stock compensation awards in a business combination. FIN 44 was effective
July 1, 2000. The adoption of FIN 44 had no effect on the Company's financial
statements.
In July 2001, the FASB issued FASB Statements No. 141, Business
Combinations (SFAS 141), and No. 142, Goodwill and Other Intangible Assets (SFAS
142). 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. It also requires the Company to
reclassify the carrying amounts of intangible assets and goodwill based on the
criteria in SFAS No. 141 at the time it adopts SFAS No. 142, which is described
below.
SFAS No. 142, which the Company will adopt on July 2, 2002, requires,
among other things, that companies no longer amortize goodwill, but instead test
goodwill for impairment at least annually. In addition, SFAS No. 142 requires
that companies identify reporting units for the purposes of assessing potential
future impairments of goodwill, reassess the useful lives of other existing
recognized intangible assets, and cease amortization of intangible assets with
an indefinite useful life. An intangible asset with an indefinite useful life
should be tested for impairment in accordance with the guidance in SFAS No. 142.
SFAS No. 142 is required to be applied in fiscal years beginning after December
15, 2001 to all goodwill and other intangible assets recognized at that date,
regardless of when those assets were initially recognized. SFAS No. 142 requires
the Company to complete a transitional goodwill impairment test by January 2,
2002, which is six months from the date it will be adopted by the Company. The
Company is also required to reassess the useful lives of other intangible assets
within the first interim quarter after adoption of SFAS No. 142.
The Company's previous business combinations were accounted for using
the purchase method of accounting. As of September 30, 2001 and June 30, 2001,
the net carrying amount of goodwill and other intangible assets was $15,751 and
$16,146, respectively. Amortization expense for the three-month periods ended
September 30, 2001 and 2000 was $411 and $487, respectively. Currently, the
Company is assessing, but has not yet determined, how the adoption of SFAS No.
142 will impact its financial statements.
18
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
There are a number of factors that could affect our future operating
results and financial condition. Those factors include the factors discussed in
this "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and described under the caption "Factors That Could Affect Our
Future Performance" contained in "Item 1 -- DESCRIPTION OF BUSINESS," of our
Annual Report on Form 10-K for the fiscal year ended June 30, 2001 filed with
the Securities and Exchange Commission, to which reference is hereby made for
additional information regarding these factors. In particular, among the factors
described in the Annual Report that could adversely affect the Company's
performance, include the risk that the popularity of collectibles will decline;
a decline in the general economic conditions; temporary popularity of certain
collectibles could cause revenues to fluctuate; frequency and size of auctions
could cause revenues to fluctuate; limited supplies of high-end collectibles;
possibility of incurring losses on owned collectible inventories; lack of
adequate returns on new business opportunities; possibility of having to write
down the carrying value of owned collectible inventories because of market value
fluctuation or our inability to sell certain collectibles in a timely manner;
increased competition; the risk that we will incur unanticipated liabilities
under our authentication and grading warranties; and government regulation that
could cause operating costs to increase.
19
ITEM 3. 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, commodity price risk and other relevant market rate
or price risks.
Due to the cash balances that we maintain, we are exposed to risk of
changes in short-term interest rates. At June 30, 2001, we had $5,874,000 in
cash and cash equivalents. Although the cash balances were lower at September
30, 2001, we anticipate that they will increase at various times during the
fiscal year as we collect payments from purchasers of items that we sell in our
auctions. These cash balances are primarily invested in a highly liquid money
market fund and interest earned is re-invested in the same fund, which accounts
for the interest income that we generate. Reductions in short-term interest
rates could result in reductions in the amount of that income. However, the
impact on our operating results of such changes is not expected to be material.
The Company has no activities that would expose it to foreign currency
exchange rate risk or commodity price risks.
20
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K AND EXHIBITS
(a) Exhibits.
None
(b) Reports on Form 8-K.
No reports on Form 8-K were filed for the quarter ended September
30, 2001.
21
SIGNATURES
Pursuant to the requirement of the Securities Exchange 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: November 13, 2001 /s/ ROGER W. JOHNSON
---------------------------------------
Roger W. Johnson, Chairman and
Chief Executive Officer
Date: November 13, 2001 /s/ MICHAEL J. LEWIS
---------------------------------------
Michael J. Lewis,
Chief Financial Officer
S-1