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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: DECEMBER 30, 2000
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 EAST 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 FEBRUARY 6, 2001:
COMMON STOCK $.001 PAR VALUE. 24,969,699
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COLLECTORS UNIVERSE, INC.
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION --------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
December 30, 2000 and July 1, 2000...................................... 3
Condensed Consolidated Statements of Operations for the three and six months
ended December 30, 2000 and January 1, 2000............................. 4
Condensed Consolidated Statements of Cash Flows for the six months ended
December 30, 2000 and January 1, 2000................................... 5
Notes to Condensed Consolidated Financial Statements........................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................. 17
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders......................... 18
Item 6. Exhibits and Reports on Form 8-K and Exhibits............................... 18
SIGNATURES S-1
INDEX TO EXHIBITS E-1
2
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 30, 2000 AND JULY 1, 2000
(amounts in thousands, except per share data)
(unaudited)
DECEMBER 30, JULY 1,
2000 2000
------------ -----------
ASSETS
Current assets:
Cash and cash equivalents $ 9,129 $ 14,580
Accounts receivable, net 7,973 10,157
Auction consignment advances 1,421 1,693
Inventories, net 9,125 7,415
Prepaid expenses and other 337 933
Refundable income taxes 335 388
Deferred taxes 350 350
-------- --------
Total current assets 28,670 35,516
Property and equipment, net 2,107 1,616
Note receivable from related party 438 92
Other assets 495 427
Goodwill, net 16,936 17,920
Deferred taxes 661 661
-------- --------
$ 49,307 $ 56,232
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 6,407 $ 11,729
Accrued liabilities 888 1,124
Accrued compensation and benefits 576 540
Deferred revenue 1,171 1,724
-------- --------
Total current liabilities 9,042 15,117
Stockholders' equity:
Preferred stock, $.001 par value; 5,000 shares authorized;
no shares issued or outstanding -- --
Common stock, $.001 par value; 45,000 shares authorized; issued
and outstanding: 24,970 at December 30, 2000 and 25,429 at
July 1, 2000 25 25
Additional paid-in capital 41,135 41,056
Treasury stock, at cost (1,003) --
Retained earnings 108 34
-------- --------
Total stockholders' equity 40,265 41,115
-------- --------
$ 49,307 $ 56,232
======== ========
See accompanying notes to condensed consolidated financial statements
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COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ----------------------------
DECEMBER 30, JANUARY 1, DECEMBER 30, JANUARY 1,
2000 2000 2000 2000
------------ ----------- ------------ -----------
Net revenues $12,112 $ 9,762 $24,700 $18,727
Cost of revenues 7,094 4,255 14,007 8,292
------- ------- ------- -------
Gross profit 5,018 5,507 10,693 10,435
Selling, general and administrative
expenses 4,147 4,556 9,134 9,320
Amortization of goodwill and
intangibles 486 199 973 394
Impairment of goodwill 906 -- 906 --
Stock-based compensation 14 18 26 33
------- ------- ------- -------
Total operating expenses 5,553 4,773 11,039 9,747
Operating income (loss) (535) 734 (346) 688
Interest income, net 212 232 525 250
Other expense (1) -- (1) --
------- ------- ------- -------
Income (loss) before income taxes (324) 966 178 938
Provision for income taxes (129) 457 105 484
------- ------- ------- -------
Net income (loss) $ (195) $ 509 $ 73 $ 454
======= ======= ======= =======
Net income (loss) per share:
Basic $ (0.01) $ 0.02 $ 0.00 $ 0.02
======= ======= ======= =======
Diluted $ (0.01) $ 0.02 $ 0.00 $ 0.02
======= ======= ======= =======
Weighted average shares outstanding:
Basic 25,089 22,914 25,258 21,622
Diluted 25,089 24,376 25,937 22,872
See accompanying notes to condensed consolidated financial statements
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COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands, except per share data)
(unaudited)
SIX MONTHS ENDED
---------------------------
DECEMBER 30, JANUARY 1,
2000 2000
------------ ----------
OPERATING ACTIVITIES:
Net Income $ 73 $ 454
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization 2,226 690
Stock-based compensation 26 33
Changes in assets and liabilities:
Accounts receivable 2,184 (298)
Auction consignment advances 272 (5)
Inventories (1,710) (948)
Prepaid expenses and other assets 527 (473)
Accounts payable and accrued liabilities (5,529) (645)
Deferred revenue (614) 279
Income tax payable -- 485
------- -------
Net cash used in operating activities (2,545) (428)
INVESTING ACTIVITIES:
Capital expenditures (817) (529)
Net cash paid for acquired business (794) (300)
Collections on note receivable 10 10
Advances on note receivable (355) --
------- -------
Net cash used in investing activities (1,956) (819)
FINANCING ACTIVITIES:
Proceeds from exercise of stock options -- 302
Proceeds from employee stock purchases 53 --
Proceeds from sale of treasury stock -- 21,360
Purchase of company common stock (1,003) --
------- -------
Net cash (used in) provided by financing activities (950) 21,662
Net (decrease) increase in cash and cash equivalents (5,451) 20,415
Cash and cash equivalents at beginning of year 14,580 1,852
------- -------
Cash and cash equivalents at end of period $ 9,129 $22,267
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ -- $ --
Income taxes paid $ 236 $ --
SUPPLEMENTAL DISCLOSURE ON NON-CASH TRANSACTIONS:
During the six-month period ended December 30, 2000, the Company
acquired a business, as follows:
$ (25)
Fair value of assets acquired
794
Cash paid in acquisition, net of cash acquired
68
Liabilities assumed
------
Goodwill $ 837
======
See accompanying notes to condensed consolidated financial statements
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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 condensed consolidated financial statements as of, and
for the three and six-month periods ended, December 30, 2000 include the
accounts of Collectors Universe, Inc. and its subsidiaries (the "Company" or
"Collectors"). On July 14, 2000, the Company acquired Odyssey Publications, Inc.
("Odyssey"), and accordingly the accompanying condensed consolidated financial
statements of the Company, as of and for the three and six-month periods ended
December 30, 2000, include the accounts of Odyssey from the date of its
acquisition.
Unaudited Interim Financial Information
The interim condensed consolidated financial statements as of December
30, 2000 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 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"). The consolidated balance
sheet at July 1, 2000 has been derived from the audited consolidated financial
statements at that date. Operating results for the three and six-month periods
ended December 30, 2000, are not necessarily indicative of the results that may
be expected for the year ending June 30, 2001. 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 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 as for the fiscal year ended July 1, 2000.
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 GAAP 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 period. Actual results
could differ from those estimates.
2. INVENTORIES
Inventories consist of the following:
DECEMBER 30 JULY 1,
2000 2000
----------- ---------
Coins and currency $ 6,090 $ 4,412
Sportscards and sports memorabilia 2,145 1,492
Records 545 563
Other collectibles 482 1,054
---------- ---------
9,262 7,521
Less inventory reserve (137) (106)
---------- ---------
Inventories, net $ 9,125 $ 7,415
========== =========
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COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except per share data)
(unaudited)
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 30, JULY 1,
2000 2000
------------ ---------
Grading reference sets $ 47 $ 40
Computer hardware and equipment 1,604 1,421
Computer software 683 686
Equipment 1,183 1,102
Furniture and office equipment 783 634
Leasehold improvements 377 111
---------- ---------
4,677 3,994
Less accumulated depreciation and amortization (2,570) (2,378)
---------- ---------
Property and equipment, net $ 2,107 $ 1,616
4. GOODWILL
Goodwill represents the excess of the purchase price over the fair value
of net assets acquired and is amortized using the straight-line method
over periods ranging from 5 to 15 years. We periodically evaluate the
recoverability of goodwill by determining whether the amortization of
the balance over its remaining useful life can be recovered through
projected undiscounted future operating cash flows. Based upon our
analysis at December 30, 2000, we determined that the goodwill
associated with our purchase, in January 1999, of the 40% ownership
interest in Internet Universe, LLC that we did not own had become
impaired. This determination resulted primarily from a change in our
projected revenue for Internet advertising on our website
www.collectors.com. This change was the result of industry wide
reductions, beginning in the quarter ended December 30, 2000, in banner
advertising placements and in amounts that could be charged to attract
advertisers to internet websites. Accordingly, we incurred a charge of
$906 in the second fiscal quarter to reduce the carrying value of
goodwill associated with our January 1999 purchase of the remaining
ownership of Internet Universe to zero. This impairment charge is
reflected in our auction segment reporting for the three and six-month
periods ended December 31, 2000. The original amount of goodwill
resulting from our January 1999 purchase of Internet Universe was
$1,469. Amortization charges taken prior to the goodwill reduction in
December 2000 were $122, $294 and $147 in fiscal 1999, 2000 and 2001,
respectively. After reducing the carrying value of the goodwill
associated with Internet Universe, as of December 30, 2000 the Company's
goodwill was $16,936, net of accumulated amortization of $1,818.
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COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share data)
(unaudited)
5. NET INCOME (LOSS) PER SHARE
Net income (loss) per share is determined in accordance with Financial
Accounting Standards Board Statement on Financial Accounting Standards
No. 128, "Earnings Per Share." Net income (loss) per share for the three
and six-month periods ended December 30, 2000 and January 1, 2000 is
computed as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ -------------------------
DECEMBER 30, JANUARY 1, DECEMBER 30, JANUARY 1,
2000 2000 2000 2000
------------------------ -------------------------
Net income (loss) applicable to
common stockholders $ (195) $ 509 $ 73 $ 454
======== ======= ======= =======
Net income (loss) per share:
Weighted average shares outstanding
used in computation of net income
(loss) per share:
Basic 25,089 22,914 25,258 21,622
Diluted 25,089 24,376 25,937 22,872
Net income (loss) per share:
Basic $ (0.01) $ 0.02 $ 0.00 $ 0.02
-------- ------- ------- -------
Diluted $ (0.01) $ 0.02 $ 0.00 $ 0.02
======== ======= ======= =======
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
offering price.
7. BUSINESS SEGMENTS
We operate principally in two service segments: the authentication and
grading of collectibles and auctions of collectibles. We allocate a
substantial portion of operating expenses to each service segment based
upon activity levels. We do not allocate specific assets to these
service segments. All of our sales and identifiable assets are located
in the Unites States.
THREE MONTHS ENDED DECEMBER 30, 2000
------------------------------------
Grading Auction Total
------- -------- ---------
Net Revenues $ 5,230 $ 6,882 $ 12,112
======= ======== ========
Operating income (loss) $ 1,232 $ (1,301) $ (69)
Unallocated operating expense (466)
--------
Consolidated operating (loss) $ (535)
========
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COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(amounts in thousands, except share data)
(unaudited)
THREE MONTHS ENDED JANUARY 1, 2000
----------------------------------
Grading Auction Total
------- -------- --------
Net Revenues $ 5,646 $ 4,116 $ 9,762
======= ======== ========
Operating income (loss) $ 1,957 $ (1,344) $ 613
Unallocated operating income 121
--------
Consolidated operating income $ 734
========
SIX MONTHS ENDED DECEMBER 30, 2000
----------------------------------
Grading Auction Total
--------- ---------- --------
Net Revenues $ 10,646 $ 14,054 $ 24,700
======== ======== ========
Operating income (loss) $ 2,323 $ (1,703) $ 620
Unallocated operating expense (966)
--------
Consolidated operating (loss) $ (346)
========
SIX MONTHS ENDED JANUARY 1, 2000
--------------------------------
Grading Auction Total
--------- --------- -------
Net Revenues $ 11,387 $ 7,340 $18,727
======== ======== =======
Operating income (loss) $ 3,824 $ (3,134) $ 690
Unallocated operating expense (2)
-------
Consolidated operating income $ 688
=======
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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 Form 10-Q Report
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 Form
10Q 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 are
inherently uncertain and our actual results in future periods may differ
significantly from our expectations concerning or our projections of those
results or of future business trends described in this Form 10Q. The sections
below entitled Overview -- Factors Affecting Revenues and Margins" and
"Additional Factors That May Affect Future Operating Results" describes 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.
The forward-looking statements contained in this Report are made only as
of the date of the Report and the Company undertakes no obligation to update or
revise the forward-looking statements, whether as a result of new information,
future events or otherwise.
OVERVIEW
Factors Affecting Revenues and Margins
Our Business. Collectors Universe provides grading and authentication
services for sportscards, rare coins and vintage stamps and authentication
services for autographs. 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 includes in-person Internet 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 and autographs through shows, catalogs and direct sales. During the
latter part of fiscal 1999 and in fiscal year 2000, we conducted weekly
Internet-only auctions of consigned and owned collectibles, but these weekly
Internet-only auctions were discontinued at the end of fiscal 2000.
Revenue Recognition Policies. Grading and authentication service fees
are generally prepaid, although we do extend open account privileges to larger
dealers. We record, as deferred revenue, all pre-paid grading and authentication
fees until the collectibles are graded and shipped back to the submitter, at
which time, we record the grading and authentication fees as revenue and deduct
those fees from deferred revenue. For dealers who have an open account status,
we record revenue at the time of shipment. Grading and authentication fees vary,
depending primarily on the time within which the submitter desires the grading
and authentication to be completed and the item to be returned. Higher fees are
charged for faster service; however, we recently introduced a reduced fee
structure for in-person grading of coins valued at less than $1,500 that is
conducted at collectibles shows. It has been our experience that vintage or
higher value items are often submitted for faster turn-around and, therefore,
generate higher revenues than do more recent or less valuable items.
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 within 45 days
following the auction. For collectibles that we own and sell at auction, we
record the successful bidder amount, or "hammer," as the sale of 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 commissions earned, the amounts of the buyer's and
seller's fees that are payable to us. Depending upon the type of collectibles
that are being auctioned, we charge successful bidders a 10% to 15% commission
and generally charge
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consignors a 5% to 15% selling commission. On some large or important
consignments, we may negotiate a reduced consignor commission.
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, sales of
owned collectibles reduces our overall auction margins to a level that is
significantly below that realized for authentication and grading services or
auctions of consigned collectibles. Consequently, our gross margin depends, not
only upon the mix between grading and authentication revenues, on the one hand,
and auction revenues, on the other hand, but also upon the mix of consigned and
owned collectibles sold at auctions.
Additional factors that can affect our grading and authentication
margins include (i) the mix between coin submittals and trading card submittals,
because we charge more for coin grading and authentication services; and (ii)
the mix between older or vintage coins and trading cards, on the one hand, and
newer coins and trading cards, on the other hand, as collectors and dealers
generally are willing to pay higher fees for grading and authentication of
vintage items in order to obtain faster turn-around, than with respect to newer
items.
Our collectibles auctions are held periodically throughout the fiscal
year. A majority of the collectibles that we sell at our auctions are consigned
to us, and we generally pay the consignors the net proceeds from the sales of
their collectibles 45 days following the close of an auction. Both the timing
and relative size of our auctions varies depending on a number of factors,
including the availability of consignments, the number and value of the items
consigned, collectible shows and conventions and certain seasonal factors. As a
result, the number and size of auctions we conduct can vary from quarter to
quarter. Due to these and other factors, including our revenue recognition
policies, we can experience significant variations, on a quarterly basis, in our
auction revenue and in our cash flows. In addition, for these same reasons it is
difficult to forecast, on a quarterly basis, revenue that will be attributable
to our auction activities because of these factors. Also, see the discussion
regarding cash flows in the section entitled "Liquidity and Capital Resources"
below.
Recent Acquisitions
In March 2000, we purchased substantially all of the assets of the coin
auction and retail coin businesses of Bowers and Merena ("Bowers and Merena")
for $8.0 million in cash and 1,000,000 shares of our common stock. On July 14,
2000, we acquired the business of Odyssey Publications, Inc. ("Odyssey") for
$794 in cash. The operations of these businesses have been included in our
operating results from the respective dates of their acquisition. As a
consequence, their operations are included in our operating results for the
three and six-month periods ended December 30, 2000 but are not included in our
operating results for the corresponding three and six-month periods ended
January 1, 2000.
RESULTS OF OPERATIONS
NET REVENUES
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- --------------------------
DECEMBER 30, JANUARY 1, DECEMBER 30, JANUARY 1,
2000 2000 2000 2000
------------------------- --------------------------
(in thousands, (in thousands,
except per share except per share
data) data)
Grading revenues $ 5,230 $ 5,646 $ 10,646 $ 11,387
Auction revenues 6,882 4,116 14,054 7,340
-------- --------- -------- --------
Net revenues $ 12,112 $ 9,762 $ 24,700 $ 18,727
======== ========= ======== ========
Net revenues include grading and authentication fees for sportcards,
coins, autographs and stamps; the prices at which owned collectibles are sold in
our auctions or 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 three and six-month periods ended December 30,
2000 increased by 24% and 32%, respectively, as compared
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from the corresponding three and six month periods of the prior year. Those
increases were attributable to increases in auction and collectibles sales
revenues of 67% in the three months, and 91% in the six months, ended December
30, 2000. During those same three and six month periods, grading and
authentication revenues declined by 7% in each period, respectively.
The increases in auction revenues in three and six-month periods ended
December 31, 2000, are primarily attributable to the acquisition of Bowers and
Merena rare coin auction and direct sale businesses that occurred subsequent to
the prior year's comparable three and six month periods and, to a lesser extent,
an increase in the size and number of auctions held during those periods by our
other auction divisions. Those increases more than offset a decline of $2.9
million of auction revenues in the six months ended December 30, 2000 that
resulted from our discontinuance of our weekly Internet-only auctions in June
2000.
The declines in grading and authentication revenues in the three and six
month periods ended December 30, 2000 are primarily attributable to a change in
the mix of submittals to a greater proportion of more modern coins and
sportscards as compared to the same periods of the prior year. Customers
submitting modern coins and sportscards for grading and authentication generally
are less time sensitive about receiving the grading and authentication results,
and therefore more often utilize our lower cost-grading service. By contrast,
customers submitting vintage coins and sportcards more often utilize a higher
cost-grading service in order to obtain the grading and authentication results
more quickly. Also contributing to declines in grading authentication fees was a
higher proportion of sportscard submissions compared to coin submissions. The
average grading and authentication fees for sportscards are significantly lower
than the amounts charged for coin grading and authentication, due largely to the
difference in value between sportscards and coins, which affects the amounts
collectors and dealers are willing to pay for such services.
GROSS PROFIT
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- -------------------------
DECEMBER 30, JANUARY 1, DECEMBER 30, JANUARY 1,
2000 2000 2000 2000
------------------------- -------------------------
(in thousands, (in thousands,
except per share except per share
data) data)
Gross profit $ 5,018 $ 5,507 $ 10,693 $ 10,435
======= ======= ======== ========
Gross profit margin 41.4% 56.4% 43.3% 55.7%
======= ======= ======== ========
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
sportcards, production costs, printing, credit cards fees, warranty expense and
the acquisition cost of owned collectibles sold in our auctions. Gross profit
margin is gross profit stated as a percent of net revenues. Gross profits
declined by 9% in the three months ended December 30, 2000, but increased by 2%
in the six-months ended December 30, 2000, as compared to the respective
corresponding periods of the prior year. Gross profit margin declined to 41.4%
in the three months ended December 30, 2000, from 56.4% in the same period of
the prior year, and to 43.3% in the six months ended December 30, 2000 from
55.7% for the same period last year. The declines in our profit margin were
primarily attributable to: (i) lower grading revenues without a corresponding
reduction in associated costs; (ii) the inclusion in our operating results
during the current three and six-month periods of the operations of Bowers and
Merena, the gross profit margins of which were lower than Collectors'
pre-acquisition composite gross profit margin; and (iii) changes in the mix of
revenues during the current fiscal year to a higher proportion of auction and
direct sales revenues from which we realize lower margins than on sales of
consigned collectibles, and in the mix of grading and authentication submittals
to a higher proportion of newer items, as compared to vintage coins and sports
cards.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- --------------------------
DECEMBER 30, JANUARY 1, DECEMBER 30, JANUARY 1,
2000 2000 2000 2000
------------------------- --------------------------
(in thousands, (in thousands,
except per share except per share
data) data)
SG&A $ 4,147 $ 4,556 $ 9,134 $ 9,320
======== ======== ======== ========
Percent of net revenues 34.2% 46.7% 37.0% 49.8%
======== ======== ======== ========
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 decreased by 9% in the three months
and 2% in the six months ended December 31, 2000, as compared to the respective
corresponding periods of the prior year. We also reduced SG&A expenses as a
percentage of net revenues to 34.2% and 37.0% in the three and six months ended
December 30, 2000, respectively, from 46.7% and 49.8%, respectively, for the
same respective periods of the prior year. These reductions were primarily
attributable to the revenue increases generated in those three and six-month
periods of the current year, without a corresponding increase in SG&A expenses.
During fiscal year 1999 and continuing into the first quarter of fiscal year
2000, the Company incurred one-time expenses to enhance its information systems,
to develop its website and to augment its management and support infrastructure.
Subsequently, SG&A expenses have remained relatively unchanged to slightly
lower, due to a $1.5 million reduction, during the six months ended December 30,
2000, in operating expenses resulting from our decision to discontinue our
weekly Internet-only auctions in June 2000, which more than offset the
additional operating expenses resulting from the inclusion of the operations of
Bowers and Merena and the other businesses that we acquired subsequent to the
three and six month periods ended January 1, 2000.
In November 2000, we relocated our principal offices to a new and larger
facility near our original offices. After giving effect to the owner's moving
allowance, this relocation did not result in any material incremental expenses
in the three and six-month periods ended December 30, 2000, although it did
cause some disruption in our grading operations, which resulted in some lost
efficiencies during the quarter ended December 30, 2000. For the current fiscal
quarter, rent expense was approximately $200,000 higher than the previous
quarter because of duplicate facility rent during November 2000. For the
remainder of the current fiscal year, we expect quarterly facility expenses will
be approximately $200,000 higher than in prior periods.
AMORTIZATION OF GOODWILL AND INTANGIBLES
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- --------------------------
DECEMBER 30, JANUARY 1, DECEMBER 30, JANUARY 1,
2000 2000 2000 2000
-------------------------- --------------------------
(in thousands, (in thousands,
except per share except per share
data) data)
Amortization of goodwill
and intangibles $ 486 $ 199 $ 973 $ 394
======= ======= ======= =======
Percent of net revenues 4.0% 2.0% 3.9% 2.1%
=== === === ===
Amortization of goodwill and intangibles consists 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 the respective 3-year terms of those agreements.
Amortization expense for the three and six-months ended December 30, 2000 were
$487,000 and $973,000, respectively, as compared to $199,000 and $394,000,
respectively, for the corresponding periods last year. These increases primarily
resulted from the acquisition of Bowers and Merena and, to a lesser extent, our
acquisition of Odyssey Publications.
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IMPAIRMENT OF GOODWILL
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- -------------------------
DECEMBER 30, JANUARY 1, DECEMBER 30, JANUARY 1,
2000 2000 2000 2000
------------------------- -------------------------
(in thousands, (in thousands,
except per share except per share
data) data)
Impairment of goodwill $ 906 $ -- $ 906 $ --
======= ======= ======= =======
Percent of net revenues 7.5% 0.0% 3.7% 0.0%
======= ======= ======= =======
In January 1999, we increased our ownership of Internet Universe, LLC to
100% by purchasing the 40% ownership interest that we did not already own. In
connection with that acquisition, we recorded goodwill of $1,469,000. We
periodically evaluate the recoverability of goodwill by determining whether the
amortization of the balance over its remaining useful life can be recovered
through projected undiscounted future operating cash flows. Based upon our
analysis at December 30, 2000, we determined that the goodwill associated with
that January 1999 purchase 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, that became
apparent in the quarter ended December 30, 2000, in banner advertising
placements and in amounts that could be charged to attract advertisers to
internet websites. Accordingly, we incurred a charge of $906,000 in the quarter
ended December 31, 2000 to reduce the carrying value of the Internet Universe
goodwill to zero. This impairment charge is reflected in our auction segment
reporting for the three and six-month periods ended December 31, 2000.
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 low-end of the estimated pricing
range.
INTEREST INCOME
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- --------------------------
DECEMBER 30, JANUARY 1, DECEMBER 30, JANUARY 1,
2000 2000 2000 2000
------------------------- --------------------------
(in thousands, (in thousands,
except per share except per share
data) data)
Interest income, net $ 212 $ 232 $ 525 $ 250
======== ======== ======== ========
Percentage of net revenues 1.8% 2.4% 2.1% 1.3%
======== ======== ======== ========
Interest income is generated on cash balances that we invest primarily
in a highly liquid money market funds. Those cash balances are the result of the
net proceeds from our initial public offering completed in November 1999 and
internally generated cash flow. Our cash balances fluctuate from quarter to
quarter because of the variability in the timing and size of our auctions and in
the number of grading and authentication submittals. Additionally, in March
2000, we used $8.0 million of our cash as partial consideration for the
acquisition of Bowers and Merena and in July 2000, we used approximately
$800,000 to acquire Odyssey Publications. See the discussion of the primary
causes of the fluctuations in our cash balances that are described below under
the caption "Liquidity and Capital Resources."
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INCOME TAXES
Income taxes were provided for at a 59.2% combined federal and state
income tax rate for the first six-months of the current fiscal year, which
reflects the non-deductibility, for income tax purposes, of certain goodwill
amortization charges and of the $906,000 charge for the impairment of goodwill.
We anticipate that this will be the effective tax rate for the entire year
ending June 30, 2001. For the first six months of prior year, income taxes were
provided for at a combined federal and state income tax rate of 51.2%, which
reflects the effect of the non-deductibility of certain goodwill charges and
other permanent tax differences. Our statutory income tax rate as a
California-based company is approximately 40.8% without consideration for any
permanent tax differences.
PRO FORMA OPERATING RESULTS, EXCLUDING AMORTIZATION OF GOODWILL AND
INTANGIBLES AND STOCK-BASED COMPENSATION
The following pro forma operating data, which excludes non-cash charges
for goodwill and intangibles amortization, impairment of goodwill and
stock-based compensation, is presented for informational purposes only and is
not in accordance with generally accepted accounting principles. This pro forma
information assumes a 42% effective income tax rate for all periods presented.
Exclusion of goodwill amortization charges, a portion of which is not tax
deductible, accounts for the lower effective income tax rate for pro forma
purposes, as compared to the actual provision made for income taxes.
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ --------------------------
DECEMBER 30, JANUARY 1, DECEMBER 30, JANUARY 1,
2000 2000 2000 2000
------------------------ --------------------------
(in thousands, (in thousands,
except per share except per share
data) data)
Pro forma operating income $ 871 $ 951 $ 1,559 $ 1,115
======== ======== ======== ========
Pro forma income before income tax $ 1,082 $ 1,183 $ 2,083 $ 1,365
======== ======== ======== ========
Pro forma net income $ 628 $ 686 $ 1,208 $ 790
======== ======== ======== ========
Pro forma net income per share:
Basic $ 0.03 $ 0.03 $ 0.05 $ 0.04
======== ======== ======== ========
Diluted $ 0.03 $ 0.03 $ 0.05 $ 0.03
======== ======== ======== ========
Weighted average shares
outstanding:
Basic 25,089 22,914 25,258 21,622
Diluted 25,089 24,376 25,937 22,872
LIQUIDITY AND CAPITAL RESOURCES
At December 30, 2000, we had cash and cash equivalents of approximately $9.1
million compared to cash and cash equivalents of $14.5 million at July 1, 2000.
The decrease in cash since the end of the prior fiscal year primarily resulted
from the period-to-period variability or fluctuations in the timing of our
collectibles auctions. 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 between fiscal periods. At July 1, 2000, we had collected most of
the proceeds due from several large auctions that had been conducted during the
fourth quarter of fiscal 2000, but had not yet paid consignors to those
auctions, which accounted for our relatively high cash and cash equivalent
balances as of that date. We paid consignors to those auctions approximately $11
million after July 1, 2000. As a result of auctions that have been conducted
thereafter, we generated additional cash balances of approximately $6 million
that, as of December 30, 2000 were owed to consignors to those auctions,
which was $5 million less than amounts owed to consignors at July 1, 2000.
Because the variability of 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 similar significant fluctuations in subsequent
reporting periods.
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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 and,
accordingly, do not currently have any borrowing capacity. Because our
inventories are comprised of collectible coins, sportscards and other items, it
is probable that we would have difficulty in securing a significant credit
facility.
Cash used in operating activities was $2,545 for the six-month period
ended December 30, 2000 as compared with cash used in operating activities of
$428 for the six-month period ended January 1, 2000. During the six months ended
December 30, 2000, cash was provided by net income, decreases in accounts
receivable and non-cash charges for amortization and depreciation. Approximately
$5.5 million of cash was used to reduce consignor payables. Cash also was used
for inventory purchases; primarily, a large U.S. currency collection that was
sold in December by our Lyn Knight Currency Auctions Division. However, because
of our revenue recognition policies, only a portion of the revenues from that
sale was recognized in the quarter and six months ended December 30, 2000.
Net cash used in investing activities was $2.0 million for the six-month
period ended December 30, 2000 and consisted of expenditures for fixed assets,
primarily related to our facility move in November 2000, and to the cash
acquisition of Odyssey Publications in July 2000. For the prior year's
comparable period, $529,000 was used for the acquisition of fixed assets,
primarily computer-related equipment.
In the six months ended December 30, 2000, net cash of $950,000 was used
in financing activities for the purchase of 500,000 of our shares common stock
pursuant to an open market and private stock repurchase program approved by the
Board of Directors. That program authorized purchases of up to 500,000 shares of
our common stock. For the six-month period of the prior fiscal year, cash of
$302,000 was provided by the exercise of a stock option, and $21,360 was
received from our initial public offering, net of expenses.
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. However, our capital requirements
could change as a result of any of a number of factors, including our growth
rate, the need to increase inventory of collectibles for auction, capital
expenditures for leasehold improvements in our new facility. Depending on our
growth 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 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 December 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements (SAB 101). SAB 101 provides interpretive guidance on the recognition,
presentation and disclosure of revenue in financial statements under certain
circumstances. The Company is evaluating the impact that SAB 101 will have on
its consolidated financial statements, if any.
Effective July 2, 2000, the Company adopted Statement of Financial
Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging
Activities, (SFAS No. 133). SFAS No. 133 requires the Company to record all
derivatives on the balance sheet 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 did not have an impact on the Company's
financial position and results of operations.
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17
Effective July 2, 2000, the Company adopted FASB 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 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 award; and (d) the accounting
for an exchange of stock compensation awards in a business combination. The
adoption of FIN 44 did not have an impact on the Company's financial position
and results of operations.
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
above 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,"
in our Annual Report on Form 10-K for the fiscal year ended July 1, 2000 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 our future
performance, include the risk that the popularity of collectibles will decline
or an economic slowdown or contraction will negatively impact the demand for
collectibles or grading and authentication submissions; temporary popularity of
certain collectibles could cause revenues to fluctuate; limited supplies of
high-end collectibles could reduce the revenues we could generate from our
auctions or reduce our margins on auction sales; the 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 collectibles inventories because of market value fluctuation or our
inability to sell certain collectibles in a timely manner; increased
competition; the risk that our operating results will fluctuate; the risk that
we will incur unanticipated liabilities under our authentication and grading
warranties; and the adoption or implementation of government regulations that
could cause operating costs to increase.
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 maintained by the Company, we are exposed to
risk of changes in short-term interest rates. At December 30, 2000, we had
approximately $9.1 million in cash and cash equivalents. 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.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our Annual Meeting of Stockholders was held on December 5, 2000. At
that meeting stockholders voted on the following matters: (i) the election of
five directors to serve for a term of one year; and (ii) approval of an
amendment to our 1999 Stock Incentive Plan to increase the number of shares
issuable thereunder from 1,748,575 to 2,998,575 shares. The election of
directors was uncontested and all five of the nominees of the Company's Board of
Directors were elected. The amendment to the 1999 Stock Incentive Plan also was
approved. Set forth below are the results of the voting on those two matters.
(1) ELECTION OF DIRECTORS:
VOTES
-----------------------
NOMINEE FOR WITHHELD
------- ---------- ---------
David G. Hall 21,985,732 35,050
Q. David Bowers 21,872,338 148,444
Roger W. Johnson 21,985,732 35,050
Van D. Simmons 21,985,732 148,444
Ben A. Frydman 21,985,732 35,050
(2) AMENDMENT OF 1999 STOCK INCENTIVE PLAN TO INCREASE THE NUMBER OF
SHARES ISSUABLE UNDER THAT PLAN FROM 1,748,575 TO 2,998,575
SHARES:
FOR AGAINST ABSTENTIONS BROKER NON-VOTES
----------- ---------- ----------- ----------------
21,750,370 265,552 5,860 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K AND EXHIBITS
(a) Exhibits.
--------
Exhibit 27. Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed for the quarter ended December
30, 2000.
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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: February 9, 2001 /s/ DAVID G. HALL
---------------------
David G. Hall, Chairman and
Chief Executive Officer
Date: February 9, 2001 /s/ GARY N. PATTEN
-----------------------
Gary N. Patten, President
and Chief Financial Officer
S-1
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INDEX TO EXHIBITS
Exhibit 27. Financial Data Schedule
E-1