1st Quarter 10-Q for the period ended 30 September, 2006
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
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|
ý
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the quarter ended September 30, 2006
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OR
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q
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934 [NO FEE REQUIRED]
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For
the transition period from _______ to _____
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Commission
file number 0-27887
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COLLECTORS
UNIVERSE, INC.
(Exact
name of Registrant as specified in its
charter)
|
Delaware
|
33-0846191
|
(State
or other jurisdiction of
|
(I.R.S.
Employer Identification No.)
|
Incorporation
or organization)
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1921
E. Alton Avenue, Santa Ana, California 92705
|
(address
of principal executive offices and zip code)
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|
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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 ü
No
___
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act, (Check
one):
Large
accelerated filer o Accelerated
filer ý Non-accelerated
filer o
Indicate
by check mark whether the Registrant is a shell company (as defined in
Securities Exchange Act Rule 12b-2). YES
[ ]
NO x
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 29, 2006
|
|
Common
Stock $.001 Par Value
|
8,352,902
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COLLECTORS
UNIVERSE, INC.
QUARTERLY
REPORT ON FORM 10-Q
FOR
THE QUARTER ENDED SEPTEMBER 30, 2006
TABLE
OF CONTENTS
PART
I
|
Financial
Information
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Page
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Item
1.
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1
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2
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3
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5
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Item
2.
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21
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21
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21
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22
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24
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24
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27
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31
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33
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33
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Item
3.
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35
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Item
4.
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35
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PART
II
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Other
Information
|
|
|
Item
1A.
|
|
36
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|
Item
2.
|
|
36
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|
Item
6.
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36
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S-1
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E-1
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EXHIBITS
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Exhibit
31.1
|
Certifications
of Chief Executive Officer Under Section 302 of the Sarbanes-Oxley
Act of
2002
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|
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Exhibit
31.2
|
Certifications
of Chief Financial Officer Under Section 302 of the Sarbanes-Oxley
Act of
2002
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|
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Exhibit
32.1
|
Chief
Executive Officer Certification Under Section 906 of the Sarbanes-Oxley
Act of 2002
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|
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Exhibit
32.2
|
Chief
Financial Officer Certification Under Section 906 of the Sarbanes-Oxley
Act of 2002
|
|
PART
I - FINANCIAL INFORMATION
COLLECTORS
UNIVERSE, INC. AND SUBSIDIARIES
as
of September 30, 2006 and June 30, 2006
(in
thousands, except per share data)
(unaudited)
|
|
September
30,
|
|
June
30,
|
|
|
|
2006
|
|
2006
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
41,602
|
|
$
|
52,110
|
|
Accounts
receivable, net of allowance for doubtful accounts of $61 (September)
and
$37 (June)
|
|
|
1,815
|
|
|
1,753
|
|
Inventories,
net
|
|
|
452
|
|
|
437
|
|
Prepaid
expenses and other current assets
|
|
|
875
|
|
|
1,010
|
|
Customer
notes receivable, net of allowance of $16
|
|
|
5,587
|
|
|
3,797
|
|
Deferred
tax assets
|
|
|
1,414
|
|
|
1,414
|
|
Receivables
from sale of net assets of discontinued operations
|
|
|
92
|
|
|
196
|
|
Current
assets of discontinued operations held for sale
|
|
|
73
|
|
|
83
|
|
Total
current assets
|
|
|
51,910
|
|
|
60,800
|
|
Property
and equipment, net
|
|
|
3,180
|
|
|
1,897
|
|
Note
receivable
|
|
|
115
|
|
|
-
|
|
Goodwill
|
|
|
15,074
|
|
|
9,799
|
|
Intangible
assets, net
|
|
|
6,843
|
|
|
4,674
|
|
Note
receivable from sale of discontinued operations
|
|
|
298
|
|
|
321
|
|
Deferred
tax assets
|
|
|
216
|
|
|
342
|
|
Other
assets
|
|
|
512
|
|
|
388
|
|
|
|
$
|
78,148
|
|
$
|
78,221
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
880
|
|
$
|
907
|
|
Accrued
liabilities
|
|
|
2,178
|
|
|
2,043
|
|
Accrued
compensation and benefits
|
|
|
1,200
|
|
|
1,075
|
|
Income
taxes payable
|
|
|
351
|
|
|
496
|
|
Deferred
revenue
|
|
|
1,547
|
|
|
1,384
|
|
Current
liabilities of discontinued operations held for sale
|
|
|
2
|
|
|
8
|
|
Total
current liabilities
|
|
|
6,158
|
|
|
5,913
|
|
Deferred
rent
|
|
|
468
|
|
|
402
|
|
Other
long-term liabilities
|
|
|
40
|
|
|
-
|
|
Commitments
and contingencies
|
|
|
-
|
|
|
-
|
|
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 8,478 at
September 30, 2006 and 8,475 at June 30, 2006
|
|
|
8
|
|
|
8
|
|
Additional
paid-in capital
|
|
|
76,759
|
|
|
76,909
|
|
Accumulated
deficit
|
|
|
(4,264
|
)
|
|
(3,990
|
)
|
Treasury
stock, at cost (125 shares)
|
|
|
(1,021
|
)
|
|
(1,021
|
)
|
Total
stockholders' equity
|
|
|
71,482
|
|
|
71,906
|
|
|
|
$
|
78,148
|
|
$
|
78,221
|
|
See
accompanying notes to condensed consolidated financial statements.
COLLECTORS
UNIVERSE, INC. AND SUBSIDIARIES
(in
thousands, except per share data)
(unaudited)
|
|
Three
Months Ended
|
|
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
Net
revenues
|
|
$
|
9,898
|
|
$
|
8,825
|
|
Cost
of revenues
|
|
|
4,356
|
|
|
3,372
|
|
Gross
profit
|
|
|
5,542
|
|
|
5,453
|
|
Selling
and marketing expenses
|
|
|
1,262
|
|
|
1,090
|
|
General
and administrative expenses
|
|
|
3,979
|
|
|
3,200
|
|
Amortization
of intangible assets
|
|
|
171
|
|
|
20
|
|
Total
operating expenses
|
|
|
5,412
|
|
|
4,310
|
|
Operating
income
|
|
|
130
|
|
|
1,143
|
|
Interest
income, net
|
|
|
567
|
|
|
542
|
|
Other
income
|
|
|
4
|
|
|
8
|
|
Income
before income taxes
|
|
|
701
|
|
|
1,693
|
|
Provision
for income taxes
|
|
|
(318
|
)
|
|
(714
|
)
|
Income
from continuing operations
|
|
|
383
|
|
|
979
|
|
Income
(loss) from discontinued operations, net of gain on sales of discontinued
businesses
(net of income taxes)
|
|
|
11
|
|
|
(12
|
)
|
Net
income
|
|
$
|
394
|
|
$
|
967
|
|
|
|
|
|
|
|
|
|
Net
income per basic share:
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
0.05
|
|
$
|
0.11
|
|
Income
(loss) from discontinued operations, net of gain on sales of discontinued
businesses
(net of income taxes)
|
|
|
-
|
|
|
-
|
|
Net
income
|
|
$
|
0.05
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
Net
income per diluted share:
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
0.04
|
|
$
|
0.11
|
|
Income
(loss) from discontinued operations, net of gain on sales of discontinued
businesses
(net of income taxes)
|
|
|
-
|
|
|
-
|
|
Net
income
|
|
$
|
0.04
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
|
|
8,351
|
|
|
8,486
|
|
Diluted
|
|
|
8,628
|
|
|
8,806
|
|
See
accompanying notes to condensed consolidated financial
statements.
COLLECTORS
UNIVERSE, INC. AND SUBSIDIARIES
(in
thousands)
(unaudited)
|
|
Three
Months Ended
September
30,
|
|
|
|
2006
|
|
2005
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
Net
income
|
|
$
|
394
|
|
$
|
967
|
|
Adjustments
to reconcile net income to net cash (used in) provided by
operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
390
|
|
|
121
|
|
Loss
on disposal of fixed assets
|
|
|
-
|
|
|
3
|
|
Loss
on termination of sublease
|
|
|
-
|
|
|
83
|
|
Stock-based
compensation expense
|
|
|
195
|
|
|
127
|
|
Tax
benefit from exercising of stock options
|
|
|
7
|
|
|
-
|
|
Provision
for bad debts and credits
|
|
|
-
|
|
|
25
|
|
Provision
for inventory write down
|
|
|
(12
|
)
|
|
-
|
|
Discontinued
operations
|
|
|
(10
|
)
|
|
12
|
|
Deferred
income taxes
|
|
|
(12
|
)
|
|
698
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(121
|
)
|
|
296
|
|
Inventories
|
|
|
7
|
|
|
(1
|
)
|
Prepaid
expenses and other current assets
|
|
|
158
|
|
|
39
|
|
Customer
notes receivable (CFC)
|
|
|
(1,790
|
)
|
|
1,483
|
|
Income
taxes payable
|
|
|
(228
|
)
|
|
-
|
|
Other
assets
|
|
|
(66
|
)
|
|
-
|
|
Accounts
payable
|
|
|
(106
|
)
|
|
(361
|
)
|
Accrued
liabilities
|
|
|
66
|
|
|
(67
|
)
|
Deferred
rent and other long-term liabilities
|
|
|
66
|
|
|
17
|
|
Accrued
compensation and benefits
|
|
|
48
|
|
|
(200
|
)
|
Deferred
revenue
|
|
|
(316
|
)
|
|
176
|
|
Net
cash (used in) provided by operating activities
|
|
|
(1,330
|
)
|
|
3,418
|
|
Net
cash provided by operating activities of discontinued
businesses
|
|
|
14
|
|
|
173
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(1,387
|
)
|
|
(99
|
)
|
Collection
of receivables from sales of discontinued businesses
|
|
|
128
|
|
|
48
|
|
Purchase
of businesses, net of cash acquired
|
|
|
(6,182
|
)
|
|
(2,279
|
)
|
Purchase
of patents and other intangible assets
|
|
|
(343
|
)
|
|
-
|
|
Capitalized
software
|
|
|
(383
|
)
|
|
-
|
|
Net
cash used in investing activities
|
|
|
(8,167
|
)
|
|
(2,330
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Proceeds
from exercise of stock options
|
|
|
21
|
|
|
14
|
|
Payments
for retirement of common stock
|
|
|
(378
|
)
|
|
-
|
|
Dividends
paid to common stockholders
|
|
|
(668
|
)
|
|
-
|
|
Net
cash (used in) provided by financing activities
|
|
|
(1,025
|
)
|
|
14
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(10,508
|
)
|
|
1,275
|
|
Cash
and cash equivalents at beginning of period
|
|
|
52,110
|
|
|
65,439
|
|
Cash
and cash equivalents at end of period
|
|
$
|
41,602
|
|
$
|
66,714
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
7
|
|
$
|
3
|
|
Income
taxes paid
|
|
$
|
507
|
|
$
|
16
|
|
See
accompanying notes to condensed consolidated financial
statements.
COLLECTORS
UNIVERSE, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(in
thousands)
(unaudited)
|
|
Three
Months Ended
September
30,
|
|
|
|
2006
|
|
2005
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION (CONTINUED):
|
|
|
|
|
|
Effective
July 14, 2005, the Company acquired CoinFacts.com in a transaction
summarized as follows:
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
-
|
|
$
|
515
|
|
Cash
paid
|
|
|
-
|
|
|
515
|
|
|
|
|
|
|
|
|
|
Effective
September 2, 2005, the Company acquired CCE in a transaction summarized
as
follows:
|
|
|
|
|
|
|
|
Fair
value of net liabilities assumed
|
|
|
-
|
|
|
(70
|
)
|
Deferred
taxes recognized at acquisition
|
|
|
-
|
|
|
(423
|
)
|
Transition
costs
|
|
|
-
|
|
|
27
|
|
Intangible
assets
|
|
|
-
|
|
|
947
|
|
Fair
value of CTP, including net assets
|
|
|
-
|
|
|
501
|
|
Goodwill
|
|
|
-
|
|
|
1,282
|
|
Purchase
price, net of cash acquired
|
|
|
-
|
|
|
2,264
|
* |
|
|
|
|
|
|
|
|
Effective
July 1, 2006, the Company acquired Expos Unlimited, LLC in a transaction
summarized
as follows:
|
|
|
|
|
|
|
|
Fair
value of net liabilities assumed
|
|
$
|
(471
|
)
|
$
|
-
|
|
Intangible
assets
|
|
|
988
|
|
|
-
|
|
Goodwill
|
|
|
1,894
|
|
|
-
|
|
Purchase
price, net of cash acquired
|
|
|
2,411
|
** |
|
-
|
|
|
|
|
|
|
|
|
|
Effective
August 18, 2006, the Company acquired American Gemological Laboratories,
Inc.
in a transaction summarized as follows:
|
|
|
|
|
|
|
|
Fair
value of net assets acquired
|
|
$
|
7
|
|
$
|
-
|
|
Deferred
taxes recognized at acquisition
|
|
|
(137
|
)
|
|
-
|
|
Intangible
assets
|
|
|
646
|
|
|
-
|
|
Goodwill
|
|
|
3,360
|
|
|
-
|
|
Purchase
price, net of cash acquired
|
|
|
3,876
|
*** |
|
-
|
|
|
|
|
|
|
|
|
|
*
$500,000
of the purchase price was payable subsequent to September 30, 2005
and was
included
in accrued
liabilities at September 30,
2005.
|
|
|
|
|
|
|
|
**
Includes
$30,000 unpaid as of September 30, 2006, pending settlement of the
working
capital
provisions,
of the purchase agreement.
|
|
|
|
|
|
|
|
***
Includes $75,000 of direct costs accrued at September 30,
2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to condensed consolidated
financial statements.
COLLECTORS
UNIVERSE, INC. AND SUBSIDIARIES
1. SIGNIFICANT
ACCOUNTING POLICIES
Principles
of Consolidation
The
accompanying unaudited interim condensed consolidated financial statements
include the accounts of Collectors Universe, Inc. and its subsidiaries (the
“Company”). All intercompany transactions and accounts have been eliminated.
In
fiscal
2006, the Company acquired the following businesses, the results of operations
of which have been consolidated into the financial statements of the Company
from their respective dates of acquisition:
Business
|
Acquisition
Date
|
Purchase
Price
|
CoinFacts.com
|
July
14, 2005
|
$0.5
million
|
Certified
Coin Exchange
|
September
2, 2005
|
$2.4
million
|
Gem
Certification & Appraisal Lab, LLC
|
November
8, 2005
|
$3.3
million
|
Gemprint
Corporation
|
December
22, 2005
|
$8.6
million
|
In
the
first quarter of fiscal 2007, the Company acquired the following businesses,
the
results of operations of which have been consolidated into the financial
statements of the Company from their respective dates of
acquisition:
Business
|
Acquisition
Date
|
Purchase
Price
|
Expos
Unlimited, LLC
|
July
1, 2006
|
$2.5
million
|
American
Gemological Laboratories, Inc.
|
August
18, 2006
|
$3.9
million
|
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 condensed 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 months ended September 30, 2006 are not necessarily indicative of the
results that may be expected for the year ending June 30, 2007 or for any other
interim period during such year. 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, 2006. Amounts related to disclosure of June 30, 2006 balances within
these interim condensed consolidated financial statements were derived from
the
aforementioned audited consolidated financial statements and notes thereto
included in that Form 10-K.
Reclassifications
Certain
prior
period amounts have been reclassified to conform to the current period
presentation. On the Condensed Consolidated Statements of Cash Flows for the
three month period ended September 30, 2005, net cash inflows of $1,483,000
from
advances to and cash collections from customer notes receivable has been
reclassified from cash flows from investing activities to cash flows from
operating activities.
Revenue
Recognition
Net
revenues consist primarily of fees generated from the authentication and grading
of coins, sportscards, autographs, currency, diamonds, colored gemstones and
stamps. With the acquisition of Expos, the Company recognizes revenues earned
from the promotion, managing and operation of collectibles conventions in the
period that the event occurs. Authentication and grading revenues are recognized
when those services have been performed by us and the item is shipped back
to
the customer. Authentication and grading fees generally are prepaid, although
we
offer open account privileges to larger dealers. Advance payments received
for
grading services are deferred until the service is performed and the graded
item
is shipped to the customer. In the case of dealers to whom we have extended
credit, we record revenues at the time the item is shipped to the
customer.
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 and disclosure of contingent assets and liabilities at the dates
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 could be material to the condensed consolidated financial
statements.
Long-Lived
Assets
Management
regularly reviews property and equipment and other long-lived assets, including
certain identifiable intangibles and goodwill, for possible impairment. This
review occurs annually, or more frequently if events or changes in circumstances
indicate the carrying amount of the asset may not be recoverable in full. If
there is indication of impairment of property and equipment or amortizable
intangible assets, then management prepares an estimate of future cash flows
(undiscounted and without interest charges) expected to result from the use of
that asset and its eventual disposition. If these cash flows are less than
the
carrying amount of the asset, an impairment loss is recognized to write down
the
asset to its estimated fair value. The fair value is estimated at the present
value of the future cash flows discounted at a rate commensurate with
management’s estimates of the business risks. As of September 30, 2006, the
Company does not believe there has been any impairment of its long-lived assets.
There can be no assurance, however, that there will be no impairment of the
Company’s long-lived assets in the future.
Stock-Based
Compensation
At
September 30, 2006, the Company had four stock-based compensation plans. Prior
to July 1, 2005, the Company accounted for these plans under the recognition
and
measurement provisions of Accounting Principles Board (“APB”) Opinion No. 25,
Accounting
for Stock Issued to Employees,
and
related interpretations, as permitted by Statement of Financial Accounting
Standards (“SFAS”) No. 123, Accounting
for Stock-Based Compensation.
Effective
July 1, 2005, the Company adopted the provisions of Standards (SFAS) No.
123(R), Share-Based
Payment.
Accordingly, stock-based compensation cost is measured at the grant date, based
on the fair value of the award, and is recognized as expense over the employee
requisite service period, which is generally the vesting period. The following
table shows total stock-based compensation expense included in the Condensed
Consolidated Statements of Operations:
|
|
(Dollars
in thousands)
|
|
|
|
Three
Months Ended
September
30,
|
|
|
|
2006
|
|
2005
|
|
Included
in:
|
|
|
|
|
|
Cost
of revenues
|
|
$
|
76
|
|
$
|
56
|
|
Selling
and marketing expenses
|
|
|
1
|
|
|
1
|
|
General
and administrative expenses(1)
|
|
|
123
|
|
|
75
|
|
Pre-tax
stock-based compensation expense
|
|
|
200
|
|
|
132
|
|
Income
tax benefits
|
|
|
(5
|
)
|
|
(5
|
)
|
Stock-based
compensation expense
|
|
$
|
195
|
|
$
|
127
|
|
|
(1)
|
Includes
$3,000 and $0 in the three months ended September 30, 2006 and 2005,
respectively, for amortization of deferred compensation expense related
to
issuance of restricted stock (see
below).
|
For
the
three months ended September 30, 2005 and 2006, the Company estimated the rates
of forfeiture of outstanding non-vested stock-based compensation awards to
be 4%
and 10.5%, respectively.
During
the fourth quarter of 2006, the Company reviewed its assumptions, both current
and historical, regarding the assumptions that are input into the Black-Scholes
option model. The expected option term and the resultant volatility percentage
and the resultant risk-free rate assumptions were modified, which resulted
in a
correcting adjustment of compensation expense in the fourth quarter of fiscal
2006 of approximately $105,000, including the effect of the increase in the
estimated forfeiture rate from 4% to 10.5%, which we believe was erroneously
determined by us. The Company increased the expected term of options to a
weighted average of approximately 5.0 years from a previous weighted average
estimate of 2.0 years, which we believe was erroneously determined by us. After
carefully assessing the effect of the $105,000 on each of the quarters in the
nine months ended March 31, 2006, under the provisions of Statement of Financial
Accounting Standards No. 154, Accounting
Changes and Error Corrections,
a
replacement of APB Opinion No. 20, and FASB Statement No.3, we determined that
the prorata portion of such $105,000 (or $35,000 per quarter) was not material
to those quarters and, accordingly, recorded the amount of $105,000 in the
fourth quarter of fiscal 2006. The annual volatility percentage was reduced
from
approximately 75% to a range of 58% to 68%, depending on the estimated expected
term of the option.
During
the three month periods ended September 30, 2005 and 2006, 10,000 and 28,000
stock options were granted, respectively. The Company uses the Black-Scholes
option pricing model to determine the fair value of option grants issued and
used the assumptions set forth in the following table (which reflect the
adjustments described above) to determine the fair values of the options granted
in those respective three month periods:
|
|
2006
|
|
2005
|
|
Dividend yield
|
|
|
2.3%
|
|
|
-
|
|
Expected
volatility
|
|
|
52.0%
|
|
|
61.0%
|
|
Risk-free
interest rate
|
|
|
4.69%
|
|
|
3.99%
|
|
Expected
lives
|
|
|
5.1
years
|
|
|
5.1
years
|
|
Because
the Company paid its first quarterly dividend of $0.08 per common share in
the
fourth quarter of 2006, the Company assumed a dividend yield of 2.3% for stock
option grants issued in or after the fourth quarter of fiscal 2006, based on
an
annualized dividend of $0.32 per share of common stock.
At
September 30, 2006, stock options to purchase a total of 911,000 shares of
our
common stock were outstanding at a weighted average exercise price of $12.72,
of
which options to purchase 580,000 shares were exercisable at a weighted average
price of $12.37. Based on the Company’s closing stock price of $13.95 as of
Friday, September 29, 2006, and assuming all the optionees had exercised their
options as of that date, the aggregate intrinsic value (i) of the total number
of stock options then outstanding was $2,705,000 and (ii) of those options
that
were then exercisable was $2,197,000. Also, based on that same closing price
as
of September 29, 2006, approximately 335,000 of the 580,000 exercisable options
were “in-the-money-options”. The weighted average remaining contractual lives,
as of September 30, 2006, of the total number of stock options outstanding
and
of those options that were exercisable on September 30, 2006 were 7.28 years
and
6.68 years, respectively.
At
September 30, 2006, unvested stock options to purchase a total of approximately
331,000 shares had a weighted average contractual remaining life of 8.34 years
and a weighted average exercise price of $13.32. As of the same date, the
aggregate intrinsic value of those unvested options was approximately $508,000.
We estimate, based on an estimated forfeiture rate of 10.5% per annum and the
remaining vesting terms of those options as of September 30, 2006, that
approximately 257,000 of those options will vest over their remaining vesting
terms at a weighted average exercise price of $13.08 and that those options
have
an aggregate intrinsic value of $457,000 and a remaining contractual life of
7.97 years.
On
September 19, 2006, the Compensation Committee of the Board of Directors granted
the Chief Executive Officer a restricted stock award of 26,200 shares that,
subject to his continued employment with the Company, will vest over four equal
annual installments commencing on September 19, 2007. Based on the closing
price
of $13.75 on that date of grant, the Company recorded the estimated aggregate
intrinsic value of that award, in the amount of approximately $360,000, as
deferred compensation in additional paid-in capital on the Condensed
Consolidated Balance Sheet at September 30, 2006. That amount will be subject
to
amortization and, therefore, the Company expects to record compensation expense
of approximately $90,000 per year over the four-year vesting period of that
award.
As
of
September 30, 2006, $1,976,000 of total unrecognized compensation costs related
to non-vested stock-based awards is expected to be recognized over a weighted
average period of approximately 2.7 years.
Concentrations
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist primarily of cash equivalents, accounts receivable and
notes receivables.
Financial
Instruments and Cash Balances.
At
September 30, 2006, cash and cash equivalents, totaling approximately $41.6
million, were comprised primarily of money market funds. At September 30, 2006,
the Company had in excess of $0.6 million in a non-interest bearing bank account
for general day-to-day operations.
Accounts
Receivable.
A
substantial portion of accounts receivable are due from collectibles dealers.
At
September 30, 2006 and June 30, 2006, two customers accounted for approximately
42% and 31%, respectively, of total accounts receivable balances. The Company
performs an analysis of the expected collectibility of accounts receivable
based
on several factors, including the age and extent of significant past due
accounts and economic conditions or trends that may adversely affect the ability
of account debtors to pay their account receivable balances. Based on that
review, the Company establishes an allowance for doubtful accounts, when
necessary. The allowance for doubtful accounts receivable was $61,000 at
September 30, 2006.
Sources
of Revenues.
The
authentication and grading of collectible coins accounted for approximately
56%
and 65% of our net revenues for the three months ended September 30, 2006 and
2005, respectively.
Customer
Notes Receivables.
At
September 30, 2006, the outstanding principal amount of customer notes
receivable, which evidenced short term advances made to customers, totaled
$5,587,000, net of a $16,000 allowance for uncollectible amounts, and three
of
those notes receivable represented 96% of the total principal amounts
outstanding. During the quarter ended September 30, 2006, the Company made
short-term advances to and recorded cash collections from these three customers
in the aggregate amounts of $2,406,000 and $614,000, respectively. In total,
the
Company made short-term advances of $2,421,000 and recorded cash collections
of
$631,000 during the first quarter of fiscal year 2007. The Company performs
an
analysis of the expected collectibility of customer notes receivables based
on
several factors, including the age and extent of significant past due amounts,
economic conditions or trends that may adversely affect the ability of customers
to pay those notes and the value of collateral securing the repayment of the
outstanding balances. At September 30, 2006 the allowance of $16,000 reflected
a
deficiency in collateral value securing the notes of one customer. Subsequent
to
September 30, 2006, a customer repaid $3,400,000 of customer note receivables
due to the Company.
Comprehensive
Income
The
Company does not have any items of other comprehensive income requiring separate
disclosure.
Goodwill
and Other Intangible Assets.
In
accordance with SFAS No. 142, Goodwill and Other Intangible Assets, the Company
is required to evaluate the carrying value of its goodwill and certain
indefinite-lived intangible assets at least annually for impairment, or more
frequently if facts and circumstances indicate that impairment has occurred.
Management intends to formally evaluate the carrying value of its goodwill
and
other indefinite-lived intangible assets for impairment on the anniversary
date
of each of the acquisitions that gave rise to the recording of such assets.
During the three month period ended September 30, 2006, the Company completed
its annual review of the carrying value of goodwill acquired with the
acquisitions of CoinFacts.com and Certified Coin Exchange, which were
consummated in the first quarter fiscal 2006, and determined that no impairment
had occurred. Intangible assets acquired through acquisition, which have
definite lives, are subject to amortization over their remaining useful lives.
During
the first quarter 2007, the Company completed two business acquisitions and
one
asset purchase which resulted in the acquisition of goodwill and intangible
assets with indefinite lives, totaling $5,254,000 and $656,000, respectively.
The Company also acquired $1,301,000 of intangible assets through business
acquisitions with definite lives and capitalized $383,000 of certain software
development costs, both of which are subject to amortization over their
remaining useful lives (see also related discussion in note 2).
The
following table sets forth, by “reporting unit” as defined by SFAS No. 142, the
amounts classified as goodwill and intangible assets, net, on the balance sheets
as of June 30 and September 30, 2006 in thousands of dollars:
|
|
Coins
|
|
CGAL
&
Gemprint
|
|
AGL
|
|
Expos
|
|
CCE
and
Other
|
|
Total
|
|
Goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at June 30, 2006
|
|
$
|
515
|
|
$
|
8,167
|
|
$
|
-
|
|
$
|
-
|
|
$
|
1,117
|
|
$
|
9,799
|
|
Acquired
during FY2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AGL
Acquisition
|
|
|
-
|
|
|
-
|
|
|
3,360
|
|
|
-
|
|
|
-
|
|
|
3,360
|
|
Expos
Unlimited
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,894
|
|
|
-
|
|
|
1,894
|
|
Purchase
price adjustment since June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Gemprint
|
|
|
-
|
|
|
21
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
21
|
|
Balance
at September 30, 2006
|
|
$
|
515
|
|
$
|
8,188
|
|
$
|
3,360
|
|
$
|
1,894
|
|
$
|
1,117
|
|
$
|
15,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
Assets, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at June 30, 2006
|
|
$
|
29
|
|
$
|
3,365
|
|
$
|
-
|
|
$
|
-
|
|
$
|
1,280
|
|
$
|
4,674
|
|
Acquired
during FY2007 with indefinite lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AGL
Acquisition
|
|
|
-
|
|
|
-
|
|
|
522
|
|
|
-
|
|
|
-
|
|
|
522
|
|
Expos
Unlimited
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
134
|
|
|
-
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired
during FY2006 with definite lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AGL
Acquisition
|
|
|
-
|
|
|
-
|
|
|
124
|
|
|
-
|
|
|
-
|
|
|
124
|
|
Expos
Unlimited
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
854
|
|
|
-
|
|
|
854
|
|
Diamond
I.D.
|
|
|
-
|
|
|
323
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized
software costs
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
383
|
|
|
383
|
|
Less:
amortization for FY2007
|
|
|
(12
|
)
|
|
(66
|
)
|
|
(2
|
)
|
|
(22
|
)
|
|
(69
|
)
|
|
(171
|
)
|
Balance
at September 30, 2006
|
|
$
|
17
|
|
$
|
3,622
|
|
$
|
644
|
|
$
|
966
|
|
$
|
1,594
|
|
$
|
6,843
|
|
Amortization
expense for each of the five succeeding years relating to intangible assets
with
definite lives currently recorded in the Condensed Consolidated Balance Sheet
is
estimated to be as follows at September 30, 2006:
2007
(for Q2-Q4)
|
|
$
|
664,000
|
|
2008
|
|
$
|
627,000
|
|
2009
|
|
$
|
600,000
|
|
2010
|
|
$
|
610,000
|
|
2011
|
|
$
|
576,000
|
|
Approximately
$11.0 million of the $15.1 million classified as goodwill on the Condensed
Consolidated Balance Sheet at September 30, 2006 is amortizable and deductible
for tax purposes over a period of 15 years.
Stock
Buyback
During
the first quarter of fiscal year 2007, the Company repurchased a total of 27,117
shares of its common stock in the open market and, as a result, recorded a
reduction of additional paid-in capital in the amount of approximately $378,000
on the Condensed Consolidated Balance Sheet as of September 30, 2006. As this
program was authorized by the Board of Directors on December 6, 2005, there
were
no share repurchases in the three month period ended September 30,
2005.
Retirement
of Treasury Shares
On
September 19, 2006, the Board of Directors approved the retirement of 125,000
treasury shares presented on the Condensed Consolidated Balance Sheets at
September 30, 2006 and June 30, 2006 in the amount of $1,021,000. The
transaction was finalized in October 2006 and the Company will retire these
shares during the second quarter of fiscal 2007.
Dividends
On
May
31, 2006, the Company announced that its Board of Directors had adopted a
dividend policy that calls for the payment of an expected total annual cash
dividend of $0.32 per common share, payable in the amount of $0.08 per share
per
quarter. At the same time, the Board of Directors declared the first of the
quarterly cash dividends under this policy of $0.08 per share, which was paid
on
June 28, 2006 in the aggregate amount of $674,000 to stockholders of record
on
June 14, 2006. Similarly, pursuant to that dividend policy, in the first quarter
of fiscal 2007, a dividend of $0.08 per share was declared and subsequently
paid
on September 11, 2006 in the aggregate amount of approximately
$668,000.
Capitalized
Software
Statement
of Position (“SOP”) 98-1, Accounting
for the Costs of Computer Software Developed or Obtained for Internal
Use
requires
that certain costs incurred, either from internal or external sources, be
capitalized as part of intangible assets and amortized to expense on a
straight-line basis over the useful life of the software. Through September
30,
2006, the Company capitalized software development costs in the total amount
of
$804,000. Approximately $383,000 of such costs were capitalized during the
three
month period ended September 30, 2006. During the first quarter of fiscal 2007,
approximately $13,000 of such costs was recognized as amortization expense.
Planning, training, support and maintenance costs incurred either prior to
or
following the implementation phase are recognized as expense in the period
in
which they occur. The Company evaluates the carrying values of capitalized
software to determine if the carrying values are impaired, and, if necessary,
an
impairment loss is recorded in the period in which the impairment occurs.
Management believes that no such impairments have occurred.
In
July
2006, the FASB issued FASB Interpretation 48, Accounting
for Uncertainty in Income Taxes: an Interpretation of FASB Statement No.
109.
Interpretation 48 clarifies Statement 109, Accounting
for Income Taxes,
to
indicate a criterion that an individual tax position would have to meet for
some
or all of the benefit of that position to be recognized in an entity’s financial
statements. Interpretation 48 is effective for fiscal years beginning after
December 15, 2006. We will evaluate the impact of Interpretation 48 prior to
the
end of this fiscal year.
In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements. SFAS
No.
157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP) and expands disclosure about
fair value measurements. The statement emphasizes that fair value is a
market-based measurement, not an entity-specific measurement. SFAS No. 157
is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. We do not
expect the adoption of SFAS No. 157 to have a material impact on our financial
position or results of operation.
In
September 2006, the FASB issued SFAS No. 158, Employers’
Accounting for Defined Benefit Pension and Other Post Retirement Plans
(an
amendment of FASB Statement No. 87, 88, 106 and 132R). SFAS No. 158 requires
an
employer to recognize the over funded or under funded status of a defined
benefit postretirement plan (other than a multiemployer plan) as an asset or
liability in its statement of financial position and to recognize changes in
that funded status in the year in which the changes occur through comprehensive
income. As the Company currently does not sponsor one or more single-employer
defined benefit plans, we do not expect the adoption of SFAS No. 158 to have
a
material impact on our financial position or results of operation.
In
September 2006, the SEC staff issued Staff Accounting Bulletin (“SAB”) No. 108,
Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements.
SAB 108
was issued to provide consistency in the manner in which registrants quantify
financial statements. Historically, there have been two widely-used methods
for
quantifying the effects of financial statement misstatements. These methods
are
referred to as the “roll-over” method and the “iron curtain” method,
respectively. The roll-over method quantifies the amount by which the current
year income statement is misstated. Exclusive reliance on this income statement
approach can result in the accumulation of errors on the balance sheet that
may
not have been material to any individual income statement, but which may
misstate one or more balance sheet accounts. The iron curtain method quantifies
the error as the cumulative amount by which the current year balance sheet
is
misstated. Exclusive reliance on this balance sheet approach can result in
disregarding the effects of errors in the current year income statement that
result from the correction of an error existing in previously issued financial
statements. SAB 108 established an approach that requires quantification of
financial statement misstatements based on the effects of the misstatement
on
each of the Company’s financial statements and the related financial statement
disclosures. This approach is commonly referred to as the “dual approach”
because it requires quantification of errors under both the roll-over and iron
curtain methods. SAB 108 allows registrants to initially apply the dual approach
either by (1) retroactively adjusting prior financial statements as if the
dual
approach had always been used or by (2) recording the cumulative effect of
initially applying the dual approach as adjustments to the carrying values
of
assets and liabilities as of July 1, 2006 with an offsetting adjustment recorded
to the opening balance of retained earnings (accumulated deficit). Use of this
“cumulative effect” transition method requires detailed disclosure of the nature
and amount of each individual error being corrected through the cumulative
adjustment and how and when it arose. We do not expect the initial application
of SAB 108 to have any impact on the Company’s financial position or results of
operation.
On
July
14, 2005, the Company acquired substantially all the assets of CoinFacts.com
(“CoinFacts”) for $500,000 in cash. CoinFacts.com operates an Internet website
on which it publishes detailed proprietary historical information on U.S.
coins.
On
September 2, 2005, the Company acquired all of the common stock of Certified
Coin Exchange (“CCE”) and all of the common stock of an affiliated business,
computertradingpost.com, Inc. (“CTP”), for an aggregate purchase price of
$2,180,000. In addition, there was a provision for a working capital adjustment
that was determined to be $37,000. CCE is a subscription-based dealer-to-dealer
Internet bid-ask market for third-party certified coins.
The
Company was required to purchase CTP as a condition to its acquisition of CCE.
At the time it consummated the CCE acquisition, the Company intended to dispose
of CTP, and, effective November 30, 2005, disposed of CTP. In accordance with
SFAS No. 144, the results of operations of CTP from the date of its acquisition
through November 30, 2005, which included revenue of approximately $120,000
and
operating income of $38,000, were consolidated as part of income from
discontinued operations in the consolidated statement of operations for the
fiscal year ended June 30, 2006, and a loss on the sale of CTP was included
in
the gain on the sale of discontinued operations for the fiscal year ended June
30, 2006 (see note 7 below).
On
November 8, 2005, the Company acquired Gem Certification & Appraisal Lab
(“GCAL”), a forensic gemological certification and grading laboratory. As part
of that transaction, the Company also acquired all of the common stock of
Diamond Profile Laboratory, Inc. (“DPL”), a scientific diamond light performance
analysis laboratory, and all publishing and other rights to “Palmieri’s Market
Monitor,” an educational and informative industry publication currently
published by the Gemological Appraisal Association, Inc. (“GAA”). The Company
paid an aggregate acquisition price of $3,000,000 in cash for GCAL, DPL and
the
publishing and other rights to “Palmieri’s Market Monitor,” plus the assumption
of $50,000 of certain transaction-related costs.
On
December 22, 2005, the Company acquired the business and substantially all
of
the assets of Gemprint Corporation (“Gemprint”). These assets consist primarily
of a patented technology for non-invasive diamond identification which Gemprint
used to digitally capture the unique refractive light pattern (or “Gemprint”) of
each diamond that is processed with that technology. The Company paid a purchase
price for that business and those assets consisting of $7,500,000 in cash,
and
assumed certain pre-acquisition liabilities and a lease commitment at closing,
and agreed to pay $1 for each diamond that the Company registers using the
Gemprint process in excess of 100,000 registrations during any year in the
five-year period ending December 22, 2010.
GCAL
has
incorporated the Gemprint process into its GCAL business process, so that each
GCAL authenticated and graded diamond can also carry a Gemprint image stored
in
GCAL’s registered database. The Gemprint process enables GCAL to provide an
additional measure of protection by enabling it to detect misrepresentations
of
diamond quality that can occur by, for example, switching a diamond grading
certificate issued for a higher quality diamond to a lower quality
diamond.
Effective
July 1, 2006, the Company acquired the business of Expos Unlimited LLC (Expos),
a trade show management company that operates the Long Beach and the Santa
Clara, California coin, stamp and collectibles expositions, for $2,370,000
in
cash and $30,000 (which currently is being withheld until working capital
adjustments are settled). Based on the future revenues of Expos, the Company
may
be obligated to make contingent payments up to an aggregate of $750,000 after
five years, or July 2011. The Company completed an initial and preliminary
purchase price allocation based upon an acquisition price of $2,400,000 and
other direct costs of approximately $60,000. As a result of a valuation of
the
intangible assets provided by a third party, the Company allocated $988,000
to
identifiable intangible assets and allocated $204,000 and $626,000 to net assets
and assumed liabilities, respectively. Under the purchase method of accounting
for business combinations, the excess of the purchase price over the fair values
of net assets acquired and liabilities assumed, which totaled $1,894,000, was
recorded as goodwill during the three months ended September 30, 2006. The
Company, which authenticates and grades collectibles at trade shows as part
of
its collectibles authentication and grading business, believes that there exists
synergistic benefits between the Company’s core collectibles authentication and
grading businesses and the collectibles trade show business acquired from
Expos.
On
August
18, 2006, the Company acquired American Gemological Laboratories (AGL), an
international forensic colored gemstone certification and grading laboratory.
AGL is a third party authentication and grading services for colored gemstones,
including colored gemstones that are sold at auctions and by jewelry retailers.
The Company paid an acquisition price of $3,500,000 in cash for AGL, and,
depending on the future revenue performance of AGL, may become obligated to
make
contingent payments of up to an aggregate of $3,500,000 over the next five
years. The Company also completed an initial and preliminary purchase price
allocation based on the AGL acquisition price of $3,500,000, plus approximately
$217,000 of other directly-related costs and $214,000 representing a payment
to
settle a loan obligation of AGL to the seller of AGL. A third party valuation
firm performed the valuation analysis of the intangible assets acquired and
assigned a fair value of $646,000 to identifiable intangible assets.
Approximately $101,000 and $176,000 were allocated to net assets acquired and
liabilities assumed, respectively. Included within the $646,000 allocated to
intangible assets is an estimated amount of $500,000 in connection with a
colored gemstone reference set with an indefinite remaining life. The Company
expects to complete an appraisal of the reference set within fiscal year 2007,
which may result in an adjustment to the fair value of this asset. The excess
of
the purchase price over the fair value of the net assets acquired, including
intangible assets and liabilities assumed, is recorded as goodwill on the
Condensed Consolidated Balance Sheet. The amount of $3,360,000 recorded as
goodwill related to AGL as of September 30, 2006 is based on the Company’s
expectations that future growth and profit opportunities exist in this
underdeveloped market segment.
The
operating results of each of these acquired businesses were consolidated into
the Company's financial statements from the respective dates of their
acquisition.
On
September 21, 2006, the Company acquired an existing patent and other intangible
assets from Diamond I.D., Inc. (DID) for $295,000 and presented these assets
as
part of intangible assets, net, on the Condensed Consolidated Balance Sheet
at
September 30, 2006. Such acquisition of assets did not constitute a business
combination.
The
Company has performed an initial and preliminary purchase price allocation
with
respect to each of these acquisitions, as set forth in the following table.
The
Company expects to complete its accounting for these acquisitions during this
fiscal year and expects that some of the amount reported as goodwill in the
accompanying consolidated balance sheet will be allocated to acquired assets
and
assumed liabilities, including identifiable intangible assets, which will be
depreciated or amortized to expense over their estimated useful
lives.
|
|
Expos
|
|
AGL
|
|
DID
|
|
Total
|
|
Cost
of Investment:
|
|
|
|
|
|
|
|
|
|
Purchase
Price
|
|
$
|
2,400
|
|
$
|
3,500
|
|
$
|
295
|
|
$
|
6,195
|
|
Other
direct costs
|
|
|
60
|
|
|
167
|
|
|
28
|
|
|
255
|
|
Investment
banking fees
|
|
|
-
|
|
|
50
|
|
|
-
|
|
|
50
|
|
Liability
assumed
|
|
|
-
|
|
|
214
|
|
|
-
|
|
|
214
|
|
|
|
|
2,460
|
|
|
3,931
|
|
|
323
|
|
|
6,714
|
|
Value
Assigned to Assets and Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
133
|
|
|
101
|
|
|
-
|
|
|
234
|
|
Current
liabilities
|
|
|
(147
|
)
|
|
(39
|
)
|
|
-
|
|
|
(186
|
)
|
Customer
deposits
|
|
|
(479
|
)
|
|
-
|
|
|
-
|
|
|
(479
|
)
|
Property,
plant and equipment
|
|
|
70
|
|
|
-
|
|
|
-
|
|
|
70
|
|
Other
assets
|
|
|
1
|
|
|
-
|
|
|
-
|
|
|
1
|
|
Deferred
tax liabilities
|
|
|
-
|
|
|
(137
|
)
|
|
-
|
|
|
(137
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
Assets with Finite Lives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibitor
list
|
|
|
681
|
|
|
-
|
|
|
-
|
|
|
681
|
|
Website
|
|
|
25
|
|
|
25
|
|
|
-
|
|
|
50
|
|
Contract
|
|
|
49
|
|
|
-
|
|
|
-
|
|
|
49
|
|
Covenant
not to compete
|
|
|
-
|
|
|
81
|
|
|
32
|
|
|
113
|
|
Patent
|
|
|
-
|
|
|
-
|
|
|
291
|
|
|
291
|
|
Trade
name
|
|
|
99
|
|
|
18
|
|
|
-
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
Assets with Indefinite Lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Database
|
|
|
134
|
|
|
-
|
|
|
-
|
|
|
134
|
|
Reference
set
|
|
|
-
|
|
|
500
|
|
|
-
|
|
|
500
|
|
Customer
list
|
|
|
-
|
|
|
22
|
|
|
-
|
|
|
22
|
|
Excess
of purchase price over fair value of net assets acquired
(goodwill)
|
|
$
|
1,894
|
|
$
|
3,360
|
|
$
|
0
|
|
$
|
5,254
|
|
The
proforma statements of operations that are set forth in the following table
are
prepared assuming that the AGL and Expos acquisitions had occurred on July
1,
2005, instead of July 1, 2006 for Expos and August 18, 2006 for AGL. Proforma
adjustments for GCAL, Gemprint and CCE, which were acquired in fiscal 2006,
are
included for the three months ended September 30, 2005 from an assumed date
of
acquisition of July 1, 2005.
|
|
Three
Months Ended
September
30,
|
|
|
|
2006
|
|
2005
|
|
Revenue
|
|
$
|
9,975
|
|
$
|
9,723
|
|
Operating
income
|
|
|
130
|
|
|
1,134
|
|
Interest
income, net
|
|
|
567
|
|
|
545
|
|
Other
income
|
|
|
4
|
|
|
8
|
|
Income
before provision for income taxes
|
|
|
701
|
|
|
1,687
|
|
Provision
for income taxes
|
|
|
318
|
|
|
711
|
|
Income
from continuing operations
|
|
|
383
|
|
|
976
|
|
Income
(loss) from discontinued operations
|
|
|
11
|
|
|
(28
|
)
|
Net
income
|
|
$
|
394
|
|
$
|
948
|
|
|
|
|
|
|
|
|
|
Net
income per diluted share:
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
0.04
|
|
$
|
0.11
|
|
Income
(loss) from discontinued operations
|
|
$
|
-
|
|
$
|
-
|
|
Net
income
|
|
$
|
0.04
|
|
$
|
0.11
|
|
In
connection with the Company's acquisition of the business and assets of Expos,
the Company assumed a lease for the offices at which Expos conducts its
operations. The landlord under that lease is a trust of which the trustee is
the
former president of Expos, who has been retained to provide services to the
Company under a five year consulting agreement for consulting fees of $250,000
per year. The lease provides for lease payments by the Company of $3,000 per
month for a term of three years. The lease is renewable for successive periods
of one year each, subject to the right of either party to terminate the lease
prior to commencement of any such one year renewal period.
3.
CASH
AND
CASH EQUIVALENTS
At
September 30, 2006, cash and cash equivalents included approximately $41.6
million, invested primarily in money market funds. At September 30, 2005, the
Company’s cash and cash equivalent balances were primarily invested in
high-quality commerce paper and certificates of deposit issued by U.S. or
foreign companies. The minimum credit quality of the commercial paper portfolio
funds in a money market account must be rated no less than single-A long term
or
A1/P1 short term, and the portfolio must contain no more than 25% exposure
to
securities of issuers whose principal business activities are in the same
industry. However, the 25% limitation does not apply to securities guaranteed
by
the U.S. government or to bank obligations, subject to U.S. banking regulations.
In addition, the weighted average maturity of the portfolio must not exceed
90
days. Such trading securities were carried at market value in the accompanying
condensed consolidated balance sheet at September 30, 2006 and June 30, 2006.
Unrealized gains on such trading securities were approximately $110,000 and
$0
for the three months ended September 30, 2005 and 2006,
respectively.
Inventories
consist of the following:
|
|
|
|
(in
thousands)
|
|
|
|
September
30,
|
|
June
30,
|
|
|
|
2006
|
|
2006
|
|
Coins
|
|
$
|
330
|
|
$
|
346
|
|
Other
collectibles
|
|
|
35
|
|
|
37
|
|
Grading
raw materials consumable inventory
|
|
|
185
|
|
|
160
|
|
|
|
|
550
|
|
|
543
|
|
Less
inventory reserve
|
|
|
(98
|
)
|
|
(106
|
)
|
Inventories,
net
|
|
$
|
452
|
|
$
|
437
|
|
5. PROPERTY
AND EQUIPMENT
Property
and equipment consist of the following:
|
|
|
|
(in
thousands)
|
|
|
|
September
30,
|
|
June
30,
|
|
|
|
2006
|
|
2006
|
|
Coins
and stamp grading reference sets
|
|
$
|
90
|
|
$
|
62
|
|
Computer
hardware and equipment
|
|
|
1,366
|
|
|
1,271
|
|
Computer
software
|
|
|
975
|
|
|
972
|
|
Equipment
|
|
|
2,459
|
|
|
2,020
|
|
Furniture
and office equipment
|
|
|
1,023
|
|
|
793
|
|
Leasehold
improvements
|
|
|
1,265
|
|
|
607
|
|
Trading
card reference library
|
|
|
52
|
|
|
52
|
|
|
|
|
7,230
|
|
|
5,777
|
|
Less
accumulated depreciation and amortization
|
|
|
(4,050
|
)
|
|
(3,880
|
)
|
Property
and equipment, net
|
|
$
|
3,180
|
|
$
|
1,897
|
|
6. ACCRUED
LIABILITIES
Accrued
liabilities consist of the following:
|
|
(in
thousands)
|
|
|
|
September
30,
|
|
June
30,
|
|
|
|
2006
|
|
2006
|
|
Warranty
costs
|
|
$
|
748
|
|
$
|
710
|
|
Professional
fees
|
|
|
323
|
|
|
189
|
|
Amount
withheld for Expos’ acquisition (note 2)
|
|
|
30
|
|
|
-
|
|
Other
|
|
|
1,077
|
|
|
1,144
|
|
|
|
$
|
2,178
|
|
$
|
2,043
|
|
The
following
table presents the changes in the Company’s warranty reserve during the three
months ended September 30, 2006 and 2005 (in thousands):
|
|
(in
thousands)
|
|
|
|
Three
Months Ended September 30,
|
|
Three
Months Ended
September
30,
|
|
|
|
2006
|
|
2005
|
|
Warranty
reserve, beginning of period
|
|
$
|
710
|
|
$
|
609
|
|
Charged
to cost of revenue
|
|
|
121
|
|
|
116
|
|
Payments
|
|
|
(83
|
)
|
|
(142
|
)
|
Warranty
reserve, end of period
|
|
$
|
748
|
|
$
|
583
|
|
7.
|
DISCONTINUED
OPERATIONS
|
As
previously disclosed, on December 4, 2003, the Company’s Board of Directors
authorized management to implement a plan to focus the Company’s financial and
management resources, and collectibles expertise, on the operations and growth
of its grading and authentication businesses, by divesting the Company’s
collectibles auctions and direct sales businesses. Therefore, in accordance
with
SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets,
the
assets and related liabilities of those collectible sales businesses, are
classified as held for sale and the related operating results are classified
as
discontinued operations in the accompanying condensed consolidated balance
sheets at September 30, 2006 and June 30, 2006 and condensed consolidated
statements of operations for the three-month periods ended September 30, 2006
and 2005. The Company sold or otherwise disposed of all of its collectibles
auctions and direct sales businesses prior to the beginning of the quarter
ended
March 31, 2005, but elected to retain, and has been liquidating, the remaining
inventories, accounts receivable and liabilities of those businesses.
The
operating results of the discontinued collectible sales businesses that
are
included
in the accompanying consolidated condensed statements of operations, are as
follows:
|
|
(in
thousands)
|
|
|
|
Three
Months Ended
September
30,
|
|
|
|
2006
|
|
2005
|
|
Net
revenues
|
|
$
|
3
|
|
$
|
61
|
|
|
|
|
|
|
|
|
|
Income
(loss)
|
|
|
11
|
|
|
(36
|
)
|
Gain
on sale of discontinued businesses
|
|
|
6
|
|
|
4
|
|
|
|
|
17
|
|
|
(32
|
)
|
Income
tax (expense) benefit
|
|
|
(6
|
)
|
|
20
|
|
Net
loss from discontinued operations
|
|
$
|
11
|
|
$
|
(12
|
)
|
The
gains
realized on sales of discontinued businesses in the three-month periods ended
September 30, 2006 and 2005 related to contingent consideration that became
determinable in those periods.
The
following table contains summary balance sheet information with respect to
the
net assets and liabilities of the collectible sales businesses held for sale
that are included in the accompanying condensed consolidated balance sheets:
|
|
(in
thousands)
|
|
|
|
September
30,
2006
|
|
June
30,
2006
|
|
Current
assets:
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
-
|
|
$
|
10
|
|
Inventories
|
|
|
37
|
|
|
37
|
|
Notes
receivable
|
|
|
36
|
|
|
36
|
|
|
|
$
|
73
|
|
$
|
83
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Consignors
payable
|
|
$
|
1
|
|
$
|
1
|
|
Other
current liabilities
|
|
|
1
|
|
|
7
|
|
|
|
$
|
2
|
|
$
|
8
|
|
Income
tax expense was
provided for at rates of 45% and 42% for the three-month periods ended September
30, 2006 and September 30, 2005, respectively. The increased rate for the three
months ended September 30, 2006, as compared to the same three month period
in
2005, reflects a higher estimate for generally non-deductible stock-based
compensation expense for the full fiscal year 2007 as compared to the same
estimate for fiscal year 2006. During the fourth quarter of fiscal year 2006,
the Company made corrections to its assumptions that determined the fair values
associated with stock-based compensation expense that resulted in increased
estimated expense for fiscal years 2006 and 2007. These estimates where higher
than the estimates that were anticipated during the first quarter of fiscal
year
2006 (see note 1).
Net
income per share is determined in accordance with SFAS No. 128, Earnings
Per Share.
Net
income per share for the three-month periods ended September 30, 2006 and 2005,
respectively, are computed as follows:
|
|
(In
thousands,
except
share data)
|
|
|
|
Three
Months Ended
September
30,
|
|
|
|
2006
|
|
2005
|
|
Income
from continuing operations
|
|
$
|
383
|
|
$
|
979
|
|
Income
(loss) from discontinued operations, net of gain on sales of discontinued
businesses (net of income taxes)
|
|
|
11
|
|
|
(12
|
)
|
Net
income
|
|
$
|
394
|
|
$
|
967
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS) PER SHARE - BASIC:
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
0.05
|
|
$
|
0.11
|
|
Income
(loss) from discontinued operations, net of gain on sales of discontinued
businesses (net of income taxes)
|
|
|
-
|
|
|
-
|
|
Total
|
|
$
|
0.05
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS) PER SHARE - DILUTED:
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
0.04
|
|
$
|
0.11
|
|
Income
(loss) from discontinued operations, net of gain on sales of discontinued
businesses (net of income taxes)
|
|
|
-
|
|
|
-
|
|
Total
|
|
$
|
0.04
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING:
|
|
|
|
|
|
|
|
Basic
|
|
|
8,351
|
|
|
8,486
|
|
Effect
of dilutive shares
|
|
|
277
|
|
|
320
|
|
Diluted
|
|
|
8,628
|
|
|
8,806
|
|
Options
and warrants to purchase approximately 716,000 and 745,000 shares of common
stock for the three months ended September 30, 2006 and 2005, respectively,
at
exercise prices of up to $24 per share, were not included in the computation
of
diluted earnings per share because their exercise prices were greater than
the
average market price for the respective periods.
Operating
segments are defined as the components or “segments” of an enterprise for which
separate financial information is available that is evaluated regularly by
the
Company’s chief operating decision maker, or decision-making group, in deciding
how to allocate resources to and in assessing performance of those components
or
“segments.” The Company’s chief operating decision-maker is its Chief Executive
Officer. The operating segments of the Company are organized based on the
respective services that they offer to customers of the Company. Similar
operating segments have been aggregated to reportable operating segments based
on having similar services, types of customers, and other criteria that are
set
forth in SFAS No. 131, Disclosures
About Segments of an Enterprise and Related Information.
For
our
continuing operations, we operate principally in four reportable service
segments: coins, sportscards, jewelry and other high-end collectibles. Services
provided by these segments include authentication, grading, publication
advertising and subscription-based revenues. The other collectibles segment
includes autographs, stamps, currency, the CCE subscription business and our
collectibles conventions business.
We
allocate operating expenses to each service segment based upon activity levels.
The following tables set forth on a business segment basis, including a
reconciliation with the condensed consolidated financial statements, (i)
external revenues, (ii) amortization and depreciation, (iii) stock-based
compensation expense as a significant other non-cash transaction, and (iv)
operating income for the three month periods ended September 30, 2006 and 2005.
Net identifiable assets are provided by business segment as of September 30,
2006 and June 30, 2006. During the three month period since the end of the
last
fiscal year, approximately $383,000 was spent to acquire patents and other
intangible assets for the Jewelry segment, and approximately $949,000 was spent
to expand the operating facilities for GCAL, which is included as part of the
Jewelry segment. All of our sales and identifiable assets are located in the
United States.
|
|
Three
Months Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
Net
revenues from external customers
|
|
|
|
|
|
|
|
Coins
|
|
$
|
5,590
|
|
$
|
5,753
|
|
Sportscards
|
|
|
2,251
|
|
|
2,106
|
|
Jewelry
|
|
|
241
|
|
|
-
|
|
Other
|
|
|
1,816
|
|
|
966
|
|
Total
revenue
|
|
$
|
9,898
|
|
$
|
8,825
|
|
Amortization
and depreciation
|
|
|
|
|
|
|
|
Coins
|
|
$
|
40
|
|
$
|
23
|
|
Sportscards
|
|
|
21
|
|
|
21
|
|
Jewelry
|
|
|
108
|
|
|
-
|
|
Other
|
|
|
140
|
|
|
12
|
|
Total
|
|
|
309
|
|
|
56
|
|
Unallocated
amortization and depreciation
|
|
|
81
|
|
|
65
|
|
Consolidated
amortization and depreciation
|
|
$
|
390
|
|
$
|
121
|
|
Stock-based
compensation
|
|
|
|
|
|
|
|
Coins
|
|
$
|
49
|
|
$
|
30
|
|
Sportscards
|
|
|
16
|
|
|
3
|
|
Jewelry
|
|
|
-
|
|
|
-
|
|
Other
|
|
|
37
|
|
|
30
|
|
Total
|
|
|
102
|
|
|
63
|
|
Unallocated
stock-based compensation
|
|
|
98
|
|
|
69
|
|
Consolidated
stock-based compensation
|
|
$
|
200
|
|
$
|
132
|
|
Operating
income before unallocated expenses
|
|
|
|
|
|
|
|
Coins
|
|
$
|
2,384
|
|
$
|
2,733
|
|
Sportscards
|
|
|
439
|
|
|
321
|
|
Jewelry
|
|
|
(641
|
)
|
|
-
|
|
Other
|
|
|
271
|
|
|
60
|
|
Total
|
|
|
2,453
|
|
|
3,114
|
|
Unallocated
operating expenses
|
|
|
(2,323
|
)
|
|
(1,971
|
)
|
Consolidated
operating income
|
|
$
|
130
|
|
$
|
1,143
|
|
|
|
At
September 30,
|
|
At
June 30,
|
|
Identifiable
Assets
|
|
2006
|
|
2006
|
|
Coins
|
|
$
|
2,845
|
|
$
|
2,647
|
|
Sportscards
|
|
|
571
|
|
|
541
|
|
Jewelry
|
|
|
18,285
|
|
|
12,611
|
|
Other
|
|
|
10,859
|
|
|
6,284
|
|
Total
|
|
|
32,560
|
|
|
22,083
|
|
Unallocated
assets
|
|
|
45,588
|
|
|
56,138
|
|
Consolidated
assets
|
|
$
|
78,148
|
|
$
|
78,221
|
|
To
provide a source of funds for its Dealer Financing Program, in June 2005
our
wholly-owned subsidiary, Collectors Finance Corp. (“CFC”),
entered
into a two-year revolving bank line of credit agreement, that permits CFC to
borrow, at any one time, up to the lesser of (i) $7,000,000 or (ii) an amount
equal to 85% of the aggregate principal amount of customer receivables that
meet
the bank’s eligibility criteria. Borrowings under this credit line bear interest
at rates based on the bank’s Prime Rate or LIBOR, as applicable, and are secured
by substantially all the assets of CFC (including customer receivables and
CFC’s
security interests in customer-owned loan collateral). At June 30, 2006 and
September 30, 2006, the amount outstanding under this line of credit was
$0.
Costs
of
approximately $340,000 (comprising a loan agreement fee, bank fees and legal
fees) were incurred in connection with the establishment of this line of credit.
These costs were capitalized and are being amortized to net interest expense
over a two-year period and are included in net revenues in the condensed
consolidated statements of operations for the three months ended September
30,
2006 and 2005. The unamortized amount of such costs is included in prepaid
expenses and other current assets in the accompanying Condensed Consolidated
Balance Sheets at September 30, 2006 and June 30, 2006. On a quarterly basis,
CFC incurs an unused line fee of 0.25% per annum, based on the average daily
unused portion of the total facility during the quarter.
CFC’s
obligations under this line of credit have been guaranteed by the Company
pursuant to a Continuing Guaranty Agreement with the bank lender. The terms
of
that Agreement require the Company to be in compliance with certain financial
and other restrictive covenants, and require the consent of the lender (i)
for
the Company to pay cash dividends or repurchase shares of its common stock
in
amounts exceeding its annual net income in any year, and (ii) to consummate
more
than $5 million of business acquisitions in any year. The Company was in
compliance with all covenants at September 30, 2006.
Bill
Miller v. Collectors Universe, Inc.
As
previously reported, the Company was a defendant in this legal action, which
was
brought in the Superior Court of California, County of Orange, by Bill Miller,
a
former employee of the Company, who had been the president of one of the
Company’s collectibles sales businesses that was sold in 2004 and an expert in
the authentication of autographs and memorabilia. Miller alleged that the
Company had issued authentication certificates bearing his name without his
consent, in violation of a California statute prohibiting unauthorized
appropriation of a person’s name, signature or likeness. The statute provides
that a person whose name, signature or likeness has been misappropriated, in
violation of the statute, is entitled to recover the greater of $750 or the
actual damages suffered as a result of the unauthorized use, and any profits
from that were attributable to that unauthorized use that are not taken into
account in computing the actual damages. The Company denied Miller’s allegations
and asserted that he was not entitled to any recovery under the statute in
excess of his actual damages and that he had not suffered any actual damages
as
a result of the issuance of the certificates.
As
also
previously reported, at the conclusion of the trial, which took place in October
2005, (i) the jury found that the Company had used Miller’s name without
his consent on 14,060 authentication certificates, but that Miller had sustained
actual damages from that use totaling $14,060; and (ii) the parties entered
into a stipulated judgment in the case, which, among other things, provides
that
Miller’s statutory damages arising from the actions of the Company were zero.
The court left unresolved and for future determination the issue of which party,
if any, was the prevailing party in the lawsuit, which would determine which
party, if any, is entitled to recover its attorney’s fees from the other
party.
In
December 2005, Miller filed a Notice of Appeal seeking an appellate court
review, a reversal of the judgment entered by the trial court and a finding,
that as a matter of law, he is entitled to statutory damages equal to $750
for
each use of his name by the Company, or more than $10 million in total. Miller
filed an opening brief with the appellate court in August 2006, and we expect
that various responsive briefs will be filed through February 2007. The Company
has been informed by its trial counsel that, in California, it sometimes takes
as long as two years, from the filing of an appeal of a damage award, before
the
appeal is actually heard by an appellate court.
The
Company continues to believe that it will not incur any material liability
to
Miller in this case. However, there is little interpretive history with respect
to the measure of damages in a case such as the Miller case, creating a number
of relatively novel legal issues. As a result, it is not possible to predict,
with certainty, how an appellate court will ultimately rule on the issue of
damages.
Other
Legal Actions
The
Company is named from time to time, as a defendant in lawsuits that arise in
the
ordinary course of business. Management of the Company believes that none of
those lawsuits currently pending against it is likely to have a material adverse
effect on the Company.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The
discussion in this Item 2 and in Item 3 of this Quarterly Report (“Report”) on
Form 10-Q includes “forward-looking statements” within the meaning of Section
27A of the Securities Act of 1933, as amended (the “1933 Act”) and Section 21E
of the Securities Exchange Act of 1934, as amended (the “1934 Act”). Those
Sections of the 1933 Act and 1934 Act provide a “safe harbor” for
forward-looking statements to encourage companies to provide prospective
information about their financial performance so long as they provide
meaningful, cautionary statements identifying important factors that could
cause
actual results to differ from 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 condition or as to trends in our
business or in our markets, are forward-looking statements. Forward-looking
statements often include the words "believe," "expect," "anticipate," "intend,"
"plan," "estimate," "project," or words of similar meaning, or future or
conditional verbs such as "will," "would," "should," "could," or "may." Our
actual financial performance in future periods may differ significantly from
the
currently expected financial performance set forth in the forward-looking
statements contained in this Report. The sections below entitled “Factors That
Can Affect our Financial Position and Operating Results” and “Risks and
Uncertainties That Could Affect our Future Financial Performance” describe some,
but not all, of the factors and the risks and uncertainties that could cause
these differences, and readers of this Report are urged to read those sections
of this Report in their entirety and to review certain additional risk factors
that are described in our Annual Report on Form 10-K for the fiscal year ended
June 30, 2006.
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 about
future performance 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 or any other prior filings with
the
Securities and Exchange Commission.
Collectors
Universe Inc. (the “Company”) provides grading and authentication services to
dealers and collectors of high-value coins, sportscards, autographs, stamps,
and
vintage U.S. currency notes and to sellers and purchasers of diamonds, colored
gemstones and other high-value assets. We believe that our authentication and
grading services add value to these collectibles and to diamonds and colored
gemstones by enhancing their marketability and, thereby, providing increased
liquidity to the dealers and collectors and consumers that own and buy and
sell
them.
We
principally generate revenues from the fees paid for our authentication and
grading services. To a much lesser extent, we generate revenues from the sale
of
advertising on our websites; the sale of printed publications and collectibles
price guides and advertising in such publications; and fees from the sale of
collectors’ club memberships, and subscription revenues related to our CCE
dealer-to-dealer Internet bid-ask market for certified coins.
Recent
Business Acquisitions.
Effective July 1, 2006, we acquired all of the outstanding ownership interests
of Expos Unlimited LLC (“Expos”), a California limited liability company engaged
in the business of owning and conducting collectibles trade shows, for a
purchase price that consisted of $2,400,000 in cash, of which $2,370,000 was
paid to the former owners of Expos. Approximately $60,000 was incurred for
directly-related costs of the acquisition. Depending on the future revenue
performance of Expos, the Company may become obligated to make contingent
payments to those former owners of up to an aggregate of $750,000 in July 2011.
Expos owns and operates the Long Beach Coin, Stamp & Collectibles Expo
(“Long Beach”) and the Santa Clara Coin, Stamp & Collectibles Expo (“Santa
Clara”), which comprise, in total, five trade shows that are held annually. At
both the Long Beach and Santa Clara Expos, leading numismatic, philatelic and
collectibles dealers offer rare and valuable collectibles to the public, while
auctions of coins and currency are conducted by third party auction companies
alongside exhibitions of major numismatic and collectible interest. We offer
on-site authentication and grading services for the collectibles exhibited
and
bought and sold at those shows, with same day turnaround.
On
August
18, 2006, we acquired American Gemological Laboratories (AGL), an international
forensic colored gemstone certification and grading laboratory. AGL is one
of
the leading third party authentication and grading services for colored
gemstones, including colored gemstones that are sold at auction through
Sotheby’s and Christies and by jewelry retailers such as Cartier and Fred
Leighton. The Company paid an aggregate acquisition price of $3,500,000 in
cash
for AGL, and, depending on the future revenue performance of AGL, the Company
may become obligated to make payments of up to an aggregate of an additional
$3,500,000 over the next five years. We also incurred direct costs of
approximately $217,000 and paid a loan on behalf of AGL made between the seller
of AGL and AGL in the amount of $214,000.
The
operating results of these acquired businesses have been consolidated into
our
operating results from the respective dates of their acquisition.
Discontinued
Operations.
As
previously disclosed, the remaining activities resulting from our divestiture
of
our collectibles auctions and sales businesses have been classified as
discontinued operations and the discussion that follows focuses almost entirely
on our authentication and grading businesses, which comprise substantially
all
of our continuing operations. During the three months ended September 30, 2006,
we generated cash of $142,000 from the sales of our discontinued collectibles
sales businesses and the liquidation of the inventories and accounts receivable
of those businesses that were not included in those sales. As a result, at
September 30, 2006, the remaining assets of those businesses, which we are
in
the process of liquidating, totaled approximately $73,000, as compared to
$83,000 at June 30, 2006.
Factors
that Can Affect our Revenues and Cash Flows.
The
provision of authentication and grading and other value-added services provides
relatively stable and predictable cash flows, as the fees for most of the
grading submissions we receive are prepaid. In the three months ended September
30, 2006 and 2005, respectively, we used cash of $1,330,000 and generated cash
of $3,418,000, respectively, from the operating activities of our continuing
businesses. Net cash advances under notes receivable by CFC were $1,790,000
in
the three months ended September 30, 2006, compared with net proceeds from
repayments of notes receivable of $1,483,000 in the three months ended September
30, 2005.
Five
of
our coin authentication and grading customers accounted for approximately 22%
and 14% of our total net revenues in the fiscal year ended June 30, 2006 and
in
the three months ended September 30, 2006, respectively. As a result, the loss
of any of those customers, or a decrease in the volume of grading submissions
from any of them to us, would cause our net revenues to decline and, therefore,
could adversely affect our profitability. During the three months ended
September 30, 2006, revenue earned from the Company’s trade-show related
activities decreased as a result of lower submissions at trade shows by,
primarily, these customers. We believe that this decline was primarily the
result of lower gold prices in the three months ended September 30, 2006,
compared with the three months ended June 30, 2006, which reduced the volume
of
coin transactions and, therefore, the demand for our services at those shows.
The
Company’s cash flows from investing activities can be impacted by the extent to
which the Company purchases new businesses and invests in capital expenditures
Cash used in investing activities in the three months ended September 30, 2006
was $8,167 000.
Cash
flows from financing activities reflects dividends paid to common stockholders,
payments for the retirement of the Company’s common stock authorized under the
Company’s buyback program, and proceeds from the exercise of stock options. Cash
used in financing activities in the three months ended September 30, 2006 was
$1,025,000.
At
September 30, 2006, we had cash and cash equivalents totaling $41,602,000,
compared with $52,110,000 at June 30, 2006.
Factors
Affecting our Gross Profit Margins.
The
gross profit margins on authentication and grading submissions are primarily
affected by (i) the mix of collectibles submission revenues among coins,
sportscards and other collectibles, because we generally realize higher margins
on coin submissions than on submissions of other collectibles; (ii) the mix
of submission revenues between vintage or “classic” coins and sportscards, on
the one hand, and modern coins and sportscards, on the other hand; and
(iii) in the case of coins and sportscards, the “turn-around” times
requested by our customers, because we charge higher fees for faster service
times. Since, as a general rule, customers request faster turn-around times
for
vintage or classic coins and sportscards than they do for modern submissions,
the mix of submissions between vintage and modern collectibles also affects
our
profit margin. Furthermore, because a significant proportion of our direct
costs
are fixed in nature, our gross profit is also affected by the overall volume
of
collectibles authenticated and graded in any period.
Impact
of Economic Conditions on Financial Performance.
We
generate substantially all of our revenues from the collectibles markets.
Accordingly, our operating results are affected by that market’s financial
performance, which depends, to a great extent, on (i) discretionary
consumer spending and, hence, on the availability of disposable income, (ii)
on
other economic conditions, including prevailing interest and inflation rates,
which affect consumer confidence, and (iii) the performance and volatility
of the precious metals, primarily gold, and stock markets. These conditions
primarily affect the volume of purchases and sales of collectibles which, in
turn, affects the volume of authentication and grading submissions to us,
because our services facilitate commerce in collectibles. Accordingly, factors
such as improving economic conditions which usually result in increases in
disposable income and consumer confidence, and volatility in and declines in
the
prices of stocks and a weakening in the value of the U.S. Dollar, which lead
investors to increase their purchases of precious metals, such as gold bullion
and other coins, and other collectibles, usually result in increases in
submissions of collectibles for our services. By contrast, the volume of
collectibles sales and purchases and, therefore, the volume of authentication
and grading submissions, usually decline during periods characterized by
recessionary economic conditions and by declines in disposable income and
consumer confidence or by increasing stock prices and relative stability in
the
stock markets.
The
following table provides information regarding the respective numbers of coins,
sportscards, autographs, currency, diamonds and colored gemstones that were
graded or authenticated by us in the quarters ended September 30, 2006 and
2005
and their estimated values, which are the amounts at which those coins,
sportscards and stamps and other high value assets were insured by the dealers
and collectors who submitted them to us for grading and
authentication.
|
|
Units
Processed
Three
Months Ended September 30,
|
|
|
Declared
Value (000)
Three
Months Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
|
2006
|
|
2005
|
|
Coins
|
|
|
481,300
|
|
|
56
|
%
|
|
395,000
|
|
|
53
|
%
|
|
$
|
464,922
|
|
|
85
|
%
|
$
|
352,707
|
|
|
89
|
%
|
Sportscards
|
|
|
321,500
|
|
|
37
|
%
|
|
283,000
|
|
|
38
|
%
|
|
|
22,595
|
|
|
4
|
%
|
|
17,246
|
|
|
5
|
%
|
Autographs
|
|
|
34,200
|
|
|
4
|
%
|
|
55,000
|
|
|
7
|
%
|
|
|
10,475
|
|
|
2
|
%
|
|
3,188
|
|
|
1
|
%
|
Stamps
|
|
|
12,300
|
|
|
1
|
%
|
|
9,200
|
|
|
1
|
%
|
|
|
3,059
|
|
|
1
|
%
|
|
5,169
|
|
|
1
|
%
|
Currency
|
|
|
9,100
|
|
|
1
|
%
|
|
9,300
|
|
|
1
|
%
|
|
|
8,442
|
|
|
2
|
%
|
|
16,009
|
|
|
4
|
%
|
Diamonds*
|
|
|
6,000
|
|
|
1
|
%
|
|
-
|
|
|
-
|
|
|
|
23,209
|
|
|
4
|
%
|
|
-
|
|
|
-
|
|
Colored
Gemstones*
|
|
|
100
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
13,145
|
|
|
2
|
%
|
|
-
|
|
|
-
|
|
Total
|
|
|
864,500
|
|
|
100
|
%
|
|
751,500
|
|
|
100
|
%
|
|
$
|
545,847
|
|
|
100
|
%
|
$
|
394,319
|
|
|
100
|
%
|
* We
began
offering diamond grading services for the first time in November 2005 and
colored gemstones beginning in late August 2006.
Despite
a
12.2% increase in revenues in the three months ended September 30, 2006,
compared to the same period of the prior fiscal year, operating income declined
to $130,000, or 1.3% of net revenues, in the three months ended September 30,
2006 from $1.1 million, or 13% of net revenues in the three months ended
September 30, 2005. This decline was attributable to a number of different
factors, including the following: (i) a $900,00 reduction in coin
authentication and grading revenues generated from the Company’s trade show
activities, which also adversely affected our gross margin because customers
generally require and are willing to pay higher fees for faster turnaround
times
at trade shows; (ii) an operating loss of $630,00 incurred by the Company’s
diamond operations, as we continued to invest in and to develop this business;
and (iii) increased infrastructure-related costs, as we continue to upgrade
and expand our internal systems to support the Company’s increased volume of
business and entry into new markets. These, as well as other factors affecting
our operating results in the first quarter of 2007, are described in more detail
below.
The
following table sets forth certain financial data, expressed as a percentage
of
net revenues, derived from our interim condensed consolidated statements of
income (included earlier in this report) for the respective periods indicated
below:
|
|
Three
Months Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
Net
revenues
|
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost
of revenues
|
|
|
44.0
|
%
|
|
38.2
|
%
|
Gross
profit
|
|
|
56.0
|
%
|
|
61.8
|
%
|
Operating
expenses:
|
|
|
|
|
|
|
|
Selling
and marketing expenses
|
|
|
12.8
|
%
|
|
12.3
|
%
|
General
and administrative expenses
|
|
|
40.2
|
%
|
|
36.3
|
%
|
Amortization
of intangibles
|
|
|
1.7
|
%
|
|
0.2
|
%
|
Total
operating expenses
|
|
|
54.7
|
%
|
|
48.8
|
%
|
Operating
income
|
|
|
1.3
|
%
|
|
13.0
|
%
|
Interest
income, net
|
|
|
5.7
|
%
|
|
6.1
|
%
|
Other
income
|
|
|
0.1
|
%
|
|
0.1
|
%
|
Income
before provision for income taxes
|
|
|
7.1
|
%
|
|
19.2
|
%
|
Provision
for income taxes
|
|
|
(3.2
|
%)
|
|
(8.1
|
%)
|
Income
from continuing operations after income taxes
|
|
|
3.9
|
%
|
|
11.1
|
%
|
Income
(loss) from discontinued operations, net of gain on sales
of discontinued businesses (net of income taxes)
|
|
|
0.1
|
%
|
|
(0.1
|
%)
|
Net
income
|
|
|
4.0
|
%
|
|
11.0
|
%
|
General.
In
accordance with accounting principles generally accepted in the United States
of
America (“GAAP”), we record our assets at the lower of cost or fair value. In
determining the fair value of certain of our assets, principally accounts
receivable and inventories, we must make judgments, and estimates and
assumptions, regarding circumstances or trends that could affect the value
of
those assets, such as economic conditions or trends that could impact our
ability to fully collect our accounts receivable or realize the value of our
inventories in future periods. Those judgments, estimates, and assumptions
are
based on current information available to us at that time. Many of those
conditions, trends and circumstances, however, are outside of our control and,
if changes were to occur in the events, trends or other or circumstances on
which are judgments or estimates were based, or other unanticipated events
were
to happen that might affect our operations, we may be required under GAAP to
adjust our earlier estimates. Changes in such estimates may require that we
reduce the carrying value of the affected assets on our balance sheet (which
are
commonly referred to as “write-downs” of the assets involved).
It
is our
practice to establish reserves or allowances to record such downward adjustments
or “write-downs” in the carrying value of assets such as accounts and notes
receivable and inventory. Such write-downs are recorded as charges to income
or
increases in expense in our statement of operations in the periods when those
reserves or allowances are established or increased to take account of changed
conditions or events. As a result, our judgments, estimates and assumptions
about future events and changes in the conditions, events or trends upon which
those estimates and judgments were made, can and will affect not only the
amounts at which we record such assets on our balance sheet, but also our
results of operations.
The
decisions as to the timing of adjustments or write-downs of this nature also
require subjective evaluations or assessments about the effects and duration
of
events or changes in circumstances. For example, it is difficult to predict
whether events, such as occurred on September 11, 2001 or increases in interest
rates or economic slowdowns, will have short or longer term consequences for
our
business, and it is not uncommon for it to take some time after the occurrence
of an event or the onset of changes in economic circumstances for the full
effects of such events or changes to be recognized. Therefore, management makes
such estimates based upon the information available at that time and reevaluates
and adjusts its reserves and allowances for potential write-downs on a quarterly
basis.
Under
GAAP, businesses also must make estimates or judgments regarding the periods
during which, and also regarding the amounts at which, sales are recorded.
Those
estimates and judgments will depend on a number of factors, including whether
customers are granted rights to reject or adjust the payment for the services
provided to them.
As
is
described above, in the first quarter of fiscal 2007, we acquired certain
businesses and, in accordance with GAAP, we accounted for those acquisitions
using the purchase method of accounting. That accounting method required us
to
allocate the amount paid for those businesses over the fair value of the assets
and liabilities acquired, and to classify the excess of the purchase price
over
that fair value as goodwill. In accordance with GAAP, we evaluate goodwill
for
impairments at least annually, or more frequently if we believe that goodwill
has been impaired in the interim due to changing facts or events (see
“Long-Lived
Assets”
below).
Other intangible assets that are separable from goodwill and have definite
lives
are subject to amortization over their remaining useful lives. Indefinite-lived
intangible assets are subject to on-going evaluation for impairment. Management
formally evaluates the carrying value of its goodwill and other indefinite-lived
intangible assets for impairment on the anniversary date of each of the
acquisitions that gave rise to the recording of such assets.
In
making
our estimates and assumptions, we follow GAAP in order to enable us to make
fair
and consistent estimates of the fair value of assets and to establish adequate
reserves or allowances for possible write-downs in the carrying values of our
assets.
Set
forth
below is a summary of the accounting policies and critical estimates that we
believe are material to an understanding of our financial condition and results
of operations.
Revenue
Recognition Policies.
We
generally record revenue at the time of shipment of the authenticated and graded
collectible or diamond to the customer. Our authentication and grading customers
generally prepay our authentication and grading fees when they submit their
collectible items to us for authentication and grading. We record those
prepayments as deferred revenue until their graded collectibles are shipped
back
to them. At that time, we record the revenues from the authentication and
grading services we have performed for the customer and deduct this amount
from
deferred revenue. For certain dealers to whom we extend open account privileges,
we record revenue at the time of shipment of the authenticated and graded
collectible to the dealer. With respect to our acquisition of Expos, we
recognize revenue earned from the promotion, managing and operation of
collectibles conventions in the period in which the event occurs.
Accounts
Receivable, Notes Receivable and the Allowance for Doubtful Accounts.
In
the
normal course of our authentication and grading business, we extend payment
terms to many of the larger, more creditworthy dealers who submit collectibles
or diamonds to us for authentication and grading on a recurring basis. In
addition, primarily in connection with our coin dealer financing programs,
we
make advances or extend credit under notes receivable arrangements. We regularly
review our accounts and notes receivable, estimate the amount of, and establish
an allowance for, uncollectible amounts in each quarterly period. The amount
of
that allowance is based on several factors, including the age and extent of
significant past due amounts, and, in the case of notes receivable, the current
value of the collateral we hold as security for the payment obligations under
the notes receivable, and known conditions or trends that may affect the ability
of account debtors or note obligors to pay their accounts or notes receivable
balances. Each quarter we review estimates of uncollectible amounts and such
economic or other conditions or trends in order to enable us to determine
whether or not to adjust the amount of the allowance. For example, if the
financial condition of certain dealers or economic conditions were to
deteriorate, adversely affecting their ability to make payments on their
accounts or notes, increases in the allowance may be required. Since the
allowance is created by recording a charge against income that is reflected
in
general and administrative expenses, an increase in the allowance will cause
a
decline in our operating results in the period when the increase is
recorded.
Inventory
Valuation Reserve.
Our
collectibles inventories are valued at the lower of cost or fair value and
have
been reduced by an inventory valuation allowance to provide for potential
declines in the value of those inventories. The amount of the allowance is
determined and is periodically adjusted on the basis of market knowledge,
historical experience and estimates concerning future economic conditions or
trends that may impact the sale value of the collectibles inventories.
Additionally, due to the relative uniqueness of some of the collectibles
included in our collectibles inventory, valuation of such collectibles often
involves judgments that are more subjective than those that are required when
determining the market values of more standardized products.
If
there
were to be an
economic downturn or there were to occur other
events or circumstances that are likely to make it more difficult to sell,
or
that would lead us to reduce the sales prices
of those
collectibles, it may become necessary to increase the reserve. Increases in
this
reserve will cause a decline in operating results, because such increases are
recorded by charges against income.
Grading
Warranty Costs.
We
offer a limited warranty covering the coins, sportscards, stamps and currency
that we authenticate and grade. Under the warranty, if any collectible that
was
previously authenticated and graded by us is later submitted to us for
re-grading and either (i) receives a lower grade upon that resubmittal or
(ii) is determined not to have been authentic, we will offer to purchase
the collectible or pay the difference in value of the item at its original
grade
as compared with its lower grade. However, this warranty is voided if the
collectible, upon resubmittal to us, is not in the same tamper resistant holder
in which it was placed at the time we last graded it. We offer a similar limited
warranty, of one year’s duration, on the diamonds we grade. We accrue for
estimated warranty costs based on historical trends and related experience.
To
date our reserves have proved to be adequate. However, if warranty claims were
to increase in relation to historical trends and experience, we would be
required to increase our warranty reserves and incur additional charges that
would adversely affect our results of operations in those periods during which
the warranty reserve is increased.
Long-Lived
Assets.
We
regularly conduct reviews of property and equipment and other long-lived assets,
including certain identifiable intangibles and goodwill, for possible
impairment. Such reviews occur annually, or more frequently if events or changes
in circumstances indicate the carrying amount of the asset may not be
recoverable in full. In order to determine if the value of an asset is impaired,
we make an estimate of the future cash flows (undiscounted and without interest
charges) expected to result from the use of that asset and its eventual
disposition and determine its fair value by discounting those cash flows to
present value using a discount rate commensurate with management’s estimates of
the business risks associated with the asset. If that estimated fair value
is
less than the carrying amount of the asset, an impairment loss is recognized
to
write down the asset to its estimated fair value. The Company does not believe
there was any impairment of its long-lived assets as of September 30, 2006.
There can be no assurance, however, that there will be no impairments of the
Company’s long-lived assets in the future.
Stock-Based
Compensation. We
recognize share-based compensation expense based on the fair value recognition
provision of SFAS No. 123(R), Share-Based
Payment,
using
the Black-Scholes option valuation method. Under that method, assumptions are
made with respect to the expected lives of the options granted, the expected
volatility of the Company’s stock, dividend yield percentage and the risk-free
interest rate at the date of grant. In addition, under SFAS No. 123(R), we
recognize and report share-based compensation expense net of option forfeitures
that we expect will occur over the vesting period, which we estimate on the
basis of historical forfeiture experience or other factors that could affect
future forfeitures. Once we determine the compensation expense of a stock option
award, that expense is recognized in our consolidated statements of income
over
the vesting period of the option using the straight-line attribution
method.
Capitalized
Software.
In the
period January 1, 2006 through June 30, 2006, we capitalized approximately
$804,000 of software development costs related to a number of in-house software
development projects, in accordance with Statement of Position (SOP) 98-1,
Accounting
for the Costs of Computer Software Developed or Obtained for Internal
Use.
SOP
98-1 requires that certain costs incurred, either from internal or external
sources, be capitalized as part of intangible assets and amortized on a
straight-line basis over the useful life of the software. Planning, training,
support and maintenance costs incurred either prior to or following the
implementation phase are recognized as expense in the period in which they
occur. During the first quarter of fiscal 2007, approximately $13,000 was
recorded as amortization expense related to such capitalized software projects.
The Company evaluates the carrying values of capitalized software to determine
if the carrying values are impaired, and, if necessary, an impairment loss
is
recorded in the period in which the impairment occurs.
Net
Revenues
Grading
and authentication fees consist primarily of fees generated from the
authentication and grading of high-value collectibles and high-value assets.
Fees generated from the authentication and grading of collectibles include
coins, sportscards, autographs, stamps and currency and for high-value assets
diamonds and colored gemstones. To a lesser extent, we also generate revenues
from sales of collectibles club memberships; the sale of advertising on our
websites and in printed publications and collectibles price guides;
subscription-based revenues primarily related to our CCE dealer-to-dealer
Internet bid-ask market for certified coins; and fees earned from promotion
and
managing and operating collectibles conventions. Net revenues are determined
net
of discounts and allowances.
The
following table sets forth the breakout of total net revenues for the three
months ended September 30, 2006 and 2005 between grading and authentication
services and other related services:
|
|
Three
Months Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
Increase
|
|
|
|
Amount
|
|
%
of Net
Revenues
|
|
Amount
|
|
%
of Net
Revenues
|
|
Amount
|
|
%
of Net
Revenues
|
|
|
|
(Dollars
in thousands)
|
|
Grading
and authentication fees
|
|
$
|
8,315
|
|
|
84.0
|
%
|
$
|
8,062
|
|
|
91.4
|
%
|
$
|
253
|
|
|
3.1
|
%
|
Other
related services
|
|
|
1,583
|
|
|
16.0
|
%
|
|
763
|
|
|
8.6
|
%
|
|
820
|
|
|
107.5
|
%
|
Total
net revenues
|
|
$
|
9,898
|
|
|
100.0
|
%
|
$
|
8,825
|
|
|
100.0
|
%
|
$
|
1,073
|
|
|
12.2
|
%
|
The
following table sets forth certain information regarding the increases in net
revenues in our larger markets (which are inclusive of revenues from our other
related services) and in the number of units authenticated and graded in the
three months ended September 30, 2006 and 2005:
|
|
Three
Months Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
2006
vs. 2005
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(Decrease)
|
|
|
|
|
|
%
of Net
|
|
|
|
%
of Net
|
|
Revenues
|
|
Units
Processed
|
|
|
|
Amount
|
|
Revenues
|
|
Amount
|
|
Revenues
|
|
Amounts
|
|
Percent
|
|
Number
|
|
Percent
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
Coins
|
|
$
|
5,590
|
|
|
56.5
|
%
|
$
|
5,753
|
|
|
65.2
|
%
|
$
|
(163
|
)
|
|
(2.8
|
%)
|
|
86,300
|
|
|
21.8
|
%
|
Sportscards
|
|
|
2,251
|
|
|
22.7
|
%
|
|
2,106
|
|
|
23.9
|
%
|
|
145
|
|
|
6.9
|
%
|
|
38,500
|
|
|
13.6
|
%
|
Other
(1)
|
|
|
2,057
|
|
|
20.8
|
%
|
|
966
|
|
|
10.9
|
%
|
|
1,091
|
|
|
112.9
|
%
|
|
(11,800
|
)
|
|
(16.1
|
%)
|
|
|
$
|
9,898
|
|
|
100.0
|
%
|
$
|
8,825
|
|
|
100.0
|
%
|
$
|
1,073
|
|
|
12.2
|
%
|
|
113,000
|
|
|
15.0
|
%
|
(1)
|
Consists
of autographs, stamps, currency, diamonds and colored gemstones,
CCE
subscription business and our collectibles convention business in
fiscal
2006; and autographs, stamps, currency and one month of our CCE revenues
in fiscal 2005.
|
The
$1,073,000 (12.2%) increase in net revenues in the three months ended September
30, 2006, compared to the same three months of the prior year, was attributable
to an overall increase in authentication and grading service fees of $253,000
(3.1%) and increases in other related services revenues of $820,000 (107.5%).
The increases in the other related services primarily related to revenues
generated by our collectibles trade show business (which we acquired in July
2006) and increased revenues from the Company’s CCE subscription business (which
we acquired in September 2005 and, therefore, generated less than a month of
revenues in last year’s first quarter as compared to a full quarter of revenues
in the three months ended September 30, 2006).
The
3.1%
increase in authentication and grading fees, despite an increase of 15% in
the
number of units graded and authenticated, in the first quarter this year,
primarily reflects a lower average service fee for coins authenticated and
graded in the three months ended September 30, 2006 due to a decline in the
number of coins authenticated and graded at trade shows in the quarter (where
customers typically request faster turnaround times that result in higher
service fees), as compared to the same quarter last year. Such decline in the
number of coins authenticated and graded at trade shows resulted in a reduction
of $900,000 in revenues from trade shows, primarily related to our main coin
customers, compared to the three months ended September 30, 2005. In
addition, that decline substantially, but not entirely, offset increases in
revenues due to increases in submissions of sportscards and other collectibles
for authentication and grading, as well as the contribution of diamond grading
revenues in this year’s first quarter (as we acquired our diamond grading
business subsequent to last year’s first quarter). We believe that the decline
in coin authentication and grading submissions at trade shows reflects lower
gold prices in the three months ended September 30, 2006, compared to the three
months ended June 30, 2006, which led to a reduction in coin transactions and,
therefore, in grading submissions at trade shows during this year’s first
quarter.
Our
current expectation is that our coin business and, in particular, our trade
show
activity, will rebound over time back up to prior quarter levels, as gold prices
stabilize. However, there is a seasonality to our trade show activity in that
there are fewer trade shows held in the second fiscal quarter than in other
quarters due to the winter holidays.
Gross
Profit
Gross
profit is calculated by subtracting the cost of revenues from net revenues.
Cost
of revenues for grading and authentication revenues, primarily consist of labor
to grade and authenticate collectibles, production costs, credit cards fees,
warranty expense and occupancy, security and insurance costs that directly
relate to providing authentication and grading services. Cost of revenues also
include printing and other direct costs of our related revenues. In addition,
cost of revenues include stock-based compensation earned by employees whose
compensation is classified as part of cost of revenues. Gross profit margin
is
gross profit stated as a percent of net revenues.
Set
forth
below is information regarding our gross profits in the quarter ended September
30, 2006 and 2005.
|
|
Three
Months Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
|
|
Amount
|
|
%
of Revenues
|
|
Amount
|
|
%
of Revenues
|
|
Gross
profit
|
|
$
|
5,542,000
|
|
|
56.0
|
%
|
$
|
5,453,000
|
|
|
61.8
|
%
|
The
decline in the gross profit margin in the three months ended September 30,
2006,
as compared to the same three months of last year, reflects (i) a decline
in the average service fees for coins due to the mix of services provided in
the
periods as a result of a lower level of customers requesting higher margin
faster turnaround times at trade shows, as described above, (ii) a lower
gross margin earned on our sportscards business as a result of a lower level
of
advertising revenues in the quarter and increased production costs, and
(iii) a change in our revenue mix to a lower proportion of coins, on which
we realize higher margins than on the authentication and grading of other
collectibles and high-value assets, as coin revenues represented approximately
56% of total net revenues in the first quarter of fiscal 2007, compared to
approximately 65% of total net revenues in the first quarter of fiscal 2006.
Stock-based compensation costs of $76,000 and $56,000 were recognized as part
of
cost of revenues in the three months ended September 30, 2006 and 2005,
respectively.
Selling
and Marketing Expenses
Selling
and marketing expenses include advertising and promotions costs, trade-show
related expenses, customer service personnel costs and third party consulting
costs. Set forth below is information regarding our selling and marketing
expenses in the three-month period ended September 30, 2006 and
2005.
|
|
Three
Months Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
Selling
and marketing expenses
|
|
$
|
1,262,000
|
|
$
|
1,090,000
|
|
Percent
of net revenues
|
|
|
12.8
|
%
|
|
12.3
|
%
|
The
increase of $172,000 in the dollar amount of selling and marketing expenses
in
the three months ended September 30, 2006, compared to the same period of the
prior fiscal year, was primarily related to increased sales and marketing costs
primarily attributable to our diamond grading business (which we acquired in
November 2005) and our CCE subscription business (which we acquired in September
2005).
General
and Administrative Expenses
General
and administrative (“G&A”) expenses are comprised primarily of compensation
paid to general and administrative personnel, including executive management,
finance and accounting and information technology personnel, and facilities
management costs and other miscellaneous expenses.
|
|
Three
Months Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
General
and administrative expense
|
|
$
|
3,979,000
|
|
$
|
3,200,000
|
|
Percent
of net revenues
|
|
|
40.2
|
%
|
|
36.3
|
%
|
In
dollar
terms, the main components of the $779,000 increase in G&A expenses in the
three months ended September 30, 2006, compared to the same three months last
year, consisted primarily of (i) approximately $610,000 of expenses for
businesses that were acquired subsequent to September 30, 2005 and increases
associated with our CCE business that we had not operated for the full first
quarter of the prior year; (ii) increased costs of $140,000 for upgrading
and expansion of the Company’s internal systems to support the Company’s
increased volume of business and entry into new markets; and
(iii) increased business development costs of approximately $65,000
incurred in connection with our coin business. Such cost increases were
partially offset by a reduction in litigation-related costs in the first quarter
of fiscal 2007, compared to the first quarter of fiscal 2006, as last year’s
first quarter included legal fees and expenses incurred in preparation for
the
Miller
trial.
Stock-based compensation costs included in general and administrative expenses
for the three months ended September 30, 2006 and 2005 were $123,000 and
$75,000, respectively.
Amortization
of Intangible Assets
|
|
Three
Months Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
Amortization
expense
|
|
$
|
171,000
|
|
$
|
20,000
|
|
Percent
of net revenues
|
|
|
1.7
|
%
|
|
0.2
|
%
|
The
increase in the amortization expense relating to intangible assets was primarily
related to the amortization of assets that were acquired through business
acquisitions that were consummated in fiscal 2006 and in the first quarter
of
fiscal 2007. Such assets are being amortized over their estimated useful lives
as described in note 1 to the Condensed Consolidated Financial
Statements.
Stock-Based
Compensation
As
discussed in note 1 to the Company’s condensed consolidated financial
statements, in accordance with SFAS 123(R) for share-based payments, the Company
recognized stock-based compensation as follows:
|
|
Three
Months Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
Included
in:
|
|
|
|
|
|
Cost of revenues
|
|
|
76,000
|
|
|
56,000
|
|
Selling
and marketing expenses
|
|
|
1,000
|
|
|
1,000
|
|
General
and administrative expenses
|
|
|
123,000
|
|
|
75,000
|
|
|
|
$
|
200,000
|
|
$
|
132,000
|
|
As
discussed in the Company’s Form 10-K for the year ended June 30, 2006, during
the fourth quarter of 2006, the Company determined that assumptions used in
the
Black-Scholes option pricing model related principally to the expected term
of
an option and the forfeiture rate used in the determination of stock-based
compensation expense during the first three quarters of fiscal 2006 were
erroneously determined by us. We determined that the stock-based compensation
expense recognized during the interim periods of 2006, including the first
quarter of fiscal 2006, was understated by approximately $35,000 in each of
the
first three quarters, but that the understatement of expense in each of the
interim periods of 2006 was immaterial to each quarter. Therefore, $35,000
of
the increase of $68,000 in stock-based compensation expense in the three months
ended September 30, 2006, compared to the same three month period of the prior
year related to such change in assumptions that were implemented in the fourth
quarter of fiscal 2006 and carried over into fiscal 2007.
The
total
amount of compensation cost related to non-vested awards not yet recognized
at
September 30, 2006, was $1,976,000, and such amount will be recognized as
compensation expense assuming the employees to whom the options and restricted
stock awards were granted continue to be employed by the Company, as
follows:
FY
2007 (for Q-2 - Q-4)
|
|
$
|
594,000
|
|
FY
2008
|
|
|
751,000
|
|
FY
2009
|
|
|
458,000
|
|
FY
2010
|
|
|
147,000
|
|
FY
2011
|
|
|
26,000
|
|
Total
|
|
$
|
1,976,000
|
|
However,
such amounts do not include the cost of any additional options that may be
granted in future periods nor any changes that may occur in the Company’s
forfeiture percentage.
Interest
Income, Net
|
|
Three
Months Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
Interest
income, net
|
|
$
|
567,000
|
|
$
|
542,000
|
|
Percent
of net revenues
|
|
|
5.7
|
%
|
|
6.1
|
%
|
Interest
income is generated on cash and cash equivalent balances that we invest
primarily in highly liquid money market accounts, and commercial paper
instruments. Interest income, net was $567,000 in the three months ended
September 30, 2006, compared with $542,000 in the three months ended September
30, 2005. The increase in interest income in the three months ended September
30, 2006, compared to 2005, related to higher interest earned on the Company’s
cash balances in the three months ended September 30, 2006, compared to the
three months ended September 30, 2005 as a result of higher market rates of
interest in that period. The Company’s average cash balances declined in the
three months ended September 30, 2006, compared with the same period of the
prior year due primarily to the use of cash to fund business acquisitions in
fiscal 2006 and the first quarter of fiscal 2007.
Income
Tax Expense
|
|
Three
Months Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
Income
tax
expense
|
|
$
|
318,000
|
|
$
|
714,000
|
|
The
income tax expense recorded in the three months ended September 30, 2006 and
2005 was calculated based on our expected combined federal and state effective
income tax rate of approximately 45% for the three months ended September 30,
2006 and 42% for the three months ended September 30, 2005. The increase in
the
effective rate to 45% in this year’s first quarter primarily reflects a higher
effect of increased permanent differences between the Company’s income for book
purposes and for tax purposes, due to the non-deductibility of compensation
costs recognized on incentive stock options in the three months ended September
30, 2006.
Discontinued
Operations
|
|
Three
Months Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
Income
(loss) from discontinued operations, net
of gain on sales of discontinued businesses
(net of income taxes).
|
|
$
|
11,000
|
|
$
|
(12,000
|
)
|
The
income of $11,000 from discontinued operations for the three months ended
September 30, 2006, primarily related to a bad debt recovery in the
period.
The
loss
from discontinued operations in the three months ended September 30, 2005
included the results of CTP from September 2, 2005 (which was the date of its
acquisition) through September 30, 2005 and the continued activities associated
with the disposition of the assets (consisting primarily of inventories and
accounts receivables) of the collectibles sales businesses that we sold. In
the
three months ended September 30, 2005, the Company recognized a pre-tax bad
debt
expense of $73,000 in connection with a note receivable of one of our
discontinued businesses, that became uncollectible.
At
September 30, 2006, we had cash and cash equivalents of $41,602,000, as compared
to cash and cash equivalents of $52,110,000 at June 30, 2006.
Historically,
we have relied on internally-generated funds, rather than borrowings, as our
primary source of funds to support our grading operations. We expect our
authentication and grading services to provide us with relatively predictable
cash flows, largely because (i) in many instances our customers prepay for
those services at the time they submit their collectibles to us for
authentication and grading, and (ii) in the event of an on-going decline in
authentication and grading submissions, we can reduce certain of our variable
costs to reduce the impact on our cash flows of such a decline.
During
the three months ended September 30, 2006, our operating activities used net
cash of $1,330,000, which included net advances under notes receivable by CFC
of
$1,790,000.
Net
cash
used in investing activities was $8,167,000 for the three months ended September
30, 2006 and consisted primarily of cash used for business acquisitions of
$6,182,000, and capital expenditures (primarily related to expanding our
diamond grading facilities and capacity) of $1,387,000.
In
the
three months ended September 30, 2006, financing activities used net cash of
$1,025,000, primarily related to the payment of $668,000 of cash dividends
to
stockholders and $378,000 of repurchases of Company shares under our stock
buyback program.
Bank
Line of Credit.
As
previously reported, in fiscal 2005, we organized Collectors Finance Corporation
(“CFC”), as a wholly-owned subsidiary, to engage in the business of making loans
primarily to coin or sportscards dealers. All such loans are required to be
collateralized by the delivery to us of collectibles that have a fair market
value of at least the amount of the loans. The loans are required to be repaid
to us when those collectibles are returned to the dealers. To provide a source
of funding for those loans, in June 2005, CFC obtained a revolving bank line
of
credit pursuant to a loan and security agreement that permits CFC to borrow,
at
any one time, up to the lesser of (i) $7,000,000 or (ii) an amount equal to
85%
of the aggregate principal amount of those of its loan receivables that meet
the
bank’s eligibility criteria. Borrowings under that credit line, which has a term
of two years ending in June 2007, bear interest at rates based on the bank’s
prime rate of LIBOR, as applicable, and are secured by the loan receivables
due
CFC. There were no borrowings outstanding under that line of credit during
the
three months ended or at September 30, 2006.
CFC’s
obligations under this line of credit have been guaranteed by the Company
pursuant to a Continuing Guaranty Agreement with the bank lender. The terms
of
that Agreement require the Company to be in compliance with certain financial
and other restrictive covenants, and require the consent of the lender
(i) for the payment of cash dividends or repurchases of our common stock in
an aggregate amount exceeding its annual net income in any year, and
(ii) to consummate more than $5,000,000 of business acquisitions in any
year. The Company was in compliance with all of these covenants at September
30,
2006 and received the required consents from the lender for the purchases of
Expos Unlimited and American Gemological Laboratories businesses, the repurchase
of the Company’s common stock, and the payment of dividends during fiscal 2006
and 2007.
Outstanding
Financial Obligations
We
had
the following outstanding obligations under operating leases, net of sublease
income, at September 30:
Fiscal
Year
|
|
|
|
2007 (remaining
9 months)
|
|
$
|
1,058,000
|
|
2008
|
|
|
1,594,000
|
|
2009
|
|
|
1,585,000
|
|
2010
|
|
|
840,000
|
|
2011
|
|
|
393,000
|
|
Thereafter
|
|
|
1,756,000
|
|
|
|
$
|
7,226,000
|
|
With
the
exception of those obligations, we do not have any material financial
obligations, such as long-term debt, capital lease, or purchase obligations.
In
the event CFC incurs any borrowings under its line of credit, we will have
an
obligation to repay such borrowings; however, there were no borrowings
outstanding under this line of credit at September 30, 2006.
Stock
Buyback Program. In
December 2005, the Company’s Board of Directors approved a $10 million stock
buyback program. The program authorizes the Company to make up to $10,000,000
of
stock repurchases in open market or privately negotiated transactions, in
accordance with applicable Securities Exchange Commission rules, when
opportunities to make such repurchases, at attractive prices, become available.
The Company is under no obligation to repurchase any shares under the stock
buyback program and the timing, actual number and value of shares that may
be
repurchased under that program will depend on a number of factors, including
the
Company's future financial performance, the Company's available cash resources
and competing uses for the cash that may arise in the future, prevailing market
prices of the Company's common stock and the number of shares that become
available for sale at prices that the Company believes are attractive. Through
September 30, 2006, the Company had repurchased a total of 208,968 shares of
its
common stock for an aggregate purchase price of approximately $3,005,000 (which
includes transaction costs of approximately $10,000) of which a total of 27,117
shares were repurchased, at a cost of $378,000, in the first quarter of fiscal
2007.
Dividends.
In
fiscal, 2006, the Board of Directors adopted a dividend policy that calls for
the payment of an expected total annual cash dividend of $0.32 per common share,
payable in the amount of $0.08 per share per quarter. To date, the Board of
Directors has declared the following quarterly cash dividends under this
policy.
Declaration
Date
|
|
Record
Date
|
|
Dividend
Payment Date
|
|
Amount
|
|
May
31, 2006
|
|
|
June
14, 2006
|
|
|
June
28, 2006
|
|
$
|
674,000
|
|
August
15, 2006
|
|
|
August
29, 2006
|
|
|
September
12, 2006
|
|
$
|
668,000
|
|
The
declaration of cash dividends in the future, pursuant to the Company’s dividend
policy, is subject to final determination each quarter by the Board of Directors
based on a number of factors, including the Company’s financial performance and
its available cash resources, its cash requirements and alternative uses of
cash
that the Board may conclude would represent an opportunity to generate a greater
return on investment for the Company. For these reasons, as well as others,
there can be no assurance that the amount of the quarterly cash dividend will
not be reduced, or that the Board of Directors will not decide to suspend or
discontinue the payment of cash dividends, in the future.
We
plan
to use our cash resources to (i) expand our existing and implement new
marketing programs, (ii) introduce new services for our customers,
(iii) acquire or start-up other high-value collectibles or high-value asset
authentication and grading businesses, (iv) make private and open market
share repurchases under our stock buyback program if there are opportunities
to
do so at prices that we believe are attractive, (v) continue paying
dividends to our stockholders, as determined by the Board of Directors, and
(vi) fund working capital requirements, and for other corporate purposes.
Although we have no current plans to do so, we also may seek borrowings, and
we
may issue additional shares of our stock, to finance acquisitions of additional
authentication and grading businesses.
In
July
2006, the FASB issued FASB Interpretation 48, Accounting
for Uncertainty in Income Taxes: an Interpretation of FASB Statement No.
109.
Interpretation 48 clarifies Statement 109, Accounting
for Income Taxes,
to
indicate a criterion that an individual tax position would have to meet for
some
or all of the benefit of that position to be recognized in an entity’s financial
statements. Interpretation 48 is effective for fiscal years beginning after
December 15, 2006. Prior to the end of this fiscal year, we will evaluate the
impact of Interpretation 48 on our financial statements and results of
operations.
In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements,
which
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP) and expands disclosure about
fair value measurements. The statement emphasizes that fair value is a
market-based measurement, not an entity-specific measurement. SFAS No. 157
is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. We do not
expect the adoption of SFAS No. 157 to have a material impact on our financial
position or results of operation.
In
September 2006, the FASB issued SFAS No. 158, Employers’
Accounting for Defined Benefit Pension and Other Post Retirement Plans
(an
amendment of FASB Statement No. 87, 88, 106 and 132R). SFAS No. 158 requires
an
employer to recognize the over funded or under funded status of a defined
benefit postretirement plan (other than a multiemployer plan) as an asset or
liability in its statement of financial position and to recognize changes in
that funded status in the year in which the changes occur through comprehensive
income. As the Company currently does not sponsor one or more single-employer
defined benefit plans, we do not expect the adoption of SFAS No. 158 to have
a
material impact on our financial position or results of operation.
In
September 2006, the SEC staff issued Staff Accounting Bulletin (“SAB”) No. 108,
“Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements.”
SAB 108
was issued to provide consistency between how registrants quantify financial
statements. Historically, there have been two widely-used methods for
quantifying the effects of financial statement misstatements. These methods
are
referred to as the “roll-over” and “iron curtain” method. The roll-over method
quantifies the amount by which the current year income statement is misstated.
Exclusive reliance on an income statement approach can result in the
accumulation of errors on the balance sheet that may not have been material
to
any individual income statement, but which may misstate one or more balance
sheet accounts. The iron curtain method quantifies the error as the cumulative
amount by which the current year balance sheet is misstated. Exclusive reliance
on a balance sheet approach can result in disregarding the effects of errors
in
the current year income statement that results from the correction of an error
existing in previously issued financial statements. SAB 108 established an
approach that requires quantification of financial statement misstatements
based
on the effects of the misstatement on each of the Company’s financial statements
and the related financial statement disclosures. This approach is commonly
referred to as the “dual approach” because it requires quantification of errors
under both the roll-over and iron curtain methods. SAB 108 allows registrants
to
initially apply the dual approach either by (1) retroactively adjusting prior
financial statements as if the dual approach had always been used or by (2)
recording the cumulative effect of initially applying the dual approach as
adjustments to the carrying values of assets and liabilities as of July 1,
2006
with an offsetting adjustment recorded to the opening balance of retained
earnings (accumulated deficit). Use of this “cumulative effect” transition
method requires detailed disclosure of the nature and amount of each individual
error being corrected through the cumulative adjustment and how and when it
arose. We do not expect the initial application of SAB 108 to have any impact
on
the Company’s financial position or results of operation.
There
are
a number of risks and uncertainties that could affect our future operating
results and financial condition and which could cause our future operating
results to differ materially from those expected at this time. Those risks
and
uncertainties include, but are not limited to:
· |
changes
in general economic conditions or changes in conditions in the
collectibles or high-value assets markets in which we operate, such
as a
possible decline in the popularity of some high-value collectibles
or
assets, either of which could reduce the volume of authentication
and
grading submissions and, therefore, the grading fees we generate;
|
· |
a
lack of diversity in our sources of revenues and, more particularly,
our
dependence on collectible coin authentication and grading for a
significant percentage of our total revenues, which makes us more
vulnerable to adverse changes in economic conditions, including declines
in the value of precious metals or recessionary or other conditions
that
could lead to reduced coin and other collectibles submissions that
would,
in turn, result in reductions in our revenues and income;
|
· |
our
dependence on certain key executives and experts, the loss of the
services
of any of which could adversely affect our ability to obtain
authentication and grading submissions and, therefore, could harm
our
operating results;
|
· |
the
fact that for the year ended June 30, 2006 and the three months ended
September 30, 2006, our top 5 customers accounted for approximately
22%
and 14%, respectively, of our net revenues, which means that the
loss of
any of those customers, or a reduction in their grading submissions
to us,
would result in a decline in our revenues and a reduction in our
operating
income;
|
· |
increased
competition from other collectibles’ authentication and grading companies
that could result in reductions in collectibles submissions to us
or could
require us to reduce the prices we charge for our services, either
of
which could result in reductions in our revenue and income;
|
· |
the
risk that we will incur unanticipated liabilities under our authentication
and grading warranties that would increase our operating expenses;
|
· |
the
risk that new collectibles service offerings and business initiatives,
such as autograph, stamp and paper currency grading services, diamonds
and
colored gemstones, and our dealer financing program, will not gain
market
acceptance or will be unsuccessful and will, as a result, increase
our
operating expenses and reduce our overall profitability or cause
us to
incur losses;
|
· |
the
risks involved in acquiring existing or commencing new authentication
and
grading businesses, including the risks that we will be unable to
successfully integrate new businesses into our operations; that our
new
businesses (in particular our diamond and colored gemstones businesses)
may not gain market acceptance; that business expansion may result
in a
costly diversion of management time and resources from our existing
businesses and increase our operating expenses; that acquisition-related
goodwill and intangible assets may become impaired, which could adversely
impact our financial statements and results of operations; and that
we
will not achieve adequate returns on the investments we may make
in
acquiring other or establishing new businesses, any of which would
harm
our profitability or cause us to incur losses;
|
· |
the
risks that we will encounter problems with or failures of our computer
systems that would interrupt our services or result in loss of data
that
we need for our business; and
|
· |
the
potential of increased government regulation of our businesses that
could
cause operating costs to increase.
|
Certain
of these risks and uncertainties, as well as other risks, are more fully
described above in this Section of this Report (entitled
“Management's Discussion and Analysis of Financial Condition and Results of
Operations”), and in Part I: Item 1A, entitled “Risk Factors”
in our
Annual Report on
Form
10-K for our
fiscal
year
ended June 30, 2006,
as
filed with the SEC under the Securities Exchange Act of 1934.
Due
to
these and other possible uncertainties and risks, you 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. We also disclaim any obligation to
update forward-looking statements contained in this Report or
in
our 2006
Annual
Report on Form
10-K.
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 and cash equivalent balances that we maintain, we are exposed to risk
of changes in short-term interest rates. At September 30, 2006, we had
$41,602,000 in cash and cash equivalents, primarily invested in money market
funds. 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 significant activities that would expose it to foreign currency
exchange rate risk or commodity price risks.
Our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”)
are
designed to provide reasonable assurance that information required to be
disclosed in our reports filed under that Act, such as this Quarterly Report,
is
recorded, processed, summarized and reported within the time periods specified
in the rules of the Securities and Exchange Commission. Our disclosure controls
and procedures also are designed to ensure that such information is accumulated
and communicated to our management, including our CEO and CFO, to allow timely
decisions regarding required disclosures.
Our
management, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness
of
our disclosure controls and procedures in effect as of September 30, 2006.
Based
on this evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that, as of September 30, 2006, our disclosure controls and procedures
were effective to provide reasonable assurance that material information,
relating to the Company and its consolidated subsidiaries, required to be
included in our Exchange Act reports, including this Quarterly Report on Form
10−Q, is made known to management, including the CEO and CFO, on a timely basis.
There
were no changes in our internal control over financial reporting that occurred
during the quarter ended September 30, 2006, that has materially affected,
or
are reasonably likely to materially affect, our internal control over financial
reporting.
PART
II - OTHER INFORMATION
There
were no material changes in the risk factors that were disclosed under the
caption “Risk Factors” in Part IA of our Annual Report on Form 10-K for our
fiscal year ended June 30, 2006, except as may otherwise be set forth above
under the caption “Risks and Uncertainties That Could Affect Our Future
Financial Performance” in Item 2 of Part I of this Report.
Share
Repurchases.
On
December 6, 2005, Collectors Universe, Inc. reported that its Board of Directors
had authorized a stock buyback program, pursuant to which the Company may,
from
time to time, in accordance with the applicable Securities and Exchange
Commission rules, purchase up to an aggregate of $10 million of its shares
of
common stock in open market and private transactions, when opportunities to
makes such purchases become available at attractive prices. The Company is
under
no obligation to repurchase any shares under the stock buyback program and
the
timing, actual number and value of shares that may be repurchased under this
program will depend on a number of factors, including the Company’s future
financial performance; the Company’s available cash resources and competing uses
for the cash that may arise in the future; prevailing market prices of the
Company’s common stock; and the number of shares that become available for sale
at prices that the Company believes are attractive. In addition the Company
may
suspend or terminate this program at any time, without notice.
The
following table sets forth information regarding our share repurchases in each
of the months during the quarter ended September 30, 2006. These purchases
are
the share repurchases made by the Company under this program since
inception.
|
|
(a)
|
|
(b)
|
|
(c)
|
|
(d)
|
|
Monthly
Periods
Through
September 30, 2006
|
|
Total
Number
of
Shares Purchased
|
|
Average
Price Paid per Share
|
|
Total
Number
of
Shares Purchased
as
Part
of Publicly Announced
Programs
|
|
Approximate
Dollar Value
of
Shares that
May
Yet Be
Purchased
Under
the
Programs
|
|
July
1 to July 31, 2006
|
|
|
0
|
|
$
|
0
|
|
|
0
|
|
$
|
7,381,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August
1 to August 31, 2006
|
|
|
0
|
|
$
|
0
|
|
|
0
|
|
$
|
7,381,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
1 to September 30, 2006
|
|
|
27,117
|
|
$
|
13.86
|
|
|
27,117
|
|
$
|
7,005,780
|
|
Total
|
|
|
27,117
|
|
$
|
13.86
|
|
|
27,117
|
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(a)
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Exhibits:
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Exhibit
31.1
|
Certification
of Chief Executive Officer Under Section 302 of the Sarbanes-Oxley
Act of
2002
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|
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Exhibit
31.2
|
Certification
of Chief Financial Officer Under Section 302 of the Sarbanes-Oxley
Act of
2002
|
|
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Exhibit
32.1
|
Chief
Executive Officer Certification Under Section 906 of the Sarbanes-Oxley
Act of 2002
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Exhibit
32.2
|
Chief
Financial Officer Certification Under Section 906 of the Sarbanes-Oxley
Act of 2002
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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.
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COLLECTORS
UNIVERSE, INC.
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Date: November
9, 2006
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/s/
MICHAEL R. HAYNES
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Michael
R. Haynes
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Chief
Executive Officer
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COLLECTORS
UNIVERSE, INC.
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Date: November
9, 2006
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/s/
JOSEPH J. WALLACE
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Joseph
J. Wallace
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Chief
Financial Officer
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Number
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Description
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|
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Exhibit
31.1
|
Certification
of Chief Executive Officer Under Section 302 of the Sarbanes-Oxley
Act of
2002
|
|
|
Exhibit
31.2
|
Certification
of Chief Financial Officer Under Section 302 of the Sarbanes-Oxley
Act of
2002
|
|
|
Exhibit
32.1
|
Chief
Executive Officer Certification Under Section 906 of the Sarbanes-Oxley
Act of 2002
|
|
|
Exhibit
32.2
|
Chief
Financial Officer Certification Under Section 906 of the Sarbanes-Oxley
Act of 2002
|
|
|