Attached files
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 December 31, 2009
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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 1-34240
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COLLECTORS
UNIVERSE, INC.
(Exact
name of Registrant as specified in its
charter)
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Delaware
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33-0846191
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(State
or other jurisdiction of
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(I.R.S.
Employer Identification No.)
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Incorporation
or organization)
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1921
E. Alton Avenue, Santa Ana, California 92705
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(address
of principal executive offices and zip code)
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Registrant's
telephone number, including area code: (949) 567-1234
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Not Applicable
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(Former
name, former address and former fiscal year, if changed, since last
year)
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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 ý No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate website, if any, every interactive data file required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (section 232,405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). YES o NO
o
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a “smaller reporting
company”. See definitions of “accelerated filer”, “large accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check
one):
Large
accelerated filer o
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting company x
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Indicate
by check mark whether the Registrant is a shell company (as defined in
Securities Exchange Act Rule 12b-2).
YES o NO x
APPLICABLE ONLY TO CORPORATE
ISSUERS:
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
Class
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Outstanding
as of February 5, 2010
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Common
Stock $.001 Par Value
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7,683,443
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QUARTERLY
REPORT ON FORM 10-Q
FOR
THE QUARTER ENDED DECEMBER 31, 2009
TABLE
OF CONTENTS
i
ITEM 1. FINANCIAL STATEMENTS
COLLECTORS
UNIVERSE, INC. AND SUBSIDIARIES
(In
Thousands, except per share data)
(unaudited)
December
31,
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June
30,
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|||||||
ASSETS
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2009
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2009
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||||||
Current
assets:
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||||||||
Cash and cash
equivalents
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$ | 18,696 | $ | 23,870 | ||||
Accounts receivable, net of
allowance of $85 at December 31, 2009 and $63
at June 30, 2009
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1,237 | 1,252 | ||||||
Inventories, net
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540 | 497 | ||||||
Prepaid expenses and other current
assets
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907 | 868 | ||||||
Refundable income
taxes
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248 | - | ||||||
Customer notes
receivable
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- | 2,340 | ||||||
Notes receivable from sale of
net assets of discontinued operations
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142 | 212 | ||||||
Current assets of discontinued
operations
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37 | 102 | ||||||
Total current
assets
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21,807 | 29,141 | ||||||
Property and equipment,
net
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1,094 | 1,174 | ||||||
Goodwill
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2,826 | 2,626 | ||||||
Intangible assets,
net
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2,413 | 2,776 | ||||||
Notes receivable from sale of net
assets of discontinued operations
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212 | 300 | ||||||
Other assets
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267 | 74 | ||||||
Non-current assets of discontinued
operations
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182 | 182 | ||||||
$ | 28,801 | $ | 36,273 | |||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
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||||||||
Current
liabilities:
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||||||||
Accounts payable
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$ | 998 | $ | 1,051 | ||||
Accrued
liabilities
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1,355 | 1,344 | ||||||
Accrued compensation and
benefits
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1,201 | 1,341 | ||||||
Income taxes
payable
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172 | 252 | ||||||
Net deferred income tax
liability
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71 | 60 | ||||||
Deferred revenue
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2,196 | 1,883 | ||||||
Current liabilities of
discontinued operations
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1,541 | 1,827 | ||||||
Total current
liabilities
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7,534 | 7,758 | ||||||
Deferred
rent
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275 | 220 | ||||||
Net
deferred income tax liability
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197 | 208 | ||||||
Non-current
liabilities of discontinued operations
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3,460 | 3,308 | ||||||
Commitments
and contingencies
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||||||||
Stockholders’
equity:
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||||||||
Preferred stock, $.001 par value;
3,000 shares authorized, none issued or outstanding
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- | - | ||||||
Common stock, $.001 par value;
20,000 shares authorized; 7,683 and
9,158 issued and outstanding at December 31, 2009
and at June 30,
2009, respectively.
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8 | 9 | ||||||
Additional paid-in
capital
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67,542 | 75,957 | ||||||
Accumulated
deficit
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(50,215 | ) | (51,187 | ) | ||||
Total stockholders’
equity
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17,335 | 24,779 | ||||||
$ | 28,801 | $ | 36,273 |
See
accompanying notes to condensed consolidated financial
statements.
1
(In
Thousands, except per share data)
(unaudited)
Three
Months Ended
December
31,
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Six
Months Ended
December
31,
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|||||||||||||||
2009
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2008
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2009
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2008
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Net
revenues
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$ | 8,883 | $ | 7,802 | $ | 18,181 | $ | 16,845 | ||||||||
Cost
of revenues
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3,633 | 4,027 | 7,372 | 8,153 | ||||||||||||
Gross profit
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5,250 | 3,775 | 10,809 | 8,692 | ||||||||||||
Selling
and marketing expenses
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1,141 | 994 | 2,336 | 2,242 | ||||||||||||
General
and administrative expenses
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2,644 | 3,200 | 5,212 | 6,536 | ||||||||||||
Operating income
(loss)
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1,465 | (419 | ) | 3,261 | (86 | ) | ||||||||||
Interest
and other income, net
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12 | 77 | 52 | 213 | ||||||||||||
Income
(loss) before provision for income taxes
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1,477 | (342 | ) | 3,313 | 127 | |||||||||||
Provision
(benefit) for income taxes
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(202 | ) | 1,210 | (75 | ) | 1,210 | ||||||||||
Income
(loss) from continuing operations
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1,679 | (1,552 | ) | 3,388 | (1,083 | ) | ||||||||||
Loss
from discontinued operations, net of loss on sales of discontinued
businesses,
net of income taxes
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(508 | ) | (9,373 | ) | (561 | ) | (11,139 | ) | ||||||||
Net
income (loss)
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$ | 1,171 | $ | (10,925 | ) | $ | 2,827 | $ | (12,222 | ) | ||||||
Net
income (loss) per basic share:
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Income
(loss) from continuing operations
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$ | 0.23 | $ | (0.17 | ) | $ | 0.45 | $ | (0.12 | ) | ||||||
Loss
from discontinued operations
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(0.07 | ) | (1.03 | ) | (0.07 | ) | (1.22 | ) | ||||||||
Net income
(loss)
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$ | 0.16 | $ | (1.20 | ) | $ | 0.38 | $ | (1.34 | ) | ||||||
Net
income (loss) per diluted share:
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||||||||||||||||
Income (loss) from continuing
operations
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$ | 0.22 | $ | (0.17 | ) | $ | 0.45 | $ | (0.12 | ) | ||||||
Loss from discontinued
operations
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(0.07 | ) | (1.03 | ) | (0.08 | ) | (1.22 | ) | ||||||||
Net income
(loss)
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$ | 0.15 | $ | (1.20 | ) | $ | 0.37 | $ | (1.34 | ) | ||||||
Weighted
average shares outstanding:
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Basic
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7,404 | 9,079 | 7,478 | 9,113 | ||||||||||||
Diluted
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7,555 | 9,079 | 7,592 | 9,113 | ||||||||||||
Dividends declared per common
share
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$ | 0.25 | $ | - | $ | 0.25 | $ | 0.23 |
See
accompanying notes to condensed consolidated financial
statements.
2
COLLECTORS
UNIVERSE, INC. AND SUBSIDIARIES
(In
Thousands)
(unaudited)
Six
Months Ended
December
31,
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||||||||
2009
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2008
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CASH
FLOWS FROM OPERATING ACTIVITIES:
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Net
income (loss)
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$ | 2,827 | $ | (12,222 | ) | |||
Discontinued
operations
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561 | 11,139 | ||||||
Income
(loss) from continuing operations
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3,388 | (1,083 | ) | |||||
Adjustments
to reconcile income (loss) from continuing operations to net
cash
provided by operating
activities:
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||||||||
Depreciation and amortization
expense
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580 | 654 | ||||||
Stock-based compensation
expense
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495 | 525 | ||||||
Provision for bad
debts
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14 | (4 | ) | |||||
Provision for inventory
write-down
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7 | 169 | ||||||
Provision for
warranty
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288 | 250 | ||||||
Interest on notes
receivable
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(9 | ) | - | |||||
Deferred income
taxes
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- | 1,204 | ||||||
Gain on sale of customer
notes
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- | (10 | ) | |||||
Change
in operating assets and liabilities:
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||||||||
Accounts
receivable
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(7 | ) | 38 | |||||
Inventories
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(50 | ) | 1 | |||||
Prepaid expenses and
other
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(40 | ) | (284 | ) | ||||
Refundable income
taxes
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(248 | ) | - | |||||
Other assets
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(143 | ) | 4 | |||||
Accounts payable and accrued
liabilities
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(533 | ) | (575 | ) | ||||
Accrued compensation and
benefits
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(140 | ) | (126 | ) | ||||
Income taxes
payable
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(80 | ) | (18 | ) | ||||
Deferred
revenue
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313 | 32 | ||||||
Deferred rent
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56 | (58 | ) | |||||
Net cash provided by operating
activities of continuing operations
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3,891 | 719 | ||||||
Net cash used in operating
activities of discontinued businesses
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(629 | ) | (4,033 | ) | ||||
Net cash provided by (used in)
operating activities
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3,262 | (3,314 | ) | |||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
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Capital
expenditures
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(137 | ) | (69 | ) | ||||
Advances
on customer notes receivable
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- | (2,446 | ) | |||||
Proceeds
from collection of customer notes receivable
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2,348 | 4,706 | ||||||
Capitalized
software
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- | (249 | ) | |||||
Cash
received from sale of net assets of discontinued
operations
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117 | 46 | ||||||
Net cash provided by investing
activities
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2,328 | 1,988 | ||||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
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||||||||
Proceeds
from exercise of stock options
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- | 1 | ||||||
Repurchase
of common stock under “Dutch Auction” tender
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(8,911 | ) | - | |||||
Dividends
paid to common stockholders
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(1,853 | ) | (2,090 | ) | ||||
Proceeds
from sale of common stock, net
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- | 161 | ||||||
Payments
for retirement of common stock
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- | (484 | ) | |||||
Net cash used in financing
activities
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(10,764 | ) | (2,412 | ) | ||||
Net
decrease in cash and cash equivalents
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(5,174 | ) | (3,738 | ) | ||||
Cash
and cash equivalents at beginning of period
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23,870 | 23,345 | ||||||
Cash
and cash equivalents at end of period
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$ | 18,696 | $ | 19,607 | ||||
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
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||||||||
Interest
paid
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$ | 5 | $ | 2 | ||||
Income
taxes paid
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$ | 252 | $ | 8 |
See
accompanying notes to condensed consolidated financial
statements.
3
COLLECTORS
UNIVERSE, INC. AND SUBSIDIARIES
1. SUMMARY
OF 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” “we”, “us”, “our”). At December 31, 2009, such subsidiaries
were Collectors Finance Corporation (“CFC”), Certified Asset Exchange, Inc.
(“CAE”) and Expos Unlimited, Inc. (“Expos”), all of which are 100% owned by
Collectors Universe, Inc. All intercompany transactions and accounts
have been eliminated.
We have
evaluated subsequent events through February 9, 2010; the date of issuance of
these Condensed Consolidated Financial Statements.
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, Condensed Consolidated
Statements of Operations, and Condensed Consolidated Statements of 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 and six months ended December 31, 2009 are not necessarily
indicative of the results that may be expected for the year ending June 30, 2010
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, 2009, as filed with the
SEC. Amounts related to disclosure of June 30, 2009 balances within
these interim condensed consolidated financial statements were derived from the
aforementioned audited consolidated financial statements and notes thereto
included in that Annual Report on Form 10-K.
Reclassifications
Certain
prior period amounts have been reclassified to conform to the current period
presentation. During fiscal year 2009, we classified our paper
currency, diamond and colored gemstone grading and our Gemprint businesses as
discontinued operations, and, accordingly, all prior periods presented in the
Condensed Consolidated Financial Statements have been restated to reflect the
results of operations, loss per share, cash flows and financial position of
those businesses as discontinued operations (see note 7).
Revenue
Recognition
Net
revenues consist primarily of fees generated from the authentication and grading
of coins, trading cards, autographs, and stamps, net of any taxes
collected. 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. With respect to our Expos trade show
business, we recognize revenue generated by the promotion, management and
operation of collectibles conventions and trade shows in the periods in which
the shows take place.
4
A portion
of our net revenues are comprised of subscription fees paid by customers for a
membership in our Collectors Club. Those memberships entitle members
access to our on-line and printed publications, and sometimes also to vouchers
for free grading services. We record revenue for this multi-element
service arrangement, by
recognizing approximately 60% of the subscription fee in the month following the
membership purchase, on the basis that Collectors Club members typically utilize
their vouchers for free grading services within 30 days of subscribing for
memberships. The balance of the membership fee is recognized as
revenue over the life of the membership, which can range from one to two
years. We evaluate, at least semi-annually, the relative fair values
of the deliverables and the percentage factors used to allocate the membership
fee between the grading and the publication services provided under this
membership service.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that can 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 from continuing
operations could differ from results expected on the basis of those estimates,
and such differences could be material to our future results of operations and
financial condition. Examples of such estimates that could be
material include determinations made with respect to the capitalization and
recovery of software development costs, the valuation of stock-based
compensation awards and the timing of the related stock-based compensation
expense, the amount of goodwill and the existence or non-existence of goodwill
impairments, warranty reserves, the provisions or benefits for income taxes and
related valuation allowance against deferred tax assets, and adjustments to the
fair value of remaining lease obligations for our former jewelry
businesses. Each of these estimates is discussed in more detail in
the notes to these Condensed Consolidated Financial Statements, in the Critical
Accounting Policies and Estimates section of Item 2, Management’s Discussion and
Analysis of Financial Condition and Results of Operations, contained
elsewhere in this Report or in our Annual Report on Form 10-K for the fiscal
year ended June 30, 2009.
Goodwill and Other Long-Lived
Assets
In
accordance with GAAP, we are required to evaluate the carrying value of goodwill
and indefinite-lived intangible assets at least annually, or more frequently if
facts and circumstances indicate that impairment has occurred. We are also
required to evaluate the carrying values of all other tangible and intangible
assets for impairment as circumstances arise in which the carrying values of
these assets may not be recoverable on the basis of future undiscounted cash
flows. During the six months ended December 31, 2009, we paid $200,000 for the
earn-out payment pursuant to the July 2006 Membership Interest Purchase
Agreement between the Company and the sellers of our Expos Unlimited, Inc.
subsidiary, and this represented the full and final settlement. This
amount was recorded as additional goodwill on the Condensed Consolidated Balance
Sheets as of December 31, 2009 and allocated to the Expos reporting
unit.
Stock-Based
Compensation Expense
Stock-based
compensation cost is measured at the grant date of an award, based on its fair
value, and is recognized as expense over the employee or non-employee director’s
requisite service period, which is generally the vesting
period. However, if the vesting of a stock-based compensation award
is subject to satisfaction of a performance requirement or condition, the
stock-based compensation expense is recognized if, and when, it is determined
that vesting of the award has become probable. In the event that
stock-based compensation is recognized on the basis that the performance
condition is probable, and it is subsequently determined that the performance
condition is not met, then all expense previously recognized with respect to the
performance condition would be reversed.
5
The
following table shows total stock-based compensation expense included as part of
continuing and discontinued operations in the Condensed Consolidated Statements
of Operations for the three and six months ended December 31, 2009 and
2008:
Three
Months Ended
December
31,
(In
Thousands)
|
Six
Months Ended
December
31,
(In
Thousands)
|
|||||||||||||||
Included in:
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Cost
of revenues
|
$ | - | $ | 83 | $ | - | $ | 152 | ||||||||
General
and administrative expenses
|
330 | 178 | 495 | 373 | ||||||||||||
Continuing
operations
|
330 | 261 | 495 | 525 | ||||||||||||
Discontinued
operations
|
- | 7 | - | 21 | ||||||||||||
$ | 330 | $ | 268 | $ | 495 | $ | 546 |
No stock
options were granted during the three and six months ended December 31, 2009 and
2008. The following table presents information relative to the stock
options outstanding under all equity incentive plans as of December 31, 2009 and
stock option activity during the six months ended December 31,
2009. The closing prices of our common stock as of December 31, 2009
and June 30, 2009 were $9.35 and $4.88, respectively.
Shares
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Term
|
Aggregate
Intrinsic
Value
|
|||||||||||||
Options:
|
(In
Thousands)
|
(yrs.)
|
(In
Thousands)
|
|||||||||||||
Outstanding at June 30,
2009
|
585 | $ | 11.61 | 4.6 | $ | 115 | ||||||||||
Forfeited or
cancelled
|
(55 | ) | $ | 17.12 | - | - | ||||||||||
Outstanding at December 31,
2009
|
530 | $ | 11.05 | 4.2 | $ | 623 | ||||||||||
Exercisable at December 31,
2009
|
522 | $ | 11.01 | 4.2 | $ | 623 | ||||||||||
Unvested at December 31,
2009
|
8 | $ | 13.02 | 7.4 | $ | - | ||||||||||
Expect to vest at December 31,
2009
|
8 | $ | 13.02 | 7.4 | $ | - |
100
options were exercised during the six months ended December 31, 2009, and 138
options were exercised during the six months ended December 31,
2008.
The 8,000
options that were expected to vest at December 31, 2009 are based on the current
forfeiture rate of 5% and the remaining vesting terms of the 8,000 unvested
options at December 31, 2009.
During the six months ended December 31, 2009 and 2008, approximately 5,500 and 50,900 options were vested, respectively, with aggregate fair values of approximately $27,500 and $352,000, respectively.
Restricted
Stock Awards
On
June 1, 2009, the Compensation Committee of the Board of Directors approved
a management stock incentive compensation program for the fiscal year ending
June 30, 2010 (the “2010 Stock Incentive Program”), in lieu of a cash incentive
program, for the Company’s three executive officers, Michael J. McConnell, its
CEO, David G. Hall, its President, and Joseph J. Wallace, its CFO (the
“Participants”). Under the terms of that Program, on July 31,
2009, the three Participants were awarded the following number of restricted
shares that were reserved for future issuance under the Company’s 2006 Equity
Incentive Plan that was approved by the Company’s
stockholders: Mr. McConnell – 101,034 shares; Mr. Hall – 101,034
shares; and Mr. Wallace – 50,517 shares. Retention by the
Participants of their restricted shares is subject to satisfaction of certain
vesting requirements and, if a vesting requirement that applies to any of the
shares is not satisfied, those shares will be forfeited and
cancelled. Those vesting requirements of the 2010 Stock Incentive
Program are as follows:
6
(1) Performance-Based Vesting
Requirement. The vesting of seventy-five (75%) of the
restricted shares awarded to each officer will be contingent on the Company’s
achievement of a financial performance goal for fiscal 2010. If that
goal is not achieved, all of those shares will be forfeited and
cancelled. On the other hand, if the Company achieves that financial
performance goal, then (i) one-third of the shares will vest when it is
determined that the performance goal was achieved, provided that the officer is
still in the Company’s service at the end of fiscal 2010, (ii) another
one-third of those shares will vest on June 30, 2011, provided the officer is
still in the Company’s service at that time, and (iii) the final one-third
of those shares will vest on June 30, 2012, provided the officer is still
in the Company’s service at that time, subject to acceleration of such vesting
if a officer’s service with the Company is terminated without
cause.
(2) Time-Based Vesting
Requirement. The vesting of the other 25% of the restricted
shares awarded to each officer will be contingent on the continued service of
the officer to July 31, 2010, except for the 25% of the restricted shares
awarded to Mr. Wallace, the Company’s CFO, which became vested on the date
of grant.
Management
determined the fair value of the 252,585 shares of restricted stock to be an
aggregate amount of $1,028,000, based on the July 31, 2009 closing price of the
Company’s common stock of $4.07, of which $257,000 relates to time-based vesting
and $771,000 relates to performance-based vesting. The Company began
recording stock-based compensation expense for the time-based vesting shares
over the requisite service period through July 31, 2010 or immediately for those
grants that vested on the grant date. The
$771,000 associated with the performance-based vesting is recorded as expense
if, and when, it is determined that it is probable that the Company will achieve
the fiscal 2010 financial performance goal. As of September 30, 2009,
achieving the performance condition for the full year 2010 was not determined to
be probable; as a result, no performance related stock-based compensation
expense was recorded during the three months ended September 30,
2009. As of December 31, 2009, achieving the performance condition
for the full fiscal year 2010 was determined to be probable based upon financial
results achieved as of that date and the expected results for the remainder of
fiscal 2010; and, as a result, the Company recognized stock-based compensation
expense of $209,000 in the three and six months ended December 31, 2009,
representing a portion of the $771,000 for the period July 31, 2009 to December
31, 2009. In the event that the financial performance for fiscal 2010
is achieved, approximately $461,000 of expense (which is inclusive of the
$209,000 recognized through December 31, 2009) would be allocated to fiscal year
2010 as stock-based compensation expense, and the balance of approximately
$310,000 would be allocated to fiscal years 2011 and 2012.
The
following table presents the non-vested status of the restricted shares for the
six months ended December 31, 2009 and the weighted average grant-date fair
values.
Non-Vested Shares:
|
(In
Thousands)
Shares
|
Weighted
Average
Grant-Date
Fair
Values
|
||||||
Non-vested
at June 30, 2009
|
43 | $ | 3.80 | |||||
Granted (1)
|
275 | 4.50 | ||||||
Vested
|
(53 | ) | 3.33 | |||||
Non-vested
at December 31, 2009
|
265 | $ | 4.62 |
(1) Includes
the 252,585 restricted shares awarded to the Company’s three executive officers
on July 31, 2010 pursuant to the above-described 2010 Stock Incentive
Program.
7
The
following table sets forth total unrecognized compensation cost in the amount of
$925,000 related to non-vested stock-based awards expected to be recognized
through fiscal year 2012, on the assumption that the performance condition
described above is met and the $771,000 of expense is required to be
recognized. The amount does not include the cost or effect of the
possible grant of any additional stock-based compensation awards in the future
or any change that may occur in the Company’s forfeiture
percentage.
Fiscal
Year Ending June 30,
|
Amount
|
|||
2010
(6 months)
|
$ | 471,000 | ||
2011
|
356,000 | |||
2012
|
98,000 | |||
$ | 925,000 |
|
Concentrations
|
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist primarily of cash and cash equivalents, accounts
receivable and notes receivables.
Financial Instruments and
Cash Balances. At December 31, 2009, we had cash and cash
equivalents, totaling approximately $18,696,000, of which approximately
$12,740,000 was invested in money market funds. At December 31, 2009,
the Company had approximately $5,956,000 in non-interest bearing bank accounts
for general day-to-day operations.
Accounts
Receivable. A substantial portion of accounts receivable are
due from collectibles dealers. At December 31, 2009, no individual
customers accounted for more than 10% of the total net accounts receivable
balances of $1,237,000; whereas, at June 30, 2009, three customers accounted for
approximately 36% of total net accounts receivable balances of $1,252,000
outstanding on that date. The Company performs an analysis of the
expected collectability 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,
management establishes an allowance for doubtful accounts, when
necessary. The allowance for doubtful accounts receivable was $85,000
at December 31, 2009 and $63,000 at June 30, 2009.
Customer Notes
Receivables. At December 31, 2009, the gross outstanding
principal amount of customer notes receivable, which evidenced advances made to
customers, was $23,000 and was fully reserved. At June 30,
2009, the unpaid principal balance of $2,340,000, net, consisted primarily of
one note receivable that represented 99% of the total principal amount
outstanding. On November 6, 2009, the borrower repaid the principal
amount and all interest accrued on the note in full.
Customers. The
authentication, grading and sales of collectible coins accounted for
approximately 66% and 63% of our net revenues for the three and six months ended
December 31, 2009, respectively, and 56% of our net revenues for the three and
six months ended December 31, 2008. These revenues are dispersed
among many customers, although five of our coin customers accounted for
approximately 17.5% and 15.0% of our revenues for the three and six months ended
December 31, 2009, respectively.
Capitalized
Software
Our
policy 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. At December
31 and June 30, 2009, we had capitalized approximately $2,590,000, as
capitalized software and recognized related accumulated amortization and
impairment of $2,125,000 and $1,842,000, respectively. During the
three and six months ended December 31, 2009 and 2008, we capitalized no costs
and $244,000, respectively. Capitalized software costs are amortized
over their estimated useful life of 3 years. During the three months ended
December 31, 2009 and 2008, we recorded approximately $141,000 and $159,000,
respectively, as amortization expense for certain software development projects
that were completed. During the six months ended December 31, 2009
and 2008, approximately $283,000 and $287,000 were recorded as amortization
expense for capitalized 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. Management evaluates the carrying value of capitalized
software to determine if the carrying value is impaired, and, if necessary, an
impairment loss is recorded in the period in which the impairment is determined
to have occurred.
8
Warranty
Costs
We offer
a limited warranty covering the coins, trading cards and stamps 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 at any time and either (i) receives a lower grade upon that
re-submittal or (ii) is determined not to have been authentic, we will
offer to purchase the collectible or, at our option, 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
re-submittal to us, is not in the same tamper resistant holder in which it was
placed at the time we last graded it. To the extent that we purchase
an item under a warranty claim, we recognize as a reduction in our warranty
reserve the difference in value of the item at its original grade and its
re-graded estimated value. We include in our inventory the re-graded
estimated value of the item. We accrue for estimated warranty costs
based on historical trends and related experience. Increased future
claims experience under our warranty program could increase to levels higher
than in the past which could result in additional warranty accruals in
anticipation of these claims, and our ongoing warranty accrual rate could
increase to cover potential higher claims in the future, both of which could
have a material adverse impact on our future results of operations.
Dividends
In June,
2007, our Board of Directors approved a dividend policy that provided for the
payment of regular cash dividends of $0.23 per share per quarter and, pursuant
to that policy, we paid 5 consecutive quarterly cash dividends in that
amount. On September 26, 2008, the Board of Directors determined
that, due to adverse market and economic conditions, including the liquidity
crisis in the United States, the prudent course of action would be, and the
Board of Directors voted, to suspend the future payment of cash dividends in
order to preserve the Company’s cash resources to support the continued
implementation of the Company’s strategic plan. At the same time, the
Board of Directors declared a one-time 10% stock dividend that was distributed
on November 3, 2008.
On
October 26, 2009, the Company announced that the Board of Directors approved the
resumption of the quarterly cash dividend in the amount of $0.25 and declared
the first of such quarterly dividend, which was paid on November 24, 2009
to all stockholders of record as of November 10, 2009. On
January 25, 2010, the Company declared a quarterly $0.25 cash dividend per share
to be paid on February 22, 2010 to all stockholders of records as of February 8,
2010 (see note 12 below). The declaration of cash dividends in the
future 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.
Dutch
Auction Tender Offer
On June
2, 2009, the Company commenced a modified “Dutch Auction” tender offer for the
purpose of purchasing, for cash, up to 1,750,000 shares of its common stock at a
per share price of not less than $5.00 and not greater than
$5.40. The tender offer, which expired on July 2, 2009, was
oversubscribed, and on July 10, 2009, the Company purchased a total 1,749,828
shares in the tender offer, at a price of $5.00 per share, for a total purchase
price of approximately $8,911,000 (including the costs of conducting the tender
offer of $162,000), and was recorded as a reduction of additional paid-in
capital on the Condensed Consolidated Balance Sheets as of December 31,
2009.
9
Recent
Accounting Pronouncements
The FASB
has issued Accounting Standard Update (ASU) No. 2010-01, Equity (Topic 505): Accounting for
Distributions to Shareholders with Components of Stock and Cash. The
amendments to the Codification in this ASU clarify that the stock portion of a
distribution to shareholders that allows them to elect to receive cash or stock
with a potential limitation on the total amount of cash that all shareholders
can elect to receive in the aggregate is considered a share issuance that is
reflected in earnings per share prospectively and is not a stock dividend. This
ASU codifies the consensus reached in EITF Issue No. 09-E, Accounting for Stock Dividends,
Including Distributions to Shareholders with Components of Stock and
Cash. ASU 2010-01 is effective for interim and annual periods ending on
or after December 15, 2009, and should be applied on a retrospective
basis. Management does not expect the adoption of this guidance will
have a material impact on the Consolidated Financial Statements.
In
October 2009, the Financial Accounting Standards Board (“FASB”) issued
amended revenue recognition guidance for arrangements with multiple
deliverables. The new guidance eliminates the residual method of revenue
recognition and allows the use of management’s best estimate of selling price
for individual elements of an arrangement when vendor specific objective
evidence (VSOE), vendor objective evidence (VOE) or third-party evidence (TPE)
is unavailable. For the Company, this guidance is effective for all new or
materially modified arrangements entered into on or after January 1, 2011
with earlier application permitted as of the beginning of a fiscal year. Full
retrospective application of the new guidance is optional. Management does not
expect that adoption of this guidance will have a material impact on the
Consolidated Financial Statements.
In
October 2009, the FASB issued guidance which amends the scope of existing
software revenue recognition accounting. Tangible products containing software
components and non-software components that function together to deliver the
product’s essential functionality would be scoped out of the accounting guidance
on software and accounted for based on other appropriate revenue recognition
guidance. For the Company, this guidance is effective for all new or
materially modified arrangements entered into on or after January 1, 2011
with earlier application permitted as of the beginning of a fiscal year. Full
retrospective application of the new guidance is optional. This guidance must be
adopted in the same period that the Company adopts the amended accounting for
arrangements with multiple deliverables described in the preceding paragraph.
Management does not expect that the adoption of this guidance will have a
material impact on the Consolidated Financial Statements.
In
September 2009, the FASB issued amended guidance concerning fair value
measurements of investments in certain entities that calculate net asset value
per share (or its equivalent). If fair value is not readily determinable, the
amended guidance permits, as a practical expedient, a reporting entity to
measure the fair value of an investment using the net asset value per share (or
its equivalent) provided by the investee without further adjustment. The
amendments are effective for interim and annual periods ending after
December 15, 2009. Management does not expect that the adoption
of this guidance will have a material impact on the Consolidated Financial
Statements due to the adoption of this amended guidance.
In
August 2009, the FASB issued guidance on the measurement of liabilities at
fair value. The guidance provides clarification that in circumstances in which a
quoted market price in an active market for an identical liability is not
available, an entity is required to measure fair value using a valuation
technique that uses the quoted price of an identical liability when traded as an
asset or, if unavailable, quoted prices for similar liabilities or similar
assets when traded as assets. If none of this information is available, an
entity should use a valuation technique in accordance with existing fair
valuation principles. The Company adopted this guidance in the quarter ended
December 31, 2009 and there was no material impact on the Consolidated Financial
Statements.
On
July 1, 2009, the FASB issued the FASB Accounting Standards
Codification (the Codification). The Codification became the single source of
authoritative nongovernmental U.S. GAAP, superseding existing FASB, American
Institute of Certified Public Accountants (AICPA), Emerging Issues Task Force
(EITF) and related literature. The Codification eliminates the previous US GAAP
hierarchy and establishes one level of authoritative GAAP. All other literature
is considered non-authoritative. The Codification was effective for interim and
annual periods ending after September 15, 2009. The Company
adopted the Codification for the quarter ending December 31, 2009. There was no
impact to the consolidated financial results as this change is disclosure-only
in nature.
10
2. CASH
AND CASH EQUIVALENTS
At
December 31, 2009 and June 30, 2009, cash and cash equivalents consisted of
approximately $18,696,000 and $23,870,000, respectively, which was invested in
money-market funds, which comprised of investments in government-guaranteed
securities and non-interest bearing accounts.
3.
|
FAIR
VALUE MEASUREMENTS
|
|
GAAP establishes a three-tier fair value hierarchy, which prioritizes the
inputs used in measuring fair value for financial and non-financial assets
and liabilities. These tiers
include:
|
Level 1-defined as observable
inputs such as quoted prices in active markets;
Level 2-defined as inputs
other than quoted prices in active markets that are either directly or
indirectly observable for similar assets or liabilities; and
Level 3-defined as
unobservable inputs in which little or no market data exists, therefore,
requiring the Company to develop its own assumptions.
We
adopted the following disclosure requirements in two steps: (i) effective July
1, 2008, we adopted it for all financial instruments and non-financial
instruments accounted for at fair value on a recurring basis; and (ii) effective
July 1, 2009, for all non-financial instruments accounted for at fair value on a
non-recurring basis. For financial assets and liabilities, fair value
is the price we would receive to sell an asset or pay to transfer a liability in
an orderly transaction with a market participant at the measurement
date. Assets and liabilities that are measured on a recurring basis
refer to those assets and liabilities, such as money market funds and lease
obligations, that are measured each time the financial statements are
issued. Those assets or liabilities that are measured for fair value
on a periodic basis, such as the impairment of goodwill (see note 1), are
presented below as non-recurring.
Assets and Liabilities Measured at
Fair Value on a Recurring Basis at December 31 and June 30,
2009.
At
Dec. 31,
|
Fair
Value Measurements Using
|
|||||||||||||||
(In
Thousands)
|
2009
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
||||||||||||
Assets:
|
||||||||||||||||
Investments in money market
funds
|
$ | 12,740 | $ | 12,740 | $ | - | $ | - | ||||||||
Liabilities:
|
||||||||||||||||
Operating
lease obligations
|
$ | 4,563 | $ | - | $ | - | $ | 4,563 |
At
June 30,
|
Fair
Value Measurements Using
|
|||||||||||||||
(In Thousands)
|
2009
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
||||||||||||
Assets:
|
||||||||||||||||
Investments in money market
funds
|
$ | 20,200 | $ | 20,200 | $ | - | $ | - | ||||||||
Liabilities:
|
||||||||||||||||
Operating lease
obligations
|
$ | 4,454 | $ | - | $ | - | $ | 4,454 |
11
The
following table presents additional information about Level 3 liabilities for
the six months ended December 31, 2009.
Beginning
|
Loss
(1)
|
Ending
|
||||||||||||||
Balance
|
Principal
|
Included
in
|
Balance
|
|||||||||||||
(In thousands)
|
6/30/09
|
Paydowns
|
Net
Income
|
12/31/2009
|
||||||||||||
Liabilities:
|
||||||||||||||||
Operating lease
obligations
|
$ | 4,454 | $ | (296 | ) | $ | 405 | $ | 4,563 |
(1)
|
before
interest expense of $118,000 for the six months ended December 31,
2009
|
The loss
of $405,000 was included as part of the loss from discontinued operations in the
six months ended December 31, 2009 and relates to the Company’s lease
obligations in New York City. Due
primarily to an increase in available office space and further decreases in
office rents in New York City, at June 30, 2009 we increased that accrual by
$815,000 and again at December 31, 2009 by an additional $405,000, such that the
lease obligations were carried on our balance sheets at values of approximately
$4,454,000 at June 30, 2009 and $4,563,000 at December 31,
2009.
4. INVENTORIES
Inventories
consist of the following:
|
||||||||
(In
thousands)
|
||||||||
December
31,
|
June
30,
|
|||||||
2009
|
2009
|
|||||||
Coins
|
$ | 401 | $ | 336 | ||||
Other
collectibles
|
28 | 31 | ||||||
Grading
raw materials consumable inventory
|
217 | 232 | ||||||
646 | 599 | |||||||
Less
inventory
reserve
|
(106 | ) | (102 | ) | ||||
Inventories,
net
|
$ | 540 | $ | 497 |
5. PROPERTY
AND EQUIPMENT
Property
and equipment consist of the following:
|
||||||||
(In
thousands)
|
||||||||
December
31,
|
June
30,
|
|||||||
2009
|
2009
|
|||||||
Coins
and stamp grading reference sets
|
$ | 515 | $ | 515 | ||||
Computer
hardware and
equipment
|
1,365 | 1,345 | ||||||
Computer
software
|
993 | 990 | ||||||
Equipment
|
1,915 | 1,823 | ||||||
Furniture
and office
equipment
|
890 | 897 | ||||||
Leasehold
improvements
|
686 | 665 | ||||||
Trading
card reference
library
|
52 | 52 | ||||||
6,416 | 6,287 | |||||||
Less
accumulated depreciation and amortization
|
(5,322 | ) | (5,113 | ) | ||||
Property
and equipment, net
|
$ | 1,094 | $ | 1,174 |
6. ACCRUED
LIABILITIES
Accrued
liabilities consist of the following:
|
(In
thousands)
|
|||||||
December
31,
|
June
30,
|
|||||||
2009
|
2009
|
|||||||
Warranty
costs
|
$ | 751 | $ | 708 | ||||
Professional
fees
|
51 | 112 | ||||||
Other
|
553 | 524 | ||||||
$ | 1,355 | $ | 1,344 |
12
The
following table presents the changes in the Company’s warranty reserve during
the six months ended December 31, 2009 and 2008:
(In
thousands)
|
||||||||
Six
Months
Ended
December
31,
|
Six
Months
Ended
December
31,
|
|||||||
2009
|
2008
|
|||||||
Warranty
reserve, beginning of
period
|
$ | 708 | $ | 665 | ||||
Charged
to cost of
revenue
|
288 | 250 | ||||||
Payments
|
(245 | ) | (267 | ) | ||||
Warranty
reserve, end of
period
|
$ | 751 | $ | 648 |
7.
|
DISCONTINUED
OPERATIONS
|
During
fiscal 2009, the Board of Directors authorized the divesture and sale of GCAL,
Gemprint and AGL (the “Jewelry Businesses”) and the currency grading business,
the remaining assets and liabilities of which have been reclassified as assets
and liabilities of discontinued operations on the Condensed Consolidated Balance
Sheets as of June 30 and December 31, 2009. The Condensed
Consolidated Statements of Operations for the three and six months ended
December 31, 2009 and the Condensed Consolidated Statements of Cash Flows for
the six months ended December 31, 2008 have also been restated to present the
results of operations for those discontinued operations as part of the loss from
discontinued operations. As previously reported, discontinued
operations also include the remaining activities related to the disposal of our
collectibles sales businesses that we discontinued in fiscal 2004.
The
operating results of the discontinued businesses that are included in the
accompanying Condensed Consolidated Statements of Operations are as
follows:
(In
Thousands)
|
||||||||||||||||
Three
Months Ended
December
31,
|
Six
Months Ended
December
31,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Net
revenues
|
$ | - | $ | 605 | $ | 3 | $ | 1,254 | ||||||||
Income
(loss) operations of discontinued businesses
|
1 | (9,370 | ) | 1 | (11,136 | ) | ||||||||||
Loss
on sale of discontinued business
|
(509 | ) | (3 | ) | (562 | ) | (3 | ) | ||||||||
Loss
before income tax expense
|
(508 | ) | (9,373 | ) | (561 | ) | (11,139 | ) | ||||||||
Income
tax expense
|
- | - | - | - | ||||||||||||
Loss
from discontinued operations
|
$ | (508 | ) | $ | (9,373 | ) | $ | (561 | ) | $ | (11,139 | ) |
13
The
following table contains summary balance sheet information with respect to the
net assets and liabilities of the discontinued operations that are included in
the accompanying Condensed Consolidated Balance Sheets as of December 31, 2009
and June 30, 2009.
(In
Thousands)
|
||||||||
December
31,
2009
|
June
30,
2009
|
|||||||
Current
Assets:
|
||||||||
Accounts receivable,
net
|
$ | 12 | $ | 31 | ||||
Assets held for
sale
|
25 | 71 | ||||||
$ | 37 | $ | 102 | |||||
Non-Current
Assets:
|
||||||||
Other assets
|
$ | 182 | $ | 182 | ||||
Current
Liabilities:
|
||||||||
Accounts
payable
|
$ | 6 | $ | 42 | ||||
Lease
obligations
|
1,139 | 1,182 | ||||||
Other accrued
expenses
|
377 | 586 | ||||||
Deferred
revenue
|
19 | 17 | ||||||
$ | 1,541 | $ | 1,827 | |||||
Non-Current
Liabilities:
|
||||||||
Lease
obligations
|
$ | 3,424 | $ | 3,272 | ||||
Other long-term
liabilities
|
36 | 36 | ||||||
$ | 3,460 | $ | 3,308 |
At June
30 and December 31, 2009 our continuing operations consist of our collectibles
grading and authentication businesses, our CCE subscription business, our CFC
dealer-financing business and our Expos collectibles convention
business.
In
connection with and as a condition of our acquisition of CCE in September 2005,
we were required to purchase the common stock of CTP, which we disposed of in
November 2005. As part of the consideration for the sale of CTP, we
recorded a note receivable of $458,000, bearing interest at 10% per annum and
payable over five years. We have a security interest in the assets of
CTP and certain personal assets of the purchaser. At December 31 and
June 30, 2009, the carrying values of the note were $92,000 and $138,000,
respectively, of which the current portion, at December 31, 2009 and June 30,
2009 was approximately $92,000 and is included as part of the current portion of
receivables from sale of net assets of discontinued operations.
In
February 2009, we sold the assets of our currency grading business for
approximately $354,000 in consideration of a cash payment of $50,000 and a
promissory note (the “Note”) with a face value of $304,000 with annual payments
of $50,000 due on the annual anniversary dates in each year between February
2010 to February 2012 and a $154,000 payment due in February 2013. The Note is
discounted using an imputed rate of 7.25% and is carried on the Condensed
Consolidated Balance Sheets as of December and June 30, 2009 in the amount of
$257,000 as part of notes receivable from sale of net assets of discontinued
operations.
During
May 2009, we sold the AGL colored gemstone business for approximately $133,250
in consideration of a $62,500 cash payment and a non-interest bearing promissory
note due and paid in-full on November 8, 2009 in the amount of
$70,750.
During
fiscal 2009, in connection with our exiting the Jewelry Businesses, we
recognized lease obligations (including operating costs and other estimated
costs associated with subletting the spaces) at June 30, 2009 of approximately
$4,454,000, of which $1,182,000 was classified as part of current liabilities of
discontinued operations on the Condensed Consolidated Balance Sheet at June 30,
2009, and $3,272,000 was classified as non-current. During the second quarter of
fiscal 2010, we evaluated the fair value of the remaining lease obligations and
recorded an adjustment to the carrying value of the leases in the amount of
$405,000. The aggregate fair value of the remaining lease obligations
on the Condensed Consolidated Balance Sheets at December 31, 2009 is
approximately $4,563,000, of which $1,139,000 is classified as part of current
liabilities of discontinued operations and $3,424,000 is classified as
non-current.
14
8.
|
INCOME
TAXES
|
The
estimated annual effective tax rate applied to pre-tax income from continuing
operations was 5% for the three and six months ended December 31,
2009. In the three months ended December 31, 2009, the Company
recognized a federal income tax benefit of $248,000 related to the suspension of
the 90% Alternative Minimum Tax (AMT) limitation for the carryback of net
operating losses (“NOLs”). During the three and six month periods
ended December 31, 2008, we recorded a provision of $1,210,000 on pre-tax loss
of $342,000 and pre-tax income of $127,000, respectively, reflecting valuation
allowances required in those periods.
During
fiscal 2008 and 2009, we recorded valuation allowances in the total amount of
approximately $12,962,000 primarily as a result of the losses incurred by those
businesses currently classified as discontinued operations. To the
extent that the Company earned taxable income in the three and six months ended
December 31, 2009, we have realized certain deferred tax assets such that the
valuation allowance at December 31, 2009 was reduced to approximately
$11,389,000. We recognized no federal income tax provision for the
income generated in the three and six months ended December 31, 2009 and
recognized a provision for the State of California taxes payable as a result of
that state suspending the right to apply state NOLs carryforwards and limiting
to 50% the use of state tax credits carryforwards to offset California taxable
income in fiscal 2010.
9. NET
INCOME (LOSS) PER SHARE
The
number of shares used in the computation of the income or loss per share for the
three and six months period ended December 31, 2008, gives retroactive effect to
a 10% stock dividend that was distributed on November 3, 2008 to stockholders of
record as of October 20, 2008.
The
number of shares used in the computation of income or loss per share for the
three month period ended December 31, 2009 gives effect to the buyback of
1,749,828 shares in the July 10, 2009 “Dutch Auction” tender offer.
The
aggregate numbers of shares subject to options and warrants that were excluded
from the computation of diluted loss per share, because they would have been
anti-dilutive in the calculation of diluted income or loss per share, totaled
approximately 390,000 and 1,023,000 for the three months ended December 31, 2009
and 2008, respectively, and 442,000 and 995,000 for the six months ended
December 31, 2009 and 2008, respectively.
10. BUSINESS
SEGMENTS
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.
For our
continuing operations, we operate principally in three reportable service
segments: coins, trading cards and autographs and other high-end
collectibles. Services provided by these segments include
authentication, grading, publication and web advertising and subscription-based
revenues. The other collectibles segment is comprised of stamps, the
CCE subscription business, our CFC dealer financing business and our
collectibles conventions business.
15
We
allocate operating expenses to each service segment based upon each segment’s
activity level. The following tables set forth on a business segment
basis, including reconciliation with the Condensed Consolidated Financial
Statements, (i) external revenues, (ii) amortization and depreciation, (iii)
stock-based compensation expense, and (iv) operating income for the three and
six months ended December 31, 2009 and 2008. Net identifiable assets are
provided by business segment as of December 31, 2009 and June 30, 2009. All of
our sales and identifiable assets are located in the United States.
Three
Months Ended
|
Six
Months Ended
|
|||||||||||||||
December
31,
|
December
31,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Net
revenues from external customers
|
||||||||||||||||
Coins
|
$ | 5,851 | $ | 4,370 | $ | 11,408 | $ | 9,365 | ||||||||
Trading cards and
autographs
|
2,304 | 2,540 | 4,870 | 5,333 | ||||||||||||
Other
|
728 | 892 | 1,903 | 2,147 | ||||||||||||
Total revenue
|
$ | 8,883 | $ | 7,802 | 18,181 | $ | 16,845 | |||||||||
Amortization
and depreciation
|
||||||||||||||||
Coins
|
$ | 78 | $ | 77 | $ | 150 | $ | 152 | ||||||||
Trading cards and
autographs
|
57 | 73 | 102 | 126 | ||||||||||||
Other
|
92 | 103 | 200 | 205 | ||||||||||||
Total
|
227 | 253 | 452 | 483 | ||||||||||||
Unallocated amortization and
depreciation
|
59 | 84 | 128 | 171 | ||||||||||||
Consolidated amortization and
depreciation
|
$ | 286 | $ | 337 | $ | 580 | $ | 654 | ||||||||
Stock-based
compensation
|
||||||||||||||||
Coins
|
$ | - | $ | 62 | $ | - | $ | 95 | ||||||||
Trading cards and
autographs
|
- | 21 | - | 42 | ||||||||||||
Other
|
- | - | - | 22 | ||||||||||||
Total
|
- | 83 | - | 159 | ||||||||||||
Unallocated stock-based
compensation
|
330 | 178 | 495 | 366 | ||||||||||||
Consolidated stock-based
compensation
|
$ | 330 | $ | 261 | $ | 495 | $ | 525 | ||||||||
Operating
income (loss) before unallocated expenses
|
||||||||||||||||
Coins
|
$ | 2,318 | $ | 809 | $ | 4,507 | $ | 2,610 | ||||||||
Trading cards and
autographs
|
221 | 323 | 600 | 761 | ||||||||||||
Other
|
25 | (88 | ) | 226 | (28 | ) | ||||||||||
Total
|
2,564 | 1,044 | 5,333 | 3,343 | ||||||||||||
Unallocated operating
expenses
|
(1,099 | ) | (1,463 | ) | (2,072 | ) | (3,429 | ) | ||||||||
Consolidated operating loss
|
$ | 1,465 | $ | (419 | ) | $ | 3,261 | $ | (86 | ) |
At
December 31,
|
At
June 30,
|
|||||||
Identifiable
Assets
|
2009
|
2009
|
||||||
Coins
|
$ | 2,888 | $ | 2,683 | ||||
Trading cards and
autographs
|
771 | 1,003 | ||||||
Other
|
4,680 | 7,051 | ||||||
Total
|
8,339 | 10,737 | ||||||
Unallocated
assets
|
20,462 | 25,536 | ||||||
Consolidated
assets
|
$ | 28,801 | $ | 36,273 |
11.
|
RELATED
PARTY TRANSACTION
|
During
the first quarter of fiscal 2010, the Company amended the 2006 five-year
Consulting Agreement with the current president of Expos, such that (i) the term
was extended for an additional five years to July 1, 2016, and (ii) we entered
into a revised compensation agreement consisting of a 35% payout based on the
annual operating income of Expos, or $120,000 per year, whichever is
greater.
At
December 31, 2009, accounts receivable, net, on the Condensed Consolidated
Balance Sheet included $21,147 that consisted of federal and state taxes paid by
the Company on December 31, 2009 on behalf of the Company’s Chief Financial
Officer (“CFO”) in connection with stock awarded in 2009, that was required to
be paid through the Company’s payroll. The CFO reimbursed the Company the
full amount on January 4, 2010.
16
12.
|
SUBSEQUENT
EVENT
|
On
January 25, 2010, the Company announced that the Board of Directors approved the
quarterly cash dividend of $0.25 that will be paid on February 22, 2010 to
stockholders of record as of February 8, 2010.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
|
The
discussion in this Item 2 of this Quarterly Report on Form 10-Q (this
“Report”) 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 expected future financial performance so
long as they provide meaningful, cautionary statements identifying important
factors that could cause actual results to differ from projected or anticipated
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 forward-looking statements and
information contained in this Report are qualified in their entirety by, and
readers of this Report are urged to read the risk factors that are described in
Item 1A of Part I of our Annual Report on Form 10-K for the fiscal
year ended June 30, 2009 (the “Fiscal 2009 10-K”), which we filed with the
Securities and Exchange Commission (the “SEC”) on September 4,
2009.
Due to
these and other possible uncertainties and risks, readers are cautioned not to
place undue reliance on the forward-looking statements contained or recent
trends that we described 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 or revise any forward-looking statements contained in this Report or in
our Fiscal 2009 10-K or any other prior filings with the SEC, except as may be
required by applicable law or applicable Nasdaq rules.
Collectors
Universe, Inc. (“we”, “us” or the “Company”) provides grading and authentication
services to dealers and collectors of high-value coins, trading cards, event
tickets, autographs, sports and historical memorabilia and stamps. We
believe that our authentication and grading services add value to these
collectibles by enhancing their marketability and thereby providing increased
liquidity to the dealers, collectors and consumers that own, 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
other related services consisting of: (i) the sale of
advertising on our websites; (ii) the sale of printed publications and
collectibles price guides and advertising in such publications and on our
website; (iii) the sale of membership subscriptions in our Collectors Club,
which is designed to attract interest in high-value collectibles among new
collectors; (iv) the sale of subscriptions to our CCE dealer-to-dealer
Internet bid-ask market for certified coins and CoinFacts; and (v) the
management and operation of collectibles trade shows and
conventions. We also generate revenues from sales of our collectibles
inventory, which is comprised primarily of collectible coins that we have
purchased under our coin grading warranty program; however, such sales are
neither the focus nor an integral part of our on-going revenue generating
activities.
17
Continuing
Operations. Our continuing operations consist of the grading
and authentication of coins, trading cards, stamps and autographs, our CCE
dealer-to-dealer bid-ask market for certified coins and collectibles trade shows
and conventions that we conduct. The discussions that follow focus almost
entirely on the continuing businesses.
Discontinued
Operations. The remaining assets and liabilities of the
jewelry, Gemprint and currency authentication and grading businesses have been
classified as discontinued operations at June 30, 2009 and December 31, 2009,
and the operations of these businesses have been reclassified as discontinued
operations for all periods presented in this Report. In addition, we
continue to classify as discontinued operations the remaining activities, of our
collectibles auctions and sales businesses which we disposed of in fiscal
2004.
During
the second quarter of fiscal 2010, we recorded a $508,000 loss from discontinued
operations as compared to a loss from discontinued operations of $9,373,000, for
the same period in fiscal 2009 and for the six months ended December 31, 2009
and 2008, we recorded losses from discontinued operations of $561,000 and
$11,139,000, respectively. Since we were able to substantially
complete the sale and disposal of the assets of the discontinued businesses
during fiscal 2009, we expect losses from the disposal of the remaining assets
of those businesses to decline substantially in fiscal 2010 as compared to
fiscal 2009. We will, however, continue to review and, if necessary, make
adjustments to the accrual established for the real estate leases in New York
City, associated with our former jewelry operations. See accrual for
Facility Lease Expenses under Critical Accounting Policies and Estimates on page
21 of this Report.
The
following table sets forth certain financial data, expressed as a percentage of
net revenues, derived from our interim Condensed Consolidated Statements of
Operations (included earlier in this Report) for the respective periods
indicated below:
Three
Months Ended
|
Six
Months Ended
|
|||||||||||||||
December
31,
|
December
31,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Net
revenues
|
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost
of revenues
|
40.9 | % | 51.6 | % | 40.5 | % | 48.4 | % | ||||||||
Gross
profit
|
59.1 | % | 48.4 | % | 59.5 | % | 51.6 | % | ||||||||
Operating
expenses:
|
||||||||||||||||
Selling and marketing
expenses
|
12.8 | % | 12.7 | % | 12.8 | % | 13.3 | % | ||||||||
General and administrative
expenses
|
29.7 | % | 41.1 | % | 28.7 | % | 38.9 | % | ||||||||
Total operating expenses
|
42.5 | % | 53.8 | % | 41.5 | % | 52.2 | % | ||||||||
Operating
income (loss)
|
16.6 | % | (5.4 | )% | 18.0 | % | (0.6 | )% | ||||||||
Interest
and other income, net
|
0.1 | % | 1.0 | % | 0.2 | % | 1.3 | % | ||||||||
Income
(loss) before income taxes
|
16.7 | % | (4.4 | )% | 18.2 | % | 0.7 | % | ||||||||
Provision
(benefit) for income taxes
|
(2.2 | )% | 15.5 | % | (0.4 | )% | 7.2 | % | ||||||||
Income
(loss) from continuing operations
|
18.9 | % | (19.9 | )% | 18.6 | % | (6.5 | )% | ||||||||
Loss
from discontinued operations, net of income
taxes
|
(5.7 | )% | (120.1 | )% | (3.1 | )% | (66.1 | )% | ||||||||
Net
income (loss)
|
13.2 | % | (140.0 | )% | 15.5 | % | (72.6 | )% |
Our gross
profit, operating income and income from continuing operations, during this
year’s first and second quarters, increased both in absolute dollars and as a
percentage of net revenues as compared to the same quarters of fiscal
2009. Those increases were primarily attributable to an increase in
our coin revenues on which we earn a higher gross profit margin than in our
other grading and authentication businesses, and reductions in costs of revenues
and selling, general and administrative expenses that we achieved as a result of
a cost reduction program which we initiated in fiscal 2009 and have continued
into the current fiscal year. The factors that contributed to the
improvement in our operating results in this year’s second quarter are discussed
in greater detail below.
18
Factors that Can Affect our Revenues
and our Gross Profit Margins. The revenues of our continuing
operations are comprised of (i) fees generated by our authentication and
grading of high-value collectibles, and (ii) to a lesser extent, revenues
from sales of collectibles club memberships, advertising on our websites and in
printed publications and collectibles price guides, subscription-based revenues
primarily generated by our CCE dealer-to-dealer Internet bid-ask market for
collectible coins that have been authenticated and graded (collectively,
“certified”) and CoinFacts and fees earned from the management, operation and
promotion of collectibles trade shows and conventions. Our revenues
also include revenues from sales of products, which consist primarily of coins
that we purchase under our warranty policy. However, those revenues,
which vary from period to period depending on the volume and dollar amounts of
the coin warranty claims we receive, are not the focus and do not constitute an
integral part of our on-going revenue generating activities.
Our
authentication and grading fees accounted for 82.5% of our total net revenues
for the six months ended December 31, 2009. The amounts of such
revenues and our gross profit margins are primarily affected by the volume and
mix of coin and collectibles sales and purchase transactions by collectibles
dealers and collectors, because our collectibles authentication and grading
services generally facilitate sales and purchases of coins and other high value
collectibles by providing dealers and collectors with a high level of assurance
as to the authenticity and quality of the collectibles they seek to sell or
buy. Consequently, dealers and collectors most often submit coins and
other collectibles to us for authentication and grading at those times when they
are in the market to sell or buy coins and other high-value
collectibles. In addition, the level of our coin grading and
authentication revenues are impacted by the level of modern coin submissions,
which can be volatile due to specific customers or marketing programs in a given
period. Furthermore, because a significant proportion of our costs of
sales are fixed in nature in the short-term, our gross profit margin also is
affected by the overall volume of collectibles that we authenticate and grade in
any period. Other factors that affect both our revenues and gross
profit margins include (i) the volume and mix of authentication and grading
submissions among coins and trading cards, on the one hand, and other
collectibles on the other hand, because we are able to charge higher
authentication and grading fees on coins and sports cards than on other
collectibles; (ii) in the case of coins and trading cards, the “turnaround”
times requested by our customers, because we charge higher fees for faster
service times; and (iii) the mix of authentication and grading submissions
between vintage or “classic” coins and trading cards, on the one hand, and
modern coins and trading cards, on the other hand, because dealers generally
request faster turnaround times for vintage or classic coins and trading cards
than they do for modern submissions, as vintage or classic collectibles are of
significantly higher value and are more saleable by dealers than modern coins
and trading cards.
Our
revenues and gross profit margins also are affected by the level of coin
authentication and grading submissions we receive at collectibles trade shows
where we provide on-site authentication and grading services to show attendees,
because they typically request higher priced same-day turnaround for the coins
they submit to us for authentication and grading at those shows. The
level of trade show submissions varies from period to period depending upon a
number of factors, including the number and the timing of the shows and the
volume of collectible coins that are bought and sold at those shows by dealers
and collectors. In addition, the number of such submissions and,
therefore, the revenues and gross profit margin we generate from the
authentication and grading of coins at trade shows can be impacted by short-term
changes in the prices of gold that sometimes occur around the time of the shows,
because gold prices can affect the willingness of dealers and collectors to sell
and purchase coins at the shows.
Five of
our coin authentication and grading customers accounted, in the aggregate, for
approximately 15% of our total net revenues in the six months ended December 31,
2009. As a result, the loss of any of those customers, or a
significant decrease in the volume of grading submissions from any of them to
us, could cause our net revenues to decline and, therefore, could adversely
affect our results of operations.
Impact of Economic Conditions on our
Financial Performance. As discussed above, our operating
results are affected by the volume of collectibles transactions by collectibles
dealers and collectors which, in turn, is primarily affected by (i) the
disposable income available to collectors and their confidence about future
economic conditions, because high-value collectibles are generally viewed as
luxury goods and are purchased with disposable income; (ii) the cash flows
generated by collectibles dealers and their confidence about future economic
conditions, which affect the willingness of such dealers to purchase
collectibles for resale; (iii) the availability and cost of borrowings
because collectibles dealers often rely on borrowings to fund their purchases of
collectibles, (iv) prevailing and anticipated rates of inflation, because
the threat of and actual increases in inflation often lead investors and
consumers to purchase gold and silver coins as a hedge against inflation; and
(v) the performance and volatility of the gold and other precious metals
markets, which can affect the level of purchases and sales of collectible coins,
because investors and consumers will often increase their purchases of hard
assets, including gold coins if they believe that the market prices of hard
assets will increase. As a result, the volume of collectibles
transactions and, therefore, the demand for our authentication and grading
services, generally increase during periods characterized by economic growth,
the availability of lower cost borrowings, or increases in inflation or in gold
prices. By contrast, collectibles transactions and, therefore, the
demand for our services generally decline during periods characterized by
economic downturns or recessions, declines in consumer and business confidence,
an absence of inflationary pressure, or declines in the market prices of
gold. However, these conditions can sometimes counteract each other
as it is not uncommon, for example, for investors to shift funds from gold to
other investments during periods of economic growth and growing consumer and
business confidence.
19
Despite
the continued uncertainties about the ultimate severity and duration of the
current economic downturn, the number of coins graded and authenticated during
the three and six months ended December 31, 2009 increased by 37.3% and 22.5%,
respectively, as compared to the number authenticated and graded in the
corresponding periods of fiscal 2009. We believe those increases
reflect the continued high price of gold and inflationary concerns by collectors
and investors. As a result, we recorded increases in coin grading and
related revenues of approximately 33.9% and 21.8% for the three and six months
ended December 31, 2009, when compared to the same periods in fiscal
2009. On the other hand, during the three and six months ended
December 31, 2009, the number of trading cards and autographs that we
authenticated and graded declined by 11.6% and 7.1%, respectively, and, as a
result, revenues generated by that division, which is our second largest
business, declined by 9.3% and 8.7%, respectively, as compared to the same
periods of fiscal year 2009.
The
following tables provide information regarding the respective number of coins,
trading cards, autographs and stamps that we graded or authenticated in the
three and six months ended December 31, 2009 and 2008, respectively, and the
estimated value that customers insure their collectibles against loss during
transit.
Units
Processed
Three
Months Ended December 31,
|
Declared
Value (000)
Three
Months Ended December 31,
|
|||||||||||||||||||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||||||||||||||||||
Coins
|
400,200 | 56.7 | % | 291,500 | 45.7 | % | $ | 293,317 | 92.3 | % | $ | 250,052 | 89.8 | % | ||||||||||||||||||
Trading
cards and autographs(1)
|
300,700 | 42.6 | % | 340,000 | 53.3 | % | 20,895 | 6.6 | % | 21,233 | 7.6 | % | ||||||||||||||||||||
Stamps
|
4,700 | 0.7 | % | 6,600 | 1.0 | % | 3,623 | 1.1 | % | 7,129 | 2.6 | % | ||||||||||||||||||||
Total
|
705,600 | 100.0 | % | $ | 638,100 | 100.0 | % | $ | 317,835 | 100.0 | % | $ | 278,414 | 100.0 | % |
Units
Processed
Six
Months Ended December 31,
|
Declared
Value (000)
Six
Months Ended December 31,
|
|||||||||||||||||||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||||||||||||||||||
Coins
|
758,900 | 54.1 | % | 619,600 | 47.1 | % | $ | 569,624 | 91.6 | % | $ | 552,774 | 89.5 | % | ||||||||||||||||||
Trading
cards and autographs(1)
|
634,800 | 45.2 | % | 683,200 | 51.9 | % | 44,838 | 7.2 | % | 52,647 | 8.5 | % | ||||||||||||||||||||
Stamps
|
10,100 | 0.7 | % | 13,900 | 1.0 | % | 7,340 | 1.2 | % | 12,200 | 2.0 | % | ||||||||||||||||||||
Total
|
1,403,800 | 100.0 | % | 1,316,700 | 100.0 | % | $ | 621,802 | 100.0 | % | $ | 617,621 | 100.0 | % |
(1)
|
Consists
of trading cards units graded by our PSA trading card authentication and
grading business and autographs certified by our PSA/DNA autograph
authentication and grading
business.
|
Factors That Can Affect our
Financial Position. A substantial number of our authentication
and grading customers prepay our authentication and grading fees when they
submit their collectibles to us for authentication and grading. As a
result, historically, we have been able to rely on internally generated cash and
have never incurred borrowings to fund our continuing operations. We
expect that internally generated cash flow will be sufficient to fund our
continuing operations at least through the end of fiscal 2010.
Other
factors that can affect our overall cash flows and financial position include
the use of available cash to fund the payment of cash dividends or the
acquisition of outstanding shares. For example, in July 2009, we used a total of
approximately $8.9 million of available cash to purchase a total of
1,749,828 shares of our common stock, at a price of $5.00 per share, in a “Dutch
Auction” tender offer that we made to our stockholders, and in the second
quarter, we paid dividends to stockholders of $1,853,000. See
Liquidity and Capital Resources – Dutch Auction Tender Offer and
Dividends below.
20
In
response to the economic recession and the credit crisis that adversely impacted
the volume of authentication and grading submissions to us, during fiscal 2009
we implemented a cost reduction program in order to reduce our costs of revenue
and our operating expenses and, thereby, to bring those costs and expenses more
in line with our revenues and to increase our gross profits and operating
income. During the three and six months ended December 31, 2009, that
program enabled us to realize reductions in both our costs of revenues and
operating expenses and, thereby, to increase our gross profit margins, operating
income and income from continuing operations and our cash flows from
operations.
During
the three and six months ended December 31, 2009, except as discussed below,
there were no changes in the critical accounting policies or estimates that were
described in Item 7 of our Annual Report on Form 10-K, filed with the SEC,
for the fiscal year ended June 30, 2009. Readers of this report are
urged to read that Section of that Annual Report for a more complete
understanding of our critical accounting policies and estimates.
Accrual for Facility Lease
Expenses. We continue to have
obligations to pay rent and other charges under two multi-year leases for office
facilities in New York City that had been occupied by our jewelry authentication
and grading businesses prior to our discontinuance of and exit from those
businesses in fiscal 2009. Although we are seeking to sublet those
facilities in order to reduce our financial obligations under these leases,
adverse conditions in the commercial real estate market in New York City have
made it difficult for us to predict how soon and the rents at which we will be
able to sublet those office facilities. As a result, at the time we
discontinued the jewelry businesses we established accruals (including operating
costs and other estimated costs associated with subletting the spaces) totaling
approximately $3,700,000 for the rents and other charges that we estimated we
will have to pay through the term of the leases. Due primarily to an
increase in available office space and further decreases in office rents in New
York City, at June 30, 2009 we increased that accrual by $815,000, and again at
December 31, 2009 by an additional $405,000, such that the lease obligations
were carried on our balance sheets at values of approximately $4,454,000 at June
30, 2009 and $4,563,000 at December 31, 2009. Moreover, it will be
necessary for us to review our estimates of our ongoing lease expenses on a
quarterly basis and it may become necessary for us to further increase our lease
accrual in the future. The gross obligations under the leases are
$7,573,000 as set out under Liquidity and Capital Resources: Outstanding
Financial Obligations: Discontinued Operations on page 29.
Goodwill. We test
the carrying value of goodwill and other indefinite-lived intangible assets on a
formal basis at least annually on their respective acquisition anniversary
dates, or more frequently if indicators of impairment are determined to
exist. We apply a discounted cash flow model or an income approach in
determining a fair value that is used to estimate the fair value of the
reporting unit on a total basis, which is then compared to the carrying value of
the reporting unit. If the fair value of the reporting unit exceeds
the carrying value of the reporting unit, no impairment of goodwill exists as of
the measurement date. If the fair value is less than the carrying
value, then there is the possibility of goodwill impairment and further testing
and re-measurement of goodwill is required. During the first quarter of fiscal
2010, we completed the annual goodwill impairment evaluations with respect to
the goodwill acquired in our fiscal year 2006 purchases of CCE and CoinFacts and
the fiscal year 2007 acquisition of our Expos business, and determined that the
carrying value at September 30, 2009 of the acquired goodwill for these
respective businesses was not impaired.
The use
of the income approach in determining the fair value of our acquired businesses
requires that future after-tax cash flows be discounted using a discount rate
that reflects a risk adjusted weighted average cost of capital. We
determined the fair values of the Expos and CCE reporting units using discount
rates of 18% and 17%, respectively, and we concluded that the excess fair value
of approximately 10% over the carrying value of our Expos reporting unit at
September 30, 2009 was sufficient to conclude that no impairment existed at
September 30, 2009. We considered the discount rates applied to Expos
and CCE to be reasonable based upon the recurring and predictable nature of the
revenues for these businesses and were consistent with the discount rates
applied in previous years. However, a higher discount rate of 20% for
Expos could have resulted in the need for further testing and re-measurement of
goodwill and the possibility of an impairment expense.
21
Stock-Based
Compensation. On June 1, 2009, the Compensation Committee
of the Board of Directors approved a management incentive compensation program
for the fiscal year ending June 30, 2010 (the “2010 Stock Incentive Program”),
in lieu of a cash incentive program, for our three executive officers, Michael
J. McConnell, our CEO, David G. Hall, our President, and Joseph J. Wallace, our
CFO. Under the terms of that Program, on July 31, 2009, these
three officers were awarded the following numbers of restricted
shares: Mr. McConnell -- 101,034 shares; Mr. Hall -- 101,034
shares; and Mr. Wallace -- 50,517 shares. Retention by the
officers of their restricted shares is subject to satisfaction of certain
vesting requirements and, if a vesting requirement that applies to any of the
shares is not satisfied; those shares will be forfeited and
cancelled. Those vesting requirements of the 2010 Stock Incentive
Program are as follows:
(1) Performance-Based Vesting
Requirement. The vesting of seventy-five (75%) of the
restricted shares awarded to each of these officers (the “Performance-Based
Shares”) is contingent on the Company’s achievement of a financial performance
goal for fiscal 2010. If that goal is not achieved, all of those
Performance-Based Shares will be forfeited and cancelled. On the
other hand, if the Company achieves that fiscal 2010 financial performance goal,
then (i) one-third of the Performance-Based Shares of each officer will
vest when it is determined that the performance goal was achieved, provided that
the officer is still in the Company’s service at the end of fiscal 2010,
(ii) another one-third of those Shares will vest on June 30, 2011, provided
the officer is still in the Company’s service at that time, and (iii) the
final one-third of those Shares will vest on June 30, 2012, provided the
officer is still in the Company’s service at that time, subject to acceleration
of such vesting if an officer’s service with the Company is terminated without
cause.
(2) Time-Based Vesting
Requirement. The vesting of the other 25% of the restricted
shares (the “Time-Based Shares”) awarded to each of Messrs. McConnell and Hall
is contingent on their continued service with the Company to July 31,
2010. In the case of Mr. Wallace, 25% of his restricted shares became
vested on the date of the award.
Management
determined the fair value of the 252,585 shares of restricted stock to be an
aggregate amount of $1,028,000, based on the July 31, 2009 closing price of the
Company’s common stock of $4.07, of which $257,000 relates to time-based vesting
and $771,000 relates to performance-based vesting. The Company began
recording stock-based compensation expense for the time-based vesting shares
over the requisite service period through July 31, 2010 or immediately for those
grants that vested on the grant date. No compensation was recognized
in the three months ended September 30, 2009 for the performance-based shares,
as it was determined that it was not probable that the financial performance
would be achieved at September 30, 2009. During the second quarter ended
December 31, 2009, we determined that it is probable that the Company will
achieve the fiscal 2010 financial performance goal, and, as a result, we
recorded in the second quarter of fiscal 2010, approximately $209,000 as
stock-based compensation for the period July 31, 2009 to December 31,
2009. In the event that the financial performance for fiscal 2010 is
achieved, approximately $461,000 of expense (which is inclusive of the $209,000
recognized through December 31, 2009) would be allocated to fiscal year 2010 as
stock-based compensation expense, and the balance of approximately $310,000
would be allocated to fiscal years 2011 and 2012. In the event that
expense is recognized for the performance-based vesting, and, if for any reason
the award does not vest due to the financial performance goal not being met, any
previously recognized expense would be reversed.
Deferred Tax Assets and Valuation
Allowances. Through June 30, 2009, the Company has established a
valuation allowance of $12,962,000 million that comprised a full valuation
allowance against all deferred tax assets due to the uncertainty of
realization. As of December 31, 2009, the Company has analyzed all
positive and negative evidence and concluded that a full valuation allowance is
necessary, except to the extent that the Company earned taxable income in the
three and six months ended December 31, 2009. We have realized
certain deferred tax assets such that the valuation allowance at December 31,
2009 was reduced to approximately $11,389,000. Assuming that we
continue to generate taxable income in fiscal 2010 and we conclude that it is
more likely than not that we will realize such deferred tax assets, it may no
longer be necessary for us to maintain a valuation allowance against
substantially all of our deferred tax assets. In that event, we may
be able to record a tax benefit for fiscal 2010 that would have the effect of
increasing our net income for the current fiscal year and decreasing the amount
of the remaining valuation allowance.
22
Net
Revenues
Net
revenues consist primarily of fees that we generate from the authentication and
grading of high-value collectibles, including coins, trading cards, autographs
and stamps. To a lesser extent, we generate collectibles related
service revenues (referred to as “other related revenues”) from sales of
collectibles club memberships and 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 coins
authenticated and graded by us and CoinFacts; and fees earned from promoting,
managing and operating collectibles conventions. Net revenues also
include, to a significantly lesser extent, revenues from the sales of products,
consisting primarily of coins that we purchase under our warranty policy which
are not considered to be an integral part of our ongoing revenue generating
activities.
The
following tables set forth the total net revenues for the three and six months
ended December 31, 2009 and 2008 between grading and authentication services
revenues, and other related services revenues:
Three
Months Ended December 31,
|
||||||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||||||
Amount
|
%
of Net
Revenues
|
Amount
|
%
of Net
Revenues
|
Increase
|
(Decrease)
|
|||||||||||||||||||
Amount
|
%
|
|||||||||||||||||||||||
(Dollars
In Thousands)
|
||||||||||||||||||||||||
Grading
and authentication fees
|
$ | 7,514 | 84.6 | % | $ | 6,370 | 81.7 | % | $ | 1,144 | 18.0 | % | ||||||||||||
Other
related services
|
1,369 | 15.4 | % | 1,432 | 18.3 | % | (63 | ) | (4.4 | )% | ||||||||||||||
Total
Net Revenues
|
$ | 8,883 | 100.0 | % | $ | 7,802 | 100.0 | % | $ | 1,081 | 13.9 | % |
Six
Months Ended December 31,
|
||||||||||||||||||||||||
2009
|
2008
|
|||||||||||||||||||||||
Amount
|
%
of Net
Revenues
|
Amount
|
%
of Net
Revenues
|
Increase
|
(Decrease)
|
|||||||||||||||||||
Amount
|
%
|
|||||||||||||||||||||||
(Dollars
In Thousands)
|
||||||||||||||||||||||||
Grading
and authentication fees
|
$ | 14,995 | 82.5 | % | $ | 13,731 | 81.5 | % | $ | 1,264 | 9.2 | % | ||||||||||||
Other
related services
|
3,186 | 17.5 | % | 3,114 | 18.5 | % | 72 | 2.3 | % | |||||||||||||||
Total
Net Revenues
|
$ | 18,181 | 100.0 | % | $ | 16,845 | 100.0 | % | $ | 1,336 | 7.9 | % |
The
following tables set forth certain information regarding the increases
(decreases) in net revenues in our larger markets (which are inclusive of
revenues from our other related services) and in the number of units graded and
authenticated in the three and six months ended December 31, 2009 and
2008.
Three
Months Ended December 31,
|
||||||||||||||||||||||||||||||||
2009
vs. 2008
|
||||||||||||||||||||||||||||||||
2009
|
2008
|
Increase
(Decrease)
|
||||||||||||||||||||||||||||||
%
of Net
|
%
of Net
|
Revenues
|
Units
Processed
|
|||||||||||||||||||||||||||||
Amount
|
Revenues
|
Amount
|
Revenues
|
Amounts
|
%
|
Number
|
%
|
|||||||||||||||||||||||||
Coins
|
$ | 5,851 | 65.9 | % | $ | 4,370 | 56.0 | % | $ | 1,481 | 33.9 | % | 108.7 | 37.3 | % | |||||||||||||||||
Cards
and autographs
|
2,304 | 25.9 | % | 2,540 | 32.6 | % | (236 | ) | (9.3 | )% | (39.3 | ) | (11.6 | )% | ||||||||||||||||||
Other
(1)
|
728 | 8.2 | % | 892 | 11.4 | % | (164 | ) | (18.4 | )% | (1.9 | ) | (28.8 | )% | ||||||||||||||||||
Net
Revenues
|
$ | 8,883 | 100.0 | % | $ | 7,802 | 100.0 | % | $ | 1,081 | 13.9 | % | 67.5 | 10.6 | % |
23
Six
Months Ended December 31,
|
||||||||||||||||||||||||||||||||
2009
vs. 2008
|
||||||||||||||||||||||||||||||||
2009
|
2008
|
Increase
(Decrease)
|
||||||||||||||||||||||||||||||
%
of Net
|
%
of Net
|
Revenues
|
Units
Processed
|
|||||||||||||||||||||||||||||
Amount
|
Revenues
|
Amount
|
Revenues
|
Amounts
|
%
|
Number
|
%
|
|||||||||||||||||||||||||
Coins
|
$ | 11,408 | 62.7 | % | $ | 9,365 | 55.6 | % | $ | 2,043 | 21.8 | % | 139.3 | 22.5 | % | |||||||||||||||||
Cards
and autographs
|
4,870 | 26.8 | % | 5,333 | 31.7 | % | (463 | ) | (8.7 | )% | (48.4 | ) | (7.1 | )% | ||||||||||||||||||
Other
(1)
|
1,903 | 10.5 | % | 2,147 | 12.7 | % | (244 | ) | (11.4 | )% | (3.8 | ) | (27.3 | )% | ||||||||||||||||||
Net
Revenues
|
$ | 18,181 | 100.0 | % | $ | 16,845 | 100.0 | % | $ | 1,336 | 7.9 | % | 87.1 | 6.6 | % |
(1)
|
Consists
of stamps, CCE subscription business, our CFC dealer financing business,
and our collectibles convention
business.
|
For the
three months ended December 31, 2009, our net revenues increased by $1,081,000,
or 13.9%, compared to the corresponding three month period ended December 31,
2008. That increase in net revenues was primarily attributable to an
increase of $1,144,000, or 18%, in grading and authentication
fees. For the six months ended December 31, 2009, net revenues
increased by $1,336,000, or 7.9%, from $16,845,000 in fiscal 2009 to $18,181,000
in fiscal 2010, also primarily attributable to a 9.2% increase in grading and
authentication fees. The increases in grading and authentication fees of 18.0%
and 9.2% for the three and six months ended December 31, 2009, respectively, are
attributed primarily to increases in the number of coins graded of 37.3% and
22.5% in three and six months ended December 31, 2009, respectively, over the
same respective periods of the prior year, partially offset by reductions in the
number of trading cards and autographs graded and authenticated of 11.6% and
7.1% in three and six months ended December 31, 2009, respectively, over the
same periods in the prior year.
The increases
of $1,481,000 and $2,043,000 in revenues for coin grading and authentication and
other related services for the three and six months ended December 31, 2009,
respectively, were due primarily to modern and bulk grading revenue increases of
$1,003,000 and $1,538,000, respectively, representing increases of 95% and 68%
over the corresponding periods in fiscal 2009, respectively. For the same
comparative periods, revenues from grading and authentication of coins at
collectible trade shows also increased $160,000 and $250,000, representing
increases of 23% and 15%, respectively, over the prior fiscal year, due to an
increase in the number of shows attended in those periods. In
addition, revenues from the grading and authentication of vintage coins
increased by $253,000 and $85,000, representing increases of 13% and 2%,
respectively, for the three and six months ended December 31, 2009,
respectively.
We
believe the current economic recession and credit crisis has primarily led to a
decrease in the volume of trading cards, autographs and stamps submitted for
grading and authentication. As shown in the above table, grading and
authentication revenues and other related services for trading cards and
autographs decreased by $236,000 and $463,000, or 9.3% and 8.7%, for the three
and six months ended December 31, 2009, respectively, when compared to the same
periods in fiscal 2009. The volume of stamps submitted for grading declined
28.8% and 27.3% for the three and six months ended December 31, 2009,
respectively, as compared with the same periods ended December 31,
2008.
Generally,
we experience each year, a significant decline in the level of revenue from the
first fiscal quarter to the second fiscal quarter due to holidays and the timing
of revenue generated from grading performed at collectible shows, as there are
fewer trade shows in the second fiscal quarter; as a result, the second fiscal
quarter is generally our lowest revenue quarter in the fiscal year. We are
encouraged by the overall level of revenue in the second fiscal quarter of
fiscal 2010 of $8,883,000 as it represented only a 4.5% decline from the level
of revenue in the first fiscal quarter of fiscal 2010 of $9,298,000. This
compares favorably with the level of revenue in the second fiscal quarter of
fiscal 2009 of $7,802,000 that declined 13.7% from revenue in the first fiscal
quarter of fiscal 2009 of $9,043,000. We believe the continued
uncertain economic environment drove investments into hard assets, including
gold, which led to the increase in coin transactions by dealers and collectors,
which led to an increase in our revenues in the current second
quarter.
24
Although
we continue to see positive growth in the level of modern coin submissions,
which provided the additional revenue in the second quarter of fiscal 2010, the
level of modern coin revenues can be volatile due to specific customer activity
or marketing programs in a given period, so it is uncertain at this time if the
increase in modern coin submissions is sustainable. Therefore, we are not able
to predict whether or not the increase in coin authentication and grading
revenues will continue in remaining quarters of fiscal 2010, nor the level of
authentication and grading revenues for trading cards, autographs and stamps in
fiscal 2010. In addition, due to the strong performance in our coin
grading and authentication business in the first half of 2010, relative to our
other businesses, our coin business represented 63% of total revenues, compared
to 56% of total revenues in the first half of fiscal 2009; thereby, increasing
the importance of our coin grading and authentication business to our overall
financial performance.
Gross
Profit
Gross
profit is calculated by subtracting the cost of revenues from net
revenues. Gross profit margin is gross profit stated as a percent of
net revenues. The costs of authentication and grading revenues
consist primarily of labor to authenticate and grade collectibles, production
costs, credit card fees, warranty expense, occupancy, security, depreciation,
amortization and insurance costs that directly relate to providing
authentication and grading services. Cost of revenues also includes
printing, other direct costs of the revenues generated by our other non-grading
related services and the costs of product revenues, which represent the carrying
value of the inventory of products (primarily collectible coins) that we sold
and any inventory related reserves, considered necessary. In
addition, costs of revenues include stock-based compensation attributable to
employees whose compensation is classified as part of the costs of
authentication and grading revenues.
Set forth
below is information regarding our gross profit in the three and six months
ended December 31, 2009 and 2008.
Three
Months Ended December 31,
|
Six
Months Ended December 31,
|
|||||||||||||||||||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||||||||||||||||||
Gross
Profit
|
Gross
Profit
|
Gross
Profit
|
Gross
Profit
|
|||||||||||||||||||||||||||||
Amount
|
Margin
|
Amount
|
Margin
|
Amounts
|
Margin
|
Amount
|
Margin
|
|||||||||||||||||||||||||
Gross
profit
|
$ | 5,250,000 | 59.1 | % | $ | 3,775,000 | 48.4 | % | $ | 10,809,000 | 59.5 | % | $ | 8,692,000 | 51.6 | % |
As
indicated in the above table, our gross profit margin increased from 48.4% and
51.6% for the three and six months ended December 31, 2008, respectively, to
59.1% and 59.5% for the three and six months ended December 31, 2009,
respectively. This increase primarily reflects (i) increases of 33.9% and 21.8%
in coin related revenues for these comparative periods on which we earn a higher
gross profit margin (ii) lower direct costs of 8% in both comparative periods,
as a result of our cost reduction programs and operational efficiencies, such
that the increases in revenues, as discussed above, generated improvements in
our gross profit margin and (iii) a reduction in stock-based compensation
expense in fiscal 2010 as a result of awards granted in periods prior to fiscal
2009 became fully vested in fiscal 2009.
Selling
and Marketing Expenses
Selling
and marketing expenses include advertising and promotions costs, trade-show
related expenses, customer service personnel costs, depreciation and outside
services. Set forth below is information regarding our selling and
marketing expenses in the three and six months ended December 31, 2009 and
2008.
Three
Months Ended
|
Six
Months Ended
|
|||||||||||||||
December
31,
|
December
31,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Selling and marketing
expenses
|
$ | 1,141,000 | $ | 994,000 | $ | 2,336,000 | $ | 2,242,000 | ||||||||
Percent of net
revenue
|
12.8 | % | 12.7 | % | 12.8 | % | 13.3 | % |
The
increases of $147,000 and $94,000 in selling and marketing expenses in the three
and six months ended December 31, 2009, compared to the three and six months
ended December 31, 2008, were primarily attributable to increased compensation
costs related to incentive programs and higher costs incurred in connection with
on-site grading at trade shows due, primarily, to an increase in the number of
trade shows at which we participated in the three and six months ended December
31, 2009.
25
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, facilities
management costs, depreciation, amortization and other miscellaneous
expenses.
Three
Months Ended
|
Six
Months Ended
|
|||||||||||||||
December
31,
|
December
31,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
General
and administrative expenses
|
$ | 2,644,000 | $ | 3,200,000 | $ | 5,212,000 | $ | 6,536,000 | ||||||||
Percent
of net revenue
|
29.7 | % | 41.1 | % | 28.7 | % | 38.9 | % |
G&A
expenses decreased by $556,000 and $1,324,000 in the three and six months ended
December 31, 2009, compared to the same periods of fiscal 2009. That
decrease was primarily attributable to staff reductions, cost-savings measures
most of which were initially effectuated in the latter half of fiscal 2009 and a
reduction of outside professional fees.
Stock-Based
Compensation
As
discussed in Note 1 to the Company’s Condensed Consolidated Financial
Statements, the Company recognized stock-based compensation in the Condensed
Consolidated Statements of Operations, as follows:
Three
Months Ended
|
Six
Months Ended
|
|||||||||||||||
December
31,
|
December
31,
|
|||||||||||||||
Included In:
|
2009
|
2008
|
2009
|
2008
|
||||||||||||
Cost
of revenues
|
$ | - | $ | 83,000 | $ | - | $ | 152,000 | ||||||||
General
and administrative expense
|
330,000 | 178,000 | 495,000 | 373,000 | ||||||||||||
Continuing
operations
|
330,000 | 261,000 | 495,000 | 525,000 | ||||||||||||
Discontinued
operations
|
- | 7,000 | - | 21,000 | ||||||||||||
$ | 330,000 | $ | 268,000 | $ | 495,000 | $ | 546,000 |
The
increase in stock-based compensation expense of $62,000 in the three months
ended December 31, 2009 was due to the recognition of stock-based expense of
$209,000 related to our determination that achieving the financial performance
goals set forth in the July 31, 2009 restricted stock awards to executive
management was probable. In the event that those goals are not
achieved, for any reason, this expense and any additional expense recorded in
future quarters of fiscal 2010 would be reversed. If, and only if the
financial goals are met for fiscal year 2010, approximately $461,000 would be
recorded as stock-based compensation expense related to the performance
condition for vesting for fiscal 2010, and approximately $310,000 would be
recognized in fiscal years 2011 and 2012 for an aggregate amount of $771,000
over the requisite service period of approximately 3 years. See
Critical Accounting Policies and Estimates: Stock-Based
Compensation.
The
following table sets forth unrecognized compensation cost totaling $925,000
related to non-vested stock-based awards expected to be recognized through
fiscal year 2012 and assumes that $771,000 of performance-based stock
compensation expense is required to be recognized. The following
amounts and time periods do not reflect the costs or effects of
(i) possible grant of additional stock-based compensation awards in the
future or (ii) any change that may occur in the Company’s forfeiture
percentage.
Fiscal
Year Ending June 30,
|
Amount
|
|||
2010
(remaining 6 months)
|
$ | 471,000 | ||
2011
|
356,000 | |||
2012
|
98,000 | |||
$ | 925,000 |
26
Interest
and Other Income, Net
Three
Months Ended
|
Six
Months Ended
|
|||||||||||||||
December
31,
|
December
31,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Interest
Income, net
|
$ | 12,000 | $ | 77,000 | $ | 52,000 | $ | 213,000 |
Interest
and other income are generated primarily on cash and cash equivalent balances
that we invest primarily in highly-liquid money-market accounts. During the
three and six months ended December 31, 2009, other income included $26,000
related to a royalty payment received for use of our proprietary databases.
Interest income, net was $12,000 and $26,000 in the three and six months ended
December 31, 2009, compared with $74,000 and $200,000 in the three and six
months ended December 31, 2008. The decrease in interest income was
primarily attributable to (i) a shift, during fiscal 2009, of our cash and
cash equivalent balances into money-market investments that include only
government guaranteed securities, which resulted in a lower yield on such
investments; (ii) a decrease in our average cash balances in the three and
six months ended December 31, 2009, compared to the three and six months ended
December 31, 2008, due to our use of a portion of our available cash to fund the
buyback of common stock under our stock buyback program and cash used in the
operating activities and disposal of discontinued operations during fiscal 2009;
and (iii) lower prevailing interest rates as a result of actions taken by the
Federal Reserve Board.
Income
Tax Expense
Three
Months Ended
|
Six
Months Ended
|
|||||||||||||||
December
31,
|
December
31,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Provision
(benefit) for income tax
|
$ | (202,000 | ) | $ | 1,210,000 | $ | (75,000 | ) | $ | 1,210,000 |
Income
tax benefits of $202,000 and $75,000, represented an estimated annual
effective tax rate of approximately 5% recorded for the three and six months
ended December 31, 2009 offset by a benefit of $248,000 recognized in the second
quarter of fiscal 2010 related to the federal suspension of the 90% AMT
limitation for the carryback of NOLs. In fiscal 2009, the tax
provision of $1,210,000 recorded in the second quarter of that year related to
the establishment of a valuation allowance against certain deferred tax assets
due to uncertainty of realization that, according to the accounting rules, was
classified as part of the loss from continuing operations
During
fiscal years 2008 and 2009, we had established valuation allowances in the
aggregate amount of approximately $13 million against deferred tax assets due to
the length of time and extent of taxable income required to fully realize those
deferred tax assets. As a result, no federal tax was due or
recognized as an expense during the three and six months ended December 31,
2009. However, we recognized taxes due to the State of California as
a result of that state suspending the right to apply state NOLs carryforwards
and limiting to 50% the use of state tax credits carryforwards to offset
California taxable income in fiscal 2010. During the three and six months ended
December 31, 2009 and 2008, no income tax benefit was recorded in connection
with the losses from discontinued operations in those periods.
Discontinued
Operations
Three
Months Ended
|
Six
Months Ended
|
|||||||||||||||
December
31,
|
December
31,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Loss
from discontinued operations,
net of income taxes
|
$ | (508,000 | ) | $ | (9,373,000 | ) | $ | (561,000 | ) | $ | (11,139,000 | ) |
27
The
losses from discontinued operations, net of income taxes, of $508,000 and
$561,000 for the three and six months ended December 31, 2009 were related to
$405,000 associated with additional accruals recorded in the second quarter of
fiscal 2010 for the leased facilities in New York City, which we are required to
carry at the fair value of the remaining lease obligations. In
addition, losses from discontinued operations include interest accretion of
$118,000 and reserves established for assets to be sold. As noted in
the preceding section, no income tax benefit was recorded in connection with the
losses from discontinued operations in either of the three and six months ended
December 31, 2009 and 2008.
Cash and Cash Equivalent
Balances.
Historically,
we have been able to rely on internally-generated funds, rather than borrowings,
as our primary source of funds to support our operations, because many of our
authentication and grading customers prepay our fees at the time they submit
their collectibles to us for authentication and grading.
At
December 31, 2009, we had cash and cash equivalents of approximately
$18,696,000, as compared to cash and cash equivalents of $23,870,000 at June 30,
2009. This reduction in cash and cash equivalents was primarily
attributable to our use, in July 2009, of approximately $8,911,000 to purchase a
total of 1,749,828 of our shares of common stock in a “Dutch Auction” tender
offer and the payment of cash dividends to stockholders of $1,853,000 in
November 2009, partially offset by the receipt in October 2009 of approximately
$2.3 million in full payment of a note receivable from a customer that had been
outstanding at June 30, 2009.
Cash
Flows.
Cash Flows from Continuing
Operations. During the six months ended December 31, 2009 and
2008, our operating activities from continuing operations generated cash of
$3,891,000 and $719,000, respectively, primarily reflecting the improvement in
income from continuing operations of $3,388,000 in the six months ended December
31, 2009, as compared to a loss from continuing operations of $1,083,000 in the
same period of fiscal 2009.
Cash Flows of Discontinued
Operations. Discontinued operations used cash of $629,000 and
$4,033,000 in the six months ended December 31, 2009 and 2008. During
the six months ended December 31, 2009, approximately $347,000 was used to meet
ongoing obligations under our lease agreements for the two facilities in New
York City that had formerly been occupied by our discontinued jewelry
businesses; approximately $85,000 was used for severance payments made to former
employees of the jewelry businesses; $60,000 was used to settle a legal claim
arising from our discontinued auction businesses and other disbursements were
$22,000. During the six months ended December 31, 2008, $4,033,000
was used to fund the operating activities of our discontinued jewelry grading
businesses.
We expect
that cash used by our discontinued operations will decline significantly in
future periods, primarily because substantially all of the costs of
discontinuing and exiting the jewelry businesses were recognized in fiscal 2009,
with the exception of our continuing rental obligations under the leases for the
two facilities formerly occupied by our discontinued jewelry
businesses. See “Outstanding Financial Obligations -- Discontinued Operations”
below.
Cash from or used in
Investing Activities. Investing activities generated net cash
of $2,328,000 during the six months ended December 31, 2009, comprised primarily
of $2,348,000 of cash receipts in connection with the repayment of a CFC
customer note receivable, $117,000 in cash receipts related to the sale of
discontinued businesses, partially offset by $137,000 related to the purchase of
fixed assets. During the corresponding six month period of fiscal 2009, we
generated cash from investing activities of $1,988,000 primarily due to net
collections of $2,260,000 from CFC customer notes receivables, $46,000 in
proceeds from the sale of discontinued businesses, cash outlays of $249,000 for
projects accounted for as capitalized software costs for internal use and
$69,000 used to acquire fixed assets.
Cash used in Financing
Activities. In the six months ended December 31, 2009,
financing activities used net cash of $8,911,000 to repurchase shares of our
common stock pursuant to a “Dutch Auction” tender offer and $1,853,000 used in
the payment of a quarterly cash dividend in the second quarter of fiscal
2010. During the six months ended December 31, 2008, cash used in
financing activities of $2,412,000 was related to the cash payment of $2,090,000
for the first quarter fiscal 2009 cash dividend (see below under Dividends), an outflow of
$484,000 in connection with the repurchase of our common stock from the
Company’s former CEO, partially offset by proceeds of $161,000 from
the sale of the Company’s common stock to two directors.
28
Outstanding
Financial Obligations
Continuing
Operations. The following table set forth the amounts of our
financial obligations, consisting primarily of rent expense, and sublease
income, under operating leases for our continuing operations, in each of the
years indicated below:
Fiscal Year
|
Gross
Amount
|
Sublease
Income
|
||||||
2010(6 mos.)
|
$ | 576,000 | $ | 21,000 | ||||
2011
|
1,112,000 | 42,000 | ||||||
2012
|
1,118,000 | 43,000 | ||||||
2013
|
1,038,000 | 45,000 | ||||||
2014
|
1,013,000 | 46,000 | ||||||
Thereafter
|
5,141,000 | 238,000 | ||||||
$ | 9,998,000 | $ | 435,000 |
Discontinued
Operations. The following table sets forth our expected
remaining base rent obligations under operating leases for two facilities, in
New York City, that had formerly been occupied by our discontinued jewelry
authentication and grading businesses. Those leases are scheduled to
expire on December 31, 2015 and 2017, respectively.
Fiscal Year
|
Amount
|
|||
2010
(6
mos.)
|
$ | 658,000 | ||
2011
|
907,000 | |||
2012
|
941,000 | |||
2013
|
981,000 | |||
2014
|
1,022,000 | |||
Thereafter
|
3,064,000 | |||
$ | 7,573,000 | |||
Less:
Estimated fair value of minimum lease payments accrued
|
(3,818,000 | ) | ||
$ | 3,755,000 |
Rental
payments under these two leases are required to be paid in accordance with the
schedule above. At December 31, 2009, we recorded a $405,000 increase
to the lease accrual for these two facilities, based on updated estimates of the
time that it will take to sublease those facilities and the rents at which we
could expect to sublease those facilities over the remaining duration of the
leases, discounted to present value. Those estimates, in turn, were
based primarily on recent rental activities that were specific to these
locations. See Critical Accounting Policies and Estimates: Accrual
for Facility Lease Expenses.
With the
exception of lease obligations for continuing and discontinued operations, we do
not have any material financial obligations, such as long-term debt or capital
leases or purchase obligations.
Dividends. On
September 26, 2008, the Board of Directors determined that, due to adverse
market and economic conditions, including the liquidity crisis in the United
States, the prudent course of action would be, and the Board of Directors voted,
to suspend the future payment of cash dividends in order to preserve the
Company’s cash resources to support the continued implementation of the
Company’s strategic plan and the growth of its business. During
fiscal 2009, prior to suspension of cash dividends, we paid cash dividends
totaling $2,090,000 to our stockholders.
On
October 26, 2009, the Company announced that the Board of Directors approved a
resumption of regular cash dividends to our stockholders to $0.25 per share per
quarter and declared the first of such dividends, which paid in the amount of
$1,853,000 on November 24, 2009 to stockholders of record as of November 10,
2009. On January 25, 2010 the Company announced that a quarterly
dividend of $0.25 per common share would be paid on February 22, 2010 to
stockholders of record as of February 8, 2010.
29
The
declaration of cash dividends in the future, pursuant to our current dividend
policy, is subject to determination each quarter by the Board of Directors based
on a number of factors, including the Company’s financial performance, 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 Board of Directors will not decide to
reduce the amount, or suspend or discontinue the payment, of cash dividends in
the future.
Dutch Auction Tender
Offer. On June 2, 2009, we commenced a modified “Dutch
Auction” tender offer for the purpose of purchasing, for cash, up to 1,750,000
shares of our common stock at a price, per share, of not less than $5.00 and not
greater than $5.40. The principal purpose of the tender offer was to
enhance stockholder value. Additionally, our decision to discontinue and cease
expenditures for our jewelry authentication and grading businesses, meant that
cash which otherwise would have been used in those businesses was available to
fund the repurchase of shares in the tender offer. The tender offer,
which expired on July 2, 2009, was oversubscribed, and on July 10, 2009 we
purchased a total 1,749,828 shares in the tender offer, at a price of $5.00 per
share, resulting in an aggregate purchase price of approximately $8,911,000
(including the fees and expenses incurred in conducting the tender offer of
$162,000).
Share Buyback
Program. In December 2005, our Board of Directors approved a
stock buyback program that authorized up to $10,000,000 of stock repurchases in
open market or privately negotiated transactions, in accordance with applicable
Securities Exchange Commission (“SEC”) rules, when opportunities to make such
repurchases, at attractive prices, become available. At December 31,
2009, we continue to have $3.7 million available under this
program. No open market repurchases of common stock were made under
this program since the fourth fiscal quarter of 2008.
Future Uses and Sources of
Cash. We plan to use our cash resources, consisting of
available cash and cash equivalent balances, together with internally generated
cash flows, (i) to introduce new collectibles related services for our
customers; (ii) to fund working capital requirements; (iii) to fund
the payment of cash dividends; and (iv) to pay the obligations under the
leases for the two facilities formerly occupied by our discontinued jewelry
businesses, and (v) for other general corporate purposes and may include
additional repurchases of common stock under our stock buyback
program.
Although
we have no current plans to do so, we also may seek borrowings or credit
facilities and we may issue additional shares of our stock to finance the growth
of our collectibles businesses. However, due to the economic
recession and the credit crisis in the United States, there is no assurance that
we would be able to obtain such borrowings or generate additional capital on
terms acceptable to us, if at all.
The FASB
has issued Accounting Standard Update (ASU) No. 2010-01, Equity (Topic 505): Accounting for
Distributions to Shareholders with Components of Stock and Cash. The
amendments to the Codification in this ASU clarify that the stock portion of a
distribution to shareholders that allows them to elect to receive cash or stock
with a potential limitation on the total amount of cash that all shareholders
can elect to receive in the aggregate is considered a share issuance that is
reflected in earnings per share prospectively and is not a stock dividend. This
ASU codifies the consensus reached in EITF Issue No. 09-E, Accounting for Stock Dividends,
Including Distributions to Shareholders with Components of Stock and
Cash. ASU 2010-01 is effective for interim and annual periods ending on
or after December 15, 2009, and should be applied on a retrospective
basis. Management does not expect the adoption of this guidance will
have a material impact on the Consolidated Financial Statements.
In
October 2009, the Financial Accounting Standards Board (“FASB”) issued
amended revenue recognition guidance for arrangements with multiple
deliverables. The new guidance eliminates the residual method of revenue
recognition and allows the use of management’s best estimate of selling price
for individual elements of an arrangement when vendor specific objective
evidence (VSOE), vendor objective evidence (VOE) or third-party evidence (TPE)
is unavailable. For the Company, this guidance is effective for all new or
materially modified arrangements entered into on or after January 1, 2011
with earlier application permitted as of the beginning of a fiscal year. Full
retrospective application of the new guidance is optional. Management
does not expect the adoption of this guidance will have a material impact on the
Consolidated Financial Statements.
30
In
October 2009, the FASB issued guidance which amends the scope of existing
software revenue recognition accounting. Tangible products containing software
components and non-software components that function together to deliver the
product’s essential functionality would be scoped out of the accounting guidance
on software and accounted for based on other appropriate revenue recognition
guidance. For the company, this guidance is effective for all new or
materially modified arrangements entered into on or after January 1, 2011
with earlier application permitted as of the beginning of a fiscal year. Full
retrospective application of the new guidance is optional. This guidance must be
adopted in the same period that the company adopts the amended accounting for
arrangements with multiple deliverables described in the preceding paragraph.
Management does not expect the adoption of this guidance will have a material
impact on the Consolidated Financial Statements.
In
September 2009, the FASB issued amended guidance concerning fair value
measurements of investments in certain entities that calculate net asset value
per share (or its equivalent). If fair value is not readily determinable, the
amended guidance permits, as a practical expedient, a reporting entity to
measure the fair value of an investment using the net asset value per share (or
its equivalent) provided by the investee without further adjustment. The
amendments are effective for interim and annual periods ending after
December 15, 2009. Management does not expect the adoption of
this guidance will have a material impact on the Consolidated Financial
Statements due to the adoption of this amended guidance.
In
August 2009, the FASB issued guidance on the measurement of liabilities at
fair value. The guidance provides clarification that in circumstances in which a
quoted market price in an active market for an identical liability is not
available, an entity is required to measure fair value using a valuation
technique that uses the quoted price of an identical liability when traded as an
asset or, if unavailable, quoted prices for similar liabilities or similar
assets when traded as assets. If none of this information is available, an
entity should use a valuation technique in accordance with existing fair
valuation principles. The Company adopted this guidance in the quarter ended
December 31, 2009 and there was no material impact on the Consolidated Financial
Statements.
On
July 1, 2009, the FASB issued the FASB Accounting Standards
Codification (the Codification). The Codification became the single source of
authoritative nongovernmental U.S. GAAP, superseding existing FASB, American
Institute of Certified Public Accountants (AICPA), Emerging Issues Task Force
(EITF) and related literature. The Codification eliminates the previous US GAAP
hierarchy and establishes one level of authoritative GAAP. All other literature
is considered non-authoritative. The Codification was effective for interim and
annual periods ending after September 15, 2009. The Company
adopted the Codification for the quarter ending December 31, 2009. There was no
impact to the consolidated financial results as this change is disclosure-only
in nature.
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms, and that such information is accumulated and communicated to management,
including our CEO and CFO, to allow timely decisions regarding required
disclosure. In designing and evaluating our disclosure controls and
procedures, our management recognized that any system of controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, as ours are
designed to do, and management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and
procedures.
In
accordance with SEC rules, an evaluation was performed under the supervision and
with the participation of our Chief Executive Officer and Chief Financial
Officer of the effectiveness, as of December 31, 2009, of the Company’s
disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Exchange Act). Based on that evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that, as of December 31, 2009, the
Company’s disclosure controls and procedures were effective to provide
reasonable assurance that information required to be disclosed in our reports
that we file under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules of the Securities and
Exchange Commission and that such information is accumulated and communicated to
management, including our Chief Executive Officer and Chief Financial Officer,
to allow timely decisions regarding required disclosure.
31
There
were no changes in our internal control over financial reporting that occurred
during the quarter ended December 31, 2009, that has materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
There are
no material changes in the risk factors previously disclosed in Item 1A of Part
1 of our Annual Report on Form 10-K for the fiscal year ended June 30, 2009
that we filed with the SEC on September 4, 2009.
SUBMISSION
OF MATTERS TO A VOTE OF THE SECURITY
HOLDERS
|
Our
Annual Meeting of Stockholders was held on December 8, 2009. The
only matters voted on by stockholders at that Meeting were (i) the election of
seven directors to serve for a term of one year and until their successors are
elected, and (ii) the ratification of Grant Thornton LLP as the Company’s
independent registered public accounting firm for the fiscal year ending June
30, 2010.
Election of
Directors. The seven candidates named below, all of whom were
nominated by the Company’s Board of Directors, were the only candidates
nominated for election at the Meeting. Under the Company’s Bylaws,
however, to be elected to the Board, a candidate must receive a majority of the
votes cast in the election of directors. All of those seven
candidates received a majority of the votes cast and, accordingly, were elected
to serve on the Company’s Board of Directors for a term that will end at the
next Annual Meeting of Stockholders and until their respective successors are
elected.
32
Set forth
in the following table are the number of votes cast for the election of and the
number of votes withheld from each of those seven candidates. As the
election was uncontested, there were no broker non-votes.
Nominees
|
Votes
For
|
Percent
of Shares Voted
|
Votes
Withheld
|
Percent
of
Shares
Voted
|
||||||||||||
A.
Clinton Allen
|
6,207,113 | 96.7 | % | 211,117 | 3.3 | % | ||||||||||
Deborah
A. Farrington
|
6,207,869 | 96.7 | % | 210,381 | 3.3 | % | ||||||||||
David
G. Hall
|
6,202,866 | 96.6 | % | 215,384 | 3.4 | % | ||||||||||
Michael
J. McConnell
|
6,201,562 | 96.6 | % | 216,688 | 3.4 | % | ||||||||||
A.
J. “Bert” Moyer
|
6,206,483 | 96.7 | % | 211,767 | 3.3 | % | ||||||||||
Van
D. Simmons
|
6,207,275 | 96.7 | % | 210,975 | 3.3 | % | ||||||||||
Bruce
A. Stevens
|
6,207,023 | 96.7 | % | 211,227 | 3.3 | % |
Since the
election of the above-named candidates was uncontested, there was no broker
non-votes cast in the election of directors.
Ratification
of Appointment of Independent Registered Public Accounting Firm. The
ratification, by stockholders, of the appointment by the Audit Committee of
Grant Thornton LLP as the Company’s independent registered public accounting
firm for fiscal year ending June 30, 2010 required the affirmative vote of the
majority of the shares that were present, in person or by proxy, and were voted
on this proposal at the Annual Meeting. The ratification was approved
by the Company’s stockholders by the following vote:
Number
of Shares
|
Percent
of
Shares
Voted
|
|||||||
Voted
For
|
6,335,826 | 99 | % | |||||
Voted
Against
|
1,177 | 0 | % | |||||
Abstaining
|
6,873 | 1 | % |
|
|
There
were no broker non-votes cast on this
proposal.
|
EXHIBITS
|
Exhibit
31.1
|
Certification
of Chief Executive Officer Under Section 302 of the Sarbanes-Oxley
Act
|
|
Exhibit
31.2
|
Certification
of Chief Financial Officer Under Section 302 of the Sarbanes-Oxley
Act
|
|
Exhibit
32.1
|
Chief
Executive Officer Certification Under Section 906 of the Sarbanes-Oxley
Act
|
|
Exhibit
32.2
|
Chief
Financial Officer Certification Under Section 906 of the Sarbanes-Oxley
Act
|
|
33
Pursuant
to the requirement of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
COLLECTORS
UNIVERSE, INC.
|
||
Date: February
9, 2010
|
By:
|
/s/
MICHAEL J. MCCONNELL
|
Michael
J. McConnell
|
||
Chief
Executive Officer
|
COLLECTORS
UNIVERSE, INC.
|
||
Date: February
9, 2010
|
By:
|
/s/
JOSEPH J. WALLACE
|
Joseph
J. Wallace
|
||
Chief
Financial Officer
|
S-1
Number
|
Description
|
31.1
|
Certification
of Chief Executive Officer Under Section 302 of the Sarbanes-Oxley
Act
|
31.2
|
Certification
of Chief Financial Officer Under Section 302 of the Sarbanes-Oxley
Act
|
32.1
|
Chief
Executive Officer Certification Under Section 906 of the Sarbanes-Oxley
Act
|
32.2
|
Chief
Financial Officer Certification Under Section 906 of the Sarbanes-Oxley
Act
|
E-1