Collectors Universe, Inc.
COLLECTORS UNIVERSE INC (Form: 10-Q, Received: 02/09/2009 16:13:17)
 
 

 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

(Mark One)
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
 
For the quarter ended December 31, 2008
   
 
OR
   
q
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
   
 
For the transition period from _______ to _____
Commission file number 0-27887
 
 
 
 
 
COLLECTORS UNIVERSE, INC.
(Exact name of Registrant as specified in its charter)

Delaware
33-0846191
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
Incorporation or organization)
 
 
1921 E. Alton Avenue, Santa Ana, California 92705
(address of principal executive offices and zip code )
 
 
Registrant's telephone number, including area code: (949) 567-1234
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   ý    No o
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act, (Check one):
 
Large accelerated filer o
Accelerated filer ý
Non-accelerated filer o

Indicate by check mark whether the Registrant is a shell company (as defined in Securities Exchange Act Rule 12b-2).
 
YES  [  ]   NO   x
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
 
 
Class
Outstanding at  January 29, 2009
 
Common Stock $.001 Par Value
9,187,191
 
       


 
 

 

COLLECTORS UNIVERSE, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2008

TABLE OF CONTENTS

PART I
Financial Information
Page
       
   
       
   
1
       
   
2
       
   
3
       
   
4
       
 
17
   
17
   
17
   
18
   
19
   
20
   
 
22
   
28
   
30
       
 
31
       
 
31
       
PART II
Other Information
 
       
 
32
 
32
 
32
 
33
     
 
S-1
     
INDEX TO EXHIBITS                                                                                                                                           
E-1
     
EXHIBITS
   
     
Certifications of Chief Executive Officer Under Section 302 of the Sarbanes-Oxley Act of 2002
 
     
Certifications of Chief Financial Officer Under Section 302 of the Sarbanes-Oxley Act of 2002
 
     
Chief Executive Officer Certification Under Section 906 of the Sarbanes-Oxley Act of 2002
 
     
Chief Financial Officer Certification Under Section 906 of the Sarbanes-Oxley Act of 2002
 


 
 

 

PART 1 – FINANCIAL INFORMATION
ITEM 1.                                                                         FINANCIAL STATEMENTS
COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES
(in thousands, except per share data)
(unaudited)
   
December 31,
   
June 30,
 
   
2008
   
2008
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 19,607     $ 23,345  
Accounts receivable, net of allowance of $95 at December 31, 2008 and $ 79 at June 30, 2008
    1,399       1,389  
Refundable income taxes
    575       575  
Inventories, net
    791       961  
Prepaid expenses and other current assets
    1,221       959  
Customer n otes receivable , net of allowance of $31 at December 31, 2008 and at June 30, 2008
    2,390       2,062  
Net deferred income tax asset
    496       486  
Customer notes receivables held for sale
    -       3,579  
Receivables from sale of net assets of discontinued operation
    92       92  
Current assets of discontinued operation held for sale
    233       117  
Total current assets
    26,804       33,565  
                 
Property and equipment, net
    2,974       4,473  
Goodwill
    2,626       3,974  
Intangible assets, net
    3,929       8,386  
Net deferred income tax assets
    -       909  
Customer note receivable, net of current portion
    975       -  
Note receivable from sale of discontinued operation
    92       138  
Other assets
    392       396  
Non-current assets of discontinued operation held for sale
    127       177  
    $ 37,919     $ 52,018  
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current liabilities:
               
Accounts payable
  $ 1,488     $ 1,817  
Accrued liabilities
    1,636       1,724  
Accrued compensation and benefits
    1,319       1,423  
Income taxes payable
    351       368  
Deferred revenue
    2,066       2,038  
Current liabilities of discontinued operation held for sale
    244       198  
Total current liabilities
    7,104       7,568  
Deferred rent and other long-term liabilities
    770       620  
Net deferred income tax liability
    305       -  
Commitments and contingencies
    -       -  
Preferred stock, $.001 par value; 3,000 shares authorized at December 31, 2008;
5,000 at June 30, 2008; no shares issued or outstanding
    -       -  
Common stock, $.001 par value; 20,000 shares authorized at December 31, 2008 and 45,000 at June 30, 2008; outstanding 9,187
  at December 31, 2008 and 8,361 at June 30, 2008
    9       8  
Additional paid-in capital
    76,217       75,996  
Accumulated deficit
    (46,486 )     (32,174 )
Total stockholders' equity
    29,740       43,830  
    $ 37,919     $ 52,018  

See accompanying notes to condensed consolidated financial statements.

 
1

 

COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES
(in thousands, except per share data)
(unaudited)


   
Three Months Ended
December 31,
   
Six Months Ended
December 31,
 
   
2008
   
2007
   
2008
   
2007
 
Net revenues:
                       
Grading, authentication and related services
  $ 8,103     $ 8,981     $ 17,580     $ 19,544  
Product sales
    102       811       103       892  
      8,205       9,792       17,683       20,436  
Cost of revenues:
                               
Grading, authentication and related services
    4,501       5,851       9,432       10,856  
Product sales
    295       788       306       807  
      4,796       6,639       9,738       11,663  
Gross profit
    3,409       3,153       7,945       8,773  
Operating expenses:
                               
Selling and marketing expenses
    1,298       1,780       2,953       3,708  
General and administrative expenses
    3,775       3,717       7,657       7,645  
Impairment loss
    7,695       -       7,695       1  
Amortization of intangible assets
    334       274       630       533  
Total operating expenses
    13,102       5,771       18,935       11,887  
                                 
Operating loss
    (9,693 )     (2,618 )     (10,990 )     (3,114 )
Interest income, net
    75       296       199       740  
Other income (expense)
    (1 )     2       9       3  
Loss before income taxes
    (9,619 )     (2,320 )     (10,782 )     (2,371 )
Provision (benefit) for income taxes
    1,210       (925 )     1,210       (945 )
Loss from continuing operations
    (10,829 )     (1,395 )     (11,992 )     (1,426 )
Loss from discontinued operations, net of income tax benefit
    (95 )     (48 )     (229 )     (127 )
Net loss
  $ (10,924 )   $ (1,443 )   $ (12,221 )   $ (1,553 )
                                 
Net loss per basic share:
                               
Loss from continuing operations
  $ (1.19 )   $ (0.15 )   $ (1.32 )   $ (0.15 )
Loss from discontinued operations, net of income tax benefit
    (0.01 )     -       (0.02 )     (0.02 )
Net loss
  $ (1.20 )   $ (0.15 )   $ (1.34 )   $ (0.17 )
                                 
Net loss per diluted share:
                               
Loss from continuing operations
  $ (1.19 )   $ (0.15 )   $ (1.32 )   $ (0.15 )
Loss from discontinued operations, net of income tax benefit
    (0.01 )     -       (0.02 )     (0.02 )
Net  loss
  $ (1.20 )   $ (0.15 )   $ (1.34 )   $ (0.17 )
                                 
Weighted average shares outstanding:
                               
Basic
    9,083       9,340       9,116       9,325  
Diluted
    9,083       9,340       9,116       9,325  
Cash dividends declared per common share
  $ -     $ 0.25     $ 0.25     $ 0.50  

See accompanying notes to condensed consolidated financial statements.

 
2

 


COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES
(in thousands)
(unaudited)
   
Six Months Ended
December 31,
 
   
2008
   
2007
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net loss
  $ (12,221 )   $ (1,553 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
    1,294       1,138  
Stock-based compensation expense
    532       500  
Impairment loss
    7,695       1  
Provision for bad debts
    7       18  
(Gain) loss on sale of property and equipment
    1       (2 )
Gain on sale of customer notes
    (10 )     -  
Provision for inventory write down
    169       10  
Interest on notes receivable
    -       (7 )
Discontinued operations
    229       127  
Deferred income taxes
    1,205       (963 )
Changes in operating assets and liabilities:
               
Accounts receivable
    (17 )     (1,056 )
Inventories
    1       (75 )
Prepaid expenses and other current assets
    (262 )     (413 )
Other assets
    (13 )     (6 )
Income taxes payable
    (18 )     5  
Accounts payable
    (329 )     (778 )
Accrued liabilities
    (65 )     371  
Deferred rent and other long-term liabilities
    150       (26 )
Accrued compensation and benefits
    (104 )     (601 )
Deferred revenue
    28       (191 )
Net cash used in operating activities
    (1,728 )     (3,501 )
Net cash used in operating activities of discontinued businesses
    (233 )     (33 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Capital expenditures
    (1,385 )     (969 )
Proceeds from sale of property and equipment
    -       63  
Advances on customer notes receivable
    (2,446 )     (3,501 )
Proceeds from collection of customer notes receivable
    4,707       2,578  
Purchase of patents and other intangible assets
    -       (20 )
Capitalized software
    (286 )     (618 )
Cash received on sale of discontinued businesses
    46       46  
Net cash provided by (used in) investing activities
    636       (2,421 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from sale of common stock
    161       -  
Proceeds from exercise of stock options
    1       111  
Repurchase of common stock
    (484 )     -  
Dividends paid to common stockholders
    (2,091 )     (4,263 )
Net cash used in financing activities
    (2,413 )     (4,152 )
                 
Net decrease in cash and cash equivalents
    (3,738 )     (10,107 )
Cash and cash equivalents at beginning of period
    23,345       42,386  
Cash and cash equivalents at end of period
  $ 19,607     $ 32,279  
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
               
Interest paid
  $ 2     $ 9  
Income taxes paid
  $ 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, 2008, such operating subsidiaries were Collectors Finance Corporation (“CFC”),  Certified Asset Exchange, Inc. (“CAE”), Gem Certification and Assurance Lab, Inc. (“GCAL”), Expos Unlimited, Inc. (“Expos”), and American Gemological Laboratories, Inc. (“AGL”), all of which are 100% owned by Collectors Universe, Inc.  All intercompany transactions and accounts have been eliminated.
 
 
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, 2008 are not necessarily indicative of the results that may be expected for the year ending June 30, 2009 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, 2008, as filed with the SEC.  Amounts related to disclosure of June 30, 2008 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.  At December 31, 2008, we classified our paper currency business as a discontinued operation held for sale, and, accordingly, all 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 the paper currency business as a discontinued operation (see note 7). During the second fiscal quarter of 2009, we distributed a 10% stock dividend to our common stockholders, and, as such, we restated the number of shares outstanding and the loss per share for continuing and discontinued operations to give retroactive effect of the stock dividend for those shares shown in the Consolidated Statements of Operations prior to the stock dividend date of November 3, 2008.

Revenue Recognition
 
Net revenues consist primarily of fees generated from the authentication and grading of coins, sportscards, autographs, stamps, diamonds and colored gemstones.  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 in accordance with EITF   00-21 , Accounting for Revenue Arrangements With Multiple Deliverables, 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.
 
We recognize product sales when items are shipped and the requirements of Staff Accounting Bulletin No. 104, Revenue Recognition, issued by the Securities and Exchange Commission (“SEC”), have been satisfied.  Product sales consist primarily of collectible coins that we purchased pursuant to our coin authentication and grading warranty program and are not considered an integral part of the Company’s on-going revenue generating activities.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods.  Actual results could differ from those estimates, and such differences could be material to the condensed consolidated financial statements.  Examples of such estimates that could be material to the Condensed Consolidated Financial Statements include capitalized software, the valuation of stock-based compensation awards, the amount of goodwill and the existence or non-existence of goodwill and other long-lived assets impairments, warranty reserves and income tax provisions.  Each of these estimates, and the material impairment adjustment we made to our goodwill and certain long-lived assets of our jewelry reporting units as of June 30, 2008 and in the three months ended December 31, 2008, is discussed in more detail in the Annual Report on Form 10-K for the fiscal year ended June 30, 2008 and included herein in the Interim Report on Form 10-Q for the three and six months ended December 31, 2008, respectively.

Long-Lived Assets
 
Management regularly reviews property and equipment and other long-lived assets, including certain definite-lived intangibles assets, for possible impairment.  This review occurs annually, or more frequently if events or changes in circumstances indicate the carrying amount of the asset may not be recoverable in full.  If there is indication of impairment of property and equipment or amortizable intangible assets, then management prepares an estimate of future undiscounted cash flows expected to result from the use of that asset and its eventual disposition.  If these cash flows are less than the carrying amount of the asset, an impairment loss is recognized to write down the asset to its estimated fair value.  The fair value is estimated at the present value of the future cash flows discounted at a rate commensurate with management’s estimates of the business risks or based upon the replacement cost or market approach, as applicable.  During the second quarter of fiscal 2009, the Company recorded aggregate impairment losses of $7,695,000 with respect to our jewelry businesses, of which $4,963,000 was associated with property and equipment and other definite-lived intangible assets following the determination that the carrying values of these assets were not recoverable (see Impairment Losses below in this note 1).

Goodwill and Other Intangible Assets .
 
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets , the Company is required to evaluate the carrying value of its goodwill and certain indefinite-lived intangible assets at least annually for impairment, or more frequently if facts and circumstances indicate that an impairment has occurred.  Management evaluates the carrying value of its goodwill and other indefinite-lived intangible assets for impairment on the anniversary date of each of the acquisitions that gave rise to the recording of such assets. During the three months ended December 31, 2008, the Company completed its annual review of the carrying values of the goodwill and trade name indefinite-lived intangible assets acquired in the acquisitions of GCAL and Gemprint and concluded that the acquired goodwill and the trade names were fully impaired as of December 31, 2008.  Accordingly, we recorded impairment losses in the Condensed Consolidated Statements of Operations for the three months ended December 31, 2008 of $899,000 for goodwill and $184,000 for trade name intangible assets.  We also evaluated the recoverability of the goodwill and the trade name assets acquired in the AGL acquisition on an interim basis and concluded that the goodwill of $449,000 and trade name intangible assets of $1,200,000 were fully impaired and recorded an impairment loss in the Condensed Consolidated Statements of Operations for the three months ended December 31, 2008, accordingly (see Impairment Losses below in this note 1).
 
 
5

 
Stock-Based Compensation Expense
 
In accordance with Statement of Financial Accounting Standard (“SFAS”) No. 123(R), Share-Based Payment, 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’s requisite service period, which is generally the vesting period.  The following table shows total stock-based compensation expense included as part of continuing operations in the Condensed Consolidated Statements of Operations for the three and six months ended December 31, 2008 and 2007:
 

 
   
Three Months Ended
December 31,
(in thousands)
   
Six Months Ended
December 31,
(in thousands)
 
Included in :
 
2008
   
2007
   
2008
   
2007
 
Cost of revenues
  $ 86     $ 55     $ 158     $ 110  
Selling and marketing expenses
    -       -       -       (7 )
General and administrative expenses (1)
    178       205       374       397  
Pre-tax stock-based compensation expense
  $ 264     $ 260     $ 532     $ 500  
 

 
(1)
Includes $93,000 and $185,000 in the three and six months ended December 31, 2008, respectively, and $85,000 and $167,000 in the three and six months ended December 31, 2007, respectively, for amortization of compensation expense related to issuances of restricted stock.
 
For the three months ended December 31, 2008 and 2007, the Company estimated the rates of forfeiture of outstanding non-vested stock-based compensation awards to be 5% and 9%, respectively.
 
No options were granted during the three and six months ended December 31, 2008.  The following table presents information relative to the stock options outstanding under all equity incentive plans as of December 31, 2008 and stock option activity during the six months ended December 31, 2008, as adjusted to give retroactive effect to the 10% stock dividend that was declared on September 26, 2008 and distributed on November 3, 2008 to all stockholders of record as of October 21, 2008.  The closing per share prices of our common stock as of June 30, 2008 and December 31, 2008 were $7.37 and $2.93, respectively.
 

   
 
 
 
Shares
   
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term
 
 
Aggregate Intrinsic
Value
 
Options:
                   
    Outstanding at June 30, 2008
    927,200     $ 12.54  
5.5 yrs.
  $ 314,000  
       Granted
    -       -            
       Exercised
    (100 )     2.80            
       Forfeited or cancelled
    (41,500 )     11.75            
   Outstanding at December 31, 2008
    885,600     $ 12.57  
5.0 yrs.
  $ 2,677  
    Exercisable at December 31, 2008
    737,100     $ 12.55  
4.7 yrs.
  $ 2,677  
   Unvested at December 31, 2008
    148,500     $ 12.70  
6.6 yrs.
  $ -  
   Expect to vest at December 31, 2008
    141,700     $ 12.69  
6.6 yrs.
  $ -  
 
 
 
6

 
The aggregate intrinsic values of the options exercised during the six months ended December 31, 2008 and 2007 were $465 and $381,000, respectively.
 
The 141,700 options that were expected to vest at December 31, 2008 are based on the current forfeiture rate of 5% and the remaining vesting terms of the 148,500 unvested options at December 31, 2008.
 
During the six months ended December 31, 2008, approximately 50,900 options were vested with an aggregate fair value of approximately $352,000.  During the six months ended December 31, 2007, approximately 49,500 options were vested with an aggregate fair value of $364,000.

The following table presents information regarding the numbers of non-vested restricted shares that were granted or became vested during the six months ended December 31, 2008 and their weighted average grant-date fair values.

 
 
 
Non-Vested Shares:
 
 
 
Shares
   
Weighted
Average
Grant-Date
 Fair Value
 
Non-vested at June 30, 2008
    50,359     $ 12.60  
Granted
    77,778       2.70  
Vested
    (16,974 )     12.66  
Forfeited or Cancelled
    -       -  
Non-vested at December 31, 2008
    111,163     $ 5.67  
 
The following table sets forth total unrecognized compensation cost in the amount of $799,000 related to non-vested stock-based awards expected to be recognized through fiscal year 2012.  That amount and time periods do 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
 
2009
  $ 311,000  
2010
    347,000  
2011
    125,000  
2012
    16,000  
    $ 799,000  

 
Concentrations
 
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash equivalents, accounts receivable and notes receivables.
 
Financial Instruments and Cash Balances.   At December 31, 2008, we had cash and cash equivalents, totaling approximately $19,607,000, of which approximately $17,674,000 were invested in U.S. government-secured money market funds.  At December 31, 2008, the Company had approximately $1,933,000 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, 2008, no individual customer represented a significant concentration, i.e., individual accounts receivable balance comprising of at least 10% of the total net outstanding balance of $1,399,000 on that date; whereas, at June 30, 2008, three customers accounted for approximately 37% of total net accounts receivable balances of $1,389,000 outstanding on that date.  The Company performs an analysis of the expected collectibility of accounts receivable based on several factors, including the age and extent of significant past due accounts and economic conditions or trends that may adversely affect the ability of account debtors to pay their account receivable balances.  Based on that review, the Company establishes an allowance for doubtful accounts, when necessary.  The allowance for doubtful accounts receivable was $95,000 at December 31, 2008 and $79,000 at June 30, 2008.
 
 
 
7

 
Customer Notes Receivables.   At December 31, 2008, the outstanding principal amount of customer notes receivable, which evidenced advances made to customers, totaled $3,365,000, net of a $31,000 allowance for uncollectible amounts, of which $975,000 was classified as non-current customer notes receivable and $2,390,000 was classified as current customer notes receivable.  At December 31, 2008, the unpaid principal balance of one of those notes receivable was greater than 10% of the aggregate of the unpaid principal balances of all of the notes receivable that were outstanding at December 31, 2008 and represented 88% of the total principal amounts outstanding.  At June 30, 2008, three customers’ loan balances, each greater than 10% of the total notes receivable balances, represented 49% of the total principal balances outstanding.
 
During the six months ended December 31, 2008, the Company sold, without recourse, $3,554,000 of the aggregate principal amount of $3,579,000 classified as loans held for sale at June 30, 2008 for an amount that was about 0.7% over the aggregate principal amount of the loans. The proceeds from the sales are included in the Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2008 as part of proceeds from collection of customer notes receivable. As of December 31, 2008, approximately $25,000 of the $3,579,000 held for sale at June 30, 2008 was no longer held for sale.
 
Sources of Revenues .  The authentication, grading and sales of collectible coins accounted for approximately 53% of our net revenues for the three and six months ended December 31, 2008.  For the three and six months ended December 31, 2007, collectible coin revenues accounted for approximately 56% and 57% of our net revenues, respectively.
 
Capitalized Software
 
Through December 31, 2008, the Company had capitalized an aggregate of approximately $2,310,000 of software development costs, net of accumulated amortization of approximately $1,152,000, in accordance with Statement of Position (“SOP”) 98-1, Accounting for the Cost of Computer Software Developed or Obtained for Internal Use, and EITF 00-02, Accounting for Website Development Costs. In the three and six months ended December 31, 2008, approximately $54,000 and $286,000 of such costs were capitalized and approximately $223,000 and $408,000 were recognized as amortization expense, respectively.  During the three and six months ended December 31, 2007, approximately $254,000 and $618,000 of such costs were capitalized, and $135,000 and $260,000 were recorded as amortization expense, respectively.  Planning, training, support and maintenance costs incurred either prior to or following the implementation phase of a software project are recognized as expense in the period in which they are incurred.  The Company evaluates the carrying values of capitalized software to determine if those values are impaired, and, if necessary, an impairment loss is recorded in the period in which an impairment occurs.  At December 31, 2008, management evaluated the capitalized software that was in use by the jewelry businesses and concluded that the carrying value of that asset was impaired and, accordingly, in the three months ended December 31, 2008, an impairment loss of $490,000 was recorded as part of impairment losses in the carrying values of the goodwill and other long-lived assets of those businesses that total $7,695,000, which was recorded in the Condensed Consolidated Statements of Operations for the six months ended December 31, 2008.  See Impairment Losses below in this note 1.
 
Warranty Costs
 
We offer a limited warranty covering the coins, sportscards, stamps and currency that we authenticate and grade.  Under the warranty, if any collectible that was previously authenticated and graded by us is later submitted to us for re-grading 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 offer a similar limited warranty of two years duration on the diamonds we grade.  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.

 
8

 

Dividends

On September 26, 2008, the Board of Directors determined that, due to market and economic conditions, including the liquidity crisis in the United States, the prudent course of action would be to suspend the payment of cash dividends in order to preserve the Company's cash resources.  At the same time, the Board of Directors declared a 10% stock dividend on the Company's outstanding shares distributed on November 3, 2008 to all stockholders of record as of October 20, 2008.  The 10% stock dividend was recorded in the accompanying Condensed Consolidated Balance Sheet as of the declaration date of September 26, 2008 and all shares outstanding, stock option grants outstanding and the weighted average number of shares used in the computation of the loss per share for the six months ended December 31, 2008 and for the three and six months ended December 31, 2007 were retroactively adjusted for the stock dividend as of the record date of October 20, 2008.

Stock Buyback Program

On October 8, 2008, the Company acquired from its CEO approximately 120,000 shares of the Company’s common stock, and the Company paid approximately $484,000 in cash for these shares, or approximately $4.03 per share.  The selling price of $4.03 was determined based on a 10% discount from the volume weighted average price of the Company’s common stock on October 8, 2008 of $4.48.  On October 8, 2008, two directors purchased an aggregate of 40,000 shares from the Company for a selling price of $4.03, or approximately $161,000.

Impairment Losses

During the fourth quarter of fiscal year 2008, we completed an interim review of the carrying values of goodwill and other long-lived assets including identifiable intangible assets acquired with the acquisitions of GCAL and Gemprint, which were both consummated during fiscal year 2006 and have been evaluated together as the “GCAL Reporting Unit”, and AGL, which was acquired in fiscal year 2007. On the basis of those reviews, we determined that impairment losses had occurred with respect to goodwill and other long-lived assets on the basis of continued significant losses by these reporting units, the inability of these reporting units to meet or exceed projections prepared prior to June 30, 2008 and used in the evaluation for goodwill impairment as of that date and the uncertainty of future revenues, income and related cash flows. During the fourth quarter of fiscal 2008, approximately $2,169,000 was recorded as an impairment loss related to long-lived assets other than goodwill, of which approximately $1,817,000 was related to the GCAL Reporting Unit and $352,000 was related to AGL. We also recorded impairment losses of goodwill for the GCAL Reporting Unit and AGL in the fourth quarter of 2008 of $7,267,000 and $1,797,000, respectively.
 
During the first quarter of fiscal year 2009, we reported on Form 10-Q for the three months ended September 30, 2008 that no impairments of long-lived assets including goodwill had occurred in any of our reporting units, as we completed the annual impairment reviews for several of our reporting units including AGL.
 
During the second quarter of fiscal 2009, we evaluated the AGL reporting unit on an interim basis and the GCAL Reporting Unit on its annual basis and determined that impairments of goodwill and other long-lived assets had occurred in both reporting units on the basis that both these reporting units had missed projections for revenues and cash flows set forth in the revised projections prepared by management in the fourth quarter of fiscal 2008. We also considered other factors, such as the current economic climate and outlook in the United States, and concluded that the weight of negative evidence outweighed the positive evidence that future discounted or undiscounted cash flows would be adequate to recover the carrying values of the GCAL Reporting Unit or AGL as of December 31, 2008. As a result, we estimated the fair values of both of these reporting units to be equal to their salvage values, and, accordingly we recorded an impairment loss in the second quarter of fiscal 2009 in the aggregate of $7,695,000, of which $3,791,000 was associated with the GCAL Reporting Unit and $3,904,000 was associated with AGL.
 

 
9

 

The following table provides additional detail of the impairment losses associated with GCAL and AGL reporting units recorded in the Condensed Consolidated Statements of  Operations for the three months ended December 31, 2008 in thousands of dollars:
 
   
AGL
   
GCAL
   
Total
 
Goodwill
  $ 449     $ 899     $ 1,348  
Trade names (indefinite-lived)
    1,200       184       1,384  
Acquired intangible assets (definite-lived)
    718       1,307       2,025  
Capitalized software
    35       455       490  
Property and equipment
    239       347       586  
Leasehold improvements
    1,263       588       1,851  
Other assets
    -       11       11  
    $ 3,904     $ 3,791     $ 7,695  

The following table sets forth, by reporting unit, the amounts classified as goodwill and intangible assets, net, on our balance sheets as of June 30, 2008 and December 31, 2008 in thousands of dollars:

   
 
Coins
   
 
GCAL
   
 
AGL
   
 
Expos
   
CCE
and Other
   
 
Total
 
Goodwill:
                                   
Balance at June 30, 2008, net
  $ 515     $ 899     $ 449     $ 1,001     $ 1,110     $ 3,974  
Impairment loss in second quarter FY2009
    -       (899 )     (449 )     -       -       (1,348 )
Balance at December 31, 2008
  $ 515     $ -     $ -     $ 1,001     $ 1,110     $ 2,626  
                                                 
Intangible assets, net:
                                               
Balance at June 30, 2008
  $ 294     $ 2,127     $ 2,177     $ 1,590     $ 2,198     $ 8,386  
                                                 
Capitalized software additions for FY09 (6 months)
    126       35       36       -       89       286  
Less: Cap SW amortization for FY09 (6 months)
    (106 )     (122 )     (1 )     -       (179 )     (408 )
Less: Cap SW impairment at 12/31/08
            (455 )     (35 )     -       -       (490 )
Less: Cap SW reclass to discontinued operations for FY09 (6 months)
    -       -       -       -       (4 )     (4 )
                                                 
Less: amortization for 6 months FY09 for definite-lived intangible assets
    -       (94 )     (49 )     (55 )     (24 )     (222 )
                                                 
Less: impairment loss at 12/31/08 for definite-lived intangible assets
    -       (1,307 )     (718 )     -       -       (2,025 )
                                                 
Less: impairment loss at 12/31/08 for indefinite-lived intangible assets
    -       (184 )     (1,200 )     -       -       (1,384 )
                                                 
Less: reclass of AGL reference sets to non-depreciable property and equipment
    -       -       (210 )     -       -       (210 )
   Balance at December 31, 2008
  $ 314     $ -     $ -     $ 1,535     $ 2,080     $ 3,929  
 
     2.  CASH AND CASH EQUIVALENTS

At December 31, 2008 and June 30, 2008, cash and cash equivalents consisted of approximately $19,607,000 and $23,345,000, respectively, which was invested primarily in money-market funds, which comprised of investments in government-guaranteed securities.

3.  
FAIR VALUE MEASUREMENTS

 
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements.   SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP, and expands disclosures about fair value measurements, SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  In February 2008, the FASB issued SFAS No. 157-2, Effective Date of FASB Statement No. 157, which delays the effective date of SFAS 157 to fiscal years beginning after November 15, 2008 for all nonfinancial assets and nonfinancial liabilities, except for those that are recognized or disclosed at fair value in the financial statements on a recurring basis.  The Company has adopted the provisions of SFAS 157 as of July 1, 2008 for financial assets, including cash and cash equivalents, and SFAS 157-2 will be adopted as of July 1, 2009 for nonfinancial assets and nonfinancial liabilities.
 
 
 
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SFAS 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value.  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; and

Level 3-defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

As of December 31, 2008, the Company held certain assets that are required to be measured at fair value on a recurring basis.  The Company measures the following financial assets at fair value on a recurring basis.  The fair value of these financial assets was determined using the following inputs at December 31, 2008:

   
(in thousands)
 
   
 
 
Total
As of
December 31, 2008
   
Quoted
Prices in
Active
Markets
or Identical
Assets
(Level 1)
   
 
Significant
Other
Observable
Inputs
(Level 2)
   
 
 
Significant
Unobservable
Inputs
(Level 3)
 
Cash and cash equivalents
  $ 19,607     $ 19,607     $ -     $ -  
Total
  $ 19,607     $ 19,607     $ -     $ -  

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities.   SFAS No. 159 permits companies to choose to measure at fair value certain financial instruments and other items that are not currently required to be measured at fair value.  SFAS No. 159 is effective for fiscal years beginning after November 15, 2007.  The Company adopted SFAS No. 159 on July 1, 2008 and elected not to measure any additional financial instruments or other items at fair value.

4.            
INVENTORIES
 
Inventories consist of the following:
 
   
(in thousands)
 
   
December 31,
   
June 30,
 
   
2008
   
2008
 
Coins                                                                
  $ 686     $ 751  
Other collectibles                                                                
    64       28  
Grading raw materials consumable inventory
    287       273  
      1,037       1,052  
Less inventory reserve                                                                
    (246 )     (91 )
Inventories, net
  $ 791     $ 961  

During the three and six months ended December 31, 2008, we recorded additional inventory provisions of $155,000 in the Condensed Consolidated Statements of Operations, that included approximately $137,000 to reflect current market values at December 31, 2008 for certain coins that were sold in January 2009.

 
11

 

5.           PROPERTY AND EQUIPMENT

Property and equipment consist of the following:
 
   
(in thousands)
 
   
December 31
   
June 30,
 
   
2008
   
2008
 
Coins, jewelry and stamp grading reference sets
  $ 845     $ 610  
Computer hardware and equipment                                                                  
    1,565       1,861  
Computer software                                                                  
    1,032       1,032  
Equipment                                                                  
    4,192       4,206  
Furniture and office equipment                                                                  
    1,362       1,113  
Leasehold improvements                                                                  
    2,669       1,598  
Trading card reference library                                                                  
    52       52  
      11,717       10,472  
Less accumulated depreciation and amortization
    (8,743 )     (5,999 )
Property and equipment, net
  $ 2,974     $ 4,473  

          During the second quarter of fiscal 2009, and the fourth quarter of fiscal 2008, we recorded impairment losses related to property and equipment in the amounts
        of $2,437,000 and $176,000, respectively.  These amounts are presented as part of accumulated depreciation and amortization in the above table.

6.           ACCRUED LIABILITIES

Accrued liabilities consist of the following:
 
(in thousands)
 
   
December 31,
   
June 30,
 
   
2008
   
2008
 
Warranty costs                                                                
  $ 648     $ 665  
Professional fees                                                                
    140       125  
Other                                                                
    848       934  
    $ 1,636     $ 1,724  

The following table presents the changes in the Company’s warranty reserve during the six months ended December 31, 2008 and 2007:

   
(in thousands)
 
   
Six Months
Ended
December 31,
   
Six Months
Ended
December 31,
 
   
2008
   
2007
 
Warranty reserve, beginning of period                                                                
  $ 665     $ 735  
Charged to cost of revenue                                                                
    250       1,008  
Payments                                                                
    (267 )     (311 )
Warranty reserve, end of period                                                                
  $ 648     $ 1,432  

7.            
DISCONTINUED OPERATIONS

In December 2008, the Company’s Board of Directors authorized the sale of the paper currency grading business; therefore, the balance sheet amounts related to this business have been classified as discontinued operation held for sale in the Condensed Consolidated Balance Sheets for all periods shown. The results of operations and cash flows for this business are classified as loss from discontinued operations in the Condensed Consolidated Statements of Operations and the Condensed Consolidated Statements of Cash Flows, respectively, for all periods shown.


 
12

 

The remaining activities of the discontinued collectibles sales businesses that we disposed of in fiscal 2004 and which are included in the accompanying Consolidated Financial Statements are deemed to be immaterial to warrant separate disclosure.

The operating results of the discontinued businesses that are included in the accompanying Condensed Consolidated Statement of Operations, substantially all of which are associated with the paper currency grading business, are as follows:

   
(in thousands)
 
   
Three Months Ended
December 31,
   
Six Months Ended
December 31,
 
   
2008
   
2007
   
2008
   
2007
 
Net revenues                                                                
  $ 203     $ 186     $ 417     $ 370  
Loss before income tax benefit                                                                
    (95 )     (80 )     (229 )     (212 )
                                 
Income tax expense benefit                                                                
    -       (32 )     -       (85 )
Loss from discontinued operations                                                                
  $ (95 )   $ (48 )   $ (229 )   $ (127 )

The following table contains summary balance sheet information (in thousands) with respect to the net assets and liabilities of the discontinued operation held for sale that is included in the accompanying Condensed Consolidated Balance Sheets as of December 31 and June 30, 2008.

   
At December 31, 2008
   
At June 30, 2008
 
Current Assets:
           
Accounts receivable, net
  $ 17     $ 25  
Inventories, net
    157       21  
Prepaid expenses
    59       71  
    $ 233     $ 117  
                 
Non-current assets:
               
Property and equipment
  $ 6     $ 9  
Intangible assets
    86       109  
Other assets
    35       59  
    $ 127     $ 177  
                 
Current liabilities:
               
Accounts payable
  $ 39     $ 53  
Other accrued expenses
    98       98  
Deferred revenue
    107       47  
    $ 244     $ 198  

8.        
INCOME TAXES

At December 31, 2008, due to the Company recognizing additional impairment losses for its jewelry businesses, and the Company’s core profitable operations not meeting short-term expectations, combined with uncertainty as to the performance of those businesses due to the severe economic conditions currently prevailing, management did not recognize any deferred tax assets for the impairment losses recognized in the three months ended December 31, 2008 and established a valuation allowance against $1,204,000 of the $1,395,000 of deferred tax assets at September 30, 2008, such that the remaining net deferred tax assets at December 31, 2008 were $191,000.  Current net deferred tax asset of $496,000 relates to deferred tax assets established for compensation expense recognized for non-employee supplier stock options in 1999, and these options are expected to expire in the six months ended June 30, 2009.  It is expected that these options will expire unexercised due to the exercise price of the options relative to the Company’s current share price, and in accordance with SFAS 123R and related interpretations, the $496,000 will be recognized as a reduction to additional-paid-in capital upon expiration. Deferred income tax liabilities of $305,000 are associated with timing differences related to indefinite-lived intangible assets including goodwill that are amortizable for income tax purposes but not for financial reporting purposes under GAAP.

The effective tax rates were a tax expense of 11% and a 40% tax benefit in the six months ended December 31, 2008 and 2007, respectively.
 
 
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9.            
NET LOSS PER SHARE

The number of shares used in the computation of the losses per share 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 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 earnings per share, totaled approximately 1,078,800 and 1,185,000 for the three months ended December 31, 2008 and 2007, respectively.  The aggregate numbers of options, warrants and restricted shares excluded for the six month periods ended December 31, 2008 and 2007 were 1,046,300 and 1,191,100, 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 that are set forth in SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information.

For our continuing operations, we operate principally in four reportable service segments: coins, sportscards, jewelry and other high-end collectibles.  Services provided by these segments include authentication, grading, publication advertising and subscription-based revenues.  The other collectibles segment is comprised of autographs, stamps, the CCE subscription business and our collectibles conventions business.  During the second quarter of fiscal 2009, we excluded the paper currency grading business as part of the other collectibles segment for all periods presented and classified the operating results of this business as discontinued operations in the Condensed Consolidated Statements of Operations (see note 7).


 
14

 

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 impairment losses as significant other non-cash transactions, and (iv) operating income for the three and six months ended December 31, 2008 and 2007. Net identifiable assets are provided by business segment as of December 31, 2008 and June 30, 2008. All of our sales and identifiable assets are located in the United States.

   
Three Months Ended
   
Six Months Ended
 
   
December 31,
   
December 31,
 
   
2008
   
2007
   
2008
   
2007
 
Net revenues from external customers
                       
Coins
  $ 4,370     $ 5,527     $ 9,365     $ 11,565  
Sportscards
    2,007       2,192       4,196       4,484  
Jewelry
    402       534       837       914  
Other
    1,426       1,539       3,285       3,473  
Total revenue
  $ 8,205     $ 9,792     $ 17,683     $ 20,436  
Amortization and depreciation
                               
Coins
  $ 77     $ 62     $ 152     $ 119  
Sportscards
    46       24       94       47  
Jewelry
    322       322       640       635  
Other
    130       84       237       170  
Total
    575       492       1,123       971  
Unallocated amortization and depreciation
    84       84       171       167  
Consolidated amortization and depreciation
  $ 659     $ 576     $ 1,294     $ 1,138  
Impairment losses
                               
Coins
  $ -     $ -     $ -     $ -  
Sportscards
    -       -       -       -  
Jewelry
    7,695       -       7,695       1  
Other
    -       -       -       -  
Total
    7,695       -       7,695       1  
Unallocated impairment losses
    -       -       -       -  
Consolidated impairment losses
  $ 7,695     $ -     $ 7,695     $ 1  
Stock-based compensation
                               
Coins
  $ 62     $ 33     $ 95     $ 67  
Sportscards
    -       5       -       9  
Jewelry
    4       3       7       6  
Other
    20       23       64       46  
Total
    86       64       166       128  
Unallocated stock-based compensation
    178       196       366       372  
Consolidated stock-based compensation
  $ 264     $ 260     $ 532     $ 500  
Operating income (loss) before unallocated expenses
                               
Coins
  $ 809     $ 457     $ 2,610     $ 2,941  
Sportscards
    258       424       603       942  
Jewelry
    (9,276 )     (1,882 )     (10,906 )     (3,691 )
Other
    (21 )     104       133       528  
Total
    (8,230 )     (897 )     (7,560 )     720  
Unallocated operating expenses
    (1,463 )     (1,721 )     (3,430 )     (3,834 )
Consolidated operating loss
  $ (9,693 )   $ (2,618 )   $ (10,990 )   $ (3,114 )

   
At December 31,
   
At June 30,
 
Identifiable Assets
 
2008
   
2008
 
Coins                                          
  $ 2,940     $ 3,346  
Sportscards                                          
    1,001       1,035  
Jewelry                                          
    2,197       9,061  
Other                                          
    9,245       10,761  
Total                                          
    15,383       24,203  
Unallocated assets                                          
    22,536       27,815  
Consolidated assets                                          
  $ 37,919     $ 52,018  
 
 

 
15

 
11.           SUBSEQUENT EVENT
 
 
Stockholder Rights Plan
 
On January 9, 2009, the Company’s Board of Directors unanimously adopted a limited duration stockholder rights plan. In accordance with ISS guidelines, the Plan has an initial term of one year ending in January 2010, but may be extended for two additional years if the Plan is approved by our stockholders on or prior to the end of that initial one year term.
 
In connection with the adoption of the stockholder rights plan, the Board of Directors declared a non-taxable distribution of rights to purchase shares of a new series of preferred stock to all stockholders of record as of January 23, 2009. Under the Plan, if anyone becomes the beneficial owner of 20 percent or more of the Company’s outstanding shares, then, subject to limited exceptions, each right (other than those held by that person) will become exercisable and entitle its holder to purchase, at the exercise price of the right, a number of the Company’s shares having a market value of twice the right’s exercise price. If anyone announces or commences a tender offer or exchange offer for the Company’s shares, then, subject to limited exceptions, each right will entitle its holder (other than the offeror) to purchase, at the exercise price of the right, a number of the acquiring party’s shares having a market value at that time of twice the right’s exercise price. Unless and until either of those events occurs, the rights will not be exercisable, will trade with the Company’s common stock and no rights certificates will be issued.



 
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ITEM 2.
 
Forward-Looking Statements
 
The discussion in this Item 2 and in Item 3 of this Quarterly Report (“Report”) on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “1933 Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “1934 Act”).  Those Sections of the 1933 Act and 1934 Act provide a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about their financial performance so long as they provide meaningful, cautionary statements identifying important factors that could cause actual results to differ from projected 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 sections below entitled “Factors That Can Affect our Financial Position and Operating Results” and “Risks and Uncertainties That Could Affect our Future Financial Performance” describe some, but not all, of the factors and the risks and uncertainties that could cause these differences, and readers of this Report are urged to read those sections of this Report in their entirety and to review certain additional risk factors that are described in Item 1A of our Annual Report on Form 10-K, as filed by us with the Securities and Exchange Commission (the “SEC”), for the fiscal year ended June 30, 2008.
 
Due to these and other possible uncertainties and risks, readers are cautioned not to place undue reliance on the forward-looking statements contained in this Report, which speak only as of the date of this Report, or to make predictions about future performance based solely on historical financial performance.  We also disclaim any obligation to update forward-looking statements contained in this Report or in our Annual Report on Form 10-K or any other prior filings with the SEC.
 
Our Business
 
Collectors Universe, Inc. (“we”, “us” or the “Company”) provides grading and authentication services to dealers and collectors of high-value coins, sportscards, autographs and stamps and to sellers and purchasers of diamonds and colored gemstones.  We believe that our authentication and grading services add value to these collectibles and to diamonds and colored gemstones by enhancing their marketability and thereby providing increased liquidity to the dealers, 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 Collectors Club membership subscriptions; (iv) the sale of subscriptions to our CCE dealer-to-dealer Internet bid-ask market for certified coins; and (v) the collectibles trade show conventions that we conduct. 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, these activities are not the focus of or an integral part of our business.
 
Discontinued Operations .  In the three months ended December 31, 2008, the Company approved a plan to dispose of the Company’s currency authentication and grading business and this business was sold in February 2009.  Accordingly, the operations of the currency authentication and grading business have been classified as a discontinued operation held for sale at December 31 2008, and the operations of that business have been reclassified as discontinued operations for all periods presented.  In addition, as previously disclosed, we have classified as discontinued operations the remaining activities of our divestiture of the collectibles auctions and sales businesses which we disposed of in fiscal 2004.  The discussion that follows focuses almost entirely on our on-going authentication and grading businesses, which comprise substantially all of our continuing operations.
 

 
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Overview of Results of Operations for the Three and Six Months Ended December 31, 2008
 
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:

   
(in thousands)
   
(in thousands)
 
   
Three Months Ended
   
Six Months Ended
 
   
December 31,
   
December 31,
 
   
2008
   
2007
   
2008
   
2007
 
Net revenues
    100.0 %     100.0 %     100.0 %     100.0 %
Cost of revenues
    58.5 %     67.8 %     55.1 %     57.1 %
Gross profit
    41.5 %     32.2 %     44.9 %     42.9 %
Operating expenses:
                               
Selling and marketing expenses
    15.8 %     18.2 %     16.7 %     18.1 %
General and administrative expenses
    46.0 %     37.9 %     43.3 %     37.4 %
Amortization of intangibles
    4.0 %     2.8 %     3.5 %     2.6 %
Impairment losses
    93.8 %     -       43.5 %     -  
Total operating expenses
    159.6 %     58.9 %     107.0 %     58.1 %
Operating loss
    (118.1 )%     (26.7 )%     (62.1 )%     (15.2 )%
Interest income, net
    0.9 %     3.1 %     1.1 %     3.6 %
Other income
    -       -       -       -  
Loss before income taxes
    (117.2 )%     (23.6 )%     (61.0 )%     (11.6 )%
Provision (benefit) for income tax
    14.8 %     (9.4 )%     6.8 %     (4.6 )%
Loss from continuing operations
    (132.0 )%     (14.2 )%     (67.8 )%     (7.0 )%
Loss from discontinued operations,  net of income taxes
    (1.1 )%     (0.5 )%     (1.3 )%     (0.6 )%
Net loss
    (133.1 )%     (14.7 )%     (69.1 )%     (7.6 )%
 
On going grading, authentication and related service revenues decreased by $878,000 or 9.8% and $1,964,000 or 10.0% in the three months and six months ended December 31, 2008, respectively, compared to the same period of the prior fiscal year, largely due to decreases in grading and authentication fees.  Such fees decreased by $781,000 or 10.4% and $1,821,000 or 11.1%, respectively, in the three and six months ended December 31, 2008, while related services decreased by $97,000 or 6.7% and $143,000 or 4.5%, respectively, for those same three and six month periods. We experienced reductions in grading and authentication fees in all of our markets in the three and six months ended December 31, 2008, which we believe were primarily attributable to the increased severity of the economic recession and the tightening of business and consumer credit in the United States during the six months ended December 31, 2008.
 
The operating losses for the three and six months ended December 31, 2008 (which included an impairment loss related to the Company’s jewelry businesses of $7,695,000 recognized in the three months ended December 31, 2008 and reflected in both periods) was $9,693,000 and $10,990,000, respectively.  Excluding those impairment losses in the three and six months ended December 31, 2008, and a warranty charge of $822,000 recognized in the three and six months ended December 31, 2007, the operating losses would have been $1,998,000 and $3,295,000, respectively, in the three and six months ended December 31, 2008, compared to $1,796,000 and $2,292,000, respectively, in the three and six months ended December 31, 2007.
 
Our jewelry grading and authentication businesses accounted for substantially all of those operating losses, incurring operating losses (before the impairment loss) of $1,581,000 and $3,211,000, respectively, in the three and six months ended December 31, 2008, compared with $1,882,000 and $3,691,000, respectively, in the three and six months ended December 31, 2007.
 
We implemented cost reduction measures in all of our operations throughout the six month period ended December 31, 2008 and will continue to review and make changes considered necessary to our costs based on our expectations regarding near term revenues.
 
 
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We recognized the impairment losses in our jewelry businesses during the three months ended December 31, 2008, due primarily to the uncertainties of forecasting the impact of the economic recession on our jewelry businesses.
 
These, as well as other factors affecting our operating results in the second quarter of fiscal 2009, are described in more detail below.
 
Factors That Can Affect our Financial Position and Operating Results
 
Factors that Can Affect our Revenues .  Our authentication and grading fees, which accounted for approximately 82% of our total net revenues in the six months ended December 31, 2008, are primarily affected by (i) the volume and mix, among coins, sportscards and other collectibles and high-value assets, of authentication and grading submissions; (ii) in the case of coins and sportscards, the “turn-around” 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 sportscards, on the one hand, and modern coins and sportscards, on the other hand, because dealers generally request faster turn-around times for vintage or classic coins and sports 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 sportscards.
 
Our revenues are also impacted by the level of grading submissions and revenue earned from such coin grading submissions at collectibles trade shows where we provide on-site grading and authentication services to show attendees who typically request same-day turn-around.  The level of such revenues can vary depending upon a number of factors, including the number and timing of the shows held during each reporting period, and the number of dealers attending and the volume of their coin transactions at such shows, which affect the volume of submissions to us for on-site grading and same-day turn-around at the shows.  Dealer show attendance, and the volume of coin transactions at the shows are, in turn, affected by economic and market conditions, such as those we are experiencing currently, and are sometimes also affected by short-term changes in the price of gold that may occur around the time shows are held.
 
Six of our coin authentication and grading customers accounted for, in the aggregate, approximately 13% of our total net revenues in the three months ended December 31, 2008, as compared to 10% in the year ended June 30, 2008.  As a result, the loss of one or more of those customers, or a decrease in the volume of grading submissions from any of them to us, would cause our net revenues to decline and, therefore, could adversely affect the profitability of our grading and authentication operations.

Factors Affecting our Gross Profit Margins .  The gross profit margins on authentication and grading submissions also are primarily affected by (i) the volume and mix, among coins, sportscards and other collectibles and high value assets, of authentication and grading submissions, because we generally realize higher margins on coin submissions than on submissions of other collectibles and high-value assets; (ii) in the case of coins and sportscards, the “turn-around” times requested by our customers, because we charge higher fees for faster service times, (iii) the mix of authentication and grading submissions between vintage or “classic” coins and sportscards, on the one hand, and modern coins and sportscards, on the other hand, because dealers generally request faster turn-around times for vintage or classic coins and sports cards than they do for modern submissions, and (iv) the stage of development and the seasonality of our newer businesses.  Furthermore, because a significant proportion of our direct costs are generally fixed in nature, our gross profit also can be affected by the overall volume of collectibles authenticated and graded in any period.

Impact of Economic Conditions on Financial Performance .  We generate substantially all of our revenues from the collectibles and the diamond and colored gemstone markets.  Accordingly, our operating results are affected by the financial performance of those markets, which depends to a great extent on (i) discretionary consumer spending and, hence, on the availability of disposable income, (ii) on other economic conditions, including prevailing interest and inflation rates, which affect consumer confidence, (iii) the availability and cost of financing that collectibles dealers and consumers need to fund their purchases of collectibles or diamonds and colored gemstones, and (iv) the performance and volatility of the gold and other precious metals markets and the stock markets.  These conditions primarily affect the volume of purchases and sales of collectibles and high-value assets which, in turn, affects the volume of authentication and grading submissions to us, because our services facilitate commerce in collectibles.  Accordingly, factors such as improving economic conditions which usually result in increases in disposable income and consumer confidence, and volatility in and declines in the prices of stocks and a weakening in the value of the U.S. Dollar, which often lead investors to increase their purchases of precious metals, such as gold bullion and other coins and collectibles, may result in increases in submissions of collectibles for our services.  By contrast, the volume of collectibles sales and purchases and, therefore, the volume of authentication and grading submissions, may decline during periods characterized by recessionary economic conditions, declines in disposable income and consumer confidence, reductions in the availability or increases in the costs of financing, or by increasing stock prices and relative stability in the stock markets.  Due to the severity of the economic recession and the worsening of the credit crisis in the United States in the three and six months ended December 31, 2008, we have experienced declines in the demand for our services in all of our grading and authentication markets, as the collectibles and jewelry that we authenticate and grade are considered luxury items.  As a result of these economic conditions and the resulting uncertainties as to the level of revenues we can expect from our jewelry businesses in future periods, in the three months ended December 31, 2008 we recognized additional impairment losses, totaling approximately $7.7 million, in the carrying values of the assets of our jewelry businesses, which are reflected in our results of operation in both the three and six month periods ended December 31, 2008.
 
 
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The following tables provide information regarding the respective numbers of coins, sportscards, autographs, currency, diamonds and colored gemstones that were graded or authenticated by us in the three months ended December 31, 2008 and 2007 and their estimated values, which are the amounts at which those coins, sportscards and stamps and other high-value assets were insured by the dealers and collectors who submitted them to us for grading and authentication.

   
Units Processed
Three Months Ended December 31,
   
Declared Value (000)
Three Months Ended December 31,
 
   
2008
   
2007
   
2008
   
2007
 
Coins
    291,500       44.9 %     292,800       43.0 %   $ 250,052       70.4 %   $ 246,840       59.8 %
Sportscards
    292,300       45.1 %     313,000       46.0 %     17,548       4.9 %     19,402       4.7 %
Autographs
    47,700       7.3 %     50,000       7.3 %     3,685       1.1 %     6,159       1.5 %
Stamps
    6,600       1.0 %     11,700       1.7 %     7,129       2.0 %     8,928       2.1 %
Diamonds
    9,700       1.5 %     12,000       1.8 %     43,778       12.3 %     115,418       28.0 %
Colored Gemstones
    1,600       0.2 %     1,100       0.2 %     32,918       9.3 %     16,066       3.9 %
Total
    649,400       100.0 %     680,600       100.0 %   $ 355,110       100.0 %   $ 412,813       100.0 %

   
Units Processed
Six Months Ended December 31,
   
Declared Value (000)
Six Months Ended December 31,
 
   
2008
   
2007
   
2008
   
2007
 
Coins
    619,600       46.3 %     659,900       45.2 %   $ 552,774       72.9 %   $ 711,762       74.9 %
Sportscards
    593,900       44.3 %     651,500       44.6 %     44,109       5.8 %     41,997       4.4 %
Autographs
    89,300       6.7 %     94,800       6.5 %     8,538       1.1 %     16,634       1.7 %
Stamps
    13,900       1.0 %     31,400       2.2 %     12,200       1.6 %     11,987       1.3 %
Diamonds
    19,500       1.5 %     19,700       1.4 %     78,843       10.4 %     138,627       14.6 %
Colored Gemstones
    3,000       0.2 %     2,000       0.1 %     61,723       8.2 %     29,210       3.1 %
Total
    1,339,200       100.0 %     1,459,300       100.0 %   $ 758,187       100.0 %   $ 950,217       100.0 %

Critical Accounting Policies and Estimates

During the quarter ended December 31, 2008, there were no changes except as noted below 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, 2008.  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.

Grading Warranty Costs .  We offer a limited warranty covering the coins, sportscards, stamps and currency that we authenticate and grade.  Under the warranty, if any such collectible that was previously authenticated and graded by us is later submitted to us for re-grading and either (i) receives a lower grade upon resubmittal 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 resubmittal to us, is not in the same tamper-resistant holder in which it was placed at the time we last graded the item.  If we purchase an item under a warranty claim, we recognize the difference in value of the item at its original grade and its re-graded estimated value as a reduction in our warranty reserve.  We include the purchased item in our inventory at the re-graded estimated value of the item.  We offer a similar limited warranty of two years’ duration on the diamonds we grade.  We accrue for estimated warranty costs based on historical trends and related experience.  Certain warranty claims were received by us in the second quarter and early in third quarter of fiscal 2008 that were significant in relation to our historical claims experience and, as a result, we recognized, in the second quarter of 2008, an additional expense of $822,000 for those claims.  We also decided to increase our warranty accrual rate, effective January 1, 2008, to reflect this higher warranty claims experience, and we continue to monitor the adequacy of our warranty reserves on an on-going basis.  In relation to those items, which we include in inventory at the re-graded estimated value (as discussed under Inventory Valuation Reserves below) there are a number of factors that can cause such estimated values of those items between the time they are purchased under our warranty policy and they are sold by us.  However, once we have classified such items as inventory and they have been held in inventory over a quarter end period, we classify the ultimate gain or loss on the disposal of such inventory as part of the gain or loss on product sales and not as an adjustment to our warranty revenues.
 
 
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Inventory Valuation Reserve .  Our collectibles inventories are valued at the lower of cost or fair value and have been reduced by an inventory valuation allowance to provide for potential declines in the value of those inventories.  The amount of the allowance is determined and is periodically adjusted on the basis of market knowledge, historical experience and estimates concerning future economic conditions or trends that may impact the sale value of the collectibles inventories.  Additionally, due to the relative uniqueness of some of the collectibles included in our collectibles inventory, valuation of such collectibles often involves judgments that are more subjective than those that are required when determining the market values of more standardized products due to volatility in the price of precious metal, the condition of the collectible and any specific features of the individual collectible.  We review the market values of the collectible on a quarterly basis.  Ultimately, we recognize a profit or loss on the actual sale of the collectible relative to its most recent inventory carrying value. 

Long-Lived Assets Other Than Goodwill .  We regularly conduct reviews of property and equipment and other long-lived assets other than goodwill, including certain identifiable intangibles, for possible impairment.  Such reviews occur annually or more frequently if events or changes in circumstances indicate the carrying amount of the asset may not be recoverable in full.  In order to determine if the value of a definite-lived asset is impaired, we make an estimate of the future undiscounted cash flows expected to result from the use of that asset and its eventual disposition in order to determine if an impairment loss has occurred.  If the projected undiscounted cash flows are less than the carrying amount of the asset, an impairment loss is recorded to write down the asset to its estimated fair value.  The Company has incurred significant operating losses in its jewelry reporting units since the acquisitions of these businesses and the Company recognized impairment losses for these businesses in the three months and year ended June 30, 2008 due to these businesses not meeting management’s revenue expectations.  In the three months ended December 31, 2008, due to continued uncertainty as to the level of revenues we can expect from these businesses in the future, as well as worse than expected actual performance during the first six months of fiscal 2009 and the continued economic downturn, management has recognized additional impairment losses of $6,347,000 for these businesses during the three month period ended December 31, 2008.

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 to 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 remeasurement of goodwill is required. In accordance with GAAP, we consider the diamond and colored gemstone grading businesses as separate reporting units for the purpose of testing separately for the impairment of goodwill.  The Company has incurred significant operating losses in its jewelry reporting units since the acquisitions of these businesses and the Company recognized impairment losses for these businesses in the three months and year ended June 30, 2008 due to these businesses not meeting management’s revenue expectations.  In the three months ended December 31, 2008, due to continued uncertainty as to the level of revenues we can expect from these businesses in the future, as well as worse than expected actual performance during the first six months of fiscal 2009 and the continued economic downturn, management has recognized additional goodwill impairment losses of $1,348,000 for these businesses at December 31, 2008.

 
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Income Taxes and Deferred Tax Assets .  We account for income taxes in accordance with SFAS No. 109 , Accounting for Income Taxes and FASB Interpretation 48, Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109 (“FIN48”).   SFAS No. 109 requires the recording of deferred tax assets and liabilities for the future consequences of events that have been recognized in the Company’s financial statements or tax returns.  Measurement of the deferred items is based on enacted tax laws.  In the event the future consequences of differences between financial reporting bases and tax bases of the Company’s assets or liabilities result in a deferred tax asset, SFAS No. 109 requires that we evaluate the probability of realizing the future benefits comprising that asset and we review the nature, the expected timing of the realization of these assets and the expiration dates for net operating losses or credits, when determining the likelihood of realization.  In the fourth quarter of fiscal 2008, due to the length of time and the extent of the taxable income required to fully realize the deferred tax assets related to impairment losses recognized in the fourth quarter of fiscal 2008, and certain California Enterprise Zone Credits, the Company recorded a valuation allowance of $4,572,000 against deferred tax assets of $5,967,000 at June 30, 2008.  The remaining net deferred tax asset of $1,395,000 at June 30, 2008 was determined by management to be more likely than not realizable at June 30, 2008.  At December 31, 2008, due to the Company recognizing additional impairment losses for its jewelry businesses, and the Company’s core profitable operations not meeting short-term expectations, combined with uncertainty as to the performance of those businesses due to the severe economic conditions currently prevailing, management did not recognize any deferred tax assets for the impairment losses recognized in the three months ended December 31, 2008 and established a valuation allowance against $1,204,000 of the $1,395,000 of deferred tax assets, such that the remaining net deferred tax assets at December 31, 2008 were $191,000.   The current net deferred tax asset of $496,000 relates to deferred tax assets established for compensation expense recognized for non-employee supplier stock options in 1999, and these options are expected to expire in the six months ended June 30, 2009.  It is expected that these options will expire unexercised due to the exercise price of the options relative to the Company’s current share price, and in accordance with SFAS 123R and related interpretations, the $496,000 will be recognized as a reduction to additional-paid-in capital upon expiration. Deferred income tax liabilities of $305,000 refer to timing differences related to indefinite-lived intangible assets including goodwill that are amortizable for income tax purposes but not for financial reporting purposes under GAAP.
 
The effective tax rates were a tax expense of 11% and a 40% tax benefit in the six months ended December 31, 2008 and 2007, respectively.
 
 
 
Net Revenues

Net revenues consist primarily of fees that we generate from the authentication and grading of high-value collectibles, including coins, sportscards, autographs and stamps, and high-value assets consisting of diamonds and colored gemstones.  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 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 and are not considered to be an integral part of our on-going revenue generating activities.


 
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The following tables breakout the total net revenues for the three and six months ended December 31, 2008 and 2007 between grading and authentication services revenues, and other related services revenues: