SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2004
------------------
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period ________ to ________
Commission file number 1-11988
GREG MANNING AUCTIONS, INC.
---------------------------
(Exact name of Registrant as specified in its Charter)
Delaware 22-2365834
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
775 Passaic Avenue
West Caldwell, New Jersey 07006
- --------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 882-0004
--------------
Check whether the Issuer (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 filing requirements for the past 90
days.
Yes X No _____
-------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yes No X
------- ------
As of November 4, 2004, Issuer had 27,370,895 shares of its Common Stock
outstanding.
GREG MANNING AUCTIONS, INC.
Table of Contents
Page Number
-----------
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at
June 30, 2004 and September 30, 2004 3
Condensed Consolidated Statements of Earnings for the
three months ended September 30, 2004 and 2003 4
Condensed Consolidated Statements of Stockholders'
Equity for the three months ended September 30, 2004 5
Condensed Consolidated Statements of Cash Flows for the
three months ended September 30, 2004 and 2003 6
Condensed Consolidated Statement of Comprehensive Income
for the three months ended September 30, 2004 and 2003 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
Item 4. Controls and Procedures 31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 33
Item 2. Changes in Securities 33
Item 3. Defaults Upon Senior Securities 33
Item 4. Submission of Matters to a Vote of Security Holders 33
Item 5. Other Information 33
Item 6. Exhibits and Reports on Form 8-K 33
Signatures 35
2
PART I. FINANCIAL INFORMATION
GREG MANNING AUCTIONS, INC.
Condensed Consolidated Balance Sheets
(amounts in thousands except per share data)
September June 30,
30, 2004 2004
---------- ---------
Assets (Unaudited) (Audited)
------
Current Assets
Cash and Cash Equivalents $ 6,063 $ 16,263
Accounts Receivable, Net;
Auctions and Trade 14,532 14,086
Related Party 29,280 27,674
Advances to Consignors 7,041 4,032
Inventory 41,779 40,816
Deferred Tax Asset 3,301 3,821
Prepaid Expenses 991 674
--------- ---------
Total Current Assets 102,987 107,366
Property and Equipment, Net 1,745 1,936
Goodwill, Net 9,363 9,163
Other Purchased Intangibles, Net 1,972 1,898
Marketable Securities 210 186
Other Non-Current Assets
Loans Receivable - Related Party 600 600
Inventory 7,542 7,336
Deferred Tax Asset 1,794 1,959
Other 519 240
--------- ---------
Total Assets $ 126,732 $ 130,684
========= =========
Liabilities and Stockholders' Equity
------------------------------------
Current Liabilities
Demand Notes Payable - Bank $ 7,000 $ 8,500
Notes Payable and Capital Leases 4,111 4,090
Loans Payable - Related Party 801 --
Payable to Third Party Consignors 6,874 10,387
Accounts Payable 15,374 20,605
Accrued Expenses and Other Current Liabilities 4,777 4.170
Income Taxes Payable 10,151 7,743
Advances Payable - Related Party -- 3,467
Advances Payable 400 --
--------- ---------
Total Current Liabilities 49,488 58,962
Notes Payable and Capital Leases - Long Term -- --
--------- ---------
Total Liabilities 49,488 58,962
Stockholders' Equity
Preferred Stock, $.01 par value. Authorized
10,000 shares; none issued
Common Stock, $.01 par value
Authorized: 40,000 shares
Issued: September 30, 2004 - 27,739 shares,
Outstanding - 27,371 shares 277 277
Issued: June 30, 2004 - 27,716 shares,
Outstanding - 27,348 shares
Additional paid in capital 71,531 71,431
Accumulated Other Comprehensive Income: 2,120 1,832
Retained Earnings 5,864 730
Treasury stock, at cost:
368 shares at September 30 and June 30, 2004,
respectively (2,548) (2,548)
--------- ---------
Total Stockholders' Equity 77,244 71,722
--------- ---------
Total Liabilities and Stockholders' Equity $ 126,732 $ 130,684
========= =========
See accompanying notes to financial statements
3
GREG MANNING AUCTIONS, INC.
Condensed Consolidated Statements of Earnings
For the Three months ended September 30,
(thousands except per share data)
(Unaudited)
2004 2003
-------- --------
Operating Revenues
Sales of inventory $ 22,970 $ 21,523
Sales of inventory - related party 21,618 10,678
Commissions earned 3,502 2,286
-------- --------
Total Revenues 48,090 34,487
Cost of merchandise sold 30,928 27,025
-------- --------
Gross profit 17,162 7,462
Operating Expenses
General and Administrative 3,658 2,011
Salaries and Wages 3,316 1,887
Depreciation and Amortization 276 144
Marketing 799 379
-------- --------
Total Operating Expenses 8,049 4,421
-------- --------
Operating Income 9,113 3,041
-------- --------
Other Income (Expense)
Interest Income 230 15
Interest Expense (256) (209)
Other (20) 17
-------- --------
Income before income taxes 9,067 2,864
Provision for income taxes 3,933 406
-------- --------
Net Income $ 5,134 $ 2,458
======== ========
Basic Earnings per Share
Weighted average shares outstanding 27,359 16,165
======== ========
Basic Earnings per share $ 0.19 $ 0.15
======== ========
Diluted Earnings per Share
Weighted average shares outstanding 28,767 17,473
======== ========
Diluted Earnings per Share $ 0.18 $ 0.14
======== ========
See accompanying notes to financial statements
4
GREG MANNING AUCTIONS, INC.
Condensed Consolidated Statement of Stockholders' Equity
July 1, 2004 to September 30, 2004
(amounts in thousands)
(Unaudited)
Accumulated
Common Stock Additional Other Total
-------------- Paid-In Comprehensive Retained Treasury Stockholders'
Shares $ Capital Earnings Earnings Stock Equity
------ ------ ---------- ------------- --------- --------- ------------
Balance July 1, 2004 27,716 $ 277 $ 71,431 $ 1,832 $ 730 $ (2,548) $ 71,722
Exercise of stock options 23 35 35
Translation adjustment 264 264
Options issued for services
and other-Afinsa (Note 11) 65 65
Unrealized gain from Marketable 24 24
Securities, net of tax
Net income - September 30, 2004 5,134 5,134
------ ------ -------- -------- -------- --------- --------
Balance September 30, 2004 27,739 $ 277 $ 71,531 $ 2,120 $ 5,864 $ (2,548) $ 77,244
====== ====== ======== ======= ======== ========= ========
See accompanying notes to financial statements
5
GREG MANNING AUCTIONS, INC.
Condensed Consolidated Statements of Cash Flows
For the Three months Ended September 30
(amounts in thousands)
(Unaudited)
2004 2003
-------- --------
Cash flows from operating activities:
Net Income $ 5,134 $ 2,458
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization 276 144
Provision for bad debts -- 306
Options issued for services - related party 65 130
Deferred tax (benefit) expense 685 (97)
(Increase) decrease in assets:
(net of acquisition amounts)
Accounts recevable - Trade (446) (3,833)
Accounts recevable - Related Party (1,606) (1,688)
Advances to consignors (3,009) (344)
Inventory (963) 1,382
Prepaid expenses (316) 1,114
Other assets (485) (1,161)
Increase (decrease) in liabilities:
(net of acquisition amounts)
Payable to third-party consignors (3,513) 1,877
Accounts payable (5,231) 206
Accrued expenses and other liabilities 607 240
Advances payable - related party (3,467) --
Advances payable 400 (274)
Income taxes payable 2,408 --
-------- --------
(9,461) 460
Cash flows from investing activities
Capital expenditures for property and equipment (10) (89)
Purchase of Intangible Assets - Acquisitions (350) (75)
-------- --------
(360) (164)
Cash flows from financing activities:
Net proceeds from (repayment of) demand notes payable (1,500) --
Proceeds from issuance of loan payable -- (243)
Net proceeds from loans and loans payable 822 --
Proceeds from exercise of options 35 16
Proceeds from issuance of stock -- 5,536
-------- --------
(643) 5,309
Effect of exchange rates 264 935
-------- --------
Net change in cash and cash equivalents (10,200) 6,540
Cash and cash equivalents:
Beginning of period 16,263 2,250
-------- --------
End of period $ 6,063 $ 8,790
======== ========
See accompanying notes to financial statements
6
GREG MANNING AUCTIONS, INC.
Condensed Consolidated Statements of Comprehensive Income
For the Three months ended September 30
(amounts in thousands)
(Unaudited)
2004 2003
------ ------
Net Income $5,134 $2,458
Other Comprehensive Income
Unrealized gain on securities, net of tax 24 3
Currency translation adjustment, net of tax 264 935
------ ------
$5,422 $3,396
====== ======
See accompanying notes to financial statements
7
Greg Manning Auctions, Inc.
Notes to Consolidated Financial Statements
($ in Thousands Except for Per Share Amounts or as noted)
(1) Description of Business
Description of Business
- -----------------------
Greg Manning Auctions, Inc. (GMAI), together with its operating
subsidiaries (wholly owned unless otherwise indicated), Ivy and Manning
(formerly Mader) Philatelic Auctions, Greg Manning Galleries, Greg Manning
Nutmeg Auctions, (d/b/a Nutmeg Stamp Sales), H.R. Harmer, Inc., Teletrade,
Spectrum Numismatics International, North American Certified Trading, Kensington
Associates, Superior Sports Auctions, Bowers & Merena Galleries, Kingswood Coin
Auctions, Corinphila Auktionen (65% owned by GMAI), Heinrich Kohler Berliner
Briefmarken-Auktionen (66.67% owned by GMAI), Heinrich Kohler Auktionshaus,
Heinrich Kohler Briefmarkenhandel, Heinrich Kohler Verwaltungs, Auctentia
Deutschland, Auctentia Subastas, GMAI Auctentia Europe S.L.U., and GMAI
Auctentia Central de Compras (CdC) (collectively, the Company), is a traditional
and e-commerce - Internet, interactive telephone, and Internet and live
simulcast - auctioneer and merchant/dealer of collectibles, including rare
stamps, stamp collections and stocks, coins, sports trading cards and
memorabilia, and fine art. The Company conducts both in-person event auctions
and electronic auctions via the Internet and touch-tone telephone.
Afinsa Bienes Tangibles, S.A. (Afinsa) owns 100% of the outstanding stock
of Auctentia, S.L. (Auctentia). At September 30, 2004 and 2003, Afinsa and
Auctentia collectively beneficially owned approximately 69% and 72%,
respectively, of the Company's outstanding common stock.
The Company is a party to separate supply agreements with Afinsa, dated
August 1, 2003, as amended, pursuant to which the Company and CdC act as
exclusive suppliers of collectibles - primarily stamps and coins - for Afinsa on
a worldwide basis, with GMAI acting in the United States and Hong Kong, and CdC
acting in all other geographic locations. Afinsa is engaged, among other things,
in commercial and trading activities involving tangible investment products
throughout Europe. As amended, the supply agreements have a ten-year term,
terminable by either party upon six months' notice. In addition to paying the
purchase price for the goods sold under the contracts, Afinsa pays to the
Company an amount equal to 10% of the aggregate purchase price of all such goods
sold.
As a result of transactions under the supply agreements for the three
months ended September 30, 2004 and 2003 Afinsa was the Company's significant
customer, with revenues accounting for $21,618 or 45% and $10,678 or 31%,
respectively.
Transactions under the supply agreements with Afinsa (a related party)
have had a significant effect on the business, financial condition and results
of operations of the Company.
Basis of Presentation
- ---------------------
The consolidated financial statements of the Company include the accounts
of its wholly owned and majority owned subsidiaries. All intercompany accounts
and transactions have been eliminated in consolidation.
The Company accounts for all investments in investees under the cost
method of accounting when such investment ownership is less than 20%. The
Company accounts for investments in investees under the equity method of
accounting when the Company owns more than 20% of the entity, but less than
majority owned and not otherwise controlled by the Company.
8
Greg Manning Auctions, Inc.
Notes to Consolidated Financial Statements
($ in Thousands Except for Per Share Amounts or as noted)
The accompanying condensed consolidated balance sheets as of September 30,
2004 and June 30, 2004 and related condensed consolidated statements of
operations, stockholders' equity, cash flows and comprehensive income for the
three months ended September 30, 2004 and 2003 have been prepared from the books
and records maintained by the Company, in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and with the instructions to Form 10-Q. Accordingly, they do not
include all information and disclosures required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments, which are of a normal recurring nature, considered
necessary for a fair presentation have been included. For further information,
refer to the consolidated financial statements and disclosures thereto in the
Company's Form 10-K for the year ended June 30, 2004 filed with the Securities
and Exchange Commission. The results of operations for such periods are not
necessarily indicative of the results expected for the full fiscal year or for
any future period.
(2) Revenue Recognition
The Company accounts for revenue recognition in accordance with Staff
Accounting Bulletin No. 101 and No. 104, ("SAB No.'s 101/104"), which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements, and Emerging Issues Task Force ("EITF") Issue No. 99-19 "Reporting
Revenue Gross as a Principal vs. Net as an Agent" which provides guidance on the
recognition of revenue gross as a principal versus net as an agent.
The Company derives revenues from two primary sources:
1. Private Treaty Sales:
Private treaty sales represent sales of consigned property and sales of
owned inventory, which include sales to Afinsa (related party) pursuant to the
supply agreements described in Note 1.
Private treaty sales of owned inventory occur when the Company sells its
goods directly to a customer. Revenue with respect to private treaty revenues is
recognized when delivered or released to the customer for acceptance or to a
common carrier for delivery. Such amounts of revenue are recorded on a gross
basis as sales of merchandise. Sales returns have not been material.
Private treaty sales of consigned property occur when an owner of property
arranges with the Company to sell such consigned property to a third party at a
privately negotiated price. In such a transaction, the owner may set selling
price parameters for the Company, or the Company may solicit selling prices for
the owner, and the owner may reserve the right to reject any selling price. The
Company does not guarantee a fixed price to the owner, which would be payable
regardless of the actual sales price ultimately received. The Company recognizes
as private treaty revenue an amount equal to a percentage of the sales price.
Such amounts of revenue are recorded on a net basis as commission revenue and
are recognized when sold.
2. Auction Revenue:
Revenue is recognized when the collectibles are sold at auction and is
represented by an auction commission received from the buyer and seller. Auction
commissions represent a percentage of the
9
Greg Manning Auctions, Inc.
Notes to Consolidated Financial Statements
($ in Thousands Except for Per Share Amounts or as noted)
hammer price at auction sales as paid by the buyer and the seller. Such amounts
of revenue are recorded on a net basis as commission revenue.
The Company also sells its own inventory at auction. Revenue of owned
inventory is recognized when sold at auction. Such amounts of revenue are
recorded on a gross basis as sales of merchandise. Additionally, the Company is
entitled to auction commissions paid by the buyer. Sales returns have not been
material.
The Company does not provide any guarantee with respect to the
authenticity of property offered for sale at auction. Each lot is sold as
genuine and as described by the Company in the catalogue. When however, in the
opinion of a competent authority mutually acceptable to the Company and the
purchaser, a lot is declared otherwise, the purchase price will be refunded in
full if the lot is returned to the Company within a specified period. In such
event, the Company will return such lot to the consignor before a settlement
payment has been made to such consignor for the lot in question. To date,
returns have not been material. Large collections are generally sold on an "as
is" basis.
(3) Accounts Receivable
Accounts receivable consists of auction or trade receivables and consignor
advances.
Auction or trade receivables represent sales made to customers for which
short-term credit extensions are granted, which generally are not extended
beyond 90 days.
Advances to consignors represent advance payments, or loans, to the
consignor prior to the auction sale, collateralized by the items received and
held by the Company for the auction sale and the proceeds from such sale.
Interest on such amounts is generally charged at an annual rate of 12%. Such
advances generally are not outstanding for more than six months from the date of
the note.
As of September 30, 2004 and June 30, 2004, the allowance for doubtful
accounts included in auction receivables was approximately $602 and $1,095,
respectively.
(4) Marketable Securities
Investments available for sale in marketable securities as of September
30, 2004 and June 30, 2004 is as follows:
Cost Market Unrealized
Value Gain (Loss)
---- ------ ----------
September 30, 2004 Common Stock $ 285 $ 210 $ (75)
===== ====== =====
June 30, 2004 Common Stock $ 285 $ 186 $ (99)
===== ====== =====
The unrealized loss is classified as a separate component of stockholders'
equity, net of tax.
(5) Payable to Third Party Consigners
Amounts payable to third party consigners represent amounts due the third
party for the sale of their consigned inventory by the company.
10
Greg Manning Auctions, Inc.
Notes to Consolidated Financial Statements
($ in Thousands Except for Per Share Amounts or as noted)
(6) Advances Payable
Advances payable represent cash advances received by the Company
representing a deposit for a future purchase of goods from the Company or the
sale of goods on behalf of the Company.
(7) Earnings per common and common equivalent share
The following table sets forth the computations of basic earnings per
share and diluted earnings per share:
Three months ended
September 30,
--------------------
2004 2003
------- -------
BASIC EARNINGS PER SHARE:
Numerator:
Earnings available to common stockholders $ 5,134 $ 2,458
Denominator:
Weighted average common shares outstanding 27,359 16,165
Net earnings per share: - Basic 0.19 0.15
======= =======
DILUTED EARNINGS PER SHARE:
Numerator:
Earnings available to common stockholders $ 5,134 $ 2,458
Denominator:
Weighted average common shares outstanding 27,359 16,165
Effect of dilutive securities - stock options 1,408 1,308
------- -------
Weighted average common shares - assuming
dilution 28,767 17,473
Net earnings per share: - Diluted 0.18 0.14
======= =======
11
Greg Manning Auctions, Inc.
Notes to Consolidated Financial Statements
($ in Thousands Except for Per Share Amounts or as noted)
Common share equivalents consist of employee stock options using the
treasury stock method. For the three months ended September 30, 2004 and 2003,
481,000 and 55,000 employee stock options, respectively, were excluded from the
computation of diluted net income per share because the exercise price of these
options was greater than the average market price of the Company's common stock
during the period, and therefore the effect is antidilutive.
(8) Acquisitions
H.R. Harmer, Inc.
On July 30, 2004, GMAI acquired the business assets of H.R. Harmer, LLC of
New York, New York, which is engaged in the sale of primarily owned inventory to
mid- and upper-end collectors. The purchase price for the assets was $351, which
was paid at closing. The business will be operated through a recently formed
subsidiary, H.R. Harmer, Inc.
Tangible and intangible assets acquired:
Current assets................................................. $ 0
Intangible Assets.............................................. 151
Goodwill....................................................... 200
Total tangible and intangible assets acquired,
purchase price. $ 351
12
Greg Manning Auctions, Inc.
Notes to Consolidated Financial Statements
($ in Thousands Except for Per Share Amounts or as noted)
(9) Inventories
Inventories as of September 30, 2004 consisted of the following:
Current Non-current Total
------- ----------- -----
Stamps 27,926 $ 7,317 $35,243
Coins 13,372 -- 13,372
Sports Collectibles 478 -- 478
Art 3 225 228
------- ------- -------
41,779 $ 7,542 $49,321
======= ======= =======
Inventories as of June 30, 2004 consisted of the following:
Current Non-current Total
------- ----------- -----
Stamps 28,774 $ 7,111 $35,885
Coins 11,555 -- 11,555
Sports Collectibles 484 -- 484
Art 3 225 228
------- ------- -------
$40,816 $ 7,336 $48,152
======= ======= =======
The above inventory amounts reflect net realizable (LCM) allowances of
approximately $1,441 and $1,439 at September 30, 2004 and June 30, 2004
respectively. The non-current inventory represents an estimate of total
inventory, which is not expected to be sold within one year.
Inventories are stated at the lower of cost or market. In instances where
bulk purchases are made, the cost allocation is based on the relative market
values of the respective goods. The Company has agreements with certain
suppliers to share the net profits or losses attributable to the sale of
specific items of inventory.
(10) Intangible Assets
Goodwill
The changes in the carrying value of goodwill for the year ended June 30,
2004 and the three months ended September 30, 2004 are as follows:
Balance - July 1, 2003 $ 1,516
Purchased Goodwill - Auctentia 5,387
Purchased Goodwill - Nutmeg Stamp 500
Purchased Goodwill - Bowers & Merena 1,760
--------
Balance - June 30, 2004 $ 9,163
========
Balance - July 1, 2004 $ 9,163
Purchased Goodwill - HR Harmer, Inc. 200
--------
Balance - September 30, 2004 $ 9,363
========
13
Greg Manning Auctions, Inc.
Notes to Consolidated Financial Statements
($ in Thousands Except for Per Share Amounts or as noted)
Other Purchased Intangibles
At September 30, 2004 and June 30, 2004, acquired intangible assets were
comprised of the following (in thousands):
September 30,
2004 Estimated
Useful Lives Gross Carrying Accumulated Net Book
(Years) Amount Amortization Value
- -----------------------------------------------------------------------------
Trademarks 5-16 $ 3,500 $ (2,206) $ 1,294
Customer Lists 3- 5 1,880 (1,202) 678
--------- ---------- ---------
$ 5,380 $ (3,408) $ 1,972
========= ========== =========
June 30, 2004
Estimated
Useful Lives Gross Carrying Accumulated Net Book
(Years) Amount Amortization Value
- -----------------------------------------------------------------------------
Trademarks 5-16 $ 3,500 $ (2,172) $ 1,328
Customer Lists 3- 5 1,730 (1,160) 570
---------- ---------- --------
$ 5,230 $ (3,332) $ 1,898
========== ========== =========
All of the Company's intangible assets are subject to amortization.
Amortization expense (exclusive of impairment charges) for acquired intangible
assets were approximately $76 and $20, for the periods ended September 30, 2004
and 2003, respectively.
Estimated amortization expense on an annual basis for the succeeding five
years is as follows (in thousands):
For The Twelve Month Period Ended
September 30, Amount
- ------------------------------------------
2006 327
2007 281
2008 302
2009 284
2010 193
Thereafter 585
-----
Total $ 1,972
=====
(11) Related-party Transactions
At September 30, 2004 and 2003, Afinsa and Auctentia collectively
beneficially owned approximately 69% and 72%, respectively, of the Company's
outstanding common stock. Esteban Perez, Chairman of the Board of Directors and
Chief Corporate Strategy Officer for the Company, is Chairman
14
Greg Manning Auctions, Inc.
Notes to Consolidated Financial Statements
($ in Thousands Except for Per Share Amounts or as noted)
of the Board of Directors and Chief Executive Officer of Auctentia. Carlos de
Figueiredo, the First Vice Chairman of the Board of the Company, is also
director of Afinsa and an immediate family member of a 50% stockholder of common
stock of Afinsa. Emilio Ballester, a director of the Company, is Global
Strategic Investment Officer of Afinsa. Ramon Egurbide, CEO of European
Operations for the Company, is Managing Director of Auctentia.
On September 8, 2003, the Company consummated three separate transactions
with Auctentia, a wholly owned subsidiary of Afinsa. In the first transaction,
the Company acquired all of Auctentia's equity interests in the following
operating subsidiaries of Auctentia in exchange for the issuance of 3,729,226
shares of the Company's common stock: Corinphila Auktionen; Heinrich Kohler
Berliner Briefmarken-Auktionen; Heinrich Kohler Auktionshaus; Heinrich Kohler
Briefmarkenhandel; Heinrich Kohler Verwaltungs; Auctentia Deutschland; and
Auctentia Subastas.
In the second transaction, under an inventory purchase agreement and in
exchange for the issuance to Auctentia of 6,444,318 shares of stock, the Company
acquired from Auctentia all of its right, title and interest to all of the
outstanding membership interests of CdC, whose sole assets consisted of an
inventory of certain philatelic and art assets. CdC is engaged in the sale,
marketing, distribution, promotion and production of owned and third party
collectibles.
In the last transaction, the Company issued to Auctentia 2,826,456 shares
of its common stock, for a purchase price of the Euro equivalent of US $5.0
million.
In addition, in August 2003, GMAI and CdC entered into separate supply
agreements with Afinsa, pursuant to which GMAI and CdC act as exclusive
suppliers of collectibles for Afinsa on a worldwide basis. (See Note 1.)
On April 17, 2003, the Company entered into a revolving credit agreement
with Banco Santander Central Hispano, S.A. The agreement has been guaranteed by
Afinsa and requires that Auctentia maintain ownership of at least 43% of all of
authorized, issued and outstanding shares of voting stock of the Company. (See
Note 12.)
At September 30, 2004 and June 30, 2004, Afinsa had outstanding accounts
receivable balances of approximately $29,280 and $27,674, respectively, and such
amounts are included in the accompanying Consolidated Balance Sheets as Accounts
Receivable-related party. During the three months ended September 30, 2004 and
2003, sales to Afinsa were approximately $21,618 and $10,678, respectively, and
are included in the accompanying Consolidated Statements of Operations as Sales
of Inventory - Related Party.
At June 30, 2004 Afinsa had advanced $3,467 to the Company for the
purchase of product relating to the supply contracts referred to above. Such
amount is included in the accompanying Consolidated Balance Sheet as Advances
Payable - related party. The amount was repaid in full in the three months ended
September 30, 2004.
The Company granted options to certain employees of Afinsa for services.
For the three months ended September 30, 2004 such amounts were recorded at fair
value, which amounted to $65.
The Company leases office space from Afinsa in Madrid, Spain, of
approximately 2,700 square feet at an annual rental of approximately $139,000.
The lease is for a five-year term commencing September 8, 2003.
15
Greg Manning Auctions, Inc.
Notes to Consolidated Financial Statements
($ in Thousands Except for Per Share Amounts or as noted)
Other
On June 17, 2002, the Company entered into an amendment to the employment
agreement with Mr. Roberts, a director of the Company. In connection with the
amendment, the Company made available to Mr. Roberts a non-interest bearing loan
in the amount of $600,000. The loan is required to be repaid on an annual basis
in three equal installments commencing February 18, 2006; provided that if Mr.
Roberts is employed by the Company on the date that an installment is due, that
installment payment will be forgiven, and that if his employment is terminated
for death, disability, without cause or by Mr. Roberts with good reason (as
defined), then the entire loan will be forgiven at the date of termination. If
Mr. Robert's employment terminates for cause or by Mr. Roberts without good
reason, then the outstanding amount of the loan will accelerate and be due and
payable within 30 days of termination. An aggregate of $600,000 has been
disbursed under the loan agreement to date.
Scott Rosenblum, a director of the Company, is a partner of the law firm
Kramer, Levin, Naftalis & Frankel LLP, which provides legal services to the
Company. Anthony L. Bongiovanni, Jr., also a director of the Company, is
president of Micro Strategies, Incorporated, which provides technological
services to the Company.
On July 1, 2004, one of the minority shareholders of Corinphila Auktionen
made a loan to that company in the aggregate amount of $1,200. This loan bears
interest at the rate of 4% per annum and is due and payable on December 31,
2004. As of September 30, 2004 the loan balance was $801.
16
Greg Manning Auctions, Inc.
Notes to Consolidated Financial Statements
($ in Thousands Except for Per Share Amounts or as noted)
(12) Debt
Demand Notes Payable and Capital Leases
- ---------------------------------------
September 30, June 30,
2004 2004
On May 27, 2004, the Company entered into an
agreement with PNC Bank for a line of credit not
to exceed $10,000. Available borrowings are based
on certain limitations as set forth in the
agreement, and are reduced by any outstanding
letters of credit. The loan is collaterized by
accounts receivable, consignor advances and
inventory. Borrowings under the line bear interest
at the "prime" rate; provided that the Company has
the right, subject to certain conditions, to
borrow at a rate equal to LIBOR plus 2.5% per
annum. The credit line expires on May 27, 2005.
The agreement contains certain financial
covenants; which include a limit on total debt and
capital expenditures; debt to earnings before
depreciation and amortization, interest, and
taxes; fixed charge coverage; and minimum
liquidity; as further defined in the debt
agreement. $ 4,500 6,000
On April 17, 2003, the Company entered into a
revolving credit agreement with Banco Santander
Central Hispano, S.A., providing for a credit
facility of up to $2,500. Borrowings under this
facility bear interest at a rate of prime plus
..25% per annum. The Company's obligations under
the agreement have been guaranteed by Afinsa. The
agreement contains other financial agreements and
covenants, including the requirement that
Auctentia maintain at least 43% of all of the
authorized issued and outstanding shares of voting
stock of the Company. As extended, the facility
expires on April 12, 2005. 2,500 2,500
-------- -------
Total Demand Notes Payable - Bank $ 7,000 $ 8,500
======== =======
The Company obtained a secured loan from a
privately held capital coin fund which expires
June 30, 2005. This loan is collateralized by
certain inventories and bears interest at a rate
of 10% per annum. $ 4,000 $ 4,000
Other 111 90
-------- -------
Total Notes Payable and Capital Leases 4,111 4,090
Less: current portion 4,111 4,090
-------- -------
Notes Payable and Capital Leases -
Long-term Portion $ - $ -
========= ========
17
Greg Manning Auctions, Inc.
Notes to Consolidated Financial Statements
($ in Thousands Except for Per Share Amounts or as noted)
(13) Other Major Customers (Excluding Afinsa)
The Company had no other major customers for the three months ended
September 30, 2004 and 2003, respectively. Major customers (other than Afinsa)
are those that accounted for more than 10% of sales.
(14) Income Taxes
Deferred tax attributes resulting from differences between financial
accounting amounts and tax basis of assets and liabilities at September 30, 2004
and June 30, 2004 are as follows:
September 30, June 30,
2004 2004
------------ -------
Current assets and liabilities
Allowance for doubtful accounts 195 160
Inventory valuation reserve 522 522
Inventory uniform capitalization 352 352
Net federal, state operating loss
carry-forwards 2,232 2,787
------ ------
Net current deferred tax asset 3,301 3,821
====== ======
Non-current assets and liabilities
Goodwill and intangible amortization
and impairment 1,561 1,611
Depreciation 71 100
Net state operating and capital loss
carry-forwards 1,670 1,746
Investments in equity-method investees 204 204
Investments in marketable securities 30 40
------ ------
3,536 3,701
Valuation allowance, provision for
income taxes (1,742) (1,742)
------ ------
Net non-current deferred tax asset 1,794 1,959
====== ======
The realization of the above deferred tax assets is dependent on
generating sufficient taxable income in the future to offset the deductibility
of temporary differences generating the deferred tax assets.
During the period ended September 30 2004, the Company continues to
believe that it is more likely than not that the results of future operations
will generate sufficient taxable income to realize certain deferred tax assets.
However, the Company still believes uncertainty exists regarding the
realizability of certain deferred tax assets, and accordingly established a
valuation allowance, based on management's estimates, against these specific
deferred tax assets.
18
Greg Manning Auctions, Inc.
Notes to Consolidated Financial Statements
($ in Thousands Except for Per Share Amounts or as noted)
During 2002, both the State of New Jersey and California passed tax
legislation, which, among other things, requires the suspension of the use of
state net operating loss carry-forwards "NOL's" for two years. As a result,
there was no utilization of these state NOL's in the provision for state income
taxes for the three months ended September 30, 2004. In order to compensate for
the suspension of the state net operating losses, the period of availability has
been extended by two years. During 2004, the State of New Jersey required that
the utilization of net operating losses be limited to 50% of net income for
fiscal year 2005 and thereafter.
The provision for (benefit from) income taxes for the three months ended
September 30, 2004 and 2003 consist of the following:
September 30, September 30,
2004 2003
------------ ------------
Current tax expense 3,248 406
Deferred tax expense (benefit) 685 -
Net Change in valuation allowance - -
----- ---
3,933 406
===== ===
The above is further comprised of the following:
Current tax expense
Federal 2,257 -
State 448 150
Foreign 543 256
----- ---
3,248 406
===== ===
Deferred tax expense - net of change in
valuation allowance
Federal 520 -
State 165 -
Foreign - -
----- ---
685 -
===== ===
The Company has remaining available federal net operating loss carry
forwards of approximately $4,200 expiring at various times, beginning fiscal
year ending 2019 through fiscal year ended 2022. The future utilization of these
net operating loss carry forwards may be significantly limited in under the
Internal Revenue Code as a result of ownership changes due to the Company's
stock and other equity offerings.
As a result of an increase in stock ownership of the Company by Afinsa (a
related party), as discussed in Note 1, the Company was deemed to have a change
of ownership for federal income tax purposes. As a result there was a limitation
on the amount of federal net operating loss carry forwards that could be used in
the current year to offset federal taxable income.
19
Greg Manning Auctions, Inc.
Notes to Consolidated Financial Statements
($ in Thousands Except for Per Share Amounts or as noted)
The Company has remaining available net operating loss carry forwards for
state tax purposes of approximately $13,000 expiring at various times beginning
in the fiscal years ending 2008 through 2012.
(15) Stock-Based Compensation
The Company accounts for stock option plans under the recognition and
measurement principles of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. No
stock-based employee compensation cost is reflected in net income (loss), as all
options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. In accordance with
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," the effect on net income (loss) and net income (loss) per share if
the Company had applied the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," to stock-based employee compensation
is as follows:
Three months ended
September 30,
-------------------
2004 2003
-------- --------
Net income - as reported $ 5,134 $ 2,458
Deduct:
Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects 368 1,300
--------- --------
Pro forma net income $ 4,766 $ 1,158
======== ========
Net income per share:
Basic earnings per share - as reported $ 0.19 $ 0.15
Basic earnings per share - proforma $ 0.17 $ 0.07
======== ========
Net income per share:
Diluted earnings per share - as reported $ 0.18 $ 0.14
Diluted earnings per share - proforma $ 0.17 $ 0.07
======== ========
(16) Geographic Information
Geographic net sales based on customer location were as follows:
Three Months Ended
September 30,
2004 2003
--------- ---------
United States $ 25,006 $ 22,415
Asia Pacific - 352
Europe 23,084 11,720
--------- ---------
$ 48,090 $ 34,487
========= =========
20
Greg Manning Auctions, Inc.
Notes to Consolidated Financial Statements
($ in Thousands Except for Per Share Amounts or as noted)
Net property, plant and equipment by geographic area was as follows:
Three Months Ended
September 30,
2004 2003
-------- --------
United States $ 839 $ 820
Europe 906 1,116
--------- ---------
$ 1,745 $ 1,936
========= =========
(17) Supplementary Cash Flow Information
Following is a summary of supplementary cash flow information:
Three months ended
September 30,
(in thousands)
2004 2003
------- -------
Interest paid $ 256 $ 209
Income taxes paid 980 150
Summary of significant non-cash transactions:
Common stock issued for inventory - 10,118
Common stock issued for Auctentia - 6,004
21
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including, without limitation, statements regarding the
Company's expectations, beliefs, intentions or future strategies that are
signified by the words "expects," "anticipates," "intends," "believes," or
similar language. All forward-looking statements included in this document are
based on information available to the Company on the date hereof, and the
Company assumes no obligation to update any such forward-looking statements.
Actual results could differ materially from those projected in the
forward-looking statements. In evaluating the Company's business, prospective
investors should carefully consider the information set forth below, and in the
Company's Form 10-K, and other filings with the Securities and Exchange
Commission in addition to the other information set forth herein. The Company
cautions investors that its business and financial performance are subject to
substantial risks and uncertainty.
Results of Operations (Amounts in thousands except as noted or per share
information)
General
The Company operates in one segment consisting of various types of
collectibles, including philatelics and numismatics.
For the Three months ended
-----------------------------------------------------------
September 30, Percentages
----------------------- ------------------------
2004 2003 2004 2003
------ ------ ------ ------
Aggregate Sales 65,242 41,296 100% 100%
====== ====== ====== ======
By Source:
A. Auction 17,153 8,764 26% 21%
B. Sales of Inventory 26,471 21,854 41% 53%
C. Related Party 21,618 10,678 33% 26%
------ ------ ------ ------
65,242 41,296 100% 100%
====== ====== ====== ======
By Market:
A.Philatelics 31,050 16,582 48% 40%
B. Numismatics 34,192 23,906 52% 58%
C. Sports Collectibles -- 307 -- 1%
D. Art -- 1 -- 0%
E. Other Collectibles -- 500 -- 1%
------ ------ ------ ------
65,242 41,296 100% 100%
====== ====== ====== ======
The Company's aggregate sales are generated by the sale of property at
auction, by private treaty and by sale of the Company's inventory, including
sales under the exclusive supply contracts between the Company and Afinsa (a
related party). Afinsa and its subsidiary Auctentia collectively own
approximately 69% of the Company's common stock. Aggregate sales consist of the
total proceeds realized from the sale of property and include the Company's
commissions when applicable. Property sold by the Company is either consigned by
the owner of the property, or is owned by the Company directly.
Total revenues included in the Consolidated Statements of Operations are
comprised of (1) sales of inventory owned by the Company to Afinsa (a related
party), under the exclusive supply contracts, (2) sales of inventory owned by
the Company, exclusive of sales to Afinsa, and (3) the portion of sale proceeds
from auction or private treaty that the Company is entitled to retain after
remitting the sellers' share, consisting primarily of commissions paid by
sellers and buyers. Generally, the Company earns a commission from the sellers
of 0% to 15% and a commission of 10% to 15% from the buyers.
22
Only revenues and not aggregate sales are included in the accompanying
Consolidated Statements of Operations since aggregate sales are not recognized
in accordance with accounting principles generally accepted in the United States
of America.
The Company's operating expenses consist of the cost of sales of the
Company's inventory and general and administrative expenses and marketing
expenses for the three months ended September 30, 2003 and 2004. General and
administrative expenses are incurred to pay employees and to provide support and
services to those employees, including the physical facilities and data
processing. Marketing expenses are incurred to promote the services of the
Company to sellers and buyers of collectibles through advertising and public
relations, producing and distributing its auction catalogs and conducting
auctions.
Sales of inventory to Afinsa (a related party) represented a significant
portion of the Company's aggregate sales, revenue and gross profit for the
quarter ended September 30, 2004.
Three months ended September 30, 2004
Compared with the three months ended September 30, 2003
Revenues
- -----------------------------------------------------------------------------------------------------------------
Three months ended September 30, 2004 Three months ended September 30, 2003
----------------------------------------------------------------------------------------
Revenues Cost of Gross Gross Revenues Cost of Gross Gross
Goods Sold Profit Profit % Goods Sold Profit Profit
----------------------------------------------------------------------------------------
Existing Operations 22,999 20,388 2,611 11% 22,767 19,560 3,207 14%
Expanded Operations 25,091 10,540 14,551 58% 11,720 7,465 4,255 36%
---------------------------------------------------------------------------------------
48,090 30,928 17,162 36% 34,487 27,025 7,462 22%
- -------------------------=======================================================================================
For purposes of the above table and the following discussion, "Existing
Operations" refers to those of the Company's businesses that were operational in
the year ended June 30, 2003, and "Expanded Operations" represents business that
were acquired or developed during the fiscal year ended June 30, 2004;
specifically, transactions under the exclusive supply contracts with Afinsa (a
related party), and the operations of the seven European and four U.S. companies
whose businesses were acquired during the most recent fiscal year. These
recently acquired businesses are: Corinphila Auktionen (65% interest); Heinrich
Kohler Berliner Briefmarken-Auktionen (66.67% interest); Heinrich Kohler
Auktionshaus; Heinrich Kohler Briefmarkenhandel; Heinrich Kohler Verwaltungs;
Auctentia Deutschland; Auctentia Subastas (European subsidiaries); Bowers and
Merena Galleries; Kingswood Coin Auctions; Superior Sports Auctions; and Nutmeg
Stamp Sales (U.S. subsidiaries).
Revenues:
The Company recorded an increase in total revenues of approximately
$13,603 (39%), to approximately $48,090 for the three months ended September 30,
2004 from approximately $34,487 for the three months ended September 30, 2003.
Revenues from Existing Operations were $22,999 for the three months ended
September 30, 2004, an increase of $232 (or 1%) from $22,767 for the three
months ended September 30, 2003.
23
Revenues attributable to Expanded Operations for the three months ended
September 30, 2004 were as follows: $1,466 from the seven new European
subsidiaries; $2,007 from the four new U.S. subsidiaries; and $21,618 under the
exclusive supply contracts with Afinsa (a related party). The revenue
attributable to transactions under the exclusive supply contracts with Afinsa
includes the 10% fee provided for under the contracts.
For the three months ended September 30, 2004, the total revenue of
approximately $48,090 comprised approximately $44,588 of revenue from sales of
owned inventory and approximately $3,502 of commissions resulting from sales of
consigned materials.
The variation in any year in the composition of total revenues (as between
revenues resulting from inventory sales and commissions resulting from
consignment sales) is largely a function of availability, market demand and
conditions.
Gross profit increased approximately $9,700 (130%), to approximately
$17,162 for the three months ended September 30, 2004 from approximately $7,462
for the three months ended June 30, 2003. The increased gross profit was the
result of an increase in revenue of $13,603, coupled with an increase in gross
profit percentage from 22% for the three months ended September 30, 2003 to 36%
for the three months ended September 30, 2004.
The largest contributing factor to the increase in gross profit and gross
profit percentage was $21,618 in direct sales to Afinsa (a related party) in the
three months ended September 30, 2004 under the exclusive supply contracts (part
of Expanded Operations). Revenue attributable to the operations of the seven
European and the four U.S. subsidiaries acquired by the Company during the year
ended June 30, 2004 (part of Expanded Operations) also contributed to the
increase in gross profit and gross profit percentage; this revenue consisted
almost entirely of commissions, with respect to which there is no corresponding
cost of goods sold.
The gross profit percentage for sales to Afinsa (a related party) and
otherwise will vary depending on market demand, market conditions and buying
opportunities relative to each type of product being sold, as well as on the
proportion of the revenue mix between sales of merchandise (where the gross
profit will be less than 100%) and commissions earned (where there is no cost of
goods sold and therefore where the gross profit percentage will be 100%.)
24
Operating Expenses:
- -------------------------------------------------------------------------------------------------------------------------------
Existing Expanded Total Total
Operations Operations Operations Operations
----------------------------------- -------------------------------- ---------- ----------
Three months ended Spetember Three months ended Spetember
----------------------------------- --------------------------------
2004 2003 Variance Var % 2004 2003 Variance Var % 2004 2003
------------------------------------------------------------------------------------------------
General & Administrative 1,304 1,593 (289) -18% 2,354 418 1,936 463% 3,658 2,011
Salaries 1,759 1,701 58 3% 1,557 186 1,371 739% 3,316 1,887
Marketing 252 335 (83) -25% 547 44 503 1133% 799 379
Depreciation & Amortization 88 113 (25) -22% 188 31 157 505% 276 144
------------------------------------------------------------------------------------------------
3,403 3,742 (339) -9% 4,646 679 3,967 584% 8,049 4,421
- -------------------------------=========================---------============================---------=========================
The Company's operating expenses increased approximately $3,628 (82%)
during the three months ended September 30, 2004 as compared to the three months
ended September 30, 2003. Operating expenses attributable to Existing Operations
declined $339 (9%), however, when adjusted for corporate overhead charged to the
expanded operations, $366, the year to year operating expenses were flat.
Operating expenses of $2,756 was attributable to the operations of the seven
European subsidiaries (part of Expanded Operations) and $1,890 to the four U.S.
subsidiaries (part of Expanded Operations). It should be noted that in the three
months ended September 30, 2003 there was only one month of operations for the
seven European subsidiaries, September, and there was no activity for the four
new U.S. subsidiaries since those acquisitions had not taken place as of
September 30, 2003.
With respect to Existing Operations, general and administrative expenses
decreased $289 (18%). The decrease when adjusted for corporate overhead charged
to Expanded Operations increased $47 or (3%). Auction expenses are included as
general and administrative expenses and decreased $110 from $457 for the three
months ended September 30, 2003 to $347 for the three months ended September 30,
2004 due to there being one less major auction in the current fiscal quarter.
Excluding auction expenses and corporate overhead charges to Expanded
Operations, general and administrative expenses increased $209 (18%) and was due
to the following: an increase in professional fees in the amount of $88 (largely
due to costs associated with compliance with the Sarbanes-Oxley Act of 2002 and
audit fees for the European acquisitions), increased insurance costs of $16,
repairs and maintenance of $43 to upgrade the Corporate offices and fees to
secure the new line of credit.
Salaries and wages for Existing Operations increased approximately $58
(3%) for the three months ended September 30, 2004. There was however, an
allocation of $378 of salaries to cost of goods sold to reflect salaries
directly related to the exclusive supplier agreement with Afinsa. When adjusting
for this allocation, actual salaries for the three months ended September 30,
2004 increased $436 (26%) when compared to September 30, 2003, which did not
have the salary allocation for the exclusive supplier agreement. Executive
bonuses (which are based on profitability) increased $538 from the $262 accrued
for in the three months ended September 30, 2003 to the aggregate amount of $800
for the three months ended September 30, 2004.
Marketing expenses for Existing Operations decreased approximately $83
(25%), to $252 for the three months ended September 30, 2004 from $335 for the
three months ended September 30, 2003, due there being one less major auction in
the three months ended September 30, 2004. The major components of marketing
expense are catalogs and advertising.
25
Depreciation and amortization for "existing operations" decreased for the
three months ended September 30, 2004 by approximately $25 (22%), as capitalized
costs for the development of the Company`s web site became fully depreciated
during the previous quarters.
Increased costs for the three months ended September 30, 2004 were not
entirely offset by revenue increases during the period as operating costs as a
percentage of operating revenue increased to 17% for the three months ended
September 30, 2004, from 13% for the three months ended September 30, 2003. As
compared to aggregate sales, the operating costs increased to 12% from 11% for
the three months ended September 30, 2004 and 2003, respectively.
Interest income and expense:
Interest expense (net of interest income) for the three months ended
September 30, 2004 decreased approximately $168 from the three months ended
September 30, 2003, from approximately $194 to approximately $26. The decrease
in net interest expense was largely due to interest income generated from
advances to consignors by Expanded Operation's companies. There was only one
month's activity for the seven European acquisitions and no activity for the
four new U.S. acquisitions for the three months ended September 30, 2003.
Interest expense increased as the loan balances outstanding at September 30,
2004 increased to approximately $11,912 from approximately $7,023 for the period
ended September 30, 2003.
Provision for Income Taxes:
The Company's effective tax rates for the years ended June 30, 2004 and
September 30, 2004 were approximately 14% and 43%, respectively. The rate is
based on a blended rate consisting of U.S. Federal, state and foreign statutory
income tax rates. Our effective tax rate could be adversely affected by several
factors, many of which are outside of our control. The increase in the provision
for income taxes is mainly due to the lower than normal prior year balance.
Based on the evaluation of relevant factors last year, a valuation allowance for
deferred tax assets was recorded because it was determined that it was more
likely than not that a portion or all of the deferred tax assets would not be
realized. The uncertainty with generating sufficient taxable income in the
future to offset the deductibility of the temporary difference. However, as the
situation improved by the fiscal year ended June 30, 2004, a valuation allowance
was determined to be no longer necessary. Our provision for income taxes
represents our estimate of the full year's tax rate based upon the expected
taxable income taxed at the applicable jurisdiction. Our effective tax rate is
directly affected by the relative proportions of revenue and income before taxes
in the various domestic and international jurisdictions in which we operate. We
are also subject to changing tax laws, regulations and interpretations in
multiple jurisdictions in which we operate. Our effective tax rate can also be
influenced by the tax effects of purchase accounting for acquisitions and
non-recurring charges, which may cause fluctuations between reporting periods.
Recent New Jersey tax legislation will provide for the utilization of a
portion of net operating losses for fiscal year 2005 and thereafter.
Net Income:
The Company's increase in gross profit of approximately $9,700 for the
three months ended September 30, 2004 was partially offset by an increase in
operating expenses of $3,628 resulting in a net gain of $6,072 in operating
income.
26
Liquidity and Capital Resources
At September 30, 2004, the Company's working capital position was
approximately $53,499, compared to approximately $48,404 as of June 30, 2004.
The net increase of approximately $5,095 in working capital was largely due to a
decrease in accounts payable of $5,231, a decrease of payables to third party
consignors of $3,513 and a decrease of $3,467 for advances payable - related
party. The major offset of working capital was an increase of $3,009 for
advances receivable and an increase of $2,408 for taxes payable.
The Company experienced a decrease in cash flow from investing activities
for the three months ended September 30, 2004 of approximately $360. This was
primarily attributable to the purchase of intangible assets of $350.
The Company experienced a decrease in cash flow from financing activities
for the three months ended September 30, 2004 of approximately $643. This
decrease was attributable to a net repayment of debt of $678 and offset by $35
from the exercise of options.
Contractual Obligations.
Our contractual obligations related to non-cancelable operating and capital
leases at September 30, 2004 were as follows:
- ---------------------------------------------------------------------------------------------
Payment due by period
-----------------------------------------------
Less than 1-3 3-5 More than
Total 1 year years years 5 years
-----------------------------------------------
Demand Notes 11,801 11,801
Long-Term Debt
Capital Lease and Other Debt Obligations 111 111
Operating Lease Obligations 1,926 882 759 285
----------------------------------------------
Total 13,838 12,794 759 285
- --------------------------------------------------------------------------------------------
Critical Accounting Policies
- ----------------------------
The critical accounting policies are described on pages 19 thru 21 of the
financial section of its 2004 annual report. In the circumstances of GMAI's,
management believes its "critical accounting policies" are those which encompass
the use of estimates (because of inherent subjectivity), revenue recognition,
allowance for doubtful accounts and sales returns, inventory valuation and
classification.
27
Risk Factors
From time to time, information provided by the Company, including but not
limited to statements in this report, or other statements made by or on behalf
of the Company, may contain "forward-looking" information within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Such statements involve a number of risks and
uncertainties. The Company's actual results could differ materially from those
discussed in the forward-looking statements. The cautionary statements set forth
below identify important factors that could cause actual results to differ
materially from those in any forward-looking statements made by or on behalf of
the Company:
o Although the Company's results of operations for the years ended
June 30, 2003 and 2004 reflect a significant improvement over the
results of prior periods, a significant portion of the gross profit
for those periods, as well as for the period ending September 30,
2004, was attributable to sales to Afinsa (a related party). A
decrease in the level of sales to Afinsa or the termination of the
supply agreements with Afinsa could have a material adverse effect
on the Company. There is no minimum level of sales provided for
under the supply agreements with Afinsa, and the agreements may be
terminated upon six month's notice by either party.
o The Company's debt agreements expire at various times during the
next twelve months. The Company has previously been able to
refinance or renegotiate these agreements in the past. There can be
no assurance that the Company will be able to accomplish this in the
future.
o At times there may be a limited supply of collectibles available for
sale by the Company. Such supply historically has varied from time
to time. While the Company has not generally experienced a lack of
collectibles that has prevented it from conducting appropriately
sized auctions on an acceptable schedule, no assurance can be given
that the Company will be able to obtain consignments of suitable
quantities of collectibles in order to conduct auctions of the size,
and at the times, the Company may desire in the future. The
inability to do so would have a material adverse effect on the
Company.
Furthermore, the popularity of collectibles could decline. This
could affect the market value of inventory that GMAI currently
holds, including the inventory acquired under the inventory purchase
agreement, or inventory it or its subsidiaries may acquire in the
future.
o The business of selling stamps, coins, and other collectibles at
auction and in retail sales is highly competitive. The Company
competes with a number of auction houses and collectibles companies
throughout the North America, Europe and the rest of the world.
While the Company believes that there is no dominant company in the
stamp auction or collectibles business in which it operates, there
can be no assurances that other companies with greater financial and
other resources and name recognition will not enter the market.
Among the primary competitors in the philatelic auction business in
North America and Europe are Matthew Bennett, Inc., Charles Shreve
Galleries, Inc., Robert A. Siegel, Harmers of London, Thomas Hoiland
Auktioner A/S, Postiljonen AB, David Feldman, S.A. H.B.A., Edgar
Mohrmann & Co., Bolaffi, Rapp Auktionshaus. With
28
respect to sports trading card and sports memorabilia auction
business, the primary competitors are Lelands, Mastro Auctions and
Sotheby's. With respect to coin operations, the main competitors are
Heritage and Stacks.
With respect to internet operations, the market for internet
products and services is highly competitive and there are no
substantial barriers to entry. The Company expects that competition
will continue to intensify. Many of the Company's internet
competitors have more experience than the Company has maintaining
internet operations and have greater brand recognition.
o Auctentia and Afinsa currently beneficially own approximately 69% of
the issued and outstanding shares of the Company's common stock.
This represents a substantial dilution in the current voting power
of non-Auctentia related stockholders of the Company. As a result,
Auctentia and its affiliates will be able to elect the entire board
of directors of GMAI. Auctentia and its affiliates also may be able
to approve other actions as a stockholder without obtaining the
votes of other stockholders of the Company or impede transactions
that may be desirable for other stockholders. In addition, this
concentration of ownership, which is not subject to any voting
restrictions, could limit the price that investors might be willing
to pay for the Company's common stock.
o The Company and Auctentia have signed a registration rights
agreement pursuant to which Auctentia may request that 18,562,719
shares of the Company's common stock beneficially owned by it
(including 126,833 warrants to purchase GMAI common stock) be
registered by the Company at the Company's expense. Auctentia has
agreed that the 3,729,226 shares of the Company's stock it received
pursuant to the share purchase agreement will not be sold or
otherwise transferred prior to March 2005. All other registerable
Company common stock owned by Auctentia will be freely tradable
immediately after any registration.
o The transactions contemplated by the share purchase agreement have
presented challenges to management, including the integration of the
operations, product lines, technologies and personnel of the Company
and the European subsidiaries, and special risks, including possible
unanticipated liabilities, unanticipated costs and diversion of
management attention. In addition, there can be no assurance that
the combined businesses will achieve increased sales levels,
profitability, efficiencies or synergies or that the transactions
contemplated by the share purchase agreement will result in
increased earnings for the combined companies in any future period.
The difficulties of combining the operations of GMAI and the
European subsidiaries are complicated by the necessity of
coordinating geographically separated organizations.
o The Company's future success depends to a significant extent on its
retaining services of senior management and other key personnel,
particularly GMAI's President and Chief Executive Officer, Greg
Manning, and the President of Spectrum Numismatics International,
Inc., Greg Roberts. GMAI's business would be adversely affected if
for any reason it failed to retain the services of Messrs. Manning
or Roberts and failed to engage suitable replacements.
o GMAI's operations may be adversely affected by governmental
regulation and taxation of the Internet, which is subject to change.
A number of legislative and regulatory
29
proposals under consideration by federal, state, local and foreign
governmental organizations may result in enactment of laws
concerning various aspects of the Internet, including online
content, user privacy, access charges, liability for third-party
activities and jurisdictional issues. These laws could harm the
Company's business by increasing its cost of doing business or
discouraging use of the Internet. The Internet Freedom Tax Act
expired in November 2003. Federal legislation which would extend the
Act is currently pending.
o The Company's business will be adversely affected if use of the
Internet by consumers, particularly purchasers of collectibles, does
not continue to grow. A number of factors may inhibit consumers from
using the Internet. These include inadequate network infrastructure,
security concerns, inconsistent quality of service and a lack of
cost-effective high-speed service. Even if Internet use grows, the
Internet's infrastructure may not be able to support the demands
placed on it by this growth and its performance and reliability may
decline. In addition, many web sites have experienced service
interruptions as a result of outages and other delays occurring
throughout the Internet infrastructure. If these outages or delays
occur frequently in the future, use of the Internet, as well as use
of our web sites, could grow more slowly or decline.
o Some local telephone carriers claim that the increasing popularity
of the Internet has burdened the existing telecommunications
infrastructure and that many areas with high Internet use are
experiencing interruptions in telephone service. These carriers have
petitioned the U.S. Federal Communications Commission to impose
access fees on Internet service providers. If these access fees are
imposed, the cost of communicating on the Internet could increase,
and this could decrease the demand for our services and increase our
cost of doing business.
o The Company holds rights to various web domain names. Governmental
agencies typically regulate domain names. These regulations are
subject to change. GMAI may not be able to acquire or maintain
appropriate domain names in all countries in which it or its
affiliates do business. Furthermore, regulations governing domain
names may not protect the Company's trademarks and similar
proprietary rights. The Company may be unable to prevent third
parties from acquiring domain names that are similar to, infringe
upon or diminish the value of its trademarks and other proprietary
rights.
o Due to difficulty anticipating levels or values of consignments at
any given time, the stamp auction business is susceptible to
significant fluctuations in operating results and revenue
shortfalls, which could adversely affect the Company's business. In
addition, the Company's operating results in the coin business are
dependent upon product availability over the short and long term,
which cannot be predicted with any certainty. Future fluctuations in
operating results or revenue shortfalls of the Company could
adversely affect the success of the Company. If revenue fails to
offset operating expenses in the future, the Company may be required
to fund future operations through the sale of additional common
stock, which could cause the market price of its stock to decline,
as well as have a dilutive effect on the value of its common stock
currently outstanding.
o The market price of the Company's common stock has fluctuated and
may continue to fluctuate significantly due to a number of factors,
some of which may be beyond the
30
Company's control, including: sales of the Company's common stock by
stockholders; actual or anticipated fluctuations in the Company's
operating results; the operating and stock price performance of
other comparable companies; developments and publicity regarding the
Company's industry; and general economic conditions.
In addition, the stock market in general has experienced volatility
that has often been unrelated to the operating performance of
individual companies. These broad market fluctuations may adversely
affect the trading price of the Company's common stock, regardless
of the Company's actual performance, and could enhance the effect of
any fluctuations that do relate to its operating results.
o The Company may be adversely affected by the costs and other effects
associated with (i) legal and administrative cases and proceedings;
(ii) settlements, investigations, claims and changes in those items;
and (iii) adoption of new, or changes in, accounting policies and
practices and the application of such policies and practices.
o The Company's future results of operations could be adversely
affected by changes in accounting standards promulgated by the
Financial Accounting Standards Board, the Securities and Exchange
Commission, and the American Institute of Certified Public
Accountant
o Our effective tax rate could be adversely affected by several
factors, many of which are outside of our control. Our effective tax
rate is directly affected by the relative proportions of revenue and
income before taxes in the various domestic and international
jurisdictions in which we operate. We are also subject to changing
tax laws, regulations and interpretations in multiple jurisdictions
in which we operate. Our effective tax rate can also be influenced
by the tax effects of purchase accounting for acquisitions and
non-recurring charges, which may cause fluctuations between
reporting periods.
This list should not be considered an exhaustive statement of all potential
risks and uncertainties.
31
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may impact the financial
position, results of operations or cash flows of the Company due to adverse
changes in financial market prices, including interest rate risk, foreign
currency exchange rate risk, investment risk, commodity price risk and other
relevant market rate or price risks.
Our cash flows and earnings are subject to fluctuations resulting from
changes in foreign currency exchange rates (since we now have significant
subsidiaries in Spain, Switzerland and Germany, where the currency used is the
Euro or, in Switzerland, the Swiss Franc) and interest rates (since our line of
credit with Banco Santander bears interest based on the "prime" rate). We manage
our exposure to these market risks through internal control procedures and, when
deemed appropriate, may do so through the use of derivative financial
instruments, currency exchange forward contracts, currency options, or other
derivative instruments, provided such instruments may be obtained at suitable
prices. However, to date we have not done so. We do not allow speculation in
derivative instruments for profit or execution of derivative instrument
contracts for which there are no underlying exposures. We do not intend to use
financial instruments for trading purposes. We monitor our underlying market
risk exposures on an ongoing basis and believe that we can modify or adapt our
hedging strategies as needed.
The Company on April 17, 2003 entered into a revolving credit agreement
with Banco Santander Central Hispano, S.A. with a credit facility of up to
$2,500. Borrowings under this facility bear interest at a rate of prime plus
..25%. The Company currently has no activities that would expose it to material
interest rate risks.
The Company maintains investments in equity instruments of public and
privately held companies for business and strategic purposes. These investments
are included in marketable securities and other long-term assets and are
accounted for under the cost method when ownership is less than 20% and the
Company does not have the ability to exercise significant influence over
operations. For these investments, the Company's policy is to regularly review
the assumptions underlying the operating performance and cash flow forecasts in
assessing the carrying values. The Company identifies and records impairment
losses on long-lived assets when events and circumstances indicate that such
assets might be impaired.
The Company may, at times, be exposed to commodity price risk on certain
inventory products. The Company historically and currently has not experienced
any significant commodity price risks.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's Exchange
Act reports 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 the Company's management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. Within 90 days prior to the date of
this report, the Company carried out an evaluation, under the supervision and
with the participation of the Company's management, including the Company's
Chief Executive Officer along with the Company's Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures pursuant to Exchange Act Rule 13a-14.
32
Based upon the foregoing, the Company's Chief Executive Officer along with
the Company's Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective. There have been no significant changes in
the Company's internal controls or in other factors that could significantly
affect internal controls subsequent to the date the Company completed its
evaluation.
33
GREG MANNING AUCTIONS, INC.
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
The Company has not made any repurchases of its equity securities during
the quarter ended September 30, 2004; however, its 69% stockholder, Afinsa
Bienes Tangibles, S.A. purchased stock of the Company during the period, as
shown in the table below.
- -------------------------------------------------------------------------------------------------------
(d) Maximum Number
(a) Total Number (or Approximate Dollar
(a) Total Number (b) Average of Shares (or Units) Value or Shares (or
Number of Price Paid Purchased as Part Units) that May Be
Shares (or Units per Share of Publicly Announced Purchased Under the
Period Purchased) 1 (or Unit) Plans or Programs Plans or Programs
- -------------------------------------------------------------------------------------------------------
7/1/2004
7/31/2004 None None
- -------------------------------------------------------------------------------------------------------
8/1/2004
8/31/2004 None None
- -------------------------------------------------------------------------------------------------------
9/1/2004
9/30/2004 50,000 11.6272 None None
- -------------------------------------------------------------------------------------------------------
Total 50,000 11.6272
- -------------------------------------------------------------------------------------------------------
1. Afinsa purchased such shares in open-market transactions, for investment
purposes.
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K
34
(a) Exhibits
31.1 Exhibit Rule 13a-14(a)/15d-14(a) Certification of Chief
Executive Officer*
31.2 Exhibit Rule 13a-14(a)/15d-14(a) Certification of Chief
Financial Officer*
32.1 Section 1350 Certification of Chief Executive Officer *
32.2 Section 1350 Certification of Chief Financial Officer *
(b) Reports on Form 8-K
(1) Report on Form 8-K filed on September 13, 2004, relating
to a press release containing material non public
information and non-GAAP financial information, issued
on September 9, 2004.
* Filed herewith
35
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized
GREG MANNING AUCTIONS, INC.
Dated: November 4, 2004
/s/ Greg Manning
-------------------------------------
Greg Manning
Chairman and Chief Executive Officer
/s/ Larry Crawford
-------------------------------------
Larry Crawford
Chief Financial Officer
36