UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the fiscal year ended June 30, 2006
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OR
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q
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934 [NO FEE REQUIRED]
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For
the transition period from _______ to _____
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Commission
file number 0-27887
COLLECTORS
UNIVERSE, INC.
(Exact
name of Registrant as specified in its charter)
Delaware
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33-0846191
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(State
or other jurisdiction of
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(I.R.S.
Employer Identification No.)
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Incorporation
or organization)
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1921
E. Alton Avenue, Santa Ana, California
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92705
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(Address
of principal executive offices)
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(Zip
Code)
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(949)
567-1234
(Registrant's
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act: Common Stock, par value $.001
per share
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate,
by check mark, whether the Registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports); and (2) has been subject to such filing requirements
for
the past 90 days. YES [X] NO [ ]
Indicate,
by check mark, if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. x
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
As
of
December 31, 2005, the aggregate market value of the Common Stock held by
non-affiliates was approximately $121,664,000, based on the per share closing
price of $16.03 of Registrant’s Common Stock as of such date as reported by the
Nasdaq Global Market.
As
of
August 1, 2006, a total of 8,350,000 shares of Registrant's Common Stock were
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Except
as
otherwise stated therein, Items 10, 11, 12, 13 and 14 in Part III of the Form
10-K are incorporated by reference from Registrant's Definitive Proxy Statement,
which is expected to be filed with the Securities and Exchange Commission on
or
before October 28, 2006, for its Annual Meeting of Stockholders scheduled to
be
held on December 5, 2006.
COLLECTORS
UNIVERSE, INC.
FORM
10-K
FOR
THE FISCAL YEAR ENDED JUNE 30, 2006
TABLE
OF CONTENTS
PART
I
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Page
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1
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Item
1.
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1
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Item
1A
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27
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Item
2.
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34
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Item
3.
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34
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Item
4.
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34
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PART
II
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Item
5.
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36
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Item
6.
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37
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Item
7.
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40
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Item
7A.
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57
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Item
8.
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58
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59
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60
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61
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62
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63
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64
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66
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Item
9.
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93
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Item
9A
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93
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Item
9B
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96
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PART
III
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Item
10.
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96
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Item
11.
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96
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Item
12.
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96
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Item
13.
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96
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Item
14.
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96
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PART
IV
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Item
15.
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97
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S-1
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E-1
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Statements
contained in this Annual Report that are not historical facts or that discuss
our expectations, beliefs or views regarding our future operations or future
financial performance, or financial or other trends in our business, constitute
“forward-looking statements” as defined in the Private Securities Reform Act of
1995. Forward-looking statements can be identified by the fact that they do
not
relate strictly to historical or current facts. Often, such statements 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”. Forward looking statements are
estimates or predictions about the future that are based on current information
and are subject to a number of risks and uncertainties that could cause our
financial condition or operating results in the future to differ significantly
from those expected at the current time, as described in the forward-looking
statements that are contained in this Annual Report. Those risks and
uncertainties are described in Item 1A of Part I of this Annual Report as “Risk
Factors,” and in Item 7 of Part II under the caption “Management’s Discussion
and Analysis of Financial Condition and Results of Operations.” Accordingly,
readers of this Annual Report are urged to read the cautionary statements
contained in those items of this Annual Report.
Due
to
these uncertainties and risks, readers are cautioned not to place undue reliance
on such forward-looking statements contained in this Annual Report, which speak
only as of the date of this Annual Report. We undertake no obligation to update
or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
PART
I
Overview
We
are a
leading provider of value-added authentication, grading and information services
to dealers and collectors of high-value coins, sportscards, autographs, stamps
and vintage U.S. currency notes (which we will sometimes refer to generally,
as
“collectibles”) and
to
sellers and purchasers of diamonds, colored gemstones and other high value
assets.
Collectibles.
The
collectibles that we authenticate and grade have market values generally ranging
from $200 to over $1 million, due principally to their rarity, age or
association with famous individuals or historical events.
The
authenticity and the state of preservation, or quality, of these collectibles
are also important determinants of their value in the collectibles markets.
For
that reason, sellers, purchasers and collectors submit their high-value
collectibles to us for:
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Certifications
by our independent experts of their authenticity; that is, confirmation
that the collectibles are real and are what they have been represented
to
be; and
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Evaluations
of their physical condition and appearance and the assignment of
a grade
by our independent experts on the basis of uniform quality
standards.
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Once
we
have authenticated and assigned a grade to a collectible, we encapsulate it
in a
tamper-evident, clear plastic holder, or issue a certificate of authenticity,
that (i) identifies the specific collectible, (ii) sets forth the
quality grade we have assigned to it and (iii) bears one of our brand names
and logos: “PCGS” for coins, “PSA” for sportscards, “PSA/DNA” for autographs and
memorabilia, “PSE” for stamps and “PCGS Currency” for U.S. vintage currency
notes1 .
Additionally, we warrant our certification of authenticity and the grade that
we
assign to the coins and sportscards that we authenticate and grade and have
recently begun offering warranties with respect to our determinations of
authenticity and our assignment of quality grades to stamps.
Diamonds
and Colored Gemstones.
In
November 2005, we began offering diamond grading services to wholesale and
retail dealers and to purchasers of diamonds as a result of our acquisition
of
Gem Certification & Appraisal Lab (GCAL), an international forensic diamond
certification and grading laboratory. In August 2006, we extended our diamond
grading business to include the grading of high value colored gemstones,
including emeralds, rubies and sapphires, by means of our acquisition of
American Gemological Laboratories (AGL), an international forensic colored
gemstone certification and grading laboratory.
The
market values of the diamonds and colored gemstones that we grade generally
range from approximately $500 to over $1 million, depending, in the case of
diamonds, primarily on their weight, color and clarity and, in the case of
colored gemstones, the presence of and type of enhancements (almost all colored
gemstones have some treatment to enhance color or clarity or both) and sometimes
on their country of origin. For that reason, sellers and some purchasers submit
their diamonds and colored gemstones to us for:
• Confirmations,
by our independent experts that their diamonds or colored gemstones are, in
fact, natural (as opposed to synthetically manufactured) diamonds
and
colored gemstones; and
• Evaluations
of their physical condition and appearance and the assignment of a grade by
our
independent experts on the basis of uniform quality standards that, in
the
case of diamonds, relate to their color and clarity and, in the case of
colored gemstones relate to color, tone, clarity, enhancements and in some
cases, their country of origin.
Upon
completion of the grading process for diamonds, a GCAL certificate is issued
that sets forth the weight, cut, color and clarity grades assigned to the
diamond by GCAL along with other measured information such as the dimensions
of
the diamond. GCAL also includes a direct light performance analysis of each
diamond utilizing a proprietary process that measures in a digital image the
number of pixels of light which pass through a diamond, ranking the light
performance higher for more light and lower for less light. A similar process
measures the symmetry of the cut of the diamond, another feature that can have
a
direct impact on the brilliance and reflectivity of a diamond. A graphic
representation of the brilliance and symmetry is included on the certificate.
Additionally, using a patented technology for non-invasive diamond
identification that we acquired in December 2005, we digitally capture and
record the unique refractive light pattern of the diamond (which we refer to
as
a “Gemprint”), which we store in our database, cross-indexed to the certificate
number issued with the diamond2 .
This
“Gemprint” process enables us to match GCAL graded diamonds, on a one-to-one
basis, with their GCAL certificates, thereby providing an additional measure
of
protection against misrepresentations of diamond quality that can occur by,
for
example, switching a diamond grading certificate issued for a higher quality
diamond to a lower quality diamond. GCAL warrants the color and clarity grades
assigned to the diamonds within certain tolerances.
Upon
completion of the grading process for colored gemstones, an AGL certificate
is
issued that sets forth the weight, cut, color, tone and clarity grade assigned
to the gemstone along with the description of the enhancements to the gemstone,
if any, and in some cases, the country of origin. A high resolution color image
of the colored gemstone is included on the certificate for identification
purposes. We are currently testing a variety of colored gemstones with the
Gemprint process to determine which colored gemstones can be identified using
this non-invasive identification process and, if those test are successful,
we
plan on including Gemprint in the certification process with the associated
database as may be applicable to a particular colored gemstone.
1 Collectors
Universe, PCGS, Professional Sports Authenticator and PSA/DNA, Set Registry,
CU3000 First Strike,
and each of the logos associated with those names,
are
registered service or trade marks of the Company.
2 GCAL,
Gemprint and AGL and each of the logos associated with their respective names,
are registered service
marks of the Company.
We
believe that our authentication and grading services increase the liquidity
and
marketability and, therefore, add to the value, of the collectibles, diamonds
and colored gemstones that we authenticate and grade. Our services provide
sellers, purchasers and collectors with (i) the confidence of knowing that
the collectibles, diamonds or colored gemstones they are buying or selling
are
authentic or natural, as the case may be; (ii) information, in the form of
objective and uniform measures of quality, that enable sellers, purchasers
and
collectors to assess the value of those collectibles, diamonds or colored
gemstones; and (iii) information, based on analysis of the colored gemstone
and
technological comparisons to known origin specimens, relating to the country
of
origin of a colored gemstone. Armed with this information, a prospective buyer
who might otherwise be reluctant to purchase a high-priced collectible, diamond
or colored gemstone, is more confident about, and more willing to make the
purchase, particularly “sight-unseen,” on Internet auction sites such as those
operated by eBay and Blue Nile. We also believe that collectibles dealers who
sell collectibles that have been authenticated and graded by us are more readily
able to sell, and are more likely to obtain higher prices for those
collectibles, than if the collectibles had not been authenticated and graded
by
us.
We
originated the standards and methodologies we use for authenticating and grading
coins, sportscards, autographs and stamps. Those standards and methodologies
have become generally accepted in the collectible coin, sportscard and autograph
markets. Since we are the only company to have launched an independent third
party stamp grading service, and the concept of stamp grading is relatively
novel, our stamp grading standards have not yet become generally accepted;
however, we believe that these standards have been gaining wider acceptance
in
that market. The standards and methodologies we use in grading diamonds are
generally accepted in the diamond market and were developed by the Gemological
Institute of America, a non-profit educational corporation. AGL has developed
certain proprietary standards for the colored gemstone market relating to color,
tone and clarity of colored gemstones and descriptive terms used in the
disclosure of colored gemstone enhancements.
We
also
have developed some of the leading brands in the collectibles, diamonds and
colored gemstones markets in which we conduct our business:
• “PCGS”
(Professional Coin Grading Service), which is the brand name for our independent
coin authentication and grading service;
• “PSA”
(Professional Sports Authenticator), which is the brand name for our independent
sports and trading cards authentication and grading service;
• “PSA/DNA”
(PSA/DNA Authentication Services), which is the brand name for our independent
authentication and grading service for vintage autographs and memorabilia;
and
• “PSE”
(Professional Stamp Experts), which is the brand name for our independent stamp
authentication and grading service;
• “PCGS
Currency” the brand name for our recently inaugurated currency authentication
and grading service;
• “GCAL”
(Gem Certification & Assurance Lab), which is the brand name for our
independent diamond authentication and grading service; and
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“AGL”
(American Gemological Laboratories), which is the brand name of our
independent third party colored gemstone grading
business.
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PCGS
and
PSA are among the leading independent authentication and grading services in
the
collectible coin and sportscard markets in the United States. PSA/DNA and PSE
also are among the leading independent authentication services and, to our
knowledge, provide the only independent grading services, in their respective
markets. Currency authentication and grading are new to the currency market
and
PCGS Currency is one of the leading independent authentication and grading
services in the currency market. GCAL is among the top quality independent
authentication and grading services in the diamond market and is, to the best
of
our knowledge, the only service that offers a non-invasive and unchangeable
diamond identification method that makes it possible to detect the switching
or
alteration of diamond grading certificates. AGL is one of the world leaders
in
colored gemstone authentication, grading, enhancement disclosure and for the
most valuable colored gemstones, identification of the country of
origin.
We
began
offering our PCGS coin authentication and grading services in 1986 and, from
inception through fiscal year ended June 30, 2006, we had authenticated and
graded more than 12 million coins. In 1991, we launched our PSA sportscard
authentication and grading service and, through June 30, 2006, had authenticated
and graded over 9 million sportscards. In 1999, we launched our PSA/DNA vintage
autograph authentication business and in June 2004 we extended that business
by
introducing vintage autograph grading services to dealers and collectors of
autographed sports memorabilia. We started our PSE stamp authentication and
grading service in 2000. We launched PCGS Currency as an extension of the PCGS
brand in March 2005. In the second quarter of fiscal 2006, we acquired GCAL
and
the Gemprint technology. We acquired AGL in the first quarter of fiscal
2007.
The
following table provides information regarding the respective numbers of coins,
sportscards, autographs and stamps that we authenticated or graded from 2004
to
2006, the number of currency notes that we graded since the inception of our
currency authentication and grading service in the third quarter of fiscal
2005
and the number of diamonds we authenticated and graded since the acquisition
of
the diamond authentication and grading service in the second quarter of fiscal
2006.
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Units
Processed
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2006
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2005
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2004
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Coins
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1,789,000
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55
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%
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1,670,000
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58
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%
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1,241,000
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53
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%
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Sportscards
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1,199,000
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37
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%
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1,084,000
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38
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%
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998,000
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43
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%
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Autographs
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181,000
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6
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%
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77,000
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3
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%
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68,000
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3
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%
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Stamps
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38,000
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1
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%
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26,000
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1
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%
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16,000
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1
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%
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Currency
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29,000
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1
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%
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3,000
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-
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-
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-
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Diamonds
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5,000
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-
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-
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-
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-
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-
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Total
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3,241,000
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100
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%
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2,860,000
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100
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%
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2,323,000
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100
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%
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Declared
Values (000)
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2006
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2005
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2004
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Coins
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$
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1,613,000
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90
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%
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$
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1,191,000
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91
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%
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$
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993,000
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90
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%
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Sportscards
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75,000
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4
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%
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66,000
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5
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%
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67,000
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6
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%
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Autographs
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15,000
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1
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%
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26,000
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2
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%
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31,000
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3
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%
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Stamps
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21,000
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|
1
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%
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17,000
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|
1
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%
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10,000
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1
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%
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Currency
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43,000
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2
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%
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8,000
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1
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%
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-
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-
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Diamonds
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27,000
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2
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%
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-
|
|
|
-
|
|
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-
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|
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-
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Total
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$
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1,794,000
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|
100
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%
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$
|
1,308,000
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|
|
100
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%
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$
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1,101,000
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|
100
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%
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We
generate revenues principally from our authentication and grading service fees.
For collectibles, those fees. range from $4 to over $200 per item authenticated
and graded, based primarily on the type of item authenticated or graded and
the
turn-around times selected by our customers, which range from 1 to approximately
60 days. In fiscal 2006, our authentication and grading fees averaged $10.25.
As
a general rule, collectibles dealers and, to a lesser extent, individual
collectors, request faster turn-around times and, therefore, generally pay
higher fees for more valuable, older or “vintage” collectibles, than they do for
modern collectibles. Diamond authentication and grading fees, generally range
from $60 to over $300 based on the weight of the diamond and are fixed with
specific delivery times; although fees sometimes vary in the case of contracts
that provide for volume submissions. Authentication and grading fees for AGL
range from $150 to over $1,000 based on the weight of the colored gemstone
and
if the country of origin is requested.
We also generate revenues, to a lesser extent, from sales of (i) advertising
on
our websites; (ii) our printed publications and price guides and advertising
placed in such publications; (iii) our rarity or “population” reports that
contain data regarding the total number of coins and sportscards we have graded
since our inception, categorized by item type and grade determination; and
(iv)
monthly subscription fees associated with our Internet-based, dealer to dealer
exchange “CCE” (Certified Coin Exchange) for certified coins. We believe that
our printed publications, price guides and reports make collectors better
informed consumers and make collecting more interesting and exciting for them
while our dealer to dealer exchange adds liquidity to certified
coins.
In
July
2006, we acquired Expos Unlimited LLC (“Expos”), a tradeshow management company
that operates two of the larger and better known coin, stamp and collectibles
shows in Long Beach and Santa Clara, California, respectively. This acquisition
assures us of the continued availability of these two show venues for our onsite
authentication and grading services, provides us a platform for inaugurating
and
conducting collectibles shows in our other markets and adds management personnel
who are experienced in managing and conducting collectibles trade
shows.
Industry
Background
The
primary determinants of the prices of, and the willingness of sellers,
purchasers and collectors to purchase, high-value or high-priced collectibles,
diamonds, colored gemstones or other high-value assets are their authenticity
and quality. The authenticity of a collectible relates not only to the
genuineness of the collectible, but also to the absence of any alterations
or
repairs that may have been made to hide damage or to restore the item. The
authenticity of a diamond or colored gemstone relates to its formation in a
natural method and mined from the earth as opposed to laboratory grown or
synthetically produced, and in the case of colored gemstones, the country of
origin. The quality of a collectible relates to its state of preservation
relative to its original state of manufacture or creation. The quality of a
diamond is largely a function of its color and clarity. The quality of a
gemstone relates to color,
tone, clarity, enhancements and in some cases, the country of origin. With
regard to value, confirmation of authenticity generally is required before
a
buyer is willing to proceed with a purchase of a high-priced collectible,
diamond or colored gemstone. Quality directly affects value and price, usually
on an exponential basis, with higher quality collectibles, diamonds and colored
gemstones, generally attracting dramatically higher prices than those of lower
quality. Even a relatively modest difference in quality can translate into
a
significant difference in perceived value and, therefore, in price. For example,
a 1952 Mickey Mantle baseball card that received a PSA grade from us of 10
on
our PSA grading scale of 1-to-10 was sold in 2001 for $275,000. By comparison,
a
similar 1952 Mickey Mantle baseball card that received a PSA grade of 8 was
sold
in 2006 for $72,057. Although for diamonds and colored gemstones, the weight
of
the stone (as measured by mechanical devices) has a significant impact on value,
quality ratings also have a material impact on value. A round brilliant cut
two
carat natural diamond with a GCAL grade D color (which is the most desirable
blue-white color on the scale from D to the yellow tint of a P color) and a
clarity grade of flawless or “FL” (which indicates that the diamond has no
imperfections or inclusions) has a market value of approximately $68,000 -
$78,000. By comparison a similar cut two carat diamond with a GCAL grade I
color
and a clarity grade of SI2 (which is in the midpoint range of clarity) has
a
market value of approximately $11,000 - $12,000. In the same manner, a
rectangular cut two carat emerald with AGL color grade 3, tone of 70 (a very
attractive and intense green) and a clarity grade of “LI” (or lightly
included) has a market value of approximately $18,000 - $21,000. By comparison,
a similar cut emerald with AGL color grade 6, tone of 50 (an average color
and
intensity of green) and a clarity grade of “MI2” (moderately included) has
a market value of approximately $2,600 - $3,800. With respect to country of
origin, the same oval cut two carat Blue Sapphire AGL color grade 3, tone of
70
(rich and deep blue) with a clarity grade of “LI” has a market value of
approximately $2,800 - $3,400 if the country of origin is Burma, but has a
market value of approximately $20,000 - $22,000 if the country of origin is
Kashmir.
Until
the
advent of independent third party authentication and grading, most prospective
buyers, including experienced collectibles, diamond and colored gemstone dealers
and retailers, insisted on physically examining high-priced collectibles,
diamonds and colored gemstones before consummating transactions. However, unlike
professionals in the trade, most purchasers and collectors lacked the experience
and knowledge needed to determine, with confidence, the authenticity or the
quality, and hence the value, of high-priced collectibles, diamonds and colored
gemstones, even when they had the opportunity to examine them physically. As
a
result, purchasers and collectors had to rely on representations made by sellers
regarding authenticity and quality. For these reasons, “buyer beware”
characterized the high-value collectibles, diamond and colored gemstone markets,
and “sight-unseen” markets for rare coins, diamonds, colored gemstones and other
high-value collectibles were practically non-existent.
High-value
collectibles have been traditionally marketed at retail by dealers through
direct mail, catalogues, price lists and advertisements in trade publications,
and sold and purchased them at collectibles shows, auction houses and local
dealer shops. Diamonds and colored gemstones have been marketed at retail
through tens of thousands of retail jewelry stores or in departments of large
general retail stores. These markets were highly inefficient
because:
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they
were fragmented and localized, which limited both the variety of
available
collectibles, diamonds and colored gemstones and the number of potential
buyers;
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transaction
costs were often relatively high due to the number of intermediaries
involved;
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buyers
usually lacked the information needed to determine the authenticity
and
quality and, hence the value, of the collectibles, diamonds and colored
gemstones being sold; and
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buyers
and sellers were vulnerable to fraudulent practices because they
had to
rely on the dealers or other sellers in the often long distribution
channel for opinions or representations as to authenticity and
quality.
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Coin
Market.
In an
effort to overcome some of these inefficiencies, approximately 30 years ago,
professional coin dealers began using a numerical grading scale for grading
coins. That scale ranged from 1 to 70, with higher numbers denoting a higher
quality. Previously, professional dealers used descriptive terms, such as
“Fair,” “Fine” and “Uncirculated,” to characterize the quality of the coins they
sold, a practice that continued after the development of the numeric grading
system. However, whether using a numeric or a descriptive system, grading
standards varied significantly from dealer to dealer, depending on a dealer’s
subjective criteria of quality. Moreover, dealers were hardly disinterested
or
independent since, as the sellers or buyers of the coins they were grading,
they
stood to benefit financially from the assignment of a particular
grade.
Sportscard
Market.
Misrepresentations of authenticity and quality also operated as a barrier to
the
liquidity and growth of the collectibles market for sportscards. Even
experienced and knowledgeable dealers insisted on physically examining
purportedly rare and higher priced sportscards. Most collectors lacked the
knowledge needed to purchase collectible sportscards with confidence, even
when
they had physically examined them. Sportscard dealers eventually developed
a
rudimentary adjectival system to provide measures of quality, using descriptive
terms such as “Poor,” “Very Good,” “Mint” and “Gem Mint.” These measures of
quality were assigned on the basis of such characteristics as the centering
of
the image on the card and the presence or absence of bent or damaged corners,
scratches and color imperfections. However, as was the case with coins, grading
standards varied significantly from dealer to dealer, depending on a dealer’s
subjective criteria of quality. Additionally, since the dealers who bought
and
sold sportscards were the ones that assigned these grades, collectors remained
vulnerable to fraudulent practices.
Autographed
Memorabilia Market.
The
market for autographed sports, entertainment and historical memorabilia has
been
plagued by a high incidence of forgeries and misrepresentations of authenticity.
For example, Operation Bullpen, initiated by the FBI and other law enforcement
agencies beginning in 1997, has uncovered a high volume of outright forgeries
of
signatures and widespread misrepresentations as to the genuineness of sports
memorabilia. We believe that the high incidence of such fraudulent activities
was due, in large part, to a dearth of independent third party memorabilia
authentication services and an absence of systematic methodologies and specimen
data needed for verification of authenticity.
Stamp
Market.
Stamp
dealers developed an adjectival system, similar to the one developed for
sportscards, by which they valued and priced stamps based primarily on the
centering of the stamp image on the stamp paper background, ignoring other
faults in the stamp. As a result, experienced and knowledgeable dealers insisted
on physically examining purportedly rare and higher priced stamps before
purchasing them. Additionally, most collectors lacked the knowledge and
experience needed to purchase higher priced stamps with confidence.
Consequently, as was the case with coins and sportscards, collectors were forced
to depend on representations of authenticity and quality from the very dealers
from whom they purchased or to whom they sold stamps. However, prior to our
entry into the market, independent third-party stamp grading was
non-existent.
Currency
Market.
There
has been some grading of currency in the past, but none of the grading
businesses have been successful as the market was not developed, such that
there
was not substantial demand for grading services. In addition, the grading
businesses were not third-party independent grading businesses, as they were
operated and owned by currency dealers, who also bought and sold the same
materials that they graded; thereby, creating potential conflicts of interest.
PCGS Currency is an independent third-party grading service that does not have
such conflicts of interest. Our currency grading utilizes a numerical 70 -
point
system to determine the overall grade or condition of a note.
Diamond
Market. Approximately
70 years
ago, the Gemological Institute of America (“GIA”), a non-profit educational
corporation, developed a system for classifying and grading diamonds which
consisted of the “4C’s” of carat, cut, color and clarity. The system provided
terminology for identifying (1) the weight of a diamond denominated as “carats,”
(2) the shape and proportion of the diamond with a cut analysis; (3) the
relative color of the diamond using an alphabetic scale from a high quality
color of “D” to the lowest quality color of “P”; and (4) the relative clarity
of, or imperfections in the diamond using descriptive terms on a scale from
“Flawless” (“FL”) to “Very Slightly Included” (“VSI”) to “Slightly Included”
(“SI”) to “Included” (I”). In its gemologist educational programs, the GIA
taught this grading system as a required part of the curriculum. Notwithstanding
the widespread use of common terminology, these measures of quality can be
subjectively and inconsistently applied.
Colored
Gemstone Market. Although
the GIA has held classes on the identification, authentication and grading
of
colored gemstones for approximately 30 years, no significant standard and system
of color, tone and clarity grading has been in widespread use in the
marketplace. In addition, the availability of sample gemstones for technical,
trace element analysis needed to determine country of origin was very limited,
in part because of the limitation of the number of trusted samples from various
regions of the world and in part due to the limitations of the technology to
examine and classify the samples. As a result, buyers were largely dependent
on
subjective assessments of quality and country of origin from the dealers from
whom they purchased colored gemstones, and no sight-unseen market for colored
gemstones existed.
These
conditions created a need and the demand for independent authentication and
grading services from which sellers, purchasers and collectors could
obtain:
• determinations,
from independent, third party experts, of the authenticity of the high-value
collectibles, diamonds and colored gemstones that sellers, purchasers and
collectors purchased, particularly “sight-unseen” or over the
Internet;
• representations
of quality based on uniform standards applied by independent, third party
experts; and
• authoritative
information, compiled by a credible third party, to help purchasers and
collectors understand the factors that affect an item’s perceived value and
price, including:
— its
rarity;
— its
quality or grade; and
— its
historical and recent selling prices.
The
Impact of eBay and other e-Commerce Websites on the Collectibles, Diamond and
Colored Gemstone Markets.
The
advent of the Internet and, in particular, eBay’s development of an Internet or
“virtual” marketplace and other Internet-selling websites such as Blue Nile and
Amazon, have overcome many of the inefficiencies that had characterized the
traditional collectibles, diamond and colored gemstone markets. eBay and other
online marketplaces (i) offer enhanced interaction between and greater
convenience for sellers and buyers of high-value collectibles, diamonds and
colored gemstones; (ii) eliminates or reduces the involvement of dealers
and other “middlemen;” (iii) reduces transaction costs; (iv) allows
trading at all hours; and (v) provides continually updated information.
However, Internet commerce still raises, and has even heightened, concerns
about
the authenticity and quality of the collectibles, diamonds and colored gemstones
that are listed for sale on the Internet. Buyers have no ability to physically
examine them, and no means to confirm the identity or the credibility of the
dealers or sellers on the Internet. As a result, we believe that the growth
of
Internet selling websites, such as eBay, Blue Nile and Amazon, has increased
awareness of the importance of, and the demand for, independent third party
authentication and grading services of the type we provide. Our services enable
purchasers and collectors to use the Internet to purchase collectibles, diamonds
and colored gemstones “sight-unseen,” with the confidence of knowing that they
are
authentic
and are of the quality represented by sellers. The importance and value of
our
services to purchasers and collectors, we believe, are demonstrated by eBay’s
inclusion, on its collectibles websites, of information that identifies, and
encourages visitors to use, our independent third party authentication and
grading services, as well as similar services offered by some of our
competitors.
Our
Services
PCGS
Coin Authentication and Grading Services.
Recognizing the need for third party authentication and grading services, we
launched Professional Coin Grading Service in 1986. PCGS employs expert coin
graders, who are independent of coin buyers and sellers, to provide impartial
authentication and grading services. Currently, we employ 19 experts who have
an
average of 26 years of experience in the collectible coin market. We also
established uniform standards of quality measured against an actual “benchmark”
set of coins kept at our offices. We place each coin that we authenticate and
grade in a tamper-evident, clear plastic holder that bears our logo, so that
any
prospective buyer will know that it is a PCGS authenticated and graded coin.
We
also provide a warranty as to the accuracy of our coin authentication and
grading.
By
providing an independent assessment by coin experts of the authenticity and
quality of coins, we believe that PCGS has increased the liquidity of the
trading market for collectible coins. Following the introduction of our
independent, third party authentication and grading service, buyer confidence,
even between dealers, increased to such a degree that coins authenticated and
graded by PCGS were able to be traded “sight-unseen.” As a result, PCGS
facilitated the development, in 1990, of a dealer market, known as the
“Certified Coin Exchange,” on which coin dealers traded rare coins
“sight-unseen,” over a private satellite network, which now operates on the
Internet. In addition, we began to provide a range of authoritative content
on
coin collecting to inform and communicate with the collector community,
including guides and reports that track the trading prices and the rarity of
PCGS-graded coins.
More
recently, our coin authentication and grading services have facilitated the
development of a growing Internet or “virtual” marketplace for collectible
coins. A prospective buyer, who might otherwise be reluctant to purchase a
high-priced coin listed on the Internet, is able to rely on a PCGS certification
in deciding whether or not to bid and in determining the amount to offer for
the
coin. As a result, to enhance the marketability of higher priced coins, many
sellers submit their coins to PCGS for authentication and grading. That enables
the sellers to include, in their Internet sales listings, digital images of
the
coins in their tamper-evident, clear plastic holders, which identify the coins
as having been authenticated and graded by PCGS as well as their PCGS-assigned
grades.
PSA
Sportscard Authentication and Grading Services.
Leveraging the credibility and using the methodologies that we had established
with PCGS in the coin market, in 1991 we launched Professional Sports
Authenticator (PSA), which instituted a similar authentication and grading
system for sportscards. Our independent sportscard experts certify the
authenticity of and assign a grade to sportscards using a numeric system with
a
scale from 1-to-10 that we developed, together with an adjectival system to
describe their condition. Currently, we employ 13 experts who have an average
of
22 years of experience in the collectible sportscard market. We believe that
our
authentication and grading services have removed barriers that were created
by
the historical seller-biased grading process and, thereby, have improved the
overall marketability of and facilitated commerce in sportscards, including
over
the Internet and at telephonic sports memorabilia auctions.
PSA/DNA
Autograph Authentication and Grading Services.
In
1999, we launched our vintage autograph authentication business, initially
offering authentication services for “vintage” sports autographs and memorabilia
that were autographed or signed prior to the time they were presented to us
for
authentication. The vintage autograph authentication business is distinctly
different from the “signed-in-the-presence” authentication of autographs where
the “authenticator” is present and witnesses the actual signing. Vintage
autograph authentication can involve the rendering of an opinion of authenticity
by an industry expert based on (i) an analysis of the signed object, such
as the signed document or autographed item of memorabilia, to confirm its
consistency with similar materials or items that existed during the signer’s
lifetime; (ii) a comparison of the signature submitted for authentication
with exemplars; and (iii) a handwriting analysis. We currently employ 3
autograph experts with an average of 21 years of experience in the autograph
memorabilia market, as well as 3 consultants on a contract basis.
In
June
2004, we also began offering grading services for autographs, beginning with
baseballs containing a single signature or autograph. We use uniform grading
standards that we have developed and a numeric scale of 1-to-10, with the
highest number representing “Gem Mint” condition or top quality. We assign
grades to the collectibles based on the physical condition or state of
preservation of the autograph. Autograph grading is in its infancy, and we
cannot predict whether it will gain market acceptance.
PSE
Stamp Authentication and Grading Services.
In
January 2000, we launched our Professional Stamp Experts (PSE) as an
independent, third party stamp authentication and grading service. We use both
an adjectival system and a numeric scale from 1-to-100 to grade stamps. We
assign grades based on the centering of the stamp image on the stamp paper
background and the absence or presence of other faults on the stamp. There
have
been viable third party stamp authentication services in operation for several
decades, and stamp dealers and collectors had been using a subjective grading
system based primarily on the centering of the stamp image on the stamp paper
background, ignoring other faults. However, prior to our entry into the stamp
market, independent third party stamp grading was non-existent. As a result,
we
have encountered some resistance to this concept in the stamp collectibles
market, which is steeped in tradition and slow to change, as we did from coin
dealers when we launched PCGS and from sportscard dealers when we launched
PSA.
In October 2005, the Philatelic Foundation based in New York began using PSE’s
numerical grading system to assign grades to stamps. In the Spring of 2006,
Scott Publishing Company, the long-time publisher of the Scott Catalogs also
adopted PSE’s numerical grading system into their bi-annual valuing supplement.
These two events have established PSE’s numerical grading scale, and we believe
has ensured its continuing spread of third-party stamp authentication and
grading, throughout the philatelic industry. Currently, we employ 4 stamp
graders, and use another expert on a part-time basis, who have an average of
36
years of experience in the collectible stamp market.
Vintage
U.S. Paper Currency Authentication and Grading.
In the
third quarter of fiscal 2005, we began marketing a U.S. paper currency
authentication and grading service, which we decided to brand as “PCGS Currency”
because many of the dealers of currency notes are familiar with and have used
PCGS’ coin authentication and grading service. Currently we employ 1 Currency
expert with 21 years of experience. However, we also use two other experts
on a
contract basis.
GCAL
Diamond Authentication and Grading Services. In
November 2005, we acquired Gem Certification & Assurance Lab (GCAL), which
is as an independent, third party diamond authentication and grading service
that has been in the business of diamond authentication and grading since 2001.
We use the internationally recognized system of grading diamonds, commonly
referred to as the “4C’s” to authenticate and grade diamonds. In December 2005,
we acquired the assets of Gemprint Corporation, which consisted primarily of
a
patented non-invasive diamond identification technology
that enables us to create and
record
the digital
image of the unique refractive light pattern or“fingerprint”
(which
we
refer to as the “Gemprint”) of
each
diamond that
GCAL
grades. We store the digital image of the “Gemprint” in our database,
cross-indexed to the diamond’s grading certificate that is issued by GCAL, which
is assigned its own number for recordkeeping purposes. This “Gemprint” process
enables us to match GCAL graded diamonds, on a one-to-one basis, with their
GCAL
certificates, thereby providing an additional measure of protection
against
misrepresentations of diamond quality that can occur by, for example,
altering
the grading certificate or switching
a diamond grading certificate issued for a higher quality diamond to a lower
quality diamond.
There
are
more than ten diamond grading services in operation. Four of those existing
grading services, including GIA, have been in operation for more than 20 years
and are larger and better known than GCAL. However, unlike GCAL, almost all
of
the key competitors are owned, managed or governed by diamond dealers that
are
in the business of selling diamonds, including those graded by such grading
services. As a result, we believe that those grading services potentially have
inherent conflicts of interest when grading diamonds submitted by those dealers
and, therefore, do not provide truly independent third party grading services.
Additionally, unlike GCAL, none of these existing services have any process
to
secure the identification of diamonds that they have certified in order to
make
it possible to detect misrepresentations of the quality which can occur by
altering the information on or switching a grading certificate. As a result,
we
believe that GCAL’s greater independence and its Gemprint diamond identification
technology provide it with a competitive advantage that we are promoting as
a
means of increasing GCAL’s share of the diamond grading market. Also, we are the
only diamond authentication and grading service to provide a warranty with
respect to the accuracy of the color and clarity grades of each diamond we
certify. Currently, we employ 6 diamond graders who have an average of 20 years
of diamond grading experience.
AGL
Colored Gemstone Authentication and Grading Services.
In
August 2006, we acquired American Gemological Laboratories (AGL), one of the
leading independent third party authentication and grading services for colored
gemstones, such as emeralds, rubies and sapphires. Its services are used by,
among others, Sotheby’s and Christies for their jewelry auctions and by jewelry
retailers such as Cartier and Fred Leighton. AGL has been in the business of
authenticating and grading colored gemstones since 1977. We utilize the
fundamental information obtained in GIA vocational classes but express the
color
and tone using a three digit system we developed called ColorScan, and express
color and hue combinations using a 1 to 10 scale in half-point increments,
describe tone on a scale of 0-100 and identifies clarity grades on a scale
using
descriptors such as “FI” meaning “Free from Inclusions”, to “MI1” and “MI2”
meaning “Moderately Included” to “E1”, “E2” and “E3” meaning “Excessively
Included”. Enhancement and country of origin analysis is determined by
comparison to our database and of over 5,000 colored gemstone samples, perhaps
one of the largest such reference collections in the world, personally
accumulated by AGL’s president in travels around the world to various mining
sites. There are more than six competing services, with only three such services
in operation for a similar period of time as AGL.
CCE
Certified Coin Exchange. In September 2005, we acquired the Certified Coin
Exchange (CCE), a subscription-based, dealer-to-dealer Internet bid-ask market
for third party certified coins. CCE has been a marketplace in U.S. certified
rare coin trading between major coin dealers in the United States since 1990
with similar operations for uncertified coins dating back to the 1960’s.
The CCE website features over 100,000 bid and ask prices for certified
coins at www.certifiedcoinexchange.comand
over 11,000 offerings to the retail coin buyer at the Collectors Corner. The
CCE
provides liquidity in the geographically dispersed and highly fragmented market
for rare coins. The enhanced liquidity for certified coins increases volume
and
turnover for certified coins, a benefit for the PCGS coin certification
business. We believe that we can extend the success of the CCE into other
markets where the Company offers certification services such as the stamp and
sportscard markets.
Publications
and Advertising.
We
publish authoritative price guides, rarity reports and other collectibles data
to provide collectors with information that makes them better informed consumers
and makes collecting more interesting and exciting. Our publications also enable
us to market our services, create increased brand awareness and to generate
advertising revenues. Our publications include the Sports
Market Report, which
we
publish on a monthly basis primarily for distribution to approximately 7,000
PSA
Collectors Club members, and the Stamp
Market Quarterly,
which
we publish for distribution to approximately 2,500 stamp dealers and collectors.
In addition, we publish Palmieri’s Market Monitor, an educational and
informative diamond and gemstone-industry publication. We sell advertising
to
dealers and vendors for placement in our publications. We manage a Collectors
Universe website and individual websites for authentication and grading
services. On those websites, we offer collectible content, some of which is
available for a fee and some of which is available without charge. On a combined
basis, our PCGS, PSA, PSA/DNA and PSE websites attracted, on average,
approximately 227,000, 167,000 and 154,000 unique visitors per week during
the
fiscal years ended June 30, 2006, 2005 and 2004, respectively. As a result
of
the increasing number of collectors visiting our websites, in fiscal year 2005,
we began selling advertising on our websites to dealers and other vendors that
serve the collectibles markets.
Our
Mission
Our
mission is to provide the finest available authentication and grading services
to sellers and buyers of high-value collectibles and other high-value assets
in
order to:
• increase
the values and liquidity of the high value collectibles and other high value
assets;
• enable
and facilitate transactions in high value collectibles and other high value
assets;
• generally
enhance interest, activity and trading in high value collectibles and other
high
value assets; and
• achieve
profitable growth, build long-term value for our stockholders and provide
rewarding opportunities for our employees.
Our
Growth Strategy
Our
growth strategies include:
•
Leveraging
the strong brand awareness that we have achieved in our existing collectibles
markets:
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to
increase the demand for and use of our services not only by dealers,
but
also by collectors, only a relatively small percentage of which use
independent authentication or grading services;
and
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to
introduce new value-added services to customers in our existing
collectibles markets.
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• Increasing
the GCAL market share by offering services, such as its Gemprint diamond
identification service, that are not available from its competitors and by
implementing marketing programs targeted at sellers and purchasers of diamonds
that generally do not avail themselves of diamond authentication and grading
services;
•
Increasing
the AGL market share at the high-end of the market by offering enhanced grading
services which may include a guarantee of accuracy of color, tone and clarity
and Gemprint identification on appropriate colored gemstones, and at the middle
market, offer a lower priced authentication and grading certificate identifying
appropriate enhancements that would benefit the retail customer.
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Identifying
and entering other high-value collectibles or high-value asset markets
where we believe we can succeed in building and meeting the demand
among
dealers, sellers and buyers for independent, third party authentication
and grading services.
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We
are
pursuing the following strategic initiatives in order to achieve these growth
objectives:
Increasing
the Demand for our Services in Existing Collectibles Markets.
We have
established leading brands in our existing collectibles markets, including
PCGS,
PSA, PSA/DNA and PSE. We intend to use those brands, as well as our new PCGS
Currency brand, to promote Collectors Universe as the premier provider of
authentication and grading services in the high-value collectibles markets
in
order (i) to increase our market share among existing users of authentication
and grading services and (ii) to increase the use of our services by the
numerous collectors that do not currently use any independent third party
authentication or grading services.
Although
we have authenticated and graded over 12 million coins since the inception
of
PCGS and over 9 million sportscards since the inception of PSA, we estimate
that
less than 10% of the vintage United States coins and vintage sportscards have
been authenticated and graded. According to recent data available on eBay’s
websites, the number of coins being sold at any one time on eBay generally
ranges from approximately 150,000 to 180,000, of which only approximately 15%
are authenticated and graded by a third party authentication and grading
service, such as ours. Similarly, the number of sportscards being sold at any
one time on eBay generally ranges from approximately 250,000 to 300,000, of
which only about 10% are independently authenticated and graded. Additionally,
we are not aware of any other companies that offer grading services for
autographs, and we estimate that we have authenticated and graded less than
1%
of the potential market of autographs and stamps in the United States. Also,
new
collectibles are introduced each year into the markets in which we operate,
some
of which are authenticated and graded in the year of manufacture. Over time,
these collectibles will increase the supply of vintage items that are sold
by
dealers and collectors and, therefore, that will be submitted for independent
third party authentication and grading.
To
take
advantage of these market opportunities, we have:
•
enhanced
our marketing programs to promote our brands and services directly to Internet
and other auction-related businesses. These programs emphasize the benefits
of
using our services, including increased marketability and the prospect of higher
bids for collectibles;
• initiated
joint marketing programs with collectibles dealers that are designed to make
their customers aware of the availability and benefits of our authentication
and
grading services;
•
established
authorized PCGS and PSA dealer networks to increase the visibility of our brands
and the use of our services by those dealers and their customers;
•
developed
and expanded our Set RegistrySM
programs
to increase demand for our collectible coin, sportscard and stamp authentication
and grading services among collectors and to increase traffic on our websites;
and
•
increased
the promotion of our Collectors Clubs to attract and to provide incentives
for
collectors to use our services.
Expanding
Services in our Existing Markets.
Using
the brand recognition we have established in the markets we serve, we have
expanded services in our existing markets. These services include:
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Collectors
Universe Invitationals.
Since 2001, we have been holding special “invitation-only” events for our
authorized PCGS and PSA dealers. At those events, dealers have the
opportunity to meet and engage in collectibles trading with other
invited
dealers. To facilitate collectibles trading at these events, we offer
same
day, on-site authentication and grading services, enabling the dealers
to
complete their transactions while at the invitationals. In fiscal
2006, we
held nine dealer invitationals.
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Participation
at Collectibles Trade Shows.
Each year we participate in approximately 30 collectibles trade shows
that
attract collectibles dealers and collectors who buy and sell collectibles
at those shows. We offer same day, on-site authentication and grading
services, which facilitate the trading and sales of collectibles
at these
shows and conventions. At the same time, we obtain additional brand
exposure and generate increased revenues, because dealers and collectors
generally are willing to pay higher fees for same day, on-site services.
In July 2006, we acquired Expos Unlimited LLC (“Expos”), a tradeshow
management company that operates two of well-known coin, stamp and
collectibles shows in Long Beach and Santa Clara, California,
respectively. This acquisition assures us of the continued availability
of
these two show venues for our authentication and grading services,
provides us a platform for inaugurating and conducting collectibles
shows
in our other markets and adds management personnel who are experienced
in
managing and conducting collectibles trade
shows.
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Sales
of Website Advertising.
We began selling advertising on our websites to collectibles dealers
and
auctioneers in the markets in which we offer our branded authentication
and grading services. Due to the increasing number of visitors to
our
websites, we are able to offer those dealers and auctioneers the
opportunity to market their products and services to an increased
number
of prospective customers.
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Dealer
Financing Program.
Under this program, we offer short-term loans, primarily to established
collectibles dealers and collectors that use our authentication and
grading services. The loans, which are collateralized by the collectibles
that dealers submit to us for authentication and grading, are intended
to
provide those dealers and collectors with working capital. We believe
these loans will provide an incentive to dealers to submit additional
collectibles to us for authentication and grading, as well as generating
interest income for us.
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Autograph
Grading Services.
We launched autograph grading services, beginning with single signed
baseballs. Our autograph grading service meets existing and creates
additional demand for differentiation in the quality, and thus in
the
value, of autographed memorabilia. Our grading is based primarily
on
sharpness, intensity, readability and clarity of
autographs.
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Expansion
of Website Information Services.
We have been expanding the information available on our websites,
including the addition of: (i) historical coin auction prices; (ii)
reproductions of historical reference books; and (iii) the contents
of
famous coin, sportscard and stamp collections. These services are
designed
to attract new collectors, increase the number of visitors to our
websites
and increase advertising revenues. During the years ended June 30,
2006,
2005 and 2004, on a combined basis, our five websites attracted,
on
average, over 227,000, 167,000, and 154,000 visitors, respectively,
per
week.
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Photography
Services.
We now offer digital photography for collectibles that are submitted
to us
for authentication and grading. The digital images can be used by
dealers
for recordkeeping purposes and by both dealers and collectors when
listing
collectibles on internet auction sites, such as eBay. We believe
that we
are able to offer digital photography services more efficiently than
other
service providers, because we will be able to easily incorporate
this
service as part of our authentication and grading
processes.
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eBay
Promotional Programs.
Leveraging our expertise and reputation as a leading independent
third
party authenticator and grader of high-value collectibles, we work
with
eBay to create programs designed to increase the marketability of
collectibles on its auction websites and, at the same time, promote
our
authentication and grading services. We offer a fee-based “Quick Opinion”
autograph authentication service to visitors on eBay’s sports memorabilia
auction website. Our autograph experts render an authenticity opinion
based on an examination of the digital image of the autograph posted
on
eBay. We also have included, at eBay’s request, information about the
benefits of our authentication and grading services on our websites,
to
which eBay has placed links on its collectibles websites in order
to make
that information readily accessible to its
users.
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|
•
|
“First
Strike®” Program.
Every January, the U.S. Mint produces, in limited quantities, issues
of
newly minted gold and silver coins in sealed containers showing a
date of
sealing by the U.S. Mint in January. In the third quarter of fiscal
2005,
PCGS introduced a new “First
Strike”
program designed to generate submissions of these coins to us for
authentication and grading. If those coins are submitted to us in
their
original Mint-sealed containers or with other evidence that they
are part
of such an issue and are uncirculated, we authenticate and grade
and,
then, encapsulate them in our tamper-evident, clear plastic holders
with
an imprint designating the coins as First
Strike
coins. We inaugurated our First
Strike
authentication and grading program in January 2005 for newly-minted
U.S.
Gold and Silver Eagle bullion coins. We believe that, due to their
limited
availability, First
Strike
coins will generate interest among and demand for our authentication
and
grading services from dealers and collectors seeking to buy or sell
Gold
Eagle and Silver Eagle bullion coins. In fiscal year 2006, we increased
the number of First
Strike
units graded and authenticated to 253,000 from 75,000 in fiscal
2005.
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Increasing
GCAL’s Share of the Diamond Market.
We
believe that we can increase GCAL’s share of the diamond grading market,
notwithstanding competition from the larger and more established grading
services, such as GIA, by promoting GCAL’s independence, its policy, practice
and reputation for consistent and rigorous application of diamond grading
standards, and the services that GCAL is able to offer that are not available
from its competitors. Additionally, we believe that approximately 50% of the
diamonds larger than 0.25 carat are offered with third party authentication
and
grading services but have found that many diamond retailers do not promote
the
availability of diamond grading services and that the majority of consumers
do
not request such services when purchasing diamonds, which we believe gives
us an
opportunity to promote GCAL’s services, which should help us grow GCAL’s
business and market share.
To
take
advantage of this opportunity, since acquiring GCAL, we have:
• Enhanced
and established GCAL as a brand providing high quality and consistent
authentication and grading services.
•
|
Provided
increased security for purchasers of diamonds by including, with
each
diamond that is graded by GCAL, a “Gemprint” of the diamond, which is a
digital image of its unique refractive light pattern, using our patented
non-invasive diamond identification process. GCAL stores the Gemprint
in
its computer database, cross-indexed to the diamond’s GCAL grading
certificate. As a result, if a dealer or consumer wants to sell the
diamond at a future date, the seller can provide the prospective
purchaser
with evidence that the diamond being sold is, in fact, the diamond
that
was originally graded by and described in the grading certificate
issued
by GCAL, by (i) using the Gemprint process to produce another digital
image of the diamond at the time of sale and (ii) comparing that
digital
image to one stored in GCAL’s database. Consequently, the Gemprint process
enables GCAL to provide an additional measure of protection against
misrepresentations of diamond quality that can occur by, for example,
switching a diamond grading certificate issued for a higher quality
diamond to a lower quality diamond or by altering the grading certificate.
|
•
|
Launched
the Five Star Diamond Grading Certificate that includes five distinct
services bundled into one certificate at a 20% to 50% discount to
the fees
that we believe the customer would have to pay to purchase these
services
separately. GCAL’s Five Star certificate also means that the customer need
only keep a single grading certificate, rather than having to maintain
multiple grading certificates issued by the different grading services.
The five bundled services include:
|
— |
Direct
Light Performance Analysis,
which is a service that directly measures the light return from a
diamond
and expresses that return in calculations, of Optical Brilliance
and,
Optical Symmetry, using descriptive terms from Excellent, Very Good,
and
Good to Fair. These results are based on the measurement of the number
of
pixels in light return from incident light. The results are shown
on the
certificate in two digital images of the diamond along with the two
associated adjectival descriptions for Brilliance and Symmetry. The
easily
understood graphics and rating assist a potential diamond buyer in
comparing the visual qualities of one diamond to
another.
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— |
Gemprint
Security Registration,
which is a service that captures the unique light refraction pattern
of a
diamond in a digital format and records the unique “fingerprint” of the
diamond, and registers that image in a database. At any time after
the
diamond has been certified by GCAL and a Gemprint registered, the
diamond
may be matched to this database by taking another Gemprint of the
diamond
and comparing the digital image of the requested diamond to the registered
database using the Gemprint proprietary algorithm. This process provides
assurance that a GCAL certified diamond can be matched to the original
certificate making it possible to detect misrepresentations of the
quality
of the diamond by switching or altering its grading
certificates.
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— |
Laser
Inscription,
which is a service that inscribes information using a cold laser
on the
girdle of the diamond. Laser inscription is often used for quick
identification, engraving of logos or particular phrases. Laser
inscription is only a few microns deep into the diamond and can be
easily
removed and is one of the most often requested extra services that
is
included in the GCAL bundled
services.
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— |
Grading
Guarantee,
which
is a
limited warranty that provides assurance to the diamond
purchaser that if the
diamond is
submitted for re-grading, within
one year following
the date of its
original examination
(which may occur as a result of a resale of the diamond),
the color and clarity grades on
the re-grading will be
within one grade of
the color and clarity grades assigned on
the diamond’s
original
grading. This
guarantee is the first and only warranty
issued in
the industry and provides the buyer with increased confidence in
the
quality rating provided by GCAL.
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— |
Fair
and Consistent Clarity and Color Certification,
which is the result of the consensus process employed
by
GCAL, where at least two qualified diamond experts must agree on
the
subjective grading of Clarity and Color, two of the four “C’s” of diamond
grading. The other two “C’s” are Carat and Cut, both of which are measured
by high technology machines. Differences in one grade of Clarity
or one
grade of Color may result in value differences in the marketplace
of from
10% to 50%.
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|
•
|
Launched
the Source VeritasSM
Passport that includes all of the benefits of the Five Star Diamond
Grading Certificate and provides the assurance that the diamond
was
cut and polished from a rough diamond mined
in
compliance with the Kimberley Process (www.kimberleyprocess.com)
and the
2003 Clean Diamond Act, as may be applicable, which are designed
to assure
that the diamond being sold was not mined in a country where diamond
sales
are used to fund rebel movements against legitimate countries.
|
•
Launched
the GemFactsSM
Digital
Certification Data Delivery
System, by which
the information
on
a GCAL
grading certificate is
delivered, digitally,
on a
mini-CD along with the printed certificate at the time of retail sale or on
the
Internet
in a
certificate look-up feature on the GCAL website. This
digital
delivery system allows for co-marketing of certain diamond retail
programs,
including co-branding with the retail seller and may
include a
digital
marketing
video
for
the
retail seller. Educational “pop-up” windows are available when any one of 19 key
terms are touched with the cursor,
making
the GemFacts digital certificate interactive for
the user
and a helpful sales tool at the retail counter.
Increasing
AGL’s Share of the Colored Gemstone Market. We
believe we can increase AGL’s share of the colored gemstone authentication and
grading market, even though in the general market we estimate that
authentication and grading services are purchased on less than 1% of all the
colored gemstones valued at $500 or more. According
to the 2004 U.S. Census Report, imports into the United States of cut and unset
colored gemstones included 4 million carats of emeralds, 3.75
million
carats of rubies and
7.5
million carats of sapphires, along
with 1.1 billion carats of other
colored gemstones. In
the
high value market with auctioneers Sotheby’s and Christies, we estimate third
party authentication and grading of colored gemstones to be 30% to 50% of the
offerings. Of such certification , we estimate that AGL’s market share to be
approximately 50%, and we believe we can increase our volume with additional
services such as the introduction of a grading guarantee on color, tone and
clarity and the implementation of Gemprint on applicable colored gemstones.
In
the general market, colored gemstones are generally sold at retail in similar
stores and in similar venues as diamonds providing a selling environment already
familiar with the concept of third party authentication and grading of the
stones. Further, the Federal Trade Commission has promulgated regulations,
requiring disclosure of enhancements to colored gemstones that (a) are not
permanent or may not be permanent; (b) the treatment creates special care
requirements; or (c) the treatment has a significant effect on the stone’s
value. Because most retailers do not have sufficient information or expertise
to
determine the enhancements to colored gemstones, we believe we can increase
the
volume of our certificate services by offering an independent, third party
certificate of color, tone and clarity with disclosure about enhancements,
priced at a level that makes the certificate economically feasible for a larger
number of colored gemstones. In addition, we believe there is a cross-marketing
opportunity between GCAL and AGL through (i) marketing AGL services to the
retailers with which GCAL has existing relationships including Blue Nile, and
(ii) marketing GCAL services to the auctioneers and retailers with which AGL
has
existing relationships such as Sotheby’s, Christies and Cartier.
Entering
Other Collectibles and High-Value Asset Markets.
There
are additional high-value collectibles and high-value assets with respect to
which marketability and value depend primarily on their authenticity and state
of preservation or quality. We believe that the growth of some of these markets
has been hampered by the absence or limited availability of independent
authentication and grading services. We continue to evaluate opportunities
with
the intention to expand our business into one or more of those markets.
Other
markets
that we
are considering for possible expansion include:
Antique
silver
|
Musical
instruments
|
Art
|
Political
memorabilia
|
Art
glass
|
Postcards
|
Comic
books
|
Rare
books
|
Entertainment
memorabilia
|
Watches
|
Estate
jewelry
|
Wine
|
We
intend
to consider the following criteria in selecting markets for future
expansion:
• Market
Size.
The
size of the target market, measured both in terms of the volume and the value
of
the collectibles or high-value assets that trade in the market.
• Trading
Prices.
The
prices at which collectibles or other high-value assets trade in the target
market, because we have found that the more valuable the collectible or asset,
the greater is the demand for authentication and grading services.
• Competitive
Environment.
The
presence or absence of existing independent authentication and grading services
in the target market, its capacity for new entrants and the satisfaction of
dealers and collectors with the services offered by existing
providers.
• Availability
of Experts.
The
availability of experts needed to succeed in entering a target
market.
• Means
of Entry.
The
benefits and costs of entry by means of an opportunistic acquisition, as opposed
to starting a new authentication and grading service that would require the
development of a new brand.
The
largest of these currently targeted markets are
estate
and pre-owned jewelry,
including watches,
and
entertainment memorabilia, such as Hollywood props, scripts and wardrobes.
According to data available from eBay, at any one time there are approximately
300,000 to 500,000 items of entertainment memorabilia and from 80,000 to 100,000
watches listed on eBay’s
auction websites. We
are
not aware of any significant third party authentication or grading services
in
any of these markets.
There
is
no assurance that we will succeed in expanding our business into any of these
new markets or, even if we do succeed in doing so, that the authentication
or
grading services we will offer in those markets will gain market acceptance
or
become profitable.
Operations
We
offer
authentication and grading services for coins, sportscards, autographs and
autographed memorabilia, stamps, vintage U.S. and
currency
notes,
and
for
diamonds
and
colored gemstones.
Our
trained and experienced authentication and grading experts determine the
authenticity of and, using uniform quality standards, assign a quality grade
to
these collectibles and to
diamonds
and
colored gemstones.
PCGS.
Since
our inception in 1986, we have graded approximately 12 million coins. We now
authenticate and grade approximately one million coins per year. We typically
charge authentication and grading fees that range between $5 and $200 per coin,
depending primarily on the turn-around time requested by the customer, which
varies from one day for the highest level of service to approximately 60 days
for the lowest level of service. In the fiscal year ended June 30, 2006, our
fee
per coin averaged approximately $12.50. We authenticate and grade coins in
accordance with standards that we developed and which have become generally
accepted in the industry. We use both an adjectival and numeric system, with
a
scale of 1-to-70, to rate the quality of the coins, with the highest number
representing “gem” or perfect quality. We have authenticated and graded, either
before or after sale, two of the three highest priced U.S. coins ever sold
at
public auction, including an 1804 Draped Bust Silver Dollar, that was sold
by
the owner at an auction in 1999 for approximately $4.1 million, and a U.S.
1913
Liberty Head Nickel, that was recently sold for $4.15 million, the second
highest price paid for any coin.
Our
grading of coins involves an exacting and standardized process. We receive
coins
from dealers and collectors and remove all packaging that identifies the
submitter in any way. We then enter information regarding the coins into our
proprietary computerized inventory system, which tracks the coins at every
stage
of our authentication and grading process. Generally, our process requires
that
two of our experts evaluate each coin independently, and no authenticity opinion
is issued and no quality grade is assigned unless their opinions of authenticity
and the grades independently assigned by each of them are the same. In some
cases, depending on the type of coin being authenticated and graded or on the
results of the initial review process, a third expert is involved to make the
final determinations of authenticity and grade. The coin, the determination
of
authenticity and its grade are then verified by one of our senior experts,
who
has the authority to resubmit the coin for further review if deemed to be
necessary. Only after this process is complete is the coin reunited with its
invoice, thus keeping the authentication and grading process independent of
the
identity of the owner and the history of the coin. The coin is then sonically
sealed in our specially-designed, tamper-evident, clear plastic holder, which
also encases a label describing the coin, the quality grade that we have
assigned to it, a unique certificate number and bar code, and the PCGS hologram
and brand name.
PSA.
We
launched our PSA sportscard authentication and grading service in 1991 and,
through June 30, 2006, had authenticated and graded over 9 million sportscards.
Our sportscard grading system uses both an adjectival and a numeric system
with
a scale from 1-to-10, with the highest number representing “mint” condition or
perfect quality. We employ sportscard authentication and grading procedures
that
are similar to our coin authentication and grading procedures and at a minimum,
two graders are assigned to every card. On receipt of sportscards from dealers
and collectors, we remove all packaging that identifies the submitter in any
way
and enter information regarding the sportscards into our proprietary
computerized inventory system that enables us to track the sportscards
throughout our authentication and grading process. Only after the authentication
and grading process is complete is the sportscard reunited with its invoice,
thus keeping the authentication and grading process independent of the identity
of the owner and the history of the sportscard. The sportscard is then sonically
sealed in our specially-designed, tamper-evident, clear plastic holder, which
also encases a label that identifies the sportscard, the quality grade that
we
have assigned to it and a unique certificate number, and the PSA hologram and
brand name.
We
primarily authenticate and grade baseball sportscards and, to a lesser extent,
football, basketball and hockey sportscards, as well as entertainment and other
collectible cards. We typically charge fees ranging between $4 and $50 per
card,
with an average fee of $6 per card in 2006. As is the case with coin
authentication and grading, sportscard authentication and grading fees are
based
on the particular turn-around time requested by the submitter, ranging from
one
day’s turn-around for the highest level of service to approximately 60 days for
the lowest level of service.
The
sportscards submitted to us for authentication and grading include primarily
(i)
older or vintage sportscards, particularly of memorable or historically famous
players, such as Honus Wagner, Joe DiMaggio, Ted Williams and Mickey Mantle,
and
(ii) modern or newly produced sportscards of current or new athletes who have
become popular with sports fans or have achieved new records or milestones,
such
as Nolan Ryan and Roger Clemens. These sportscards have, or are perceived to
have, sufficient collectible value and are sold more frequently than are
sportscards of less notable athletes, leading dealers and collectors to submit
them for grading to enhance their marketability. Also, the production and sale
of each new series of sportscards, which take place at the beginning and during
the course of each new sports season, create new collectibles that provide
a
source of future additional authentication and grading submissions to us. Among
the sportscards that we have authenticated and graded is a 1909 Honus Wagner
baseball card, which received a PSA grade of NM-MT8 and was sold by the owner,
via auction, in 2000 for approximately $1.3 million.
PSA/DNA.
In
1999, we began offering authentication services for vintage sports autographs.
Because of the variability in the size of autographed memorabilia, the
procedures we use necessarily differ from those used in authenticating and
grading coins and sportscards. Customers may ship the
autographed
memorabilia to us for authentication at our offices or, in the case of dealers
or collectors that desire to have a large number of items authenticated, we
will
sometimes send an expert to the customer’s location for “on-site” examination
and authentication. Our experts reference what we believe is one of the largest
databases of known genuine examples of signatures for comparison to a submitted
specimen and draw upon their training and experience in handwriting analysis.
In
most cases, we take a digital photograph of the autographs that we authenticate
and store those photographs in a master database. Before shipping the item
back
to the customer, a tamper-evident label is affixed to the collectible. The
label
contains our PSA/DNA name and logo and a unique certificate number. For
additional security, in all cases when an item is fully authenticated, we tag
the items with synthetic DNA-laced ink, which is odorless, colorless and
tasteless and visible only when exposed to a narrow band wavelength of laser
light using a hand-held, battery-powered lamp. As a result, if the label is
removed from the item, it is still possible to verify that the item was
authenticated by us.
Memorabilia
that have been authenticated by our vintage autograph service include Mark
McGwire’s 70th home run baseball, which was sold at auction in 1999 for more
than $3 million, and a baseball bat autographed by Babe Ruth, which he used
to
hit the first home run ever hit in Yankee Stadium in 1923. That bat recently
was
sold by Sotheby’s for more than $1.2 million.
We
also
offer grading services for autographs. We use uniform grading standards that
we
have developed to assign two grades to the collectible, one based on the
physical condition or state of preservation of the autograph, and the other
based on the physical condition of the collectible, using a numeric scale of
1-to-10, the highest number representing “Gem Mint” condition or perfect
quality.
PSE.
We
commenced our PSE stamp authentication and grading service in January 2000.
In
rating the quality of stamps, we assign a numeric grade to each stamp that
ranges from 1-to-100. The grade assigned to a stamp is based on several
characteristics, including the centering of the image on the stamp and the
absence or presence of various faults, such as creases, perforation problems
and
other imperfections that, if present, will reduce the value of the stamp. For
a
stamp to receive a grade of 100, which means that it is in “gem” condition, the
image on the stamp must be perfectly centered and the stamp must be faultless.
Stamps submitted to us for grading are independently examined and graded by
at
least two of our stamp experts. After a stamp has been authenticated and graded,
we generally issue a certificate of authentication that briefly describes the
stamp and the grade assigned to it and has a digital image of the stamp
attached. The certificate bears the PSE name and logo and a unique certification
number that we assign to the stamp for record keeping purposes. We also offer
our customers the option of having the stamp encapsulated in a tamper-evident,
clear plastic holder with an encased label that, like the certificate,
identifies the stamp and sets forth the grade assigned to it, its unique
certification number and the PSE name and logo.
Stamps
that have been authenticated and graded by us include an 1868 1¢ “Z” Grill U.S.
postage stamp, which received a PSE grade of Extremely Fine (XF) 90 and was
last
sold at auction in 1989 for more than $900,000. The owner submitted the stamp
to
us shortly after we initiated our stamp authentication and grading service
in
2000.
The
volume of stamp authentication and grading submissions through fiscal 2006,
relative to the number of coin and sportscard submissions, has not been
material. Since stamp grading services are
relatively
new to
the market, we cannot predict when or even whether our services will gain the
level of market acceptance needed for stamp grading to become a material
contributor to our operating results.
Vintage
U.S. Paper Currency.
PCGS
began marketing a vintage U.S. paper currency grading service, under the brand
name “PCGS Currency” in the third quarter of fiscal 2005. We have engaged a
number of paper currency experts to grow this business and to authenticate
and
grade vintage paper currency. We use an adjectival and numeric grading system,
with a scale of 1-to-70, which is similar to the system that we use for grading
coins, largely because most vintage currency dealers are already familiar with
that system. Currently, there are two relatively small vintage paper currency
authentication and grading companies
with
which we compete, one of
which
is a subsidiary of, Numismatic Guaranty Corporation of America, our principal
coin authentication and grading competitor, which started a separate vintage
paper currency authentication and grading service in the first calendar quarter
of 2005. The rare currency market is smaller than our other collectibles markets
and there is no assurance that our currency authentication and grading service
will gain broad market acceptance or
that
demand
for
such
services or our
entry
into that market will generate material revenues for us or
enable
this service to
become
profitable.
Diamonds. GCAL
was
founded in 2001 and was acquired by the Company in the second quarter of fiscal
2006. We employ diamond grading experts and mineralogists to examine,
authenticate and grade diamonds. We use a combination of technology and the
application of industry standards in this process. To authenticate diamonds,
we
use a Raman Spectrometer to examine the chemical composition and Fourier
Transform Infrared Spectrometer to assist in determining various treatments
that
may be applied to diamonds. In addition, we use DiamondSure and DiamondView
to
verify diamonds and Sarin instruments to weigh and measure the dimensions along
with a Colorimeter to assist in color grading. Experts review each diamond
with
respect to established color reference sets and various magnification devices
to
closely examine for imperfections and inclusions that would affect the clarity
grade and application of clarity standards. In addition to providing information
relative to the “4C’s” of diamond grading, we also provide a direct measurement
of light performance with technology acquired as part of the GCAL acquisition,
and we provide a registration of the Gemprint of each diamond using the patented
technology that produces, records, stores, sorts and matches digital refractive
images from a pinpoint, single laser light source applied to the
diamond.
GCAL
assigns a quality grade to the diamond by measuring its Cut,
Carat, Color
and
Clarity (which
are known as the “4C’s” of the diamond).
Cut and
Carat are measured
using
measurement equipment,
while
the Color and Clarity are determined by our experts through the application
of
industry standards. Grades are applied using a scale in Color from a top Color
grade of “D” to a faint yellow lower Color grade of “M” or lower, and a Clarity
grade of “Flawless” (“FL”) to “Very, Very Slightly Included 1” to “Very, Very
Slightly Included 2” (“VS1” and “VS2”), to the much lower quality grade of
“Included 3” (“I3”).
Colored
Gemstones.
AGL
was
founded in 1977 and was acquired by the Company in the first quarter of fiscal
2007. We employ colored gemstone experts to examine, authenticate, grade,
identify enhancements and determine the country of origin. We utilize a
combination of technology, industry standards and standards, systems and
terminology that were developed by AGL. To authenticate colored gemstones,
we
use one or more technologies including Raman Spectrometer, near infrared,
specimen comparison and trace element comparison to authenticate colored
gemstones from our extensive reference collection of over 5,000 samples. Weight
is measured by technologically sophisticated scales. Color and tone are reviewed
by our experts to determine the application of the three digit code for color
and tone from a system we developed called ColorScan. Color and hue are
described on a numeric scale from 1 to 10 in half point increments with tone
set
forth on a scale from 0-100. Clarity is reviewed to determine the application
of
a scale using descriptors such as “FI”
meaning “Free from Inclusions”, to “MI1” and “MI2” meaning “Moderately Included”
to “E1”, “E2” and “E3” meaning “Excessively Included”.
A
critical review of the stone for enhancements is completed relying on the
reference collection and other testing resulting in the use of descriptions
and
disclosures that we developed. If requested, an analysis of the country of
origin is performed, comparing the subject stone and its trace elements and
crystalline structure to those in the reference collection.
Publications
and Content.
We
publish authoritative price guides and rarity reports for coins, sportscards,
sports autographs and memorabilia and stamps. This information is available
on
our website and in our publications. These publications include:
• Price
Guides.
We
provide a wide variety of authoritative price guides for a number of collectible
markets. For example, we track the prices at which the 3,000 most
actively-traded U.S. coins are sold, dating back to 1970, and compile and
publish this information in a generally recognized collectible coin index,
known
as the CU3000.
• Rarity
Reports.
We
compile and publish reports that list the total number of coins and sportscards
we have graded since our inception, categorized by item type and grade
determination. We can publish, for example, the exact number of Mint State
(MS)
67-grade 1881-S Morgan silver dollars that we have graded. We believe that
collectors use this information to make more informed decisions regarding the
purchase of particular coins.
• Articles.
Collecting is a passion for many and has nuances and anecdotes that are well
suited to a library of articles for each category of collectibles. We write
informative articles and publish them on our websites. A sense of community
is
also important to collectors. We therefore encourage our customers to
communicate and to write articles which we sometimes publish on our websites
or
include in our publications.
• Historical
Content.
Collecting is often about history, and, in many instances, historical events
associated with a collectible enhance its value. In our publications, we provide
short histories about unusual and rare collectibles. We believe that these
historical accounts add to the attractiveness and excitement of purchasing
such
items. During 2004, House of Collectibles, a division of Random House, published
the second edition of the Official
Guide to Coin Grading and Counterfeit Detection,
which
was authored by our collectible coin experts. To enhance the historical content
that we are able to provide dealers and collectors, in the first quarter of
the
current fiscal year we acquired CoinFacts.com, which operates a website at
www.coinfacts.com, at which we are now able to offer coin dealers and collectors
proprietary information about the date and mintmark combinations of U.S.
Colonial Coins, early U.S. coins, such as the Liberty Cap Half Cent of 1794,
to
the most recent U.S. minted coins, such as the Fifty State Quarters™ and the One
Ounce American Eagle Gold and Silver Bullion Coins currently being produced
by
the U.S. Mint.
• News.
We
provide market news and information that are accessible to collectors and
dealers on our websites. The news and information most often relate to recent
events, such as sales of collectibles at record prices, the introduction of
new
collectibles and trends and developments in the collectibles markets we
serve.
Marketing
We
employ
both “pull” and “push” strategies in marketing our services to dealers and
collectors of high-value collectibles and diamonds. For collectibles, our “pull”
strategies are designed to promote our brands and increase the preference among
collectors for our authentication and grading services and to encourage
collectors to communicate that preference to their collectibles dealers, because
most authentication and grading submissions are made by dealers. In our
experience, if a customer requests a particular grading
service,
the dealer ordinarily will comply with that request. On the other hand, if
the
customer expresses no preference, the dealer will make its own choice of
authentication and grading service or may even decide not to submit the
collectible to an independent service for authentication and grading.
For
diamonds and colored gemstones, our “pull” strategy is designed to promote our
brands to the retail consumers who are interested in buying a diamond or colored
gemstone, principally communicating over the Internet
to this
target market through our websites primarily in response to search engine
inquiries for information on diamonds or colored gemstones, diamond and colored
gemstone pricing, purchasing assistance and other searches. Each of our websites
are planned to be one of the few websites that
offers independent,
third party education, information and price guides that is not associated
with
the sale of diamonds or diamond jewelry or colored gemstones. Since most diamond
submissions come from diamond “sightholders” (authorized buyers of rough
diamonds from the mining companies) and jewelry manufacturers, the
objective of
our
“pull” strategy is to create demand from
retail
consumers for our brand at the retail counter. For
colored gemstones, the supply chain is
more
diversified than for diamonds, but the strategy to “pull” demand from the
retailers and consumers is similar. We believe that consumer demand will
lead
diamond and colored gemstone and jewelry retailers
to order
diamonds, colored gemstones and diamond and colored gemstones jewelry that
have
been
graded by one of our services. In
addition, we promote our services to the many independent and chain store
retailers through trade publication advertising and trade show appearances
to
demonstrate the benefits of selling diamonds and colored gemstones with our
diamond and colored gemstone grading certificates
in
order
to
encourage retailers to ask for or even demand our brand of certification
on
diamonds and colored gemstones and diamond or colored gemstone
jewelry
they
purchase from sightholders and wholesale distributors.
Therefore,
our “pull” oriented marketing programs emphasize (i) the protections that
collectors and retail customers will have if they purchase collectibles,
diamonds and colored gemstones that we have authenticated and graded, and
(ii) the improved marketability and higher prices that they and the
associated retailers can realize if they use our independent third party
authentication and grading services.
Our
“Push” Strategy,
on the
other hand, is designed to market our services directly to collectibles dealers
and to diamond sightholders, colored gemstone suppliers and diamond and colored
gemstone jewelry manufacturers to encourage them to use and promote our
services.
Our
“Pull” Strategy.
We have
developed and implemented a number of marketing programs and initiatives
designed to create consumer preference for collectibles that have been
authenticated and graded by us. Those programs and initiatives
include:
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Direct
Advertising.
We directly address collectors by advertising our services in trade
journals and periodicals in each of our markets. Those journals include
Coin
World,
Linn’s
Stamp News,
Sports
Collectors Digest
and Autograph
Collector Magazine.
We make personal appearances at major, national-market trade shows
around
the United States that are attended by collectors, as well as dealers.
We
also participate in and support programs conducted by non-profit
associations whose members are primarily collectors, such as the
American
Numismatic Association and the American Stamp Dealers
Association.
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Set
Registry Programs.
We provide collectors with the opportunity to participate in free
Internet
“Set
Registry” programs that we host on our collectibles websites. These
programs encourage collectors to assemble full sets of related
collectibles that have been authenticated and graded by us. Generally,
each registered set is comprised of between 50 and 200 separate,
but
related, collectibles. Examples include particular issues of coins,
such
as Twenty Dollar Gold Double Eagles or Morgan Silver Dollars; particular
sets of sportscards, such as all Hall of Fame pitchers or a particular
team, like the 1961 Yankees; or sets of collectible stamps, such
as
Columbian Commemoratives or Graf Zeppelin Airmail stamps. Our Set
Registry
programs enable collectors:
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to
register their sets on our websites, which provides them with an
off-site
reference source for insurance and informational
purposes;
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to
display on our websites, and compare the completeness and quality
grades
of, the collectibles making up their sets to those of other collectors
who
have registered similar sets on our websites, thereby creating a
competitive aspect to collecting that adds to its excitement;
and
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to
enter our annual Company-sponsored
Set Registry competitions and awards programs in which collectors
can win
awards for having collected the most complete and highest graded
sets of
particular series or issues of coins, sportscards or
stamps.
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The
collectibles that may be registered on our Set Registries and included in our
Set Registry competitions are limited to collectibles that have been
authenticated and graded by us. To register the collectibles to be included
in a
particular set, a collector is required to enter the unique certificate number
that we had assigned to each of the collectibles when last authenticated and
graded by us. We use the certificate number to compare the information being
submitted by the collector with our database of information to verify that
the
collectibles being registered by a participant for inclusion in a particular
set
qualify to be included in that set.
We
have
found that our Set Registry competitions (i) create a preference and
increase demand among collectors for our brands, and (ii) promote the
trading of collectibles authenticated and graded by us by set registrants
seeking to improve the completeness and overall quality of their sets, which
generally results in additional authentication and grading submissions to us.
Annual awards for set completeness and quality have been issued by PCGS and
PSA
each year since 2002 and by PSE beginning in 2004. As an indication of the
popularity of our Set Registry programs, more than 40,000 sets were registered
on our Set Registries as of June 30, 2006, which represents a 34% increase
over
the number registered as of June 30, 2005.
• Collectors
Clubs Subscription Program.
We also
have established “Collectors Clubs” for coin, currency and sportscard
collectors. For an annual membership fee, ranging from $50 to $200, collectors
receive a number of benefits, including (i) the right to have, without any
further charge, a specified number of collectibles authenticated and graded
by
us, a privilege that non-member collectors do not have; and (ii) access to
certain proprietary data that we make available on our websites or in print.
As
of June 30, 2006, there were approximately 15,000 members in our Collectors
Clubs.
• Retail
Diamond Buyer Website.
We
are
in
the process of completing our diamond website that will make
educational information and
our
pricing guide, The
Market Monitor,
accessible
to the retail consumer as a
valuable
information
tool that will
assist
the consumer in making his
or
her diamond purchase decision, based primarily
on
quality and value. Using our GemCalc diamond calculator, the consumer
will
be
able to use
the
website to identify various diamond qualities that can
be
obtained at different price points. Because
the information and price guides will
be
valid
only
on
GCAL
certified diamonds, we anticipate that some of the users will request GCAL
certification at the retail counter. We plan to launch this website in October
2006.
• Diamond
Certificate Co-Branding.
GCAL
has a program of co-branding the diamond sightholder or the retailer on the
diamond grading certificate in order to provide point-of-sale support for the
brand or after-sale support for the brands once the consumer has taken the
diamond home. Diamond
sightholders are requested by many diamond mining interests to conduct
marketing programs
to
“brand” a diamond from that mining interest at the retail counter. Co-branding
on the diamond grading certificate is one of the most cost effective ways
by
which
a sightholder can brand the diamonds it purchases and resells. Retailers
are searching for various points of differentiation in a sales presentation
and
co-branded diamond grading certificates can
create a
point of differentiation
between
the retailer and those
of
its
competitors who are not using GCAL’s services.
• Colored
Gemstone Brand Extension. Because
AGL has an established brand associated with the high-value colored gemstones,
we believe we can extend that brand “down market” to the middle value market
using the existing retail distribution channels and providing the retailers
and
customers with information about the AGL brand and its prominence for high
value
colored gemstones.
• Retail
Colored Gemstone Buyer Website. In
a
similar manner to the diamond buyer website now in production, we plan on
providing a website for colored gemstone buyers that would provide education,
information and fair market pricing information, based on our pricing guide
The
Market Monitor.
The
design will be focused on functionality for the retail consumer with all
information centered on the AGL brand, including the pricing information for
AGL
certified colored gemstones. It is our belief that because the information
and
education will be provided by AGL and the associated fair market pricing will
be
based on AGL’s certified colored gemstones, the website users will ask for AGL
certification at the retail counter.
Our
“Push” Strategy.
We also
market our services directly to collectibles dealers and auctioneers to promote
their use of our authentication and grading services. Our marketing message
is
focused on the potential increase in marketability of the collectibles due
to
the increase in consumer confidence that is attributable to our authentication
and grading of those collectibles. These marketing programs
include:
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Trade
Publication Advertising and Direct Communications.
We communicate to dealers and auctioneers by direct contact and through
advertising in trade journals and publications in the respective
markets.
Those journals include Coin
World,
Linn’s
Stamp News,
Sports
Collectors Digest
and Autograph
Collector Magazine.
We also communicate with our dealers and with auctioneers by direct
mail,
email, and telephone.
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Trade
Shows and Conventions.
There are numerous collectibles trade shows and conventions held
annually
in the United States, of which approximately 30 generally are considered
to be the largest and most significant in the collectible coin,
sportscard, autograph and stamp markets. At these shows and conventions,
collectibles dealers gather on a trading floor or “bourse” to buy and sell
collectibles. We offer same day, on-site authentication and grading
services, which facilitate the trading and sales of collectibles
at these
shows and conventions. At the same time, we obtain additional brand
exposure and generate increased revenues, because dealers and collectors
generally are willing to pay higher fees for same day, on-site
services.
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In
July
2006, we acquired Expos Unlimited LLC (“Expos”), a tradeshow management company
that operates two of the larger and better known coin, stamp and collectibles
shows in Long Beach and Santa Clara, California, respectively. This acquisition
assures us of the continued availability of these two show venues for our onsite
authentication and grading services, provides us a platform for inaugurating
and
conducting collectibles shows in our other markets and adds management personnel
who are experienced in managing and conducting collectibles trade
shows.
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Our
Dealer Invitationals.
We sponsor and host 8-to-10 “invitation-only” events per year for our
larger dealers that provide them with forums for buying and selling
their
collectibles. We also offer same day, on-site authentication and
grading
services at these invitationals. Like the other trade shows and
conventions we attend, these invitationals enable us to generate
additional authentication and grading revenues. At the same time,
because
we host the invitationals, they provide additional brand exposure
and
build goodwill for us among the collectibles
dealers.
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Authorized
Dealer Network.
We have implemented authorized dealer programs for coin and sportscard
collectibles dealers and auction companies. Authorized dealers are
able to
use our marketing materials which are designed to promote our services
and
those of our authorized dealers to collectors. Those materials include
“point of sale” and “point of purchase” displays and brochures and direct
mail pieces for insertion in customer mailings. In addition, authorized
dealers may use our brand logotypes on their websites to attract
buyers
for coins and sportscards that have been authenticated and graded
by us.
We also conduct joint marketing programs with our authorized dealers
in
which we provide financial support for dealer marketing programs,
approved
by us, that promote both the dealer’s products and services and our
authentication and grading
services.
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Jewelry
Trade Publication Advertising, Trade Show Appearances and Educational
Seminars. GCAL
advertises in the major jewelry trade publications and maintains
an active
press relations campaign. GCAL was featured in the June 2006 issue
of
Modern
Jeweler
for the launch of the new GCAL service Source Veritas Passport. GCAL
also
attends the major jewelry trade shows primarily in the summer (targeted
at
the fall and holiday selling season) and late fall and winter (targeted
at
the Valentine’s Day and Mother’s Day season). GCAL also has the
opportunity to hold educational seminars at some of the trade shows
and
in-store training on grading issues and the use of the GCAL diamond
grading certificate in retail transactions. Because colored gemstones
are
sold at retail through virtually identical channels of distribution,
AGL
will utilize these same communication channels in trade publications,
trade show appearances and educational seminars. This increased
utilization of the existing communications links, will allow for
significant synergy between GCAL and AGL with respect to the time,
energy,
messaging and expenses in these venues.
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Cross-Marketing
Between GCAL and AGL. GCAL
is establishing relationships with retailers to provide diamond
authentication and grading services for the middle market. By introducing
the AGL brand to the retailers and drawing on the high value brand
recognition of AGL and a more value-driven pricing program, we believe
we
can cross-market AGL services to the GCAL relationships. On the other
hand, AGL has relationships with some of the high value sellers like
Sotheby’s and Christies. By introducing GCAL to these high value sellers
and describing the benefits of GCAL certification including guaranteed
grading and the security benefits of Gemprint, we believe we can
cross-market GCAL to the AGL
relationships.
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eBay
Promotional Programs.
Since
1999, we have worked with eBay on programs to increase the volume of
collectibles traded on eBay and, at the same time, to provide greater exposure
for our authentication and grading services. Current programs
include:
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Informative
and Educational Web Pages.
We have created web pages for eBay specifically designed to inform
and
educate eBay buyers and sellers about the benefits of our authentication
and grading services. eBay includes, on its collectibles web pages,
links
to our web pages and encourages its collectibles customers to use
our
services. eBay has similar programs with other collectibles authentication
and grading services.
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Quick
Opinion Autograph Authentication Service.
We have developed, for eBay’s customers that visit its sports memorabilia
auction website, a fee-based “Quick Opinion” autograph authentication
service. For a prescribed fee, currently $7 per autograph, an eBay
visitor
that is interested in selling or buying an autographed item of memorabilia
on the eBay auction website can obtain, from one of our autograph
experts,
a “quick” opinion as to the authenticity of the autograph, generally
provided within a day of submission. The opinion is based on an
examination of a digital image of the autograph posted on eBay and,
due to
the limitations inherent in this process, we do not warrant the accuracy
of these opinions. The fees generated by this service are shared
between
us and eBay.
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Other
Initiatives.
We have maintained an ongoing dialogue with eBay regarding other
programs
that will attract collectibles sellers and buyers and make it easier
for
them to complete collectibles transactions on eBay’s collectibles auction
websites. For example, the Chief Executive Officer of the Company
has been
invited and attended the eBay Collectibles Summit meetings where
there is
discussion and an exchange of ideas relating to increasing the listings
and sales on eBay in the collectibles
markets.
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Intellectual
Property
Our
intellectual property consists primarily of trademarks, copyrights, proprietary
software and trade secrets. As part of our confidentiality procedures, we
generally enter into agreements with our employees and consultants and limit
access to, and distribution of, our software, documentation and other
proprietary information. The following table sets forth a list of our
trademarks, both registered and unregistered, that are currently being used
in
the conduct of our business:
Registered
Marks
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Unregistered
Marks
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Collectors
Universe
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World
Series of Grading
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PSE
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PCGS
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CU3000
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Coin
Universe
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Professional
Sports Authenticator
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PSE
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Collectors.com
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PSA
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History
in Your Hands
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Record
Universe
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PSA/DNA
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First
Strike
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PCGS
Currency
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Currency
Universe
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Diamond
Market Monitor
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Set
Registry
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First
Strike
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Diamond
Profile
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Expos
Unlimited
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Gemprint
Appraiser
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Gemprint
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Long
Beach Coin, Stamp and Collectibles Expo
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Palmieri’s
Market Monitor
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Professional
Currency Grading
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Santa
Clara Coin, Stamp and Collectibles Expo
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Quick
Opinion
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Source
Veritas
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Sports
Market Report
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AGL
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We
have
not conducted an exhaustive search of possible prior users of the unregistered
trademarks listed above and, therefore, it is possible that our use of some
of
these trademarks may conflict with others.
The
Company owns several patents related to the Gemprint process and scanning
device. The principal patent is number 5,828,405 issued by the United States
Patent and Trademark Office (“USPTO”) in 1998. Generally, this patent provides
for the capture of the unique optical response of a gemstone (or optical
“fingerprint”) where a laser beam is focused on the gemstone and the optical
response is recorded in a digital image. This is accomplished at a controlled
site, currently in the form of a small rectangular box about the size of a
breadbox, and connected to a desktop computer or other computing system for
receiving and displaying a data signal from a two dimensional video camera.
The
two dimensional video camera id part of a light image capture arrangement
comprising a laser diode in combination with optical means for producing a
collimated light beam directed at a gemstone. The gemstone is oriented in a
predetermined manner relative to the light beam and a screen surface is located
to collect and display the unique light pattern from a gemstone. The video
camera directed at the screen surface is sized to collect the image in a digital
format and directs the data signal to the attached computing device. With a
communication link to a database through a local area network or through the
Internet, the digital image is stored in a standardized manner. In a similar
manner, subsequent digital images can be obtained and then compared using an
algorithm to those images on the database. Other related patents are 5,124,935
and 2,679,821 issued by USPTO and related patents filed in the United Kingdom,
Canada and Israel.
Collectibles
Experts
As
of
June 30, 2006, we employed 47 experts in our authentication and grading
operations, who have from 1 to 50 years, and an overall average of 25 years,
of
experience. Our experts include individuals that either (i) had previously
been collectibles dealers or were recognized as experts in the markets we serve,
(ii) who we have trained in our authentication and grading methodologies
and procedures, or in the case of diamonds, who have been trained in the
vocational schools and/or have experience in grading in competing organizations.
However, talented authentication and grading experts in collectibles are in
short supply and there is considerable competition among collectibles
authentication and grading companies for their services. As a result, we have
recently increased our focus on training young authenticators and graders who
we
believe have the skills or knowledge base to become collectibles experts. We
also sometimes contract with outside experts, usually collectibles dealers,
to
assist us with special grading issues or to enable us to address short-term
increases in authentication and grading orders.
Service
Warranties
We
issue
an authenticity or grading warranty with every coin and sportscard authenticated
or graded by us. Under the terms of the warranty, if a coin or sportscard that
was graded by us later receives a lower grade upon resubmission to us for
grading, we are obligated either to purchase the coin or sportscard at the
price
paid by the then-owner of the coin or sportscard or, instead, if we so choose,
to pay the difference in value of the item at its original grade as compared
with its lower grade. Similarly, if a coin or sportscard that has been
authenticated by us is later determined not to have been authentic, we are
obligated under our warranty to purchase the coin or sportscard at the price
that the then-owner paid for that collectible. We accrue for estimated warranty
costs based on historical claims experience.
Before
returning an authenticated or graded coin or sportscard to our customer, we
place the coin or sportscard in a tamper-evident, clear plastic holder that
encapsulates a label identifying the collectible as having been authenticated
and graded by us. The warranty is voided in the event the plastic holder has
been broken or damaged or shows signs of tampering.
We
recently began offering a similar warranty for stamps and currency notes that
we
authenticate and grade. To obtain such a warranty, the customer must elect
to
have his or her stamp encapsulated in a in a tamper-evident, clear plastic
holder that includes a label identifying the collectible as having been
authenticated or graded by us, because we do not offer such a warranty in those
cases where the customer chooses, instead, to have us issue a certificate of
authenticity and grade.
We
do not
provide a warranty with respect to our opinions regarding the authenticity
or
quality of autographs.
We
recently began offering a warranty with respect to the color and clarity grades
assigned by GCAL to the diamonds it grades, which is the first such warranty
offered by any diamond grading service. Under the terms of the warranty, if
a
diamond certified by GCAL is submitted for subsequent grading by GCAL within
one
year of the date of the original certification (which often occurs if the
diamond is being sold), and, on that resubmittal receives a color or clarity
grade that is more than one grade lower than its original color or clarity
grade, we will be obligated either to purchase the diamond at the price paid
by
the then-owner of the diamond or, instead, if we so choose, to pay the
difference in value of the diamond at its original grade as compared with its
lower grade.
Customer
Service and Support
We
devote
significant resources, including a 25 person staff, to providing personalized
customer service and support in a timely manner handling approximately 300
to
500 customer service calls per day. On our websites, customers are able to
check
the status of their collectibles submissions throughout the authentication
and
grading process and to confirm the authenticity of the over 18 million
collectibles that we have graded. When customers need services or have any
questions, they can telephone or e-mail our support staff, Monday through Friday
between the hours of 7:00 A.M. and 6:00 P.M., Pacific Time. We also involve
our
collectibles and diamond experts in providing support services when necessary
to
address special issues.
Supplies
In
order
to obtain volume discounts, we have chosen to purchase most of the
injection-molded plastic parts for our clear plastic holders principally from
a
single supplier. There are numerous suppliers for these items, however, and
we
believe that, if necessary, we could obtain those items from any of those other
suppliers without significant cost to us. However, if it were to become
necessary for us to obtain another supplier, we might have to arrange for the
fabrication of a die for the new supplier. Fabrication of high precision dies
can be a lengthy process. Therefore, it is our practice to maintain at least
a
one month supply of these molded plastic parts in inventory.
Competition
Coin
Authentication and Grading.
We have
three primary competitors in the coin authentication and grading market:
Numismatic Guaranty Corporation of America (“NGC”), Independent Coin Grading and
ANACS, a subsidiary of Amos Press, Inc.
Sportscard
Authentication and Grading.
We have
two primary competitors in sportscard authentication and grading: Beckett
Sportscard Grading Corporation, and Sportscard Guaranty, LLC.
Autograph
Authentication and Grading.
In the
vintage autograph authentication market, we compete with James Spence
Authentication (“JSA”) and a few smaller competitors.
Stamp
Authentication and Grading.
In
stamp authentication, our principal competitors are the Philatelic Foundation
and the American Philatelic Society, both of which are non-profit organizations.
The Philatelic Foundation also grades stamps.
Currency
Authentication and Grading.
We have
two competitors in currency: Paper Money Guaranty, (a subsidiary of NGC), and
a
smaller startup competitor.
Diamond
Authentication and Grading.
In the
diamond grading market, we compete with ten other grading services, several
of
which are larger, have been in business longer and are better known than GCAL.
Our principal competitors are the Gemological Institute of America, a non-profit
educational organization (GIA); AGS Laboratories, an affiliate of the American
Gem Society, a non-profit trade association; European Gemological Laboratories;
International Gemological Institute; and Gemological Science International.
Colored
Gemstone Authentication and Grading. In
the
colored gemstone market, we compete with six or more such services, some of
which have operating histories longer than AGL. Our principal competitors are
Gubelin Gemological Laboratories, Schweizerische
Stiftung für Edelstein-Forschung (SSEF, or the Swiss Gemological Institute), a
non-profit organization and Gemological Testing Center of the American Gem
Trade
Association, a non-profit trade association.
The
principal competitive factors in our authentication and grading markets are
(i) brand recognition and awareness, (ii) an established reputation
for integrity, independence and consistency in the application of grading
standards, and (iii) responsiveness of service. Price is much less of a
factor in the case of vintage collectibles, but is a more important
consideration with respect to modern coins and sportscards because of their
significantly lower values. Price is a more important competitive factor in
the
Diamond market, due to the larger number of competitors. Because the current
market in colored gemstones certification is primarily focused on high-value
colored gemstones, price is not as much of an important consideration as the
credibility and history of the particular grading service. We believe that
our
PCGS, PSA, PSA/DNA, PSE and PCGS Currency brands compete favorably
with
respect to all of these factors and are among the leaders in each of their
respective markets. We believe that our GCAL brand is a premium brand in
the
diamond market, interpreting the grading standards in a rigorous and consistent
manner, and one of the three or four top quality brands, despite the fact
that
it is the smallest, in terms of the volume of grading submissions, as compared
to its principal competitors. We believe that AGL is a premium brand and
competes favorably with respect to all of these factors. Barriers to entry
into
the authentication and grading market are relatively low, especially in the
sportscard authentication and grading market. However, brand name recognition
and a reputation for integrity, independence and consistency in the application
of grading standards can take several years to develop. The limited supply
of
collectibles experts also operates as a barrier to entry or expansion in
our
collectibles markets. By contrast, the supply of grading experts in the diamond
and colored gemstone markets are much more plentiful. In colored gemstones,
the
availability of a suitable and trusted reference collection is essential
to
providing accurate enhancement and country of origin
analysis.
Information
Technology
We
have
developed proprietary software systems that we use in our authentication and
grading operations, principally for order tracking, processing and
recordkeeping, and the operation and maintenance of our Internet websites.
These
software systems include Grading Management and Production Systems, Set
Registry, Population Reports, Price Guides, Market Indexes, Article Libraries
QuickOpinion Systems and Featured Dealer Systems. These systems operate on
software platforms in Microsoft Visual Basic.NET, Microsoft ASP.NET and
Microsoft SQL Server. We also have legacy systems, which we are in process
of
replacing, in Cold Fusion and Visual Basic 6. We also maintain an integrated
local area network that assists in and provides certain controls on production,
product physical movement, accounting and financial functions, data warehousing
and other tasks. During the fiscal year ended June 30, 2006, these systems
tracked the authentication and grading process and generated records and data
for over 3.2 million collectibles submitted to us for authentication and
grading, without significant disruption or loss of service.
Although
we do not primarily conduct our business on the Internet, we do use the Internet
for information exchange and delivery of market-oriented content and for our
Set
Registry and certain of our other marketing programs. As a result, we have
25
Dell PowerEdge Servers with RAID, along with a fully redundant SQL Server 2000
with high-availability cluster supporting over two terabytes of clustered
storage. The hardware resides at our headquarters in a server room that has
24/7
environmental monitoring and alerting through hardware sensors, 24/7 network
availability and performance monitoring and alerting through network management
software and 24/7 Internet availability and performance monitoring and alerting
through third party providers. The Internet connectivity flows through multiple
Internet providers supporting up to approximately 47 megabit Internet bandwidth
with multiple layers of Internet firewall protection, including three Cisco
PIX
firewalls and Microsoft ISA Server protection. We maintain a multi-tiered
antivirus and anti-spam SMTP infrastructure scanning all incoming mail through
four different AV engines. The system is backed up nightly with 1.6 terabyte
capacity, expandable to over 3 terabytes under current configuration, and is
managed by administrators certified by Microsoft, Cisco and Linux.
However,
we do not have redundant computer systems at a location that is remote from
Southern California, where our computer systems currently are located. As a
result, any damage to or failure of our computer systems due to a catastrophic
event in Southern California, such as an earthquake, could cause an interruption
in our services.
Government
Regulation
With
the
exception of laws in some states that require memorabilia authenticators to
certify to the accuracy of their authentication opinions, there are no material
government regulations specifically relating to the authentication and grading
businesses that we conduct, other than regulations that apply generally to
businesses operating in the markets where we maintain operations or conduct
business. However, our dealer finance program will be subject to numerous laws
and regulations in those states in which we may make loans to
dealers.
Disposition
of Collectibles Sales Businesses
During
the period from 1999 through the latter part of fiscal 2004, we also were
engaged in the business of marketing and selling collectible coins, sportscards,
currency and sports entertainment and historical memorabilia. Most of those
sales were made at multi-venue auctions that were conducted by our collectibles
sales businesses, which were comprised of Bowers and Merena Galleries and
Kingswood Coin Auctions for rare coins, Superior Sports Auctions for vintage
sportscards and sports memorabilia, Lyn Knight Currency Auctions for currency
and Odyssey Publications for entertainment and historical memorabilia. We also
sold collectible coins by direct sales methods.
In
December 2003, our Board of Directors authorized management to implement a
plan
to focus our financial and management resources, and collectibles expertise,
on
the operations and growth of our authentication and grading businesses, and
to
divest the collectibles auctions and direct sales businesses. This decision
was
based on a number of factors and considerations that included, among others,
(i)
the historical operating results of the collectibles auction and direct sales
businesses, which had proven to be disappointing as compared to the operating
results of our authentication and grading businesses; (ii) a lack of synergies
between the collectibles sales businesses and our grading authentication
businesses, which made it difficult to achieve a meaningful reduction in our
operating expenses; and (iii) the additional capital that we believed would
be
required to grow our collectibles auction and direct sales businesses in
comparison to the lower capital requirements of our authentication and grading
businesses.
As
a
result of this decision, we sold our collectibles sales businesses during fiscal
2004, but retained the collectibles inventory and accounts receivables of those
businesses, which we have substantially liquidated. We also terminated the
licenses under which we operated our David Hall Rare Coins Division, which
had
been engaged in the business of selling collectible coins at retail. We
generated cash of $750,000, $2,332,000 and $10,435,000 in fiscal years ended
June 30, 2006, 2005 and 2004, from the disposition of those businesses and
the
liquidation of their inventories and accounts receivables.
The
divestiture of the collectibles sales businesses has enabled us to focus our
financial and managerial resources on growing our existing authentication and
grading revenues and extending our authentication and grading business into
new
markets, such as the diamond and colored gemstone markets, and to reduce our
operating expenses, and, thereby, increase our overall profitability, as
compared to the periods prior to the disposition of those collectibles sales
businesses.
Employees
As
of
June 30, 2006, we had 211 full-time employees and 17 part-time employees, of
which 172 were employed in our authentication and grading-related businesses,
including our 47 experts and 25 customer service and support personnel. The
other employees included 12 in information services, 3 in marketing, 3 in our
CCE subscription business, and 38 in other business and administrative services.
We have never had a work stoppage, and no employees are represented under
collective bargaining agreements. We consider relations with our employees
to be
good.
Our
business is subject to a number of risks and uncertainties that could prevent
us
from achieving our business objectives and that could hurt our future financial
performance and the price performance of our common stock, and cause our future
financial condition and future financial performance to differ significantly
from our current expectations described in the forward-looking statements
contained in this Annual Report. Those risks and uncertainties, many of which
are outside of our control, include the following:
A
decline in the popularity of high-value collectibles and a resulting decrease
in
submissions for our services could adversely impact our business.
The
volume of collectibles submitted to us for authentication and grading is
affected by the demand for and market value of those collectibles. As the demand
for and value of collectibles increase, authentication and grading submissions,
as well as requests by submitters for higher price, faster turn-around times,
also increase. However, that also means that a decline in popularity and,
therefore in the value, of the collectibles that we authenticate and grade
would
cause decreases in authentication and grading submissions and in requests for
faster turn-around times and, therefore, also in our revenues and profitability.
We have found, over the years, that the popularity of collectibles can vary
due
to a number of factors, most of which are outside of our control, including
perceived scarcity of collectibles, general consumer confidence and trends
and
their impact on disposable income, precious metals prices, interest rates and
other general economic conditions. For example, declines in gold prices or
further increases in interest rates could lead to reductions in authentication
and grading submissions and, therefore, could adversely affect our profitability
and financial condition.
Declines
in general economic conditions could result in decreased demand for our
services, which could adversely affect our operating results.
The
availability of discretionary or disposable income is an important factor in
the
willingness and ability of collectors and consumers to purchase, and the prices
that they are willing to pay for, high-value collectibles, diamonds and colored
gemstones. Declines in purchases and sales, and in the value, of collectibles,
diamonds or colored gemstones usually result in declines in the use of
authentication and grading services, as such services are most often used by
sellers and purchasers of collectibles in conjunction with and to facilitate
sale and purchase transactions. As a result, economic uncertainties, downturns
and recessions can and do adversely affect our operating results by
(i) reducing the frequency with which collectibles dealers and collectors
submit their coins, sportscards and other collectibles for authentication and
grading; (ii) consumers purchasing fewer diamonds; thereby leading to a lower
number of diamonds for grading by retailers; (iii) causing collectibles dealers
and collectors to request longer authentication and grading turn-around times
with respect to the collectibles they submit to us for grading, which would
reduce our revenues and profitability, and (iv) reducing the ability of
customers to pay outstanding accounts receivable.
Temporary
popularity of some collectibles may result in short-term increases, followed
by
decreases, in the volume of submissions for our services, which could cause
our
revenues to fluctuate.
Temporary
consumer popularity or “fads” among collectors may lead to short-term or
temporary increases, followed by decreases, in the volume of collectibles that
we authenticate and grade. These trends may result in significant
period-to-period fluctuations in our operating results and could result in
declines in our net revenues and profitability, not only because of a resulting
decline in the volume of authenticating and grading submissions, but also
because such trends could lead to increased price competition, which could
require us to reduce our authentication and grading fees in order to maintain
market share. In the last few years, for example, the popularity of sportscards
has declined and, at the same time, we have experienced a decline in sportscard
authentication and grading submissions.
Our
revenues and income depend significantly on revenues generated by our coin
authentication and grading services. A decrease in the level of submissions
for
these services, which historically has been impacted by changes in economic
conditions, could adversely affect our revenues and results of operations.
Coin
authentication and grading accounted for approximately 65%, 69% and 66% of
our
net revenues in fiscal 2006, 2005 and 2004, respectively. Furthermore, in fiscal
2005, coin grading was the segment of our authentication and grading business
that experienced the most significant increase in net revenues. We believe
that
this growth in coin grading submissions has been due, at least in part, to
the
volatility of and uncertainties regarding the performance of the stock markets,
coupled with the decline in interest rates and in the value of the U.S. Dollar,
which have led investors to shift some of their investments from stocks and
bonds to precious metals. The lack of diversity in our sources of revenues
and
our dependence on coin grading submissions for a majority of our net revenues
make us more vulnerable to adverse changes in economic conditions. These adverse
changes include declines in the value of precious metals or recessionary
conditions that could result in declines in collectibles authentication and
grading submissions generally or, more particularly, in collectible coin
submissions that would, in turn, result in reductions in our total net revenues
and income.
Our
top 5 customers, account for approximately 22% of our total net revenues.
During
the year ended June 30, 2006, five of our coin authentication and grading
customers accounted for approximately 22% of our total net revenues. As a
result, the loss of any of those customers, or a lower level of activity by
any
of those customers, may cause our net revenues to decline and, therefore, could
harm our profitability. During the fourth quarter of fiscal 2005, the owner
of
the largest of these customers encountered an unexpected and serious medical
problem, which led to a 55% decrease in revenues earned from that customer
in
fiscal 2006, compared to fiscal 2005.
Our
stamp, currency and diamond authentication and grading businesses are in their
start-up phases.
There can be no assurance that these businesses will prove to be successful.
We
purchased our diamond grading business in November 2005, started our currency
authentication and grading business in March 2005, and our stamp authentication
and grading business in fiscal 2000. These businesses have yet to make a
material contribution to our net revenues. To date, our stamp, currency and
diamond grading businesses have incurred operating losses and there is no
assurance that these services will gain market acceptance or will ever make
a
material contribution to our net revenues or achieve profitability. If they
do
not, we may have to discontinue, and write off our investments in, those
businesses.
Future
acquisitions and the commencement of new businesses present risks, and we may
be
unable to achieve the financial and strategic goals of any acquisition or
commencement of any new business.
One
component of our growth strategy is to acquire existing or to start new
businesses that serve other markets for other collectibles or high-value assets.
In fiscal 2006, we acquired four businesses and, to-date in fiscal 2007, we
have
acquired two other businesses, a colored gemstone grading business and a trade
show management company. These new businesses will face a number of risks and
uncertainties, including:
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difficulties
in integrating newly acquired or newly started businesses into existing
operations, as a result of which we may incur increased operating
costs
that would adversely affect our operating
results;
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the
risk that our current and planned facilities, computer systems and
personnel and controls will not be adequate to support our expanded
operations;
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diversion
of management time and capital resources from our existing businesses,
which could adversely affect their performance and our operating
results;
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dependence
on key management personnel of acquired or newly started businesses
and
the risk that we will be unable to integrate or retain such
personnel;
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the
risk that new services we may introduce or begin offering, whether
as a
result of internal expansion or business acquisitions, will not gain
acceptance;
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competition
from established or larger competitors in new markets, such as (in
our
diamond grading business), which could adversely affect the financial
performance of any of the businesses we may have acquired or started;
and
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the
risk that the anticipated benefits of any acquisition or of the
commencement of any new business may not be realized, in which event
we
will not be able to achieve an acceptable return on our
investment.
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There
are risks associated with new service offerings, including our dealer financing
program, with which we have little experience.
We
are
continually exploring new services that we might introduce and offer to our
existing authentication and grading customers as a means of increasing our
net
revenues and profitability. Those new services, however, may prove to be
unprofitable and negatively impact our operating results.
One
of
those new services that we introduced in fiscal year 2005 is a Dealer Financing
Program that involves our making short-term loans to collectibles dealers that
are collateralized by the collectibles that they submit or have been submitted
to us for authentication and grading. There is no assurance that we will be
successful in achieving sustained profitability in our Dealer Financing Program.
Additionally the lending business is subject to a number of risks and
uncertainties, and we have limited loan underwriting and collection experience.
In addition, the failure or inability of borrowers to repay their loans is
an
inherent risk in a lending business. Our ability to minimize loan losses will
depend on several factors, including:
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The
loan underwriting policies and controls we continue to adopt and
implement, which could prove to be inadequate to prevent loan losses
from
occurring;
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Our
ability to sell collateral, when a borrower defaults in the payment
of a
loan, for amounts sufficient to offset loan losses, which can be
affected
by a number of factors outside of our control, including (i) changes
in economic conditions, (ii) increases in market rates of interest
and (iii) changes in the condition or value of the collateral that
will secure the loans we make; and
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The
reserves we will need to establish for potential loan losses, which
may
prove to be inadequate, in which case we would have to incur additional
charges, which would
have the effect of reducing our net income and could negatively impact
our
financial condition.
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Additionally,
the business of lending is subject to numerous state and certain federal laws
and regulations, which may impose significant costs or limitations on the way
we
conduct or expand such a business.
We
currently have a $7 million bank line of credit, expiring in June 2007, that
we
can use to fund some of the eligible loans we make. To-date, we have not
utilized this line of credit, as we have adequate cash resources to fund the
Dealer Financing Program. However, in the event we make borrowings under this
line of credit in the future, we cannot assure that our cash flow from the
operations of our dealer finance program will be sufficient to enable us to
repay any borrowings under the line of credit. Also, the loan agreements
establishing the line of credit impose certain restrictive covenants on the
Company which could operate to restrict our plans to grow our business.
We
are dependent on our key management personnel.
Our
performance is greatly dependent on the performance of our senior management
and
certain other key employees. As a result, the loss of the services of any of
our
executive officers or other key employees could harm our business. Some of
our
executive officers and key employees are experts in the collectibles markets
and
have industry-wide reputations for authentication and grading of collectibles.
In particular, the loss of Michael R. Haynes, our Chief Executive Officer,
or
David G. Hall, our President, could have a negative effect on our reputation
for
expertise in the collectibles markets in which we operate and could lead to
a
reduction in authentication and grading submissions to us.
We
are dependent on our collectibles experts.
In
certain of our markets, there are a limited number of individuals who have
the
expertise to authenticate and grade collectibles, and competition for available
collectibles experts is intense. Accordingly, our business and our growth
initiatives are heavily dependent on our ability (i) to retain our existing
collectibles experts, who have developed relatively unique skills and enjoy
a
reputation for being experts within the collectibles markets, and (ii) to
implement personnel recruiting, succession and training programs that will
enable us to add collectibles experts, as necessary, to grow our business and
offset employee turnover that can occur from time to time. As a result, we
have
initiated an “apprentice program” in our coin grading business. If we are not
successful in retaining our existing collectibles experts or in hiring and
training new collectibles experts, this could limit our ability to grow our
business and adversely affect our operating results and financial condition.
Moreover, some of our experts could leave our company to join a competitor
or
start a competing business.
We
could suffer losses on authentication and grading warranties.
Certain
of our grading service businesses offer customers service warranties. The
warranties offered by our collectibles grading businesses provide that:
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if
any collectible we have authenticated and sealed in our tamper-evident
plastic cases is later determined not to have been genuine, we would
have
to purchase the collectible at the price paid for it by its then
owner;
and
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if
any collectible that was graded by us and sealed in our tamper-evident
plastic cases later receives a lower grade upon resubmission to us
for
grading, we would be obligated either to purchase the collectible
at the
price paid by its then owner or to pay the difference in its value
at its
original grade as compared to its value at the lower
grade.
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GCAL
offers a grading warranty that provides that if a diamond graded by us is
submitted for regrading within the succeeding year and, on regrading is assigned
a color or clarity grade that is more than one grade lower than the original
color or clarity grade it received, GCAL will become obligated to purchase
the
diamond at the price paid by its then owner or, if GCAL so chooses, to pay
the
difference in its value at its original grade as compared to its value at the
lower grade.
We
have
no insurance coverage for claims made under these warranties and, therefore,
we
maintain reserves to satisfy such warranty claims based on historical
experience, which in the past have proven to be adequate. If warranty claims
were to exceed these reserves, we would incur additional charges that would
adversely affect our operating results and financial condition.
Increased
competition could adversely affect our financial performance.
Although
there are few major competitors in the collectibles authentication and grading
markets in which we currently operate, competition in these markets is,
nevertheless, intense. In addition, in the diamond market there are a number
of
grading services that are substantially larger, have been in business
substantially longer and are better known than GCAL. Increased competition
in
our collectibles markets could adversely affect our pricing and profit margins
and our ability to achieve further growth, and we cannot assure that we will
continue to be successful in competing against existing or future competitors
in
our collectibles markets. In our diamond business, which is just beginning
to
implement its growth strategy, we are likely to encounter intense competition
from larger and more established competitors that have significant market
shares. Also, our entry into new collectibles or high-value asset markets could
lead other potential competitors to enter those markets as well. Such
competition could adversely affect our ability to generate profits and could
cause us to continue to incur losses in those markets and damage our financial
condition.
We
depend on our ability to protect and enforce our intellectual property rights.
We
believe that our patents, trademarks and other proprietary rights are important
to our success and competitive position. We rely on a combination of patents,
trademarks, copyright and trade secret laws to establish and protect our
proprietary rights. However, the actions we take to establish and protect our
intellectual and other proprietary rights may prove to be inadequate to prevent
imitation of our services or products or to prevent others from claiming
violations of their intellectual and proprietary rights by us. In addition,
others may develop similar trade secrets or other intellectual property
independently or assert rights in our intellectual and other proprietary rights
that could lead them to seek to block sales of our services based on allegations
that use of some of our marks or other intellectual property constitutes a
violation of their intellectual property rights.
Our
unregistered trademarks could conflict with trademarks of others.
We
have
not conducted an exhaustive search of possible prior users of our unregistered
trademarks, including Coin Universe, Collectors.com and PSE. Therefore, it
is
possible that our use of some of these trademarks may conflict with others.
As a
result, we could face litigation or lose the use of some of these trademarks,
which could have an adverse effect on our name recognition and result in a
decrease in revenues and an increase in expenses.
The
imposition of government regulations could increase our costs of doing business.
With
the
exception of state laws applicable to autograph authentication, the collectible
coin and other high-value collectibles markets are not currently subject to
direct federal, state or local regulation. However, from time to time government
authorities discuss additional regulations which could impose restrictions
on
the collectibles industry, such as regulating collectibles as securities or
requiring collectibles dealers to meet registration or reporting requirements,
or regulating the conduct of auction businesses. Adoption of laws or regulations
of this nature could lead to a decline in sales and purchases of collectibles
and, therefore, also to a decline in the volume of coins, sportscards and other
collectibles that are submitted to us for authentication and grading.
Our
reliance on a single source for principally all of our “tamper-evident,” clear
plastic coin and sportscard holders exposes us to potential supply and quality
problems.
We
place
all of the coins, sportscards and currency notes, and sometimes also the stamps
that we authenticate and grade, in tamper-evident, clear plastic holders. In
order to take advantage of volume pricing discounts, we have chosen to purchase
substantially all of those holders, on a purchase order basis, from one
principal supplier. Our reliance on a single supplier for a substantial portion
of those plastic holders exposes us to the potential for delay in our ability
to
deliver timely authentication and grading services in the event that supplier
were to terminate its services to us or to encounter financial or production
problems. If, in such an event, we were unable to obtain replacement holders
in
a relatively short period of time, we could lose customer orders, or incur
additional production costs. In addition, if the replacement holders were not
of
comparable quality to our existing supplier, we could expose ourselves to the
potential for additional warranty claims in the event that tampering with our
holders was not evident. These occurrences could cause a decline in our net
revenues and have a material adverse effect on our results of operations.
Our
computer and network systems may be vulnerable to unforeseen problems and
security risks, and we are vulnerable to system failure due to a lack of
redundant systems at another location.
Our
operations are dependent on our ability to protect our computer systems that
we
use in our authentication and grading operations and to maintain our websites
against damage from fire, power loss, telecommunications failure, earthquakes
and similar catastrophic events. In this regard, Southern California, where
we
are primarily located, is particularly vulnerable to earthquakes and fires
that
could result in damage to our computer systems. In addition, our diamond
operations are located in a New York City high-rise building that could be
vulnerable to terrorist attacks or to fire or other disasters. We do not have
redundant computer systems at a location that is remote from Southern
California. Any damage to or failure of our computer systems could cause an
interruption in our services that could harm our business, operating results
and
financial condition.
In
addition, our operations are dependent on our ability to protect our computer
systems and network infrastructure from damage that could occur from physical
break-ins, security breaches and other disruptive problems caused by the
technology that we employ in our operations. Computer break-ins and security
breaches also could jeopardize the security of information stored in and
transmitted through our computer systems and network infrastructure, which
could
cause us to incur significant liability and possibly also damage our reputation.
Other disruptions due to problems on the Internet or actions of Internet users
could make it difficult for our customers to access our websites. In either
case, problems of this nature could adversely affect our business and operating
results, and security breaches that would adversely affect the privacy of
customer information could lead existing customers to terminate their business
relationships with us. Although we intend to continue to implement and upgrade
sophisticated technology to prevent such disruptions and damage, there is no
assurance that our security measures will prove to be successful.
We
rely on third parties for various Internet and processing services.
Our
operations depend on a number of third parties for Internet access and delivery
services. We have limited control over these third parties and no long-term
relationships with any of them. For example, we do not own a gateway onto the
Internet, but, instead, rely on Internet service providers to connect our
website to the Internet. Should the third parties that we rely on for Internet
access or delivery services be unable to serve our needs for a sustained time
period as a result of a strike, natural disaster or other reason, our revenues
and business could be harmed.
We
are exposed to potential risks and we will continued to incur increased costs
as
a result of the internal control testing and evaluation process mandated by
Section 404 of the Sarbanes-Oxley Act of 2002.
Although
we continue to document and test the effectiveness of our internal controls
over
financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of
2002, we expect we will continue to incur costs, including increased accounting
fees, in order to maintain compliance with that Section of the Sarbanes-Oxley
Act. Also, if our efforts to comply with new or changed laws, regulations and
standards differ from the activities intended by regulatory or governing bodies
due to ambiguities related to our practices, our reputation may be harmed or
we
may be subject to litigation.
If
our quarterly results are below the expectations of securities market analysts
and investors or we decide to suspend or discontinue the payment of dividends,
the price of our common stock may decline.
Many
factors, including those described in this “Risk Factors” section, can affect
our business, financial condition and results of operations, which makes the
prediction of our future financial results difficult. These factors include:
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increases
or decreases in number of collectibles or diamonds graded from period
to
period;
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changes
in market conditions that can affect the demand for our authentication
and
grading services, such as a decline in the popularity of certain
collectibles;
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general
economic conditions that affect the availability of disposable income
among collectors and consumers; and
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the
actions of our competitors.
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If
our
quarterly operating results fall below expectations or we decide to suspend
or
discontinue the payment of dividends, securities market analysts may downgrade
our common stock and some of our stockholders may sell their shares, which
could
adversely affect the trading prices of our common stock. Additionally, in the
past, companies that have experienced declines in the trading price of their
shares due to events of this nature have been the subject of securities class
action litigation. If we become involved in a securities class action litigation
in the future, it could result in substantial costs and diversion of our
management’s attention and resources, thus harming our business.
No
assurance that we will continue to pay cash dividends.
On
May
31, 2006, the Company adopted a dividend policy that calls for the payment
of an
expected total annual cash dividend of $0.32 per common share, payable in the
amount of $0.08 per share, per quarter and since then we have paid two
consecutive cash dividends, each in the amount of $0.08 per share, in accordance
with this dividend policy. The payment of cash dividends in the future, pursuant
to the Company’s dividend policy, is subject to final determination each quarter
by the Board of Directors based on a number of factors, including the Company’s
financial performance and its available cash resources, its cash requirements
and alternative uses of cash that the Board may conclude would represent an
opportunity to generate a greater return on investment for the Company. For
these reasons, as well as others, there can be no assurance that the amount
of
the Company’s current quarterly cash dividend will not be reduced or that the
Board of Directors will not decide to suspend or discontinue the payment of
cash
dividends in the future.
Provisions
in our charter documents or in Delaware law may make an acquisition of us more
difficult or delay a change in control, which may adversely affect the market
price of our common stock.
Our
Amended and Restated Certificate of Incorporation and Bylaws contain
anti-takeover provisions, including those listed below, that could make it
more
difficult for a third party to acquire control of us, even if that change of
control would be beneficial to our stockholders:
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our
board of directors has the authority to issue common stock and preferred
stock and to determine the price, rights and preferences of any new
series
of preferred stock without stockholder
approval;
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there
are limitations on who can call special meetings of our stockholders;
and
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stockholders
may not take action by written
consent.
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In
addition, provisions of Delaware law and our stock option plans may also
discourage, delay or prevent a change in control of our company or unsolicited
acquisition proposals.
We
lease
approximately 59,000 square feet for our California-based headquarters under
a
nine-year lease that commenced in November 2000. We currently sublease 2,184
square feet of this office space to a related party sub-tenant with an
expiration date that coincides with the expiration of the Company's nine-year
lease. In addition, we lease approximately 7,300 square feet in New York under
operating leases through November 2015 in connection with our diamond grading
business. We believe that our leased offices are sufficient for our current
business requirements.
Bill
Miller v. Collectors Universe, Inc. As previously reported, the Company was
a
defendant in this legal action, which was brought in the Superior Court of
California, County of Orange, by Bill Miller, a former employee of the Company,
who was president of one of the Company’s collectibles sales businesses that was
sold in 2004 and an expert in the authentication of autographs and memorabilia.
Miller alleged that the Company had issued authentication certificates bearing
his name without his consent, in violation of a California statute prohibiting
unauthorized appropriation of a person’s name, signature or likeness. The
statute provides that a person whose name, signature or likeness has been
misappropriated, in violation of the statute, is entitled to recover the greater
of $750 or the actual damages suffered as a result of the unauthorized use,
and
any profits that were attributable to that unauthorized use that are not taken
into account in computing the actual damages. The Company denied Miller’s
allegations and asserted that he was not entitled to any recovery under the
statute in excess of his actual damages and that he had not suffered any actual
damages as a result of the issuance of the certificates.
As
also
previously reported, at the conclusion of the trial, which took place in October
2005, (i) the jury found that the Company had used Miller’s name without
his consent on 14,060 authentication certificates, but that Miller had sustained
actual damages from that use totaling $14,060; and (ii) the parties entered
into a stipulated judgment in the case, which, among other things, provides
that
Miller’s statutory damages arising from the actions of the Company were zero.
The court left unresolved and for future determination the issue of which party,
if any, was the prevailing party in the lawsuit, which would determine which
party, if any, is entitled to recover its attorney’s fees from the other
party.
In
December, 2005, Miller filed a Notice of Appeal seeking an appellate court
review, a reversal of the judgment entered by the trial court and a finding,
that as a matter of law, he is entitled to statutory damages equal to $750
for
each use of his name by the Company, or more than $10 million in total. Miller
filed an opening brief in August 2006, and we expect that various responsive
briefs will be filed through February 2007. The Company has been informed by
its
trial counsel that, in California, it sometimes takes as long as two years,
from
the filing of an appeal of a damage award, before the appeal is actually heard
by an appellate court.
The
Company continues to believe that it will not incur any material liability
to
Miller in this case. However, there is little interpretive history with respect
to the measure of damages in a case such as the Miller case, creating a number
of relatively novel legal issues. As a result, it is not possible to predict,
with certainty, how an appellate court will ultimately rule on the issue of
damages.
Other
Legal Actions
The
Company is named from time to time, as a defendant in lawsuits that arise in
the
ordinary course of business. Management of the Company believes that none of
those lawsuits currently pending against it is likely to have a material adverse
effect on the Company.
None.
Name
|
|
Age
|
|
Positions
|
|
|
|
|
|
Michael
R. Haynes
|
|
55
|
|
Chief
Executive Officer
|
David
G. Hall
|
|
59
|
|
President
|
Joseph
J. Wallace
|
|
46
|
|
Chief
Financial Officer
|
Michael
J. Lewis
|
|
62
|
|
Senior
Vice President - Finance and Chief Compliance
Officer
|
MICHAEL
R. HAYNES
has
served as Chief Executive Officer and Director since January 1, 2003. He served
as Chief Operating Officer, Chief Financial Officer and Director of Tangible
Asset Galleries, Inc, a distributor of fine art, from 2000 to 2002. He has
been
President, Chief Operating Officer and/or Chief Financial Officer of eight
collectibles, precious metals, specialty retail, distribution, e-commerce and
manufacturing businesses. Overall, Mr. Haynes has more than 25 years of
experience in managing the growth and development of growth companies, which
includes over 19 years experience in managing both public and private companies
engaged in the business of selling collectibles at auction, retail and
wholesale. He was also one of the co-founding board members of the Industry
Council for Tangible Assets, a Washington, D.C. trade association for dealers
and auctioneers of tangible and collectible assets, where he served for nine
years. Mr. Haynes holds a Master's degree in Business and a Bachelor of Science
degree in mechanical engineering, both from Southern Methodist University.
He is
a Certified Public Accountant and a Certified Financial Planner.
DAVID
G. HALL
has
served as President of Collectors Universe, Inc. since September 2001. From
April 2000 to September 2001, Mr. Hall served as our Chairman of the Board
and
Chief Executive Officer. Mr. Hall also has served as Chairman of the Board
and a
Director of Professional Coin Grading Services, Inc., the Company’s predecessor,
since it was founded in February 1986 and also served as its President and
Chief
Executive Officer until January 1999. Mr. Hall was honored in 1999 by
COINage
Magazine
as
Numismatist of the Century, along with 14 others. In 1990, Mr. Hall was named
an
Orange County Entrepreneur of the Year by INC.
magazine. In
addition, he has written A
Mercenary’s Guide to the Rare Coin Market,
a book
dedicated to coin collecting. Mr. Hall is also a member of the Professional
Numismatists Guild.
JOSEPH
J. WALLACE
became
the Company’s Chief Financial Officer effective September 15, 2005. Prior to
becoming Chief Financial Officer, he was the Company’s Vice President of Finance
from November 2004 and Controller from June 2004. From 1997 to 2003, Mr. Wallace
was Vice President of Finance, Chief Financial Officer and Secretary of STM
Wireless, Inc., a public traded company engaged in the business of developing,
manufacturing and marketing satellite communications products and services,
which filed for Chapter 11 protection under the Bankruptcy Code in February
2003. Mr. Wallace is a Fellow of the Institute of Chartered Accountants, a
member of the Institute of Certified Public Accountants, in Ireland, and a
CPA
in the State of California.
MICHAEL
J. LEWIS served
as
Chief Financial Officer of Collectors Universe, Inc. from October 2001 until
September 15, 2006, when he became Senior Vice President of Finance and Chief
Compliance Officer. From January 2000 to October 2001, Mr. Lewis was a private
investor. In 1998, Mr. Lewis was Chief Financial Officer of the Young
Presidents’ Organization. During 1999, Mr. Lewis was an associate with Eureka
Financial Markets, a venture capital firm. From 1994 to 1997, Mr. Lewis served
as Chief Executive Officer of National Case Management. Prior to that time,
Mr.
Lewis served as a Financial Consultant or as Chief Financial Officer in several
companies, including Chief Financial Officer of Western Digital Corporation
and
Emulex Corporation.
PART
II
Our
common stock is listed on the Nasdaq Global Market, trading under the symbol
CLCT. The following table sets forth the high and low closing prices of our
common stock, as reported by NASDAQ for each of the fiscal quarters in the
fiscal years ended June 30, 2006 and 2005:
Fiscal
2006
|
|
High
|
|
Low
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
17.54
|
|
$
|
12.58
|
|
Second
Quarter
|
|
|
16.14
|
|
|
11.78
|
|
Third
Quarter
|
|
|
17.56
|
|
|
13.73
|
|
Fourth
Quarter
|
|
|
16.18
|
|
|
13.44
|
|
Fiscal
2005
|
|
High
|
|
Low
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
14.87
|
|
$
|
10.53
|
|
Second
Quarter
|
|
|
20.43
|
|
|
14.50
|
|
Third
Quarter
|
|
|
21.60
|
|
|
17.78
|
|
Fourth
Quarter
|
|
|
19.34
|
|
|
14.82
|
|
The
Company had 110 holders
of record of its common stock and approximately 3,122 beneficial owners on
June
30, 2006.
Dividends. On
May
31, 2006, the Company adopted a dividend policy that calls for the payment
of an
expected total annual cash dividend of $0.32 per common share, payable in the
amount of $0.08 per share, per quarter. The Board of Directors has declared
the
following quarterly cash dividends under this policy.
Declaration
Date
|
|
Record
Date:
|
|
Dividend
Payment
Date
|
May
31, 2006
|
|
June
14, 2006
|
|
June
28, 2006
|
August
15, 2006
|
|
August
29, 2006
|
|
September
12, 2006
|
The
declaration of cash dividends in the future, pursuant to the Company’s dividend
policy, is subject to final determination each quarter by the Board of Directors
based on a number of factors, including the Company’s financial performance and
its available cash resources, its cash requirements and alternative uses of
cash
that the Board may conclude would represent an opportunity to generate a greater
return on investment for the Company. For these reasons, as well as others,
there can be no assurance that the amount of the quarterly cash dividend will
not be reduced or that the Board of Directors will not decide to suspend or
discontinue the payment of cash dividends in the future.
Share
Repurchases
On
December 6, 2005, the Company announced that its Board of Directors had approved
a $10 million stock buyback program. The program authorizes the Company to
make
up to $10 million of stock purchases in the open market or private transactions,
in accordance with applicable SEC rules. The Company is under no obligation
to
repurchase any shares under this program, and the timing, actual number and
value of shares that may be repurchased under this program will depend on a
number of factors, including the Company’s future financial performance, the
Company’s available cash resources and competing uses for the cash that may
arise in the future, prevailing market prices of the Company’s common stock and
the number of shares that become available for sale at prices that the Company
believes are attractive. During the year ended June 30, 2006, the Company
repurchased and retired 181,851 shares, for which it paid a total of
approximately $2,618,416, which is net of transaction costs of approximately
$10,000. No shares were purchased pursuant to this program prior to March 2006.
The
following table sets forth information regarding our share repurchases pursuant
to our share buyback program in each of the months during the year ended June
30, 2006, which were the initial share repurchases made by the Company under
this program.
|
|
(a)
|
|
(b)
|
|
(c)
|
|
(d)
|
|
Monthly
Periods
During
the Year Ended
June
30, 2006
|
|
Total
Number
of
Shares Purchased
|
|
Average
Price Paid per Share
|
|
Total
Number of Shares Purchased
as
Part of Publicly Announced
Programs
|
|
Approximate
Dollar Value
of
Shares that
May
Yet Be
Purchased
Under
the
Programs
|
|
|
|
|
|
|
|
|
|
|
|
January
1 to January 31, 2006
|
|
|
0
|
|
|
N/A
|
|
|
0
|
|
$
|
10,000,000
|
|
February
1 to February 28, 2006
|
|
|
0
|
|
|
N/A
|
|
|
0
|
|
$
|
10,000,000
|
|
March
1 to March 31, 2006
|
|
|
50,000
|
|
$
|
14.02
|
|
|
50,000
|
|
$
|
9,299,202
|
|
April
1 to April 30, 2006
|
|
|
0
|
|
$
|
0
|
|
|
0
|
|
$
|
9,299,202
|
|
May
1 to May 31, 2006
|
|
|
12,451
|
|
$
|
14.26
|
|
|
12,451
|
|
$
|
9,121,614
|
|
June
1 to June 30, 2006
|
|
|
119,400
|
|
$
|
14.57
|
|
|
119,400
|
|
$
|
7,381,584
|
|
Total
|
|
|
181,851
|
|
$
|
14.40
|
|
|
181,851
|
|
|
|
|
The
selected operating data for the fiscal years ended June 30, 2006, 2005 and
2004,
and the selected balance sheet data at June 30, 2006 and 2005, that are set
forth below are derived from the Company’s audited consolidated financial
statements included elsewhere in this Annual Report. The selected operating
data
for the fiscal years ended June 30, 2003 and 2002 and the related balance sheet
data at June 30, 2004, 2003 and 2002 were derived from audited consolidated
financial statements that are not included in this Annual Report. The following
data should be read in conjunction with our consolidated financial statements
and the related notes thereto and with “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” included below in this Annual
Report.
On
July
14, 2005, the Company purchased substantially all the assets of CoinFacts.com,
which operates an Internet website on which it publishes detailed proprietary
information and history on U.S. Coins for $500,000 in cash. On September 2,
2005, the Company acquired the common stock of Certified Coin Exchange (“CCE”),
which operates a subscription-based dealer-to-dealer Internet bid-ask market
for
third-party certified coins for an aggregate purchase price of $2,180,000.
On
November 8, 2005, the Company acquired Gem Certification & Appraisal Lab
(“GCAL”), a forensic gemological certification and grading laboratory. As part
of that transaction, the Company also acquired Diamond Profile Laboratory,
Inc.
(DPL), a scientific diamond light performance analysis laboratory, and all
publishing and other rights to “Palmieri’s Market Monitor,” an educational and
informative industry publication currently published by the Gemological
Appraisal Association, Inc. (GAA). The Company paid an aggregate acquisition
price of $3,000,000 in cash for GCAL, DPL and the publishing and other rights
to
“Palmieri’s Market Monitor,” and assumed certain transaction-related costs of
$50,000.
On
December 22, 2005, the Company acquired the business and substantially all
of
the assets of Gemprint Corporation (“Gemprint”), consisting primarily of a
patented technology for non-invasive diamond identification which Gemprint
used
to digitally capture the unique refractive light pattern (or “Gemprint”) of each
diamond that is processed with that technology. The Company paid a purchase
price for Gemprint’s business and assets of $7,500,000 in cash, and assumed
certain pre-acquisition liabilities and lease commitments, and agreed to pay
additional contingent purchase price of $1 for each diamond that the Company
registers using the Gemprint process in excess of 100,000 registrations per
year
during the five year period ending December 22, 2010.
The
operating results of each of these acquired businesses have been included in
our
consolidated results of operations from the respective dates of their
acquisition by us.
In
the
third quarter of fiscal 2005, we completed a public offering in which we sold
a
total of 3,450,000 shares of our common stock at a public offering price of
$17.50 per share, of which 2,195,856 shares were sold by the Company. The net
proceeds to us, after payment of underwriting commissions and offering expenses,
were approximately $35,657,000.
As
previously disclosed, in December 2003 the Company approved, and during the
balance of fiscal 2004 implemented, a plan to dispose of its collectibles sales
businesses. As a result, the consolidated selected financial data set out below
for the five years ended June 30, 2006 have been restated to classify the assets
and related liabilities of those businesses as held for sale and the related
operating results as discontinued operations. Therefore, for fiscal years 2002
through 2006, the income or loss from discontinued operations reflects the
after-tax results of operations of those businesses through the respective
dates
of their disposal, plus any gain or loss recognized on the disposal of those
businesses, plus any profit or loss realized on the disposal of the remaining
assets of those businesses. In addition, in fiscal year 2006, discontinued
operations also include the operations of CTP (a business we acquired as part
of
the CCE acquisition). for the period of ownership of the CTP
business.
|
|
Years
Ended June 30, (1)
|
|
|
|
(in
thousands, except per share data)
|
|
|
|
2006(3)
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
Consolidated
Statement of Operations Data:
|
|
|
|
Net
revenues
|
|
$
|
36,914
|
|
$
|
33,607
|
|
$
|
26,420
|
|
$
|
20,337
|
|
$
|
18,635
|
|
Cost
of revenues
|
|
|
14,890
|
|
|
12,239
|
|
|
10,322
|
|
|
8,754
|
|
|
7,935
|
|
Gross
profit
|
|
|
22,024
|
|
|
21,368
|
|
|
16,098
|
|
|
11,583
|
|
|
10,700
|
|
Selling,
general and administrative expenses
|
|
|
18,255
|
|
|
13,901
|
|
|
11,829
|
|
|
11,486
|
|
|
11,884
|
|
Settlement
of lawsuit
|
|
|
-
|
|
|
500
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Amortization
of goodwill
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
90
|
|
Impairment
of goodwill
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
6
|
|
|
51
|
|
Operating
income (loss)
|
|
|
3,769
|
|
|
6,967
|
|
|
4,269
|
|
|
91
|
|
|
(1,325
|
)
|
Interest
income, net
|
|
|
2,346
|
|
|
906
|
|
|
135
|
|
|
94
|
|
|
191
|
|
Other
income (expense), net
|
|
|
22
|
|
|
26
|
|
|
(25
|
)
|
|
(6
|
)
|
|
(20
|
)
|
Income
(loss) before provision (benefit) for income taxes
|
|
|
6,137
|
|
|
7,899
|
|
|
4,379
|
|
|
179
|
|
|
(1,154
|
)
|
Provision
(benefit) for income taxes
|
|
|
2,733
|
|
|
3,141
|
|
|
1,581
|
|
|
(557
|
)
|
|
(502
|
)
|
Income
(loss) from continuing operations
|
|
|
3,404
|
|
|
4,758
|
|
|
2,798
|
|
|
736
|
|
|
(652
|
)
|
Income
(loss) from discontinued operations, net of gain
on
sales of discontinued businesses (net of income taxes)
|
|
|
296
|
|
|
60
|
|
|
(1,068
|
)
|
|
(2,202
|
)
|
|
(1,858
|
)
|
Cumulative
effect of accounting change (net
of income taxes)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(8,973
|
)
|
|
-
|
|
Net
income (loss)
|
|
$
|
3,700
|
|
$
|
4,818
|
|
$
|
1,730
|
|
$
|
(10,439
|
)
|
$
|
(2,510
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per basic share:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$
|
0.40
|
|
$
|
0.68
|
|
$
|
0.45
|
|
$
|
0.12
|
|
$
|
(0.10
|
)
|
Income
(loss) from discontinued operations, net of gain
on
sales of discontinued businesses (net of income taxes)
|
|
|
0.04
|
|
|
0.01
|
|
|
(0.17
|
)
|
|
(0.35
|
)
|
|
(0.30
|
)
|
Cumulative
effect of accounting change (net
of income taxes)
|
|
|
|
|
|
-
|
|
|
-
|
|
|
(1.45
|
)
|
|
-
|
|
Net
income (loss)
|
|
$
|
0.44
|
|
$
|
0.69
|
|
$
|
0.28
|
|
$
|
(1.68
|
)
|
$
|
(0.40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per diluted share: (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$
|
0.39
|
|
$
|
0.64
|
|
$
|
0.44
|
|
$
|
0.12
|
|
$
|
(0.10
|
)
|
Income
(loss) from discontinued operations, net of gain
on
sales of discontinued businesses (net of income taxes)
|
|
|
0.03
|
|
|
0.01
|
|
|
(0.17
|
)
|
|
(0.35
|
)
|
|
(0.30
|
)
|
Cumulative
effect of accounting change (net
of income taxes)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1.43
|
)
|
|
-
|
|
Net
income (loss)
|
|
$
|
0.42
|
|
$
|
0.65
|
|
$
|
0.27
|
|
$
|
(1.66
|
)
|
$
|
(0.40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,473
|
|
|
7,013
|
|
|
6,170
|
|
|
6,205
|
|
|
6,347
|
|
Diluted
|
|
|
8,782
|
|
|
7,452
|
|
|
6,463
|
|
|
6,294
|
|
|
6,347
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
52,110
|
|
$
|
65,439
|
|
$
|
21,454
|
|
$
|
4,482
|
|
$
|
4,947
|
|
Working
capital - continuing operations
|
|
|
54,812
|
|
|
68,576
|
|
|
22,308
|
|
|
4,566
|
|
|
5,621
|
|
Working
capital - discontinued operations
|
|
|
75
|
|
|
338
|
|
|
991
|
|
|
13,803
|
|
|
13,732
|
|
Goodwill
and Intangibles - continuing
|
|
|
14,473
|
|
|
79
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
assets - continuing operations
|
|
|
78,138
|
|
|
75,123
|
|
|
32,690
|
|
|
15,926
|
|
|
11,503
|
|
Total
assets - discontinued operations
|
|
|
83
|
|
|
411
|
|
|
1,384
|
|
|
16,365
|
|
|
34,006
|
|
Stockholders'
equity
|
|
|
71,906
|
|
|
70,566
|
|
|
29,366
|
|
|
26,319
|
|
|
37,128
|
|
(1) In
fiscal
2002, the Company’s fiscal year ended on the Saturday closest to June 30 and, as
a result, fiscal 2002 ended on June 29, 2002. Beginning with fiscal 2003 the
Company changed its fiscal year end to June 30. For clarity of presentation,
fiscal 2002 is reported as having ended on June 30.
(2) Per
share
data and weighted average shares outstanding in fiscal 2002 and 2001 have been
retroactively adjusted for a
1-for-4
reverse stock split of our outstanding shares, which was effectuated on December
9, 2002.
(3)
Effective
July 1, 2005, the Company adopted SFAS 123R, using the modified prospective
transition method. Accordingly, in fiscal year 2006, cost of revenues, sales
and
marketing costs, and general and administrative costs, include $302,000, $1,000
and $367,000, respectively, of stock-based compensation expense that was not
required to be recognized as an expense in prior years.
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the “Selected Consolidated
Financial Data” and our Consolidated Financial Statements and related notes,
included elsewhere in Part II of this Annual Report. This discussion also should
be read in conjunction with the information in Item IA of Part I of this Report,
entitled “Risk Factors”, which contains information about certain risks and
uncertainties that can affect our business and our financial performance in
the
future.
Introduction
and Overview
Our
Business
Collectors
Universe Inc. (the “Company”) provides authentication and grading services to
dealers and collectors of high-value coins, sportscards, autographs, stamps,
and
vintage U.S. currency notes (which we refer to generically as “collectibles”)
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
and buy and sell them.
We
principally generate revenues from the fees paid for our authentication and
grading services. To a much lesser extent, we generate revenues from the sale
of
advertising on our websites; the sale of printed publications and collectibles
price guides and advertising in such publications; and the sale of historical
data and information about the collectibles authenticated and graded by us
(that
we believe facilitates commerce in those collectibles).
On
July
14, 2005, the Company purchased substantially all the assets of CoinFacts.com,
which operates an Internet website on which it publishes detailed proprietary
information and history on U.S. Coins.
On
September 2, 2005, the Company acquired the common stock of Certified Coin
Exchange (“CCE”), which operates a subscription-based dealer-to-dealer Internet
bid-ask market for third-party certified coins.
On
November 8, 2005, the Company acquired Gem Certification & Appraisal Lab
(“GCAL”), a forensic gemological certification and grading laboratory. As part
of that transaction, the Company also acquired Diamond Profile Laboratory,
Inc.
(DPL), a scientific diamond light performance analysis laboratory, and all
publishing and other rights to “Palmieri’s Market Monitor,” an educational and
informative industry publication currently published by the Gemological
Appraisal Association, Inc. (GAA). The Company paid an aggregate acquisition
price of $3,000,000 in cash for GCAL, DPL and the publishing and other rights
to
“Palmieri’s Market Monitor,” and assumed certain transaction-related costs of
$50,000.
On
December 22, 2005, the Company acquired the business and substantially all
of
the assets of Gemprint Corporation (“Gemprint”), consisting primarily of a
patented technology for non-invasive diamond identification which Gemprint
uses
to digitally capture the unique refractive light pattern (or “Gemprint”) of each
diamond that is processed with that technology. The Company paid a purchase
price for Gemprint’s business and assets of $7,500,000 in cash, and assumed
certain pre-acquisition liabilities and lease commitments, and agreed to pay
additional contingent purchase price of $1 for each diamond that the Company
registers using the Gemprint process in excess of 100,000 registrations per
year
during the five year period ending December 22, 2010.
GCAL
has
incorporated the Gemprint process into its diamond grading process, so that
each
GCAL authenticated and graded diamond also carries a Gemprint image stored
in
GCAL’s registered database, which enables GCAL to provide an additional measure
of protection against misrepresentations of diamond quality that can occur
by,
for example, switching a diamond grading certificate issued for a higher quality
diamond to a lower quality diamond.
The
operating results of these acquired businesses have been consolidated into
our
operating results from the respective dates of their acquisition.
As
previously reported, during the period from 1999 through the latter part of
fiscal 2004, we also were engaged in the business of marketing and selling
collectible coins, sportscards and sports entertainment and historical
memorabilia. Most of those sales were made at multi-venue auctions that were
conducted by our collectibles sales divisions. We also sold collectible coins,
at retail, by direct sales methods. In December 2003 we adopted a plan to focus
our financial and managerial resources and collectibles expertise on the
operation and growth of our authentication and grading and other collectibles
service businesses, and to divest our collectibles auctions and direct sales
businesses. Pursuant to that plan, during fiscal 2004 we sold our collectibles
auction businesses and terminated our direct sales collectible coins business.
However, we retained the collectibles inventories and the outstanding accounts
receivables of those businesses, substantially all of which had been liquidated
by June 30, 2006.
In
accordance with Statement of Financial Accounting Standard (“SFAS”) No. 144, the
assets and related liabilities of the collectible sales businesses have been
classified as held for sale and their related operating results have been
classified as discontinued operations.
In
connection with our acquisition of CCE in September 2005, we also acquired
one
of its affiliated companies (“CTP”) that was engaged in an unrelated business.
At the time we consummated the CCE acquisition we intended to dispose of CTP
and, effective November 30, 2005, we disposed of CTP. Accordingly, CTP has
been
classified as a discontinued business and its operating results for the period
during fiscal year 2006 that we owned it, have been included in discontinued
operations.
As
a
result of our divestiture of our collectibles auctions and sales businesses
and
the disposition of CTP, the discussion that follows focuses almost entirely
on
our authentication and grading businesses, which comprise substantially all
of
our continuing operations.
Factors
That Can Affect our Financial Position and Operating Results
Factors
that Can Affect our Revenues and Cash Flows.
The
provision of authentication and grading services has provided relatively stable
and predictable cash flows for us, as the fees for a significant proportion
of
the authentication and grading submissions we receive are prepaid. In the years
ended June 30, 2006, 2005 and 2004, respectively, we generated cash of
$7,593,000, $7,447,000 and $6,068,000, respectively, from the operations of
our
continuing businesses.
During
the year ended June 30, 2006, 2005 and 2004, we generated cash of $751,000,
$2,332,000 and $10,435,000 from the sales of our collectibles sales businesses
and the liquidation of the retained inventories and accounts receivables of
those businesses. As a result, at June 30, 2006, the remaining assets of those
businesses, which we are in the process of liquidating, totaled $83,000, as
compared to $411,000 at June 30, 2005. Therefore, it is not expected that the
Company will generate any substantial cash flows from the sale of the remaining
assets of the discontinued businesses in the future.
During
the year ended June 30, 2006, five of our coin authentication and grading
customers accounted for approximately 22% of our total net revenues. As a
result, the loss of any of those customers, or a decrease in the volume of
grading submissions from any of them to us, would cause our net revenues to
decline and, therefore, could adversely affect our profitability. During the
fourth quarter of fiscal 2005, the owner of the largest of these customers
encountered an unexpected and serious medical problem, which led to a 55%
decrease in revenues from that customer in fiscal 2006, compared to fiscal
2005.
The
Company’s cash flows from investing activities can be impacted by the extent to
which the Company purchases new businesses, invests in capital expenditure
and
makes advances or receives repayments under the Dealer Financing Program. Cash
used in investing activities in fiscal year 2006 was $18,253,000.
Cash
flows from financing activities reflects dividends paid to common stockholders,
payments for the retirement of the Company’s common stock authorized under the
Company’s buyback program, and proceeds from the exercise of stock options. Cash
used in financing activities in fiscal 2006 was $3,059,000.
At
June
30, 2006, we had cash and cash equivalents totaling $52,110,000, compared with
$65,439,000 at June 30, 2005.
Factors
Affecting our Gross Profit Margins.
Our
gross profit margins are primarily affected by the mix and the total number
of
units submitted to us for authentication and grading and the level of our
non-grading revenues. The gross profit on our authentication and grading
revenues is affected by the (i) mix of submission revenues among coins,
sportscards and other collectibles; (ii) the mix of submission revenues
between vintage or “classic” coins and sportscards, on the one hand, and modern
coins and sportscards, on the other hand, since, as a general rule, customers
request faster turn-around times for vintage or classic coins and sportscards
than they do for modern submissions; and (iii) in the case of coins and
sportscards, the “turn-around” times requested by our customers, because we
charge higher fees for faster service times. Furthermore, because a significant
proportion of our direct costs are relatively fixed in nature, our gross profit
is also affected by the overall volume of collectibles authenticated and graded
in any period.
Impact
of Economic Conditions on Financial Performance.
We
generate substantially all of our revenues from the collectibles and high-value
asset 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, and
(iii) the performance and volatility of the precious metals and 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, diamonds and other high-value assets. Accordingly,
factors such as improving economic conditions which usually result in increases
in disposable income and consumer confidence, and volatility in and declines
in
the prices of stocks and a weakening in the value of the U.S. Dollar, which
lead
investors to increase their purchases of precious metals, such as gold bullion,
other coins, and other collectibles and high-value assets, usually result in
increases in submissions of collectibles for our services. By contrast, the
volume of collectibles and high-end value asset sales and purchases and,
therefore, the volume of authentication and grading submissions, usually decline
during periods characterized by recessionary economic conditions and by declines
in disposable income and consumer confidence or by increasing stock prices
and
relative stability in the stock markets.
The
following table provides information regarding the respective numbers of coins,
sportscards, autographs, stamps, currency notes and diamonds that we graded
or
authenticated in the fiscal years ended June 30, 2006, 2005, and 2004 and their
estimated values, which are the amounts at which those coins, sportscards,
stamps, currency and diamonds were insured by the dealers, collectors and
consumers who submitted them to us for grading and authentication.
|
|
Units
Processed
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Coins
|
|
|
1,789,000
|
|
|
55
|
%
|
|
1,670,000
|
|
|
58
|
%
|
|
1,241,000
|
|
|
53
|
%
|
Sportscards
|
|
|
1,199,000
|
|
|
37
|
%
|
|
1,084,000
|
|
|
38
|
%
|
|
998,000
|
|
|
43
|
%
|
Autographs
|
|
|
181,000
|
|
|
6
|
%
|
|
77,000
|
|
|
3
|
%
|
|
68,000
|
|
|
3
|
%
|
Stamps
|
|
|
38,000
|
|
|
1
|
%
|
|
26,000
|
|
|
1
|
%
|
|
16,000
|
|
|
1
|
%
|
Currency(1)
|
|
|
29,000
|
|
|
1
|
%
|
|
3,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Diamonds(2)
|
|
|
5,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
|
|
|
3,241,000
|
|
|
100
|
%
|
|
2,860,000
|
|
|
100
|
%
|
|
2,323,000
|
|
|
100
|
%
|
|
|
Declared
Values (000)
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Coins
|
|
$
|
1,613,000
|
|
|
90
|
%
|
$
|
1,191,000
|
|
|
91
|
%
|
$
|
993,000
|
|
|
90
|
%
|
Sportscards
|
|
|
75,000
|
|
|
4
|
%
|
|
66,000
|
|
|
5
|
%
|
|
67,000
|
|
|
6
|
%
|
Autographs
|
|
|
15,000
|
|
|
1
|
%
|
|
26,000
|
|
|
2
|
%
|
|
31,000
|
|
|
3
|
%
|
Stamps
|
|
|
21,000
|
|
|
1
|
%
|
|
17,000
|
|
|
1
|
%
|
|
10,000
|
|
|
1
|
%
|
Currency(1)
|
|
|
43,000
|
|
|
2
|
%
|
|
8,000
|
|
|
1
|
%
|
|
-
|
|
|
-
|
|
Diamonds(2)
|
|
|
27,000
|
|
|
2
|
%
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
|
|
$
|
1,794,000
|
|
|
100
|
%
|
$
|
1,308,000
|
|
|
100
|
%
|
$
|
1,101,000
|
|
|
100
|
%
|
1 We
commenced our currency authentication and grading business in fourth quarter
of
2005.
2 We
commenced the authentication and grading of diamonds in the second quarter
of
2006 when we acquired GCAL and Gemprint.
Overview
of Fiscal 2006 Operating Results
As
the
following table indicates, operating income decreased by 45.9% in fiscal 2006,
as compared to fiscal 2005, despite a 9.8% increase in revenues, due primarily
to the combined effects of an increase in costs of revenues, a decline in our
gross profit margin, and an increase in selling, general and administrate
expenses. Income from continuing operations decreased by 28.4%, primarily as
a
result of the above factors that impacted operating income partially offset
by
increased interest income earned in fiscal 2006, but inclusive of a higher
income tax rate due to stock-based compensation.
|
|
2006
Amount
|
|
%
|
|
2005
Amount
|
|
%
|
|
2006
vs 2005
%
of Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
$
|
36,914
|
|
|
100.0
|
%
|
$
|
33,607
|
|
|
100.0
|
%
|
|
9.8
|
%
|
Cost
of revenues
|
|
|
14,890
|
|
|
40.3
|
%
|
|
12,239
|
|
|
36.4
|
%
|
|
21.7
|
%
|
Gross
profit
|
|
|
22,024
|
|
|
59.7
|
%
|
|
21,368
|
|
|
63.6
|
%
|
|
3.1
|
%
|
Selling
and marketing expenses
|
|
|
4,918
|
|
|
13.4
|
%
|
|
3,534
|
|
|
10.5
|
%
|
|
39.2
|
%
|
General
and administrative expenses
|
|
|
13,337
|
|
|
36.1
|
%
|
|
10,367
|
|
|
30.9
|
%
|
|
28.6
|
%
|
Settlement
of lawsuit
|
|
|
-
|
|
|
0
|
%
|
|
500
|
|
|
1.5
|
%
|
|
(100.0
|
)%
|
Operating
income
|
|
|
3,769
|
|
|
10.2
|
%
|
|
6,967
|
|
|
20.7
|
%
|
|
(45.9
|
)%
|
Interest
income, net
|
|
|
2,346
|
|
|
6.3
|
%
|
|
906
|
|
|
2.7
|
%
|
|
158.9
|
%
|
Other
income (expense), net
|
|
|
22
|
|
|
0.1
|
%
|
|
26
|
|
|
0.1
|
%
|
|
(15.4
|
%)
|
Income
before provision for income taxes
|
|
|
6,137
|
|
|
16.6
|
%
|
|
7,899
|
|
|
23.5
|
%
|
|
(22.3
|
)%
|
Provision
for income taxes
|
|
|
2,733
|
|
|
7.4
|
%
|
|
3,141
|
|
|
9.3
|
%
|
|
(13.0
|
%)
|
Income
from continuing operations
|
|
|
3,404
|
|
|
9.2
|
%
|
|
4,758
|
|
|
14.2
|
%
|
|
(28.4
|
)%
|
Income
from discontinued operations(1)
|
|
|
296
|
|
|
0.8
|
%
|
|
60
|
|
|
0.1
|
%
|
|
393.3
|
%
|
Net
income
|
|
|
3,700
|
|
|
10.0
|
%
|
$
|
4,818
|
|
|
14.3
|
%
|
|
(23.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per diluted share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
0.39
|
|
|
|
|
$
|
0.64
|
|
|
|
|
|
(39.1
|
)%
|
Income
from discontinued operations(1)
|
|
|
0.03
|
|
|
|
|
|
0.01
|
|
|
|
|
|
200.0
|
%
|
Net
income
|
|
$
|
0.42
|
|
|
|
|
$
|
0.65
|
|
|
|
|
|
(35.4
|
)%
|
(1)
Net
of
gain on sales of discontinued businesses (net of income taxes).
The
increase in costs of revenue in fiscal 2006 was primarily attributable to an
increase in coin grader-related compensation costs and the recognition, pursuant
to SFAS No. 123(R), of $302,000 of stock based compensation cost. Stock based
compensation was not required to be recognized as an expense in years prior
to
fiscal 2006. The decline in our gross margin in fiscal 2006 was due primarily
to
(i) those increases in costs of revenues (ii) a change in the mix of
collectibles and high value assets graded to a lower proportion of coins, on
which we realize higher margins than on authentication and grading of other
collectibles; and (iii) a decline in the average service price for coin
authentication and grading services due to the mix of services provided in
2006
as compared to 2005.
The
increase in selling and marketing costs in fiscal 2006 was primarily due to
(i)
costs of approximately $850,000 related to the promotion and marketing of our
new businesses; and (ii) increased collectibles trade-show expenses and
advertising expenses, due primarily to an increase in the number of collectibles
trade shows in which we participated in fiscal 2006. The increase in general
and
administrative expenses was primarily attributable to expenses incurred in
connection with (i) the acquisition and integration into our operations of
newly acquired businesses, (ii) investments in infrastructure to support
our expanded operations, (iii) audit and Sarbanes-Oxley compliance costs,
(iv) stock-based compensation costs arising from the adoption of SFAS
123(R) at the beginning of fiscal 2006, and (v) litigation
costs.
See
more
detailed discussion of Results of Operations on pages 46 to 53.
Critical
Accounting Policies and Estimates
General.
In
accordance with accounting principles generally accepted in the United States
of
America (“GAAP”), we record our assets at the lower of cost or fair value. In
determining the fair value of certain of our assets, principally accounts
receivable and inventories, we must make judgments, and estimates and
assumptions, regarding circumstances or trends that could affect the value
of
those assets, such as economic conditions or trends that could impact our
ability to fully collect our accounts receivable or realize the value of our
inventories in future periods. Those judgments, estimates, and assumptions
are
based on current information available to us at that time. Many of those
conditions, trends and circumstances, however, are outside of our control and,
if changes were to occur in the events, trends or other or circumstances on
which are judgments or estimates were based, or other unanticipated events
were
to happen that might affect our operations, we may be required under GAAP to
adjust our earlier estimates. Changes in such estimates may require that we
reduce the carrying value of the affected assets on our balance sheet (which
are
commonly referred to as “write-downs” of the assets involved).
It
is our
practice to establish reserves or allowances to record such downward adjustments
or “write-downs” in the carrying value of assets such as accounts and notes
receivable and inventory. Such write-downs are recorded as charges to income
or
increases in expense in our statement of operations in the periods when those
reserves or allowances are established or increased to take account of changed
conditions or events. As a result, our judgments, estimates and assumptions
about future events and changes in the conditions, events or trends upon which
those estimates and judgments were made, can and will affect not only the
amounts at which we record such assets on our balance sheet, but also our
results of operations.
The
decisions as to the timing of adjustments or write-downs of this nature also
require subjective evaluations or assessments about the effects and duration
of
events or changes in circumstances. For example, it is difficult to predict
whether events, such as occurred on September 11, 2001 or increases in interest
rates or economic slowdowns, will have short or longer term consequences for
our
business, and it is not uncommon for it to take some time after the occurrence
of an event or the onset of changes in economic circumstances for the full
effects of such events or changes to be recognized. Therefore, management makes
such estimates based upon the information available at that time and reevaluates
and adjusts its reserves and allowances for potential write-downs on a quarterly
basis.
Under
GAAP, businesses also must make estimates or judgments regarding the periods
during which, and also regarding the amounts at which, sales are recorded.
Those
estimates and judgments will depend on a number of factors, including whether
customers are granted rights to reject or adjust the payment for the services
provided to them.
As
is
described above, during fiscal year 2006 we acquired certain businesses and,
in
accordance with GAAP, we accounted for those acquisitions using the purchase
method of accounting. That accounting method required us to allocate the amount
paid for those businesses over the fair value of the assets and liabilities
acquired, and to classify the excess of the purchase price over that fair value
as goodwill. In accordance with GAAP, we will be evaluating goodwill for
impairments at least annually, or more frequently if we believe that goodwill
has been impaired in the interim due to changing facts or events (see
“Long-Lived
Assets”
below).
Other intangible assets that are separable from goodwill and have definite
lives
are subject to amortization over their remaining useful lives. Indefinite-lived
intangible assets are subject to on-going evaluation for impairment. Management
intends to formally evaluate the carrying value of its goodwill and other
indefinite-lived intangible assets for impairment on the anniversary date of
each of the acquisitions that gave rise to the recording of such
assets.
In
making
our estimates and assumptions, we follow GAAP in order to enable us to make
fair
and consistent estimates of the fair value of assets and to establish adequate
reserves or allowances for possible write-downs in the carrying values of our
assets.
Set
forth
below is a summary of the accounting policies and critical estimates that we
believe are material to an understanding of our financial condition and results
of operations.
Revenue
Recognition Policies.
We
generally record revenue at the time of shipment of the authenticated and graded
collectible or diamond to the customer. Our authentication and grading customers
generally prepay our authentication and grading fees when they submit their
collectible items to us for authentication and grading. We record those
prepayments as deferred revenue until their graded collectibles are shipped
back
to them. At that time, we record the revenues from the authentication and
grading services we have performed for the customer and deduct this amount
from
deferred revenue. For certain dealers to whom we extend open account privileges,
we record revenue at the time of shipment of the authenticated and graded
collectible to the dealer.
Accounts
Receivable, Notes Receivable and the Allowance for Doubtful Accounts.
In
the
normal course of our authentication and grading business, we extend payment
terms to many of the larger, more creditworthy dealers who submit collectibles
or diamonds to us for authentication and grading on a recurring basis. In
addition, primarily in connection with our coin dealer financing programs,
we
make advances or extend credit under notes receivable arrangements. We regularly
review our accounts and notes receivable, estimate the amount of, and establish
an allowance for, uncollectible amounts in each quarterly period. The amount
of
that allowance is based on several factors, including the age and extent of
significant past due amounts, and, in the case of notes receivable, the current
value of the collateral we hold in support of the notes receivable, and known
conditions or trends that may affect the ability of account debtors or note
obligors to pay their accounts or notes receivable balances. Each quarter we
review estimates of uncollectible amounts and such economic or other conditions
or trends in order to enable us to determine whether or not to adjust the amount
of the allowance. For example, if the financial condition of certain dealers
or
economic conditions were to deteriorate, adversely affecting their ability
to
make payments on their accounts or notes, increases in the allowance may be
required. Since the allowance is created by recording a charge against income
that is reflected in general and administrative expenses, an increase in the
allowance will cause a decline in our operating results in the period when
the
increase is recorded.
Inventory
Valuation Reserve.
Our
collectibles inventories are valued at the lower of cost or fair value and
have
been reduced by an inventory valuation allowance to provide for potential
declines in the value of those inventories. The amount of the allowance is
determined and is periodically adjusted on the basis of market knowledge,
historical experience and estimates concerning future economic conditions or
trends that may impact the sale value of the collectibles inventories.
Additionally, due to the relative uniqueness of some of the collectibles
included in our collectibles inventory, valuation of such collectibles often
involves judgments that are more subjective than those that are required when
determining the market values of more standardized products.
If
there
were to be an
economic downturn or there were to occur other
events or circumstances that are likely to make it more difficult to sell,
or
that would lead us to reduce the sales prices
of those
collectibles, it may become necessary to increase the reserve. Increases in
this
reserve will cause a decline in operating results, because such increases are
recorded by charges against income.
Grading
Warranty Costs.
We
offer a limited warranty covering the coins, sportscards, stamps and currency
that we authenticate and grade. Under the warranty, if any collectible that
was
previously authenticated and graded by us is later submitted to us for
re-grading and either (i) receives a lower grade upon that resubmittal or
(ii) is determined not to have been authentic, we will offer to purchase
the collectible or pay the difference in value of the item at its original
grade
as compared with its lower grade. However, this warranty is voided if the
collectible, upon resubmittal to us, is not in the same tamper resistant holder
in which it was placed at the time we last graded it. We offer a similar limited
warranty, of one year’s duration, on the diamonds we grade. We accrue for
estimated warranty costs based on historical trends and related experience.
To
date our reserves have proved to be adequate. However, if warranty claims were
to increase in relation to historical trends and experience, we would be
required to increase our warranty reserves and incur additional charges that
would adversely affect our results of operations in those periods during which
the warranty reserve is increased.
Long-Lived
Assets.
We
regularly conduct reviews of property and equipment and other long-lived assets,
including certain identifiable intangibles and goodwill, for possible
impairment. Such reviews occur annually, or more frequently if events or changes
in circumstances indicate the carrying amount of the asset may not be
recoverable in full. In order to determine if the value of an asset is impaired,
we make an estimate of the future cash flows (undiscounted and without interest
charges) expected to result from the use of that asset and its eventual
disposition and determine its fair value by discounting those cash flows to
present value using a discount rate commensurate with management’s estimates of
the business risks associated with the asset. If that estimated fair value
is
less than the carrying amount of the asset, an impairment loss is recognized
to
write down the asset to its estimated fair value. The Company does not believe
there was any impairment of its long-lived assets as of June 30, 2006. There
can
be no assurance, however, that there will be no impairments of the Company’s
long-lived assets in the future.
Stock-Based
Compensation. Effective
July 1, 2005, we began recognizing share-based compensation expense based on
the
fair value recognition provision of SFAS No. 123(R), Share-Based
Payment,
using
the Black-Scholes option valuation method. Under that method, assumptions are
made with respect to the expected lives of the options granted, the expected
volatility of the Company’s stock, dividend yield percentage and the risk-free
interest rate at the date of grant. In addition, under SFAS No. 123(R), we
recognize and report share-based compensation expense net of option forfeitures
that we expect will occur over the vesting period, which we estimate on the
basis of historical forfeiture experience or other factors that could affect
future forfeiture. Once we determine the compensation expense of a stock option
award, that expense is recognized in our consolidated statements of operations
over the vesting period of the option using the straight-line attribution
method.
Capitalized
Software.
Through
June 30, 2006, we capitalized approximately $421,000 of software development
costs in accordance with Statement of Position (SOP) 98-1, Accounting
for the Costs of Computer Software Developed or Obtained for Internal
Use.
SOP
98-1 requires that certain costs incurred, either from internal or external
sources, be capitalized as part of intangible assets and amortized on a
straight-line basis over the useful life of the software. Planning, training,
support and maintenance costs incurred either prior to or following the
implementation phase are recognized as expense in the period in which they
occur. During fiscal 2006, approximately $11,000 was recorded as amortization
expense. The Company evaluates the carrying values of capitalized software
to
determine if the carrying values are impaired, and, if necessary, an impairment
loss is recorded in the period in which the impairment occurs.
Results
of Operations
The
following table sets forth certain financial data, expressed as a percentage
of
net revenues, derived from our statements of operations for the respective
periods indicated below:
|
|
Fiscal
Years Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Net
revenues
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost
of revenues
|
|
|
40.3
|
%
|
|
36.4
|
%
|
|
39.1
|
%
|
Gross
profit
|
|
|
59.7
|
%
|
|
63.6
|
%
|
|
60.9
|
%
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
Selling
and marketing expenses
|
|
|
13.4
|
%
|
|
10.5
|
%
|
|
12.0
|
%
|
General
& administrative expenses
|
|
|
36.1
|
%
|
|
30.9
|
%
|
|
32.7
|
%
|
Settlement
of lawsuit
|
|
|
-
|
|
|
1.5
|
%
|
|
-
|
|
Total
operating expenses
|
|
|
49.4
|
%
|
|
42.8
|
%
|
|
44.7
|
%
|
Operating
income
|
|
|
10.2
|
%
|
|
20.7
|
%
|
|
16.2
|
%
|
Interest
income, net
|
|
|
6.3
|
%
|
|
2.7
|
%
|
|
0.5
|
%
|
Other
income (expense), net
|
|
|
-
|
|
|
0.1
|
%
|
|
(0.1
|
%)
|
Income
before provision for income taxes
|
|
|
16.6
|
%
|
|
23.5
|
%
|
|
16.6
|
%
|
Provision
(benefit) for income taxes
|
|
|
7.4
|
%
|
|
9.3
|
%
|
|
6.0
|
%
|
Income
from continuing operations
|
|
|
9.2
|
%
|
|
14.2
|
%
|
|
10.6
|
%
|
Income
(loss) from discontinued operations, net of gain on sales of discontinued
businesses
(net of income taxes)
|
|
|
0.8
|
%
|
|
0.1
|
%
|
|
(4.1
|
%)
|
Net
income
|
|
|
10.0
|
%
|
|
14.3
|
%
|
|
6.5
|
%
|
Net
Revenues.
Net
revenues consist primarily of fees generated from the grading and authentication
of sportscards, coins and stamps and, to a much lesser extent, the grading
of
diamonds, revenues from the sale of advertising, subscription-based revenues,
and the publication of collectibles magazines. Net revenues are determined
net
of discounts and allowances.
The
following tables set forth certain information regarding the increases in net
revenues and in the number of collectibles authenticated and graded in fiscal
2006, fiscal 2005 and fiscal 2004:
|
|
2006
|
|
2005
|
|
2006
vs. 2005
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(Decrease)
|
|
|
|
|
|
%
of Net
|
|
|
|
%
of Net
|
|
Revenues
|
|
Units
Processed
|
|
|
|
Amount
|
|
Revenues
|
|
Amount
|
|
Revenues
|
|
Amounts
|
|
Percent
|
|
Number
|
|
Percent
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
Coins
|
|
$
|
23,829
|
|
|
64.6
|
%
|
$
|
23,203
|
|
|
69.0
|
%
|
$
|
626
|
|
|
2.7
|
%
|
|
119,000
|
|
|
7.1
|
%
|
Sportscards
|
|
|
8,461
|
|
|
22.9
|
%
|
|
8,143
|
|
|
24.2
|
%
|
|
318
|
|
|
3.9
|
%
|
|
115,000
|
|
|
10.6
|
%
|
Other
(1)
|
|
|
4,624
|
|
|
12.5
|
%
|
|
2,261
|
|
|
6.8
|
%
|
|
2,363
|
|
|
104.6
|
%
|
|
147,000
|
|
|
138.7
|
%
|
|
|
$
|
36,914
|
|
|
100.0
|
%
|
$
|
33,607
|
|
|
100.0
|
%
|
$
|
3,307
|
|
|
9.8
|
%
|
|
381,000
|
|
|
13.3
|
%
|
|
|
2005
|
|
2004
|
|
2005
vs. 2004
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(Decrease)
|
|
|
|
|
|
%
of Net
|
|
|
|
%
of Net
|
|
Revenues
|
|
Units
Processed
|
|
|
|
Amount
|
|
Revenues
|
|
Amount
|
|
Revenues
|
|
Amounts
|
|
Percent
|
|
Number
|
|
Percent
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
Coins
|
|
$
|
23,203
|
|
|
69.0
|
%
|
$
|
17,474
|
|
|
66.1
|
%
|
$
|
5,729
|
|
|
32.8
|
%
|
|
429,000
|
|
|
34.6
|
%
|
Sportscards
|
|
|
8,143
|
|
|
24.2
|
%
|
|
7,126
|
|
|
27.0
|
%
|
|
1,017
|
|
|
14.3
|
%
|
|
86,000
|
|
|
8.6
|
%
|
Other
(1)
|
|
|
2,261
|
|
|
6.8
|
%
|
|
1,820
|
|
|
6.9
|
%
|
|
441
|
|
|
24.2
|
%
|
|
22,000
|
|
|
26.2
|
%
|
|
|
$
|
33,607
|
|
|
100.0
|
%
|
$
|
26,420
|
|
|
100.0
|
%
|
$
|
7,187
|
|
|
27.2
|
%
|
|
537,000
|
|
|
23.1
|
%
|
|
(1)
|
Consists
of autographs, stamps, currency and diamonds in fiscal 2006; autographs,
stamps and currency in fiscal 2005; and autographs and stamps in
fiscal
2004.
|
Fiscal
2006 vs 2005
Revenues
increased by $3,307,000 or 9.8% to $36,914,000 in fiscal year 2006, compared
to
$33,607,000 in fiscal year 2005. This increase was comprised of increases of
approximately $2,300,000, or 7%, in grading and authentication revenues, and
approximately $1,000,000, or 39%, in related services, primarily attributable
to
businesses we acquired in the first six months of fiscal year 2006.
Approximately $1,600,000 of our fiscal 2006 revenues were generated by GCAL
and
CCE (which we acquired in the first half of fiscal 2006) and by our currency
authentication and grading business and our dealer lending business, which
recorded their first full year of operations following their launch in the
latter half of 2005. As a result, revenue growth, excluding those four
businesses, in 2006 was 5% over fiscal 2005.
The
7%
increase in grading and authentication revenues was driven by a 13% increase
in
the number of units graded and authenticated in fiscal year 2006, compared
to
the prior fiscal year. Coin grading revenues increased by 2%, compared to a
7%
increase in the number of units graded, as a result of modern coins (for which
we earn a lower service fee) representing a higher proportion of total coins
graded in fiscal year 2006, compared to fiscal 2005, primarily as a result
of
the continued success of the Company’s First
Strike
program
(see below). For sportcards, the 11% increase in the number of units graded
resulted in a 4% increase in grading revenues reflecting a decrease in the
average service fee due to a higher proportion of units graded at special
pricing than in the prior year. The 139% increase in units graded and
authenticated for other collectibles resulted in a 70% increase in grading
and
authentication revenues, primarily reflecting a change in pricing in our
autograph authentication services business that makes such services more
attractive to a larger number of dealers and collectors.
The
7%
increase in the number of coins graded and authenticated in fiscal 2006, as
compared to the prior year, was primarily attributable to an increase in coin
submissions under the Company’s First
Strike
program
(which has expanded in 2006 into a third and fourth quarter program, as compared
to only a third quarter program in fiscal 2005). These increases more than
offset a reduction in the number of units submitted from a coin dealer that
had
been our largest customer until the fourth quarter of fiscal 2005, when its
owner sustained a serious illness. Revenues attributable to coin submissions
by
that customer declined from 9% of total revenues in fiscal 2005 to 4% of total
revenues for fiscal 2006. Although the Company’s growth in revenues in the
current year has been depressed by the loss of coin revenues from that customer,
we continue to believe that general economic conditions are favorable to our
coin grading and other businesses as evidenced by unit increases of 6% and
31%,
respectively, in the third and fourth quarters of fiscal 2006, compared to
the
corresponding periods of the prior year.
Fiscal
2005 vs. 2004.
The
number of coins, sportcards and other collectibles (consisting of autographs,
stamps and currency) authenticated or graded in 2005 increased by 34.6%, 8.6%
and 26.2%, respectively, in 2005, as compared to 2004, resulting in a 23.1%
increase, overall, in the number of units authenticated and graded and a 27.2%
increase in net revenues. Also contributing to the increase in net revenues
in
2005 were increases in sales of advertising and collectors club memberships
totaling approximately $920,000 (which includes an approximate $319,000 increase
in on-line advertising) in 2005, as compared to 2004. The average of the service
fees earned for all collectibles was approximately the same in 2005 and 2004.
However, revenues from modern coin submissions, on which we earn a lower average
service fee than for vintage coin submissions, accounted for a higher proportion
of the coins authenticated and graded in 2005, than in 2004. As a result, in
2005, the increase in the number of coins authenticated and graded was greater
than the increase in the net revenues attributable to coin submissions.
Gross
Profit.
Gross
profit is calculated by subtracting the cost of revenues from net revenues.
Gross profit margin is gross profit stated as a percent of net revenues. Cost
of
authentication and grading revenues, primarily consist of labor to authenticate
and grade collectibles, production costs, credit cards fees, warranty expense
and occupancy, security and insurance costs that directly relate to providing
authentication and grading services, and printing and other direct costs. In
fiscal year 2006, our costs of revenues included stock-based compensation,
earned by employees in our authentication and grading division, which was
required to be recognized in accordance with SFAS No. 123(R), beginning in
fiscal 2006. Stock based compensation was not required to be recognized in
fiscal years prior to 2006.
|
|
Fiscal
Year Ended June 30,
(Dollars
in thousands)
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Gross
profit
|
|
$
|
22,024
|
|
$
|
21,368
|
|
$
|
16,098
|
|
Gross
profit margin
|
|
|
59.7
|
%
|
|
63.6
|
%
|
|
60.9
|
%
|
The
decline in our gross profit margin from 63.6% in 2005 to 59.7% in fiscal year
2006, was primarily attributable to (i) a modest decline in the average service
fees for coins due to the mix of services provided in the periods; (ii)
increased coin grader-related compensation costs of $410,000 (which is net
of a
$194,000 credit for the reversal of a long-term compensation accrual for a
former employer due to termination of his employment) in fiscal year 2006,
as a
result of an increase in the number of graders and the implementation of a
more
fixed-rate compensation plan: (iii) a change in the mix of collectibles and
high
value assets graded to a lower proportion of coins, on which we realize higher
margins than on authentication and grading of other collectibles; and (iv)
stock-based compensation expense of $302,000 for fiscal year 2006, recorded
as
required by SFAS No. 123(R). Coin revenues represented approximately 65% of
total net revenues in fiscal 2006, compared to approximately 69% of total net
revenues, in fiscal 2005.
The
increase in the gross profit margin in 2005, as compared to 2004, was primarily
attributable to (i) increases of 30% in coin authentication and grading
revenues, on which we realize higher margins than on authentication and grading
submissions of sportscards and other collectibles; (ii) the increases in
net revenues (described above), which caused the fixed elements of our costs
of
revenues to represent a lower percentage of total revenues than in 2004; and
(iii) increases, as compared to 2004, in sales of website advertising, for
which the cost of sales were minimal.
Selling
and Marketing Expenses
Selling
and marketing expenses are comprised primarily of advertising and promotions
costs, trade-show related expenses, customer service personnel costs and third
party consulting costs.
|
Fiscal
Year Ended June 30,
(Dollars
in thousands)
|
|
2006
|
|
2005
|
|
2004
|
Selling
and marketing expenses
|
$4,918
|
|
$3,534
|
|
$3,165
|
As
a percentage of net revenues
|
13.4%
|
|
10.5%
|
|
12.0%
|
The
increase of $1,384,000 in selling and marketing expenses in fiscal year 2006,
compared to fiscal year 2005 were primarily attributable to (i) costs of
approximately $850,000 (of which approximately $600,000 related to our diamond
grading business), incurred in fiscal 2006 in connection with the launch of
the
Company’s currency grading division and the commencement of marketing programs
for the businesses that we acquired in the first six months of fiscal year
2006
and the launch of the Company’s currency grading division; (ii) increased
collectibles trade-show expenses of approximately $330,000 incurred in fiscal
2006 due to the Company participating in more trade shows in fiscal 2006, and
focusing more resources on our trade show programs (at which we are able to
generate higher average service fees due to the faster turnaround times demanded
by dealers and collectors attending those shows); (iii) increased
advertising and promotional expenses of approximately $220,000 incurred in
fiscal 2006, including promotional costs associated with the Company’s
First
Strike
program;
and (iv) increases in personnel costs in our customer service
departments.
The increase of $369,000 in selling and marketing expenses in 2005, compared
to
2004, was primarily attributable to increases in general marketing expenses
(customer service personnel, advertising and trade-show related costs) in 2005.
Notwithstanding those increases, however, as a percentage of net revenues,
selling and marketing expenses decreased from 12.0% of net revenues in 2004
to
10.5% in 2005, indicating that we were able to increase authentication and
grading revenues and sales of advertising without having to make commensurate
increases in our selling and marketing expenses.
General
and Administrative Expenses.
General
and administrative (“G&A”) expenses are comprised primarily of compensation
paid to general and administrative personnel, including executive management,
finance and accounting, information technology personnel, facilities management
costs and other miscellaneous expenses. In fiscal 2006, G&A expenses also
included stock-based compensation required to be recognized in accordance with
SFAS No. 123 (R), effective July 1, 2005.
|
|
Fiscal
Year Ended June 30,
(Dollars
in thousands)
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
General
& administrative expenses
|
|
$
|
13,337
|
|
$
|
10,367
|
|
$
|
8,664
|
|
As
a percentage of net revenues
|
|
|
36.1
|
%
|
|
30.9
|
%
|
|
32.7.
|
%
|
The
increase in general and administrative expenses of $2,970,000 in fiscal 2006
were primarily attributable to general and administrative expenses incurred
in
connection with the acquisition and integration in our operations of the newly
acquired businesses, investment in infrastructure to support the growth of
our
businesses, litigation costs, audit and Sarbanes-Oxley compliance costs and
stock-based compensation costs (arising from the adoption of SFAS 123(R)).
The
increased costs associated with the acquired businesses were approximately
$1,000,000, which included business transition and intangible amortization
costs
of approximately $340,000. We also incurred approximately $290,000 in connection
with the implementation of our business acquisition and expansion program in
fiscal 2006. The increased infrastructure costs of approximately $630,000 in
fiscal 2006 included investments in information technology systems and one-time
space-related costs to support the growth of our businesses. Litigation costs
were approximately $190,000 higher in fiscal 2006 than in fiscal 2005, primarily
attributable to the costs of the trial in the Miller
lawsuit
that took place in the second quarter of fiscal 2006. Increased audit, Sarbanes-
Oxley and tax compliance costs of approximately $400,000, were incurred
primarily in the first and fourth quarters of fiscal 2006. Stock-based
compensation costs recognized pursuant to SFAS 123(R) and included in general
and administrative expenses for fiscal 2006 were $367,000.
Although,
in 2005, G&A expenses increased by $1,703,000, as compared to 2004, such
expenses did not increase at the same rate as did net revenues, due primarily
to
improvements in operating efficiencies and staff reductions we were able to
make
as a result of the disposition of our collectibles sales businesses. Therefore,
as a percentage of net revenues, G&A expenses declined to 30.8% in 2005 from
32.7% for 2004. In dollar terms, the larger value components of the increases
in
G&A expenses in 2005, compared to 2004, consisted primarily of
(i) increases of approximately $320,000 in legal fees, including fees
incurred on litigation matters, such as the Real Legends lawsuit (discussed
below); (ii) approximately $185,000 of costs incurred in connection with
the launch of our new currency grading service during 2005;
(iii) consulting fees and audit costs of approximately $400,000 incurred in
connection with the documentation and testing of our internal control over
financial reporting, as required by Section 404 of the Sarbanes-Oxley Act 2002;
(iv) new business development personnel and outside consulting costs of
$263,000 incurred to develop and maintain our knowledge base in coins and to
identify and analyze acquisition opportunities, and (v) general expenses
and infrastructure costs incurred to support the increased volume of business
that we conducted in 2005, as compared with 2004.
Settlement
of Lawsuit
|
|
Fiscal
Year Ended June 30,
(Dollars
in thousands)
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Settlement
of lawsuit
|
|
$
|
-
|
|
$
|
500
|
|
$
|
-
|
|
As
a percentage of net revenues
|
|
|
-
|
|
|
1.5
|
%
|
|
-
|
|
As
previously reported, in January 2005, without any admission of wrongdoing,
we
settled a legal action brought by Real Legends, Inc., a seller of sports cards
against When It Was a Game (“WIWAG”), a sports card dealer, and against us as a
co-defendant. Pursuant to the settlement terms, all of the claims asserted
against the Company by plaintiff were settled and plaintiff terminated the
litigation, with prejudice, and we paid plaintiff $600,000, of which $100,000
was reimbursed to us by one of our insurers. As a result, the net cost to us
of
the settlement in 2005 was $500,000, or 1.5% of our net revenues.
Stock-Based
Compensation
In
accordance with SFAS No. 123(R) - Share-Based
Payment
which,
in the Company’s case, became effective as of July 1, 2005, we recognized
stock-based compensation of $670,000 during fiscal 2006. That stock-based
compensation was attributable to the following:
|
|
Year
Ended
June
30,
|
|
|
|
2006
|
|
Cost
of revenues
|
|
$
|
302,000
|
|
Selling
and marketing expenses
|
|
|
1,000
|
|
General
and administrative expenses
|
|
|
367,000
|
|
|
|
$
|
670,000
|
|
Prior
to
the adoption of SFAS No 123(R), we accounted for stock-based compensation
in accordance with the Accounting Principle Board Opinion No. 25, Accounting
for Stock Issued to Employees,
and
related interpretations. As such, compensation expense was recorded at the
date
of grant only if the quoted market price of the underlying stock on that
date
exceeded the exercise price of the options. However, we had disclosed, in
the
notes to our financial statements, pro forma net earnings and pro forma net
earnings per share as if the fair value of all stock options as of their
respective grant dates were recognized as expense over the vesting periods
of
those options in accordance with SFAS No. 123 Accounting
for Stock-Based
Compensation.
We
adopted SFAS No. 123(R) using the modified prospective method. Under this
transition method, compensation costs recognized in fiscal 2006 include:
(i) compensation cost for all share-based awards granted prior to, but not
yet vested as of July 1, 2005, based on their respective grant date fair values
estimated in accordance with the original provisions of SFAS No. 123; and
(ii) compensation cost for all share-based awards granted subsequent to
June 30, 2005, based on their respective grant-date fair values estimated in
accordance with the provisions of SFAS No. 123(R). In accordance with the
modified prospective method, results for the corresponding periods of the prior
year have not been restated and the Company will continue to disclose the pro
forma effect of option grants on net earnings and net earnings per share for
periods ended prior to July 1, 2005 in the footnotes to its financial
statements. However, we became aware of an error in the determination of the
proforma expense in years prior to adoption, as it relates to our estimate
of
the expected term assumption. Therefore, the fiscal year 2005 proforma expense
has been restated as disclosed in note 2 to our consolidated financial
statements included in Part II, Item 8 of this Annual Report.
There
were no modifications made to outstanding stock options prior to the adoption
of
SFAS No. 123(R).
We
will
also continue to account for equity instruments issued to persons other than
Company employees and directors (“non-employees”) in accordance with the
provisions of SFAS No. 123 and Emerging Issues Task Force (“EITF”) Issue No.
96-18, Accounting
for Equity Instruments that are Issued to Other Than Employees for Acquiring,
or
in Conjunction with Selling Goods or Services.
All
transactions in which goods or services are the consideration received for
equity instruments issued to non-employees are accounted for based on the fair
value of the consideration received or the fair value of the equity instrument
issued, whichever is more reliably measurable. The measurement date used to
determine the fair value of any such equity instrument is the earliest to occur
of (i) the date on which the third-party performance is complete, (ii) the
date
on which it is probable that performance will occur, or (iii) if different,
the
date on which the compensation has been earned by the non-employee. However,
no
equity instruments were issued to non-employees for goods or services during
the
three years ended June 30, 2006.
The
Company issues stock options to employees and outside directors whose only
condition for vesting are continued employment or service during the related
vesting period. Typically, the vesting period is four years for employee awards
and six months for director awards, although awards are sometimes granted with
immediate vesting.
For
purposes of SFAS No. 123(R), the Company calculates stock-based
compensation by estimating the fair value of each stock option using the
Black-Scholes option valuation model and various assumptions that are described
in note 2 to the consolidated financial statements included in Part II, Item
8
of this Annual Report. Once the compensation cost of an option is determined,
that cost is recognized on a straight-line basis over the vesting period of
the
option.
For
fiscal 2006, stock-based compensation consisted of compensation costs
attributable to options granted in prior years that were outstanding but were
not fully vested as of July 1, 2005, the effective date of SFAS No. 123(R),
and
compensation costs for options that were granted during fiscal 2006, prorated
from their respective grant dates to June 30, 2006. Compensation costs, as
determined, were adjusted for estimated forfeitures in accordance with SFAS
No.
123(R). Options to purchase a total of approximately 42,000 shares of our common
stock were granted to employees during fiscal 2006.
The
method we employ to calculate stock-based compensation is consistent with the
method used to compute stock-based compensation under SFAS No. 123, except
that
under SFAS No. 123(R), we are required to estimate forfeitures, which we were
not required to and did not estimate under SFAS No. 123. We have estimated
forfeitures to be 10.5% per annum.
During
the fourth quarter of fiscal 2006, we increased the forfeiture rate from 4%
to
10.5% per annum based on estimates of future forfeitures over the remaining
term
of unvested options at June 30, 2006 and the correction of an error in our
earlier estimate as more fully disclosed in note 2 to our consolidated financial
statements included in Part II, Item 8 of this Annual Report.
A
total
of $1,691,000 of compensation expense related to unvested stock-based
compensation awards remained unrecognized as of June 30, 2006. Based on the
assumption that the forfeiture rate will remain at 10.5% per annum, for the
remaining vesting periods, that amount will be recognized as compensation
expense as follows:
Year
Ending June 30,
|
|
Amount
|
|
2007
|
|
$
|
684,000
|
|
2008
|
|
|
635,000
|
|
2009
|
|
|
341,000
|
|
2010
|
|
|
31,000
|
|
Total
|
|
$
|
1,691,000
|
|
However,
these amounts do not include the cost of any additional stock based compensation
awards that may be granted in future periods nor, as mentioned above, any
changes that might occur in the Company’s compensation award forfeiture
rate.
Interest
Income, Net
Interest
income is generated on cash balances that we invested, primarily in highly
liquid money market accounts, short-term bank certificates of deposit, auction
rate securities and commercial paper instruments.
|
|
Fiscal
Year Ended June 30
(Dollars
in thousands)
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Interest
income, net
|
|
$
|
2,346,000
|
|
$
|
906,000
|
|
$
|
135,000
|
|
Percent
of net revenue
|
|
|
6.3
|
%
|
|
2.7
|
%
|
|
0.5
|
%
|
Interest
income, net totaled $2,346,000 in fiscal year 2006, compared with $906,000
in
fiscal year 2005, which was primarily attributable to increases in our average
cash, cash equivalents and short-term investment balances during fiscal 2006
and, to a lesser extent, increased interest rates during fiscal 2006. The
increase in the average cash and cash equivalent and short-term investment
balances were attributable to (i) the sale by us of 2,195,856 shares of our
common stock in a public offering that we completed in the third quarter of
fiscal 2005, which generated net proceeds to us of $35,657,000; and (ii) cash
generated from the disposition of our collectibles sales businesses; and (iii)
cash generated by operations, reduced by cash expended for business acquisition
in fiscal year 2006. Interest income, net was $906,000 in 2005, compared to
$135,000 in fiscal 2004. The increase in interest income in 2005, compared
to
2004, resulted primarily from the same factors as indicated above.
Provision
for Income Taxes
|
|
Fiscal
Year Ended June 30
(Dollars
in thousands)
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Provision
for income taxes
|
|
$
|
2,733,000
|
|
$
|
3,141,000
|
|
$
|
1,581,000
|
|
Income
tax expense recorded in fiscal 2006 was calculated based on our expected
combined federal and state effective income tax rates of approximately 45%
for
the fiscal year 2006, compared with 40% for the fiscal year 2005. The increase
in the effective tax rate to 45% in fiscal 2006 reflects increased permanent
differences between the Company’s income for book purposes and for tax purposes
due primarily to the non-deductibility of compensation costs on incentive stock
options.
The
provision made for income taxes in fiscal 2005 and 2004 were calculated on
the
basis of our expected federal and state effective income tax rates for those
years.
Discontinued
Operations
|
|
Fiscal
Year Ended June 30
(Dollars
in thousands)
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Income
(loss) from discontinued operations, net of gain on sales of discontinued
businesses
(net
of
income taxes)
|
|
$
|
296,000
|
|
$
|
60,000
|
|
$
|
(1,068,000
|
)
|
As
a
result of our decision in fiscal 2004 to dispose of our collectibles sales
businesses, in accordance with SFAS No. 144 the assets and related liabilities
of those businesses have been classified as held for sale and their related
operating results for fiscal years 2006, 2005 and 2004 have been classified
as
discontinued operations in the consolidated financial statements included in
this Annual Report. The income (loss) from discontinued operations includes
(i)
the losses from the operations of our discontinued collectibles sales businesses
through the respective dates on which they were disposed of in fiscal 2004;
and
(ii) the losses or gains recognized on the sales of those businesses and the
disposition of those assets (consisting primarily of inventories and accounts
receivables) that we retained; and (iii) for fiscal 2006 the results of CTP
from
September 2, 2005 to November 30, 2005 (the date of its disposition). Other
than
fiscal 2004, when the collectible sales businesses were sold, the gain on
disposal of those businesses related to additional consideration on the sales
of
those businesses that became determinable in fiscal 2005 and 2006, as the terms
of the sale of some of those businesses included provision for future
consideration based on the performance of such businesses for a period of time
subsequent to their sales.
Quarterly
Results of Operations and Seasonality
The
following tables present unaudited quarterly financial information for each
of
the eight quarters beginning September 30, 2004 and ending on June 30, 2006.
The
information has been derived from our unaudited quarterly financial statements,
which have been prepared by us on a basis consistent with our audited financial
statements appearing elsewhere in this Form 10-K. The consolidated financial
information set forth below includes all adjustments, (consisting of normal
adjustments and accruals) that management considers necessary for a fair
presentation of the unaudited quarterly results when read in conjunction with
the consolidated financial statements and the notes thereto appearing elsewhere
in this Form 10-K. These operating results, which reflect the reclassification
of our results of operations between continuing operations and discontinued
operations as a result of the disposition of our collectibles sales businesses,
are not necessarily indicative of results that may be expected for any
subsequent periods.
Revenues
in the second quarter of fiscal 2006 were 7% lower than the revenues for the
second quarter of fiscal 2005, due primarily to lower coin submissions from
one
of our largest customers due to a serious illness that occurred in the fourth
quarter of fiscal 2005, which resulted in a reduction in revenues earned from
that customer in the second quarter and fiscal 2006.
The
increase in revenues of 12% and 25% in the third and fourth quarters of fiscal
2006, compared to the corresponding periods of the prior year, reflect the
continued success of the Company’s First
Strike
program,
which, in fiscal year 2006, generated revenues in both the third and fourth
quarters, compared with primarily the third quarter of fiscal 2005. In addition,
in fiscal 2006, the Company benefited from revenues from new businesses that
we
did not own or operate for the full fiscal year 2005.
With
respect to the sales and marketing costs in our diamond grading business,
approximately $240,000 was associated with the initial re-launch and
re-positioning of the company at the major trade show of the year in early
June
2006 which we do not expect to repeat. Along with the newly acquired American
Gemological Laboratories (AGL), an authentication and grading service in colored
gemstones, our aggregate expenditures for sales and marketing will continue
at
approximately current levels associated with the jewelry division for at least
the first three quarters of fiscal 2007 as we communicate our new services
as
part of our strategy to increase market share. Because of the similar
distribution channels for GCAL and AGL, and even though AGL is adding new
services which will require marketing expenditures, we do not anticipate
increases above current levels since many of the expenditures are expected
in
the same trade publications, the same trade shows and in other related
promotional activities. Since we expect revenues to increase at GCAL and AGL,
we
also expect that the percentage of revenue associated with sales and marketing
expenses will decline.
With
respect to the general and administrative expense incurred by our GCAL diamond
grading business, approximately $140,000 was associated with legal and
consulting expenses related to the initial integration, in part related to
legal
expenses to support some of the new proprietary services and programs introduced
by GCAL during the term such as Source Veritas. Along with the newly acquired
colored gemstone grading business of AGL, we expect the integration expenses
for
software, systems and legal expenses to continue at approximately current levels
associated with the jewelry division for at least the first three quarters
of
2007 as we complete the integration of GCAL and initiate and complete the
integration of AGL. Since we expect revenues to increase at GCAL and AGL, we
also expect that the percentage of revenue associated with their general and
administrative expenses will decline.
Quarterly
Reports of Operations
|
|
Quarters
Ended
(In
thousands, except per share data)
|
|
|
|
Sept.
30,
2004
|
|
Dec.
31,
2004
|
|
Mar.
31
2005
|
|
June
30,
2005
|
|
Sept.
30,
2005
|
|
Dec.
31,
2005
|
|
Mar.
31
2006
|
|
June
30,
2006
(1)
|
|
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
$
|
8,195
|
|
$
|
7,982
|
|
$
|
8,955
|
|
$
|
8,475
|
|
$
|
8,825
|
|
$
|
7,447
|
|
$
|
10,022
|
|
$
|
10,620
|
|
Cost
of revenues
|
|
|
2,826
|
|
|
2,998
|
|
|
3,263
|
|
|
3,152
|
|
|
3,372
|
|
|
3,118
|
|
|
4,088
|
|
|
4,312
|
|
Gross
profit
|
|
|
5,369
|
|
|
4,984
|
|
|
5,692
|
|
|
5,323
|
|
|
5,453
|
|
|
4,329
|
|
|
5,934
|
|
|
6,308
|
|
SG&A
expenses
|
|
|
3,244
|
|
|
3,040
|
|
|
3,464
|
|
|
4,153
|
|
|
4,310
|
|
|
3,944
|
|
|
4,632
|
|
|
5,369
|
|
Settlement
of lawsuit
|
|
|
-
|
|
|
500
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Operating
income
|
|
|
2,125
|
|
|
1,444
|
|
|
2,228
|
|
|
1,170
|
|
|
1,143
|
|
|
385
|
|
|
1,302
|
|
|
939
|
|
Interest
and other income, net
|
|
|
64
|
|
|
112
|
|
|
225
|
|
|
531
|
|
|
550
|
|
|
616
|
|
|
596
|
|
|
606
|
|
Income
before income taxes
|
|
|
2,189
|
|
|
1,556
|
|
|
2,453
|
|
|
1,701
|
|
|
1,693
|
|
|
1,001
|
|
|
1,898
|
|
|
1,545
|
|
Provision
(benefit) for income taxes
|
|
|
878
|
|
|
628
|
|
|
981
|
|
|
654
|
|
|
714
|
|
|
447
|
|
|
804
|
|
|
768
|
|
Income
from continuing operations
|
|
|
1,311
|
|
|
928
|
|
|
1,472
|
|
|
1,047
|
|
|
979
|
|
|
554
|
|
|
1,094
|
|
|
777
|
|
Income
(loss) from discontinued operations,
net
of gain
on sales of
discontinued businesses
(net
of income taxes)
|
|
|
(69
|
)
|
|
(7
|
)
|
|
(3
|
)
|
|
139
|
|
|
(12
|
)
|
|
181
|
|
|
-
|
|
|
127
|
|
Net
income
|
|
$
|
1,242
|
|
$
|
921
|
|
$
|
1,469
|
|
$
|
1,186
|
|
$
|
967
|
|
$
|
735
|
|
$
|
1,094
|
|
$
|
904
|
|
Net
income per basic share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
0.21
|
|
$
|
0.15
|
|
$
|
0.21
|
|
$
|
0.12
|
|
$
|
0.11
|
|
$
|
0.07
|
|
$
|
0.13
|
|
$
|
0.09
|
|
Income
(loss) from discontinued operations,
net of gain on sales of
discontinued businesses
(net
of income
taxes)
|
|
|
(0.01
|
)
|
|
-
|
|
|
-
|
|
|
0.02
|
|
|
-
|
|
|
0.02
|
|
|
-
|
|
|
0.02
|
|
Net
income
|
|
$
|
0.20
|
|
$
|
0.15
|
|
$
|
0.21
|
|
$
|
0.14
|
|
$
|
0.11
|
|
$
|
0.09
|
|
$
|
0.13
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per diluted share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
0.20
|
|
$
|
0.14
|
|
$
|
0.19
|
|
$
|
0.12
|
|
$
|
0.11
|
|
$
|
0.06
|
|
$
|
0.12
|
|
$
|
0.09
|
|
Income
(loss) from discontinued operations,
net
of gain on sales of
discontinued
businesses
(net
of income
taxes)
|
|
|
(0.01
|
)
|
|
-
|
|
|
-
|
|
|
0.01
|
|
|
-
|
|
|
0.02
|
|
|
-
|
|
|
0.01
|
|
Net
income
|
|
$
|
0.19
|
|
$
|
0.14
|
|
$
|
0.19
|
|
$
|
0.13
|
|
$
|
0.11
|
|
$
|
0.08
|
|
$
|
0.12
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
6,214
|
|
|
6,242
|
|
|
7,113
|
|
|
8,479
|
|
|
8,486
|
|
|
8,488
|
|
|
8,485
|
|
|
8,433
|
|
Diluted
|
|
|
6,569
|
|
|
6,695
|
|
|
7,571
|
|
|
8,902
|
|
|
8,806
|
|
|
8,803
|
|
|
8,822
|
|
|
8,750
|
|
(1)
During the fourth quarter of 2006, the Company determined that assumptions
used in the Black-Scholes option pricing model related principally to the
expected term of an option and the forfeiture rate used in the determination
of
stock-based compensation expense during fiscal 2006 were incorrect. We
determined that the stock-based compensation expense recognized during the
interim periods of 2006 was understated by approximately $35,000 in each of
the
first three quarters of 2006, or approximately $105,000 for the nine month
period ended March 31, 2006. We also determined that the understatement of
expense in each of the interim periods of 2006 was immaterial to each quarter,
and, accordingly, in the fourth quarter of 2006, we recorded a correcting
adjustment of $105,000 to stock-based compensation expense, or approximately
$0.01 per diluted share. Accordingly, this adjustment is reflected in cost
of
revenues ($47,000) and selling, general and administrative expense ($58,000).
See notes 2 and 17 to the consolidated financial statements included in Part
II,
Item 8 of this Annual Report.
|
|
Quarters
Ended
(In
thousands)
|
|
|
|
Sept.
30,
2004
|
|
Dec.
31,
2004
|
|
Mar.
31,
2005
|
|
June
30,
2005
|
|
Sept.
30,
2005
|
|
Dec.
31,
2005
|
|
Mar.
31,
2006
|
|
June
30,
2006
|
|
Selected
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units
authenticated or graded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coins
|
|
|
371
|
|
|
421
|
|
|
449
|
|
|
429
|
|
|
395
|
|
|
357
|
|
|
474
|
|
|
563
|
|
Sportscards
|
|
|
265
|
|
|
253
|
|
|
283
|
|
|
283
|
|
|
283
|
|
|
275
|
|
|
315
|
|
|
326
|
|
Autographs
|
|
|
22
|
|
|
17
|
|
|
15
|
|
|
23
|
|
|
55
|
|
|
34
|
|
|
45
|
|
|
47
|
|
Stamps
|
|
|
5
|
|
|
7
|
|
|
7
|
|
|
7
|
|
|
9
|
|
|
7
|
|
|
10
|
|
|
12
|
|
Currency
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3
|
|
|
9
|
|
|
5
|
|
|
9
|
|
|
6
|
|
Diamonds
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1
|
|
|
1
|
|
|
3
|
|
Total
|
|
|
663
|
|
|
698
|
|
|
754
|
|
|
745
|
|
|
751
|
|
|
679
|
|
|
854
|
|
|
957
|
|
Liquidity
and Capital Resources
At
June
30, 2006, we had cash and cash equivalents of $52,110,000, as compared to
$65,439,000 at June 30, 2005.
Historically,
we have relied on internally-generated funds, rather than borrowings, as our
primary source of funds to support our grading operations. Additionally, our
authentication and grading services have, and in the future we expect that
they
will, provide us with relatively stable and predictable cash flows, largely
because (i) in many instances our customers prepay for those services at
the time they submit their collectibles to us for authentication and grading,
and (ii) in the event of a decline in authentication and grading
submissions, we have the ability to reduce our variable operating costs to
offset, at least partially, the impact on our cash flows of such a
decline.
Due
to
the Company having utilized its net operating losses for federal tax purposes
by
March 31, 2006, the Company was required to make federal tax payments on its
estimated taxable income in the fourth quarter of fiscal 2006. The Company
continues to have losses and tax credits available for state income tax
purposes.
During
fiscal 2006, operating activities of our continuing operations provided net
cash
of $7,593,000, compared with $7,447,000 generated in fiscal 2005.
Investing
activities used net cash of $18,253,000 during fiscal 2006, primarily to fund
(i) $14,582,000 used to fund the purchases of the businesses we acquired
during the fiscal year 2006; and (ii) net advances of $2,253,000 that we
made under our Dealer Financing Program conducted by our wholly owned
subsidiary, Collectors Finance Corporation, and (iii) capital expenditures
of $1,366,000, primarily for the purchase of fixed assets.
In
fiscal
2006, financing activities used net cash of $3,059,000, including cash of
$2,628,000 used to repurchase the Company’s common stock under the Company’s
Stock Buyback Program (see below) and $674,000 used to pay cash dividends to
stockholders (see below), partially offset by proceeds of $243,000 from the
exercise of employee stock options.
Bank
Line of Credit.
In
fiscal 2005 we organized Collectors Finance Corporation (“CFC”), as a
wholly-owned subsidiary, to engage in the business of making loans primarily
to
coin dealers. All such loans are required to be collateralized by the delivery
to us of collectibles that have a fair market value of at least the amount
of
the loans. The loans are required to be repaid to us when those collectibles
are
returned to the dealers. To provide a source of funding for those loans, in
June
2005 CFC obtained a revolving bank line of credit pursuant to a loan and
security agreement that permits CFC to borrow, at any one time, up to the lesser
of (i) $7,000,000 or (ii) an amount equal to 85% of the aggregate
principal amount of those of its loan receivables that meet the bank’s
eligibility criteria. Borrowings under that credit line, which has a term of
two
years ending in June 2007, bear interest at rates based on the bank’s prime rate
or LIBOR, as applicable, and are secured by the loan receivables due CFC. There
were no borrowings outstanding under that line of credit at June 30,
2006.
CFC’s
obligations under this line of credit have been guaranteed by the Company
pursuant to a Continuing Guaranty Agreement with the bank lender. The terms
of
that Agreement require the Company to be in compliance with certain financial
and other restrictive covenants, and require the consent of the lender
(i) for the payment of cash dividends or repurchases of our common stock in
an aggregate amount exceeding its annual net income in any year, and
(ii) to consummate more than $5,000,000 of business acquisitions in any
year. The Company was in compliance with all of these covenants at June 30,
2006
and received the required consents from the lender for the purchase of the
Gemprint business, the repurchase of the Company’s common stock, and the payment
of dividends during fiscal 2006.
Outstanding
Financial Obligations.
We had
the following outstanding obligations under operating leases, net of sublease
income at June 30, 2006 for years ending June 30:
2007
|
|
$
|
1,410,000
|
|
2008
|
|
|
1,594,000
|
|
2009
|
|
|
1,585,000
|
|
2010
|
|
|
840,000
|
|
2011
|
|
|
393,000
|
|
Thereafter
|
|
|
1,756,000
|
|
|
|
$
|
7,578,000
|
|
With
the
exception of these obligations, we do not have any material financial
obligations, such as long-term debt, capital lease, or long-term purchase
obligations. In the event that CFC incurs any borrowings under its line of
credit, we will have an obligation to repay such borrowings; however, as noted
above, there were no borrowings outstanding under this line of credit at June
30, 2006.
Stock
Buyback Program. In
December 2005, the Company’s Board of Directors approved a $10 million stock
buyback program. The program authorizes the Company to make up to $10,000,000
of
stock repurchases in open market or privately negotiated transactions, in
accordance with applicable Securities Exchange Commission rules, when
opportunities to make such repurchases, at attractive prices, become available.
The Company is under no obligation to repurchase any shares under the stock
buyback program and the timing, actual number and value of shares that may
be
repurchased under that program will depend on a number of factors, including
the
Company's future financial performance, the Company's available cash resources
and competing uses for the cash that may arise in the future, prevailing market
prices of the Company's common stock and the number of shares that become
available for sale at prices that the Company believes are attractive. During
fiscal year 2006, the Company repurchased a total of 181,851 shares of its
common stock for an aggregate purchase price of approximately $2,628,000 (which
includes transaction costs of approximately $10,000). Additional information
regarding these share repurchases is set forth in Item 5 of Part II of this
Annual Report.
Dividends.
On May
31,
2006, the Board of Directors adopted a dividend policy that calls for the
payment of an expected total annual cash dividend of $0.32 per common share,
payable in the amount of $0.08 per share per quarter. To date, the Board of
Directors has declared the following quarterly cash dividends under this
policy.
Declaration
Date
|
|
Record
Date
|
|
Dividend
Payment Date
|
May
31, 2006
|
|
June
14, 2006
|
|
June
28, 2006
|
August
15, 2006
|
|
August
29, 2006
|
|
September
12, 2006
|
The
declaration of cash dividends in the future, pursuant to the Company’s dividend
policy, is subject to final determination each quarter by the Board of Directors
based on a number of factors, including the Company’s financial performance and
its available cash resources, its cash requirements and alternative uses of
cash
that the Board may conclude would represent an opportunity to generate a greater
return on investment for the Company. For these reasons, as well as others,
there can be no assurance that the amount of the quarterly cash dividend will
not be reduced, or that the Board of Directors will not decide to suspend or
discontinue the payment of cash dividends, in the future.
We
plan
to use our cash resources to (i) expand our existing and implement new
marketing programs; (ii) introduce new services for our customers;
(iii) acquire or start-up other high-value collectibles or high-value asset
authentication and grading businesses; (iv) make private and open market
share repurchases under our stock buyback program if there are opportunities
to
do so at prices that we believe are attractive; (v) continue paying
dividends to our stockholders, as determined by the Board of Directors; and
(vi) fund working capital requirements, and for other corporate purposes.
Although we have no current plans to do so, we also may seek borrowings, and
we
may issue additional shares of our stock, to finance acquisitions of additional
authentication and grading businesses.
Recent
Accounting Pronouncements
In
March
2006, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 155, Accounting
for Certain Hybrid Financial Instruments
(an
amendment of FASB Statements No. 133 and 140) and SFAS No.156, Accounting
for Servicing of Financial Assets (an
amendment of FASB Statement No. 140). We do not expect the adoption of SFAS
No.
155 and SFAS No. 156 to have a material impact on our financial position or
results of operation.
In
July
2006, the FASB issued FASB Interpretation 48, Accounting
for Uncertainty in Income Taxes: an interpretation of FASB Statement No.
109.
Interpretation 48 clarifies Statement 109, Accounting
for Income Taxes,
to
indicate a criterion that an individual tax position would have to meet for
some
or all of the benefit of that position to be recognized in an entity’s financial
statements. Interpretation 48 is effective for fiscal years beginning after
December 31, 2006. We do not expect the adoption of Interpretation 48 to have
a
material impact on our financial position or results of operation.
Market
risk represents the risk of loss that may impact our financial position, results
of operations or cash flows due to adverse changes in financial market prices,
including interest rate risk, foreign currency exchange rate risk, commodity
price risk and other relevant market rate or price risks.
Due
to
the cash and cash equivalent balances that we maintain, we are exposed to risk
of changes in short-term interest rates. At June 30, 2006, we had $52,110,000
in
cash and cash equivalents, primarily invested in money market funds. Reductions
in short-term interest rates could result in reductions in the amount of that
income. However, the impact on our operating results of such changes is not
expected to be material.
The
Company has no activities that would expose it to foreign currency exchange
rate
risk or commodity price risks.
Index
to Consolidated Financial Statements
|
Page
|
|
|
Report
of Grant Thornton LLP, Independent Registered Public Accounting
Firm
|
59
|
|
|
Report
of Deloitte & Touche LLP, Independent Registered Public Accounting
Firm
|
60
|
|
|
Consolidated
Balance Sheets at June 30, 2006 and 2005
|
61
|
|
|
Consolidated
Statements of Operations for the Years Ended June 30, 2006, 2005
and
2004
|
62
|
|
|
Consolidated
Statements of Stockholders’ Equity For the Years Ended June 30, 2006, 2005
and 2004
|
63
|
|
|
Consolidated
Statements of Cash Flows for the Years Ended June 30, 2006, 2005
and
2004
|
64
|
|
|
Notes
to Consolidated Financial Statements For the Years Ended June 30,
2006,
2005 and 2004
|
66
|
Board
of
Directors and Stockholders
Collectors
Universe, Inc. and Subsidiaries
We
have
audited the accompanying consolidated balance sheets of Collectors Universe,
Inc. and subsidiaries (the Company) as of June 30, 2006 and 2005, and the
related consolidated statements of operations, stockholders’ equity and cash
flows for each of the two years ended June 30, 2006. These financial statements
are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our
audits.
We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above, present
fairly, in all material respects, the consolidated financial position of
Collectors Universe, Inc. and subsidiaries as of June 30, 2006 and 2005 and
the
results of their consolidated operations and their consolidated cash flows
for
each of the two years ended June 30, 2006, in conformity with accounting
principles generally accepted in the United States of America.
As
described in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for stock-based employee compensation as a
result of adopting Statement of Financial Accounting Standards No. 123(R),
Share-Based
Payment, effective
July 1, 2005.
Our
audit
was conducted for the purpose of forming an opinion on the basic consolidated
financial statements taken as a whole. The Schedule II is presented for purposes
of additional analysis and is not a required part of the basic consolidated
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic consolidated financial statements
and, in our opinion, is fairly stated in all material respects in relation
to
the basic consolidated financial statements taken as a whole.
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Collectors Universe,
Inc.
and subsidiaries’ internal control over financial reporting as of June 30, 2006,
based on criteria established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission and
our
report dated September 7, 2006, expressed an unqualified opinion
thereon.
/s/
GRANT
THORNTON LLP
Irvine,
California
September
7, 2006
To
the
Stockholders and Board of Directors of
Collectors
Universe, Inc.
We
have
audited the accompanying consolidated statements of operations, stockholders’
equity and cash flows of Collectors Universe, Inc. and subsidiaries (the
Company) for the year ended June 30, 2004. Our audit also included the financial
statement schedule listed in the index in Part IV, Item 15(A) (2) for the year
ended June 30, 2004. These financial statements and the financial statement
schedule are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these financial statements and the financial
statement schedule based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Collectors
Universe, Inc. and subsidiaries for the year ended June 30, 2004, in conformity
with accounting principles generally accepted in the United States of America.
Also, in our opinion, such financial statement schedule for the year ended
June
30, 2004, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
DELOITTE
& TOUCHE LLP
Costa
Mesa, California
September
23, 2004
(in
thousands, except per share data)
|
|
June
30,
|
|
ASSETS
|
|
2006
|
|
2005
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
52,110
|
|
$
|
65,439
|
|
Accounts
receivable, net of allowance of $37 in 2006 and $38 in
2005
|
|
|
1,753
|
|
|
1,508
|
|
Inventories,
net
|
|
|
437
|
|
|
436
|
|
Prepaid
expenses and other current assets
|
|
|
1,010
|
|
|
1,102
|
|
Customer
notes receivable, net of allowance of $16 in 2006 and $0 in
2005
|
|
|
3,797
|
|
|
1,560
|
|
Deferred
income taxes
|
|
|
1,414
|
|
|
2,854
|
|
Receivables
from sale of net assets of discontinued operations
|
|
|
196
|
|
|
63
|
|
Current
assets of discontinued operations held for sale
|
|
|
83
|
|
|
365
|
|
Total
current assets
|
|
|
60,800
|
|
|
73,327
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
1,897
|
|
|
857
|
|
Goodwill
|
|
|
9,799
|
|
|
-
|
|
Intangible
assets, net
|
|
|
4,674
|
|
|
79
|
|
Note
receivable from sale of discontinued operation
|
|
|
321
|
|
|
-
|
|
Deferred
income taxes
|
|
|
342
|
|
|
1,051
|
|
Other
assets
|
|
|
388
|
|
|
174
|
|
Non-current
assets of discontinued operations held for sale
|
|
|
-
|
|
|
46
|
|
|
|
$
|
78,221
|
|
$
|
75,534
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
907
|
|
$
|
753
|
|
Accrued
liabilities
|
|
|
2,043
|
|
|
1,563
|
|
Accrued
compensation and benefits
|
|
|
1,075
|
|
|
1,069
|
|
Income
taxes payable
|
|
|
496
|
|
|
-
|
|
Deferred
revenue
|
|
|
1,384
|
|
|
1,001
|
|
Current
liabilities of discontinued operations held for sale
|
|
|
8
|
|
|
27
|
|
Total
current liabilities
|
|
|
5,913
|
|
|
4,413
|
|
|
|
|
|
|
|
|
|
Deferred
rent
|
|
|
402
|
|
|
386
|
|
Other
long-term liabilities
|
|
|
-
|
|
|
169
|
|
Commitments
and contingencies (note 15)
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
Preferred
stock, $.001 par value; 5,000 shares authorized;
|
|
|
|
|
|
|
|
no
shares issued or outstanding
|
|
|
-
|
|
|
-
|
|
Common
stock, $.001 par value; 45,000 shares authorized;
|
|
|
|
|
|
|
|
Shares
issued: 8,475 in 2006 and 8,610 in 2005;
|
|
|
|
|
|
|
|
Shares
outstanding (net of treasury stock): 8,350 in 2006 and 8,485 in
2005
|
|
|
8
|
|
|
9
|
|
Additional
paid-in capital
|
|
|
76,909
|
|
|
78,594
|
|
Accumulated
deficit
|
|
|
(3,990
|
)
|
|
(7,016
|
)
|
Treasury
stock, at cost (125 shares)
|
|
|
(1,021
|
)
|
|
(1,021
|
)
|
Total
stockholders’ equity
|
|
|
71,906
|
|
|
70,566
|
|
|
|
$
|
78,221
|
|
$
|
75,534
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|
Year
Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Net
revenues:
|
|
|
|
|
|
|
|
Grading,
authentication and related services
|
|
$
|
36,914
|
|
$
|
33,607
|
|
$
|
26,420
|
|
Cost
of revenues:
|
|
|
|
|
|
|
|
|
|
|
Cost
of grading, authentication and related services
|
|
|
14,890
|
|
|
12,239
|
|
|
10,322
|
|
Gross
profit
|
|
|
22,024
|
|
|
21,368
|
|
|
16,098
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
Selling
and marketing expenses
|
|
|
4,918
|
|
|
3,534
|
|
|
3,165
|
|
General
and administrative expenses
|
|
|
13,337
|
|
|
10,367
|
|
|
8,664
|
|
Settlement
of lawsuit
|
|
|
-
|
|
|
500
|
|
|
-
|
|
Total
operating expenses
|
|
|
18,255
|
|
|
14,401
|
|
|
11,829
|
|
Operating
income
|
|
|
3,769
|
|
|
6,967
|
|
|
4,269
|
|
Interest
income, net
|
|
|
2,346
|
|
|
906
|
|
|
135
|
|
Other
income (expense), net
|
|
|
22
|
|
|
26
|
|
|
(25
|
)
|
Income
before provision for income taxes
|
|
|
6,137
|
|
|
7,899
|
|
|
4,379
|
|
Provision
for income taxes
|
|
|
2,733
|
|
|
3,141
|
|
|
1,581
|
|
Income
from continuing operations
|
|
|
3,404
|
|
|
4,758
|
|
|
2,798
|
|
Income
(loss) from discontinued operations, net of gain on sales of discontinued
businesses
(net
of
income taxes)
|
|
|
296
|
|
|
60
|
|
|
(1,068
|
)
|
Net
income
|
|
$
|
3,700
|
|
$
|
4,818
|
|
$
|
1,730
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per basic share:
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
0.40
|
|
$
|
0.68
|
|
$
|
0.45
|
|
Income
(loss) from discontinued operations, net of gain on sales of discontinued
businesses
(net
of
income taxes)
|
|
|
0.04
|
|
|
0.01
|
|
|
(0.17
|
)
|
Net
income
|
|
$
|
0.44
|
|
$
|
0.69
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per diluted share:
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
0.39
|
|
$
|
0.64
|
|
$
|
0.44
|
|
Income
(loss) from discontinued operations, net of gain on sales of discontinued
businesses
(net
of
income taxes)
|
|
|
0.03
|
|
|
0.01
|
|
|
(0.17
|
)
|
Net
income
|
|
$
|
0.42
|
|
$
|
0.65
|
|
$
|
0.27
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,473
|
|
|
7,013
|
|
|
6,170
|
|
Diluted
|
|
|
8,782
|
|
|
7,452
|
|
|
6,463
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
COLLECTORS
UNIVERSE, INC. AND SUBSIDIARIES
(in
thousands)
|
|
Common
Stock
|
|
Additional
Paid-in
|
|
Retained
Earnings
(Accumulated
|
|
Treasury
Stock
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit)
|
|
Shares
|
|
Amount
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at June 30, 2003
|
|
|
6,255
|
|
$
|
6
|
|
$
|
40,898
|
|
$
|
(13,564
|
)
|
|
(125
|
)
|
$
|
(1,021
|
)
|
$
|
26,319
|
|
Exercise
of stock options
|
|
|
204
|
|
|
-
|
|
|
883
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
883
|
|
Tax
benefit on exercise of
stock options
|
|
|
-
|
|
|
-
|
|
|
342
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
342
|
|
Issuances
of stock under stock purchase plan and related compensation
expense
|
|
|
12
|
|
|
-
|
|
|
92
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
92
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,730
|
|
|
-
|
|
|
-
|
|
|
1,730
|
|
Cancellation
of stock issued to a
former officer
|
|
|
(133
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Balance
at June 30, 2004
|
|
|
6,338
|
|
$
|
6
|
|
$
|
42,215
|
|
$
|
(11,834
|
)
|
|
(125
|
)
|
$
|
(1,021
|
)
|
$
|
29,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock in public
offering (net of expenses)
|
|
|
2,196
|
|
|
2
|
|
|
35,655
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
35,657
|
|
Exercise
of stock options
|
|
|
71
|
|
|
1
|
|
|
283
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
284
|
|
Tax
benefit on exercise of
stock options
|
|
|
-
|
|
|
-
|
|
|
338
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
338
|
|
Issuances
of stock under stock purchase plan and related
compensation expense
|
|
|
5
|
|
|
-
|
|
|
103
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
103
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4,818
|
|
|
-
|
|
|
-
|
|
|
4,818
|
|
Balance
at June 30, 2005
|
|
|
8,610
|
|
$
|
9
|
|
$
|
78,594
|
|
$
|
(7,016
|
)
|
|
(125
|
)
|
$
|
(1,021
|
)
|
$
|
70,566
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
of stock options
|
|
|
47
|
|
|
-
|
|
|
243
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
243
|
|
Stock
compensation expenses
|
|
|
-
|
|
|
-
|
|
|
670
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
670
|
|
Tax
benefit on exercise of
stock options
|
|
|
-
|
|
|
-
|
|
|
29
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
29
|
|
Shares
repurchased and cancelled under the Stock Repurchase Plan
|
|
|
(182
|
)
|
|
(1
|
)
|
|
(2,627
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,628
|
)
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,700
|
|
|
-
|
|
|
-
|
|
|
3,700
|
|
Dividends
paid ($0.08 per share)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(674
|
)
|
|
-
|
|
|
-
|
|
|
(674
|
)
|
Balance
at June 30, 2006
|
|
|
8,475
|
|
$
|
8
|
|
$
|
76,909
|
|
$
|
(3,990
|
)
|
|
(125
|
)
|
$
|
(1,021
|
)
|
$
|
71,906
|
|
The
accompanying notes are in integral part of these consolidated financial
statements.
COLLECTORS
UNIVERSE, INC.
(in
thousands)
|
|
Year
ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
3,700
|
|
$
|
4,818
|
|
$
|
1,730
|
|
Adjustments
to reconcile net income to net cash provided
|
|
|
|
|
|
|
|
|
|
|
by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
919
|
|
|
443
|
|
|
647
|
|
Stock-based
compensation expense
|
|
|
670
|
|
|
33
|
|
|
50
|
|
Tax
benefit from exercise of stock options
|
|
|
29
|
|
|
338
|
|
|
342
|
|
Loss
on termination of sublease
|
|
|
83
|
|
|
-
|
|
|
-
|
|
Discontinued
operations
|
|
|
(296
|
)
|
|
(60
|
)
|
|
1,068
|
|
Provision
for bad debts and returns
|
|
|
55
|
|
|
38
|
|
|
31
|
|
Provision
for inventory write-down
|
|
|
72
|
|
|
-
|
|
|
53
|
|
(Gain)
loss on sale of property and equipment
|
|
|
8
|
|
|
(10
|
)
|
|
25
|
|
Deferred
income taxes
|
|
|
1,853
|
|
|
2,474
|
|
|
1,154
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(115
|
)
|
|
(756
|
)
|
|
(367
|
)
|
Inventories
|
|
|
(73
|
)
|
|
16
|
|
|
(325
|
)
|
Prepaid
expenses and other
|
|
|
(63
|
)
|
|
(321
|
)
|
|
(143
|
)
|
Refundable
income taxes
|
|
|
-
|
|
|
13
|
|
|
1,170
|
|
Other
assets
|
|
|
(278
|
)
|
|
(88
|
)
|
|
29
|
|
Accounts
payable and accrued liabilities
|
|
|
403
|
|
|
510
|
|
|
(350
|
)
|
Accrued
compensation and benefits
|
|
|
(164
|
)
|
|
133
|
|
|
446
|
|
Income
taxes payable
|
|
|
496
|
|
|
-
|
|
|
(14
|
)
|
Deferred
revenue
|
|
|
278
|
|
|
(224
|
)
|
|
448
|
|
Deferred
rent
|
|
|
16
|
|
|
(15
|
)
|
|
10
|
|
Other
long-term liabilities
|
|
|
-
|
|
|
105
|
|
|
64
|
|
Net
cash provided by operating activities
|
|
|
7,593
|
|
|
7,447
|
|
|
6,068
|
|
Net
cash provided by operating activities of discontinued
businesses
|
|
|
390
|
|
|
784
|
|
|
8,128
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sale of property and equipment
|
|
|
8
|
|
|
11
|
|
|
83
|
|
Capital
expenditures
|
|
|
(1,366
|
)
|
|
(256
|
)
|
|
(538
|
)
|
Purchase
of businesses, net of cash acquired
|
|
|
(14,582
|
)
|
|
-
|
|
|
-
|
|
Advances
on customer notes receivable
|
|
|
(4,283
|
)
|
|
(6,078
|
)
|
|
-
|
|
Proceeds
from collection of customer notes receivable
|
|
|
2,030
|
|
|
4,518
|
|
|
-
|
|
Capitalized
software
|
|
|
(421
|
)
|
|
-
|
|
|
-
|
|
Cash
received from sale of net assets of discontinued
operations
|
|
|
361
|
|
|
1,548
|
|
|
2,307
|
|
Net
cash provided by (used in) investing activities
|
|
|
(18,253
|
)
|
|
(257
|
)
|
|
1,852
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from employee stock purchase plan
|
|
|
-
|
|
|
70
|
|
|
60
|
|
Proceeds
from sale of common stock, net
|
|
|
-
|
|
|
35,657
|
|
|
-
|
|
Proceeds
from exercise of stock options
|
|
|
243
|
|
|
284
|
|
|
864
|
|
Payments
for retirement of common stock
|
|
|
(2,628
|
)
|
|
-
|
|
|
-
|
|
Dividends
paid to common stockholders
|
|
|
(674
|
)
|
|
-
|
|
|
-
|
|
Net
cash provided by (used in) financing activities
|
|
|
(3,059
|
)
|
|
36,011
|
|
|
924
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(13,329
|
)
|
|
43,985
|
|
|
16,972
|
|
Cash
and cash equivalents at beginning of year
|
|
|
65,439
|
|
|
21,454
|
|
|
4,482
|
|
Cash
and cash equivalents at end of year
|
|
$
|
52,110
|
|
$
|
65,439
|
|
$
|
21,454
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
COLLECTORS
UNIVERSE, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (continued)
(in
thousands)
|
|
|
Year
ended June 30,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION |
|
|
|
|
|
|
|
|
|
|
Income
taxes paid
|
|
$
|
624
|
|
$
|
213
|
|
$
|
14
|
|
Interest
paid
|
|
$
|
16
|
|
$
|
3
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
July 14, 2005, the Company acquired CoinFacts.com in a transaction
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
515
|
|
$
|
-
|
|
$
|
-
|
|
Purchase
price
|
|
$
|
515
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
September 2, 2005, the Company acquired Certified Coin Exchange
(CCE) in
a
transaction
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Fair
value of net liabilities assumed
|
|
$
|
(41
|
)
|
$
|
-
|
|
$
|
-
|
|
Deferred
taxes recognized at acquisition
|
|
|
(296
|
)
|
|
-
|
|
|
-
|
|
Intangible
assets
|
|
|
947
|
|
|
-
|
|
|
-
|
|
Fair
value of computertradingpost.com, Inc., including net
assets
|
|
|
600
|
|
|
-
|
|
|
-
|
|
Goodwill
|
|
|
1,117
|
|
|
- |
|
|
-
|
|
Purchase
price, net of $50 cash acquired
|
|
$
|
2,327
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
November 8, 2005, the Company acquired Gem Certification and
Appraisal Lab
(GCAL) in a transaction summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Fair
value of net assets acquired
|
|
$
|
119
|
|
$
|
-
|
|
$
|
-
|
|
Intangible
assets
|
|
|
53
|
|
|
-
|
|
|
-
|
|
Goodwill
|
|
|
3,068
|
|
|
-
|
|
|
-
|
|
Purchase
price, net of $28 cash acquired
|
|
$
|
3,240
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
December 22, 2005, the Company acquired the business of Gemprint
Corporation
in a transaction summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Fair
value of net assets acquired
|
|
$
|
40
|
|
$
|
-
|
|
$
|
-
|
|
Intangible
assets
|
|
|
3,444
|
|
|
-
|
|
|
-
|
|
Goodwill
|
|
|
5,099
|
|
|
-
|
|
|
-
|
|
Purchase
price
|
|
$
|
8,583
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
During
2004, in connection with the divestiture of the Company’s collectibles
auctions and direct sales businesses, the Company sold such businesses
for
gross proceeds of approximately $2,874,000, of which $2,307,000
and
$544,000 were received in 2004 and 2005, respectively. The balance
of
$23,000 is included as part of the receivables from the sale of
discontinued operations in the accompanying balance sheet at June
30,
2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
connection with the sale of CTP in November, 2005, the Company
received a
note receivable of $458,000.
The
Company realized a gain of $104,000 in fiscal 2006 related to the
on-going
disposal of one of its collectible sales businesses, which proceeds
were
received subsequent to June 30, 2006 (see note 4).
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
COLLECTORS
UNIVERSE, INC. AND SUBSIDIARIES
1. Company
Organization and Nature of Business
Organization
Collectors
Universe, Inc. (“We,” “us,” the “Company” or “Collectors Universe”) is a
Delaware corporation that was organized on February 5, 1999 for the purpose
of
enabling Professional Coin Grading Service, Inc. (“PCGS”) to acquire other
businesses that, like PCGS, would provide services to the collectibles markets.
On February 5, 1999, Collectors Universe issued 4,327,000 shares of common
stock
in exchange for all of the outstanding shares of PCGS. As a result of that
exchange, the former stockholders of PCGS became stockholders of Collectors
Universe, with each of them receiving a number of our shares based on his or
her
percentage ownership of the shares of PCGS. Prior to this exchange, Collectors
Universe had no operating assets or liabilities and had not yet conducted any
operations. The assets and liabilities acquired were recorded at the PCGS’ basis
as the transaction represented a transfer of assets and liabilities between
entities under common control.
Concurrently,
with the exchange transaction with PCGS, Collectors Universe acquired the assets
of the auction businesses of Lyn F. Knight Rare Coins, Inc. (“Lyn Knight”) and
Kingswood Coin Auctions, LLC (“Kingswood”) and the minority ownership interests
in Superior Sportscard Auctions, LLC (“Superior”) and Internet Universe, LLC
(“IU”), both of which were majority-owned subsidiaries of PCGS at the time these
acquisitions were consummated. See note 4, Discontinued Operations.
In
fiscal
2005, Collectors Finance Corporation (“CFC”) began operations as a 100%
subsidiary of the Company to engage in the business of making short-term loans
to collectibles dealers pursuant to a Dealer Financing Program. Under that
program, CFC offers short-term loans to established collectibles dealers. The
loans are secured by the delivery of coins or other collectibles to us. In
March
2005, CFC received a California Finance Lenders License.
In
fiscal
2006, the Company acquired the following businesses, the results of operations
of which have been consolidated into the financial statements of the Company
from their respective dates of acquisition:
Business
|
Acquisition
Date
|
Purchase
Price
|
CoinFacts.com
|
July
14, 2005
|
$0.5
million
|
Certified
Coin Exchange
|
September
2, 2005
|
$2.2
million
|
Gem
Certification & Appraisal Lab, LLC
|
November
8, 2005
|
$3.0
million
|
Gemprint
Corporation
|
December
22, 2005
|
$7.5
million
|
Nature
of the Business
We
are a
collectibles company engaged in the provision of authentication, grading and
related services for high-value collectibles and other high value assets. We
provide authentication and grading services for rare collectibles, consisting
of
coins, vintage U.S. paper currency, sportscards, stamps, sports memorabilia
and
autographs, and for diamonds and colored gemstones. We also publish magazines
that provide market prices and information for certain collectibles and high
value assets, operate the CCE subscription business and sell advertising on
our
websites and in those magazines.
During
the period from 1999 through the latter part of fiscal 2004, we also were
engaged in the business of marketing and selling high-end collectible coins,
sportscards and sports entertainment and historical memorabilia. Most of those
sales were made at multi-venue auctions that were conducted by our collectibles
sales divisions, which were comprised of Bowers and Merena Galleries and
Kingswood Coin Auctions for rare coins, Superior Sportscard Auctions for vintage
sportscards and sports memorabilia and Odyssey for entertainment and historical
memorabilia. We also sold collectible coins by direct sales
methods.
On
December 4, 2003, our Board of Directors adopted a plan to focus the Company’s
financial and management resources and collectibles expertise, on the operations
and growth of its authentication and grading businesses, by divesting the
collectibles auctions and direct sales businesses comprising its collectibles
sales segment. As a result, in the accompanying consolidated financial
statements, the assets and related liabilities of the collectibles sales segment
have been classified as held for sale and the related operating results have
been classified as discontinued operations in accordance with Statement of
Financial Accounting Standards (SFAS) No. 144 (see note 4).
2. Summary
of Significant Accounting Policies
Basis
of Presentation
The
accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of
America.
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of
Collectors Universe, Inc. and its owned subsidiaries, all of which are 100%
owned by the Company. At June 30, 2006, such operating subsidiaries were
Professional Coin Grading Services, Inc., Collectors Finance Corporation,
Certified Asset Exchange, Inc., and Gem Certification and Assurance Lab, Inc.
In
2004, the Company disposed of the businesses comprising its collectibles sales
segment and, accordingly, the assets and liabilities of those businesses have
been classified as held for sale and their related operating results (including
the gains or losses recognized on the sales of those businesses) have been
classified as discontinued operations. See note 4.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that 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 may differ from those estimates,
and such differences may be material to the consolidated financial
statements.
Cash
and Cash Equivalents
We
consider all highly liquid investments with original maturities of three months
or less at the date of purchase to be cash and cash equivalents. At June 30,
2006, cash and cash equivalents included approximately $51,000,000 of trading
securities, primarily comprising money market-account balances. However, such
cash and cash equivalents may also, at times, include high quality commercial
paper issued by U.S. or foreign companies and bank certificates of deposit,
which were included in cash and cash equivalents at June 30, 2005. The minimum
credit quality of the portfolio of trading securities must be rated no less
than
single-A long term or A1/P1 short term, and the portfolio must contain no more
than 25% exposure to securities of issuers whose principal business activities
are in the same industry. However, the 25% limitation does not apply to
securities guaranteed by the U.S. government or to bank obligations, subject
to
U.S. banking regulations. In addition, the weighted average maturity of the
portfolio must not exceed 90 days. Such trading securities are carried at market
value in the accompanying consolidated balance sheet at June 30, 2006.
Unrealized gains on such trading securities were approximately $0 and $106,000
at June 30, 2006 and 2005.
Concentrations
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk at June 30, 2006 consist primarily of cash and cash equivalents,
accounts receivables and notes receivables.
Financial
Instruments and Cash Balances. Through
September 30, 2004, the Company had invested its excess cash in a large
uninsured institutional money market fund. In September 2004, the Company
adopted a policy to invest its excess cash in a portfolio of high quality U.S.
dollar-denominated money market type or similar securities, and appointed a
new
portfolio manager. At June 30, 2006 and 2005, the Company’s excess funds of
approximately $51,000,000 and $60,000,000, respectively, were primarily invested
in certificates of deposit, in a money market fund, and in high quality
commercial paper. In addition, at June 30, 2006, the Company had approximately
$600,000 in a non-interest bearing bank account for general day-to-day
operations.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
Accounts
Receivable. A
substantial portion of accounts receivable is due from collectibles dealers.
At
June 30, 2006 and 2005, accounts receivable from two and one customers
represented 31% and 46%, respectively, of the Company’s total gross accounts
receivable balances. We perform 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 impact
the ability of the debtor to pay their account receivable balances. Based on
such review, we establish an allowance for doubtful accounts, when necessary.
The allowance for doubtful accounts receivable was $37,000 and $38,000 at June
30, 2006 and June 30, 2005, respectively.
Customers.
The
authentication and grading of collectible coins accounted for approximately
65%,
69% and 66% of our net revenues for the years ended June 30, 2006, 2005 and
2004, respectively.
Customer
Notes Receivable. During
the year ended June 30, 2006, we made short term advances, in an aggregate
principal amount of $4,283,000 to collectibles dealers and collectors who are
customers, and recorded aggregate cash collections of $2,030,000. We perform
an
analysis of the expected collectibility of customer notes receivable based
on
several factors, including the age and extent of significant past due notes
and
economic conditions or trends that may offset the ability of the debtor to
pay
their customer notes receivable balances, including the adequacy of the
collateral received to secure such balances. At June 30, 2006, we recorded
an
allowance for uncollectible customer notes receivable of $16,000 reflecting
a
deficiency of collateral value for one customer.
Suppliers.
We
purchase injection-molded parts, holograms and printed labels for our grading
services. There are numerous suppliers for these items and, as a result, it
is
possible to change suppliers without significant delay or cost to the Company.
However, while there are numerous sources for injection-molded parts, these
parts require a die to fabricate the part. The manufacture of high precision
dies can be a lengthy process and requires considerable expertise in their
fabrication. Although, we do not have back-up dies for some of our high volume
injection-molded parts and we rely on one supplier for these requirements,
we
believe that this supplier maintains a large enough inventory of the
injection-molded parts to allow time for us to have new molds manufactured
for
us by other suppliers.
Fair
Value of Financial Instruments
The
carrying value of cash and cash equivalents, accounts receivable, customer
notes
receivable, receivables from sale of net assets of discontinued operations,
accounts payable and accrued liabilities approximate their respective fair
values due to the short-term nature of such instruments. The carrying value
of
the note receivable related to the sale of a discontinued operation approximates
fair value, as the interest rate on such note approximates an amount that would
be extended to parties with similar credit risk and remaining
maturities.
Inventories
Our
inventories consist primarily of (i) our coin and stamp collectibles
inventories, and (ii) consumable supplies that we use in our continuing
authentication and grading businesses. We account for those collectibles
inventories under the specific identification method. Inventories are valued
at
the lower of cost or market. Inventories are periodically reviewed to identify
slow moving items, and the allowance for inventory loss is recognized, as
necessary. The allowance for inventory loss was $106,000 and $34,000 at June
30,
2006 and 2005, respectively. It is possible that our estimates of market value
could change in the near term due to market conditions in the various
collectibles markets served by the Company.
Property
and Equipment
Property
and equipment are stated at cost. Depreciation and amortization are provided
using the straight-line method over the estimated useful lives ranging from
three to seven years. Leasehold improvements are amortized over the shorter
of
the estimated useful lives of the improvements or the term of the related lease.
Repair and maintenance costs are expensed as incurred.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
Long-Lived
Assets
Management
regularly reviews property and equipment and other long-lived assets, including
certain identifiable intangibles, 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, equipment or amortizable intangible
assets, then management would prepare an estimate of future cash flows
(undiscounted and without interest charges) expected to result from the use
of
that asset and its eventual disposition. If these cash flows are less than
the
carrying amount of the asset, an impairment loss would be recognized to write
down the asset to its estimated fair value. The fair value would be estimated
at
the present value of the future cash flows discounted at a rate commensurate
with management’s estimates of the business risks. No long-lived asset
impairments were identified at June 30, 2006 or 2005.
Revenue
Recognition
Net
revenues consist primarily of fees generated from the authentication and grading
of coins, sportscards, autographs, currency, stamps and diamonds (which the
Company began grading in the second quarter of 2006). 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.
Shipping
and Handling Costs
Shipping
and handling costs incurred to return to our customers their collectibles
property are recorded as costs of revenues, net of amounts received from such
customers.
Cooperative
Marketing Arrangements
In
accordance with EITF 01-09, Accounting
for Consideration Given By a Vendor to a Customer (Including a Reseller of
the
Vendor’s Products),
marketing allowances given to a customer have been classified as a reduction
of
revenues in the year ended June 30, 2006.
Warranty
Costs
We
offer
a warranty covering most of the collectibles we authenticate and grade. Under
the warranty, if any coin, sportscard, stamp or currency note that was
previously graded by us is later submitted to us for re-grading and either
(i) receives a lower grade upon that resubmittal or (ii) is determined
not to have been authentic, we will offer to purchase the collectible or
higher-value asset, or, in the alternative, 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-evident clear plastic holder in which it was placed
at
the time we last graded it or shows signs of tampering. We also offer a similar
warranty, of one year’s duration and subject to certain limitations, covering
the diamonds that we authenticate and grade. We accrue for estimated warranty
costs based on historical trends and related experience.
Advertising
Costs
Advertising
costs are expensed as incurred and amounted to approximately $620,000, $260,000
and $149,000 in the fiscal years ended June 30, 2006, 2005 and 2004,
respectively.
Income
Taxes
We
account for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes.
This
statement requires the recognition 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 an
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
evaluation
of the probability of being able to realize the future benefits indicated by
such asset. A valuation allowance related to a deferred tax asset is recorded
when it is more likely than not that some portion or all of the deferred tax
asset will not be realized.
Capitalized
Software
At
June
30, 2006, the Company capitalized approximately $421,000 as capitalized software
in accordance with Statement of Position (“SOP”) 98-1, Accounting
for the Costs of Computer Software Developed or Obtained for Internal
Use.
SOP
98-1 requires that certain costs incurred, either from internal or external
sources, be capitalized as part of intangible assets and amortized on a
straight-line basis over the useful life of the software. During fiscal 2006,
the Company recorded approximately $11,000 as amortization expense for certain
projects that were completed. Planning, training, support and maintenance costs
incurred either prior to or following the implementation phase are recognized
as
expense in the period in which they occur. The Company evaluates the carrying
values of capitalized software to determine if the carrying values are impaired,
and, if necessary, an impairment loss is recorded in the period in which the
impairment occurs.
Stock-Based
Compensation
At
June
30, 2006, the Company had three stock-based compensation plans. Prior to July
1,
2005, the Company accounted for these plans under the recognition and
measurement provisions of Accounting Principles Board (“APB”) Opinion No. 25,
Accounting
for Stock Issued to Employees,
and
related interpretations, as permitted by SFAS No. 123, Accounting
for Stock Based Compensation.
No
stock-based employee compensation cost was recognized in the statements of
operations for fiscal years prior to June 30, 2006, as all options granted
under
these plans had an exercise price equal to the market value of the underlying
common stock on the date of grant.
Effective
July 1, 2005, on the first day of the Company’s fiscal year 2006, the Company
adopted the fair value recognition provisions of SFAS No. 123(R), Share-Based
Payment,
using
the modified-prospective transition method. Under this transition method,
compensation cost recognized in the fiscal year ended June 30, 2006 and in
subsequent fiscal years includes: (a) compensation cost for all share-based
payments granted and not yet vested prior to July 1, 2005, based on the grant
date fair value estimated in accordance with the original provisions of SFAS
No.
123, and (b) compensation cost for all share-based payments granted subsequent
to June 30, 2005 based on the grant-date fair value estimated in accordance
with
the provisions of SFAS No. 123(R). Results for prior periods have not been
restated. However, we became aware of an error in the determination of the
proforma expense in years prior to adoption, as it relates to our estimate
of
the expected term of the outstanding options. Therefore, the fiscal year 2005
proforma expense has been restated as disclosed in note 2 below.
Since
stock-based compensation expense recognized in the statement of operations
for
the fiscal year ended June 30, 2006 is based on awards expected to vest, the
compensation expense has been reduced for estimated forfeitures. SFAS No. 123(R)
requires forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those
estimates. At June 30, 2006, the annual forfeiture rate is estimated to be
10.5%.
The
Company calculates stock-based compensation by estimating the fair value of
each
option using the Black-Scholes option pricing model. The Company’s determination
of the fair value of share-based payment awards is made as of their respective
dates of grant using that option pricing model and that determination is
affected by the Company’s stock price as well as assumptions regarding a number
of subjective variables. These variables include, but are not limited to, the
Company’s expected stock price volatility over the term of the awards, the
expected term of the option, the dividend yield and actual and projected
employee stock option exercise behavior. The Black-Scholes option pricing model
was developed for use in estimating the value of traded options that have no
vesting or hedging restrictions and are fully transferable. Because the
Company’s employee stock options have certain characteristics that are
significantly different from traded options, the existing valuation models
may
not provide an accurate measure of the fair value of the Company’s employee
stock options. Although the fair value of employee stock options is determined
in accordance with SFAS No. 123(R) using an option-pricing model, that value
also may not be indicative of the fair value observed in a willing buyer/willing
seller market transaction.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
The
calculated compensation cost, net of estimated forfeitures, is recognized on
a
straight-line basis over the remaining vesting period of the option as of the
adoption date of July 1, 2005.
The
Company issues stock options to employees and outside directors whose only
condition for vesting are continued employment or service during the related
vesting period. Typically, the vesting period is four years for employee awards
and six months for director awards, although awards are sometimes granted with
immediate vesting.
The
weighted-average grant date fair value of employee stock options granted during
the fiscal year ended June 30, 2006 was $6.57, using the Black-Scholes model
with the following weighted-average assumptions:
|
|
2006
|
|
2005
|
|
2004
|
|
Dividend
yield
|
|
|
2.3
|
%
|
|
-
|
|
|
-
|
|
Expected
volatility
|
|
|
58
|
%
|
|
62
|
%
|
|
68
|
%
|
Risk-free
interest rate
|
|
|
4.7
|
%
|
|
3.5
|
%
|
|
3.65
|
%
|
Expected
lives
|
|
|
5.1
years
|
|
|
4.1
years
|
|
|
5.5
years
|
|
As
a
result of adopting SFAS No. 123(R) on July 1, 2005, the Company’s net income
before income taxes for the fiscal year ended June 30, 2006 was $670,000 lower
than if it had continued to account for share-based compensation under APB
Opinion No. 25. Of the $670,000 of such compensation expense that was recognized
in the accompanying consolidated statement of operations for the year ended
June
30, 2006, $302,000 was recorded as a cost of revenues, $1,000 as selling and
marketing expenses, and $367,000 as general and administrative expenses. Basic
and diluted net income per share for the fiscal year ended June 30, 2006 would
have been $0.51 and $0.49, respectively, if the Company had not adopted SFAS
No.
123 (R), compared to reported basic and diluted net income per share of $0.44
and $0.42, respectively.
During
the fourth quarter of 2006, the Company reviewed its assumptions, both current
and historical, regarding the assumptions that are input into the Black-Scholes
option model. The expected option term and the resultant volatility percentage
and the resultant risk-free rate assumptions were modified, which resulted
in a
correcting adjustment of compensation expense in the fourth quarter of fiscal
2006 of approximately $105,000, including the effect of the increase in the
estimated forfeiture rate from 4% to 10.5%, which we believe was erroneously
determined by us. The Company increased the expected term of options to a
weighted average of approximately 5.0 years from a previous weighted average
estimate of 2.0 years, which we believe was erroneously determined by us. After
carefully assessing the effect of the $105,000 on each of the quarters in the
nine months ended March 31, 2006, under the provisions of Statement of Financial
Accounting Standards No. 154, “Accounting
Changes and Error Corrections”,
a
replacement of APB Opinion No. 20, and FASB Statement No.3, we determined that
the prorata portion of such $105,000 was not material to those quarters and,
accordingly, we have recorded the amount of $105,000 in the fourth quarter
of
fiscal 2006. The annual volatility percentage was reduced from approximately
75%
to a range of 58% to 68%, depending on the estimated expected term of the
option.
Because
the Company paid its first quarterly dividend of $0.08 per common share
beginning in the fourth quarter of 2006, the Company incorporated a dividend
yield percentage assumption of 2.3% for stock option grants issued in 2006,
based on an annualized dividend of $0.32 per share of common stock.
The
total
amount of compensation expense related to unvested awards not yet recognized
at
June 30, 2006 was $1,691,000 and, assuming no change in forfeiture rates, that
amount will be recognized as compensation expense as follows:
Fiscal
Year Ending June 30
|
|
Amount
|
|
2007
|
|
|
684,000
|
|
2008
|
|
|
635,000
|
|
2009
|
|
|
341,000
|
|
2010
|
|
|
31,000
|
|
Total
|
|
$
|
1,691,000
|
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
However,
such amounts do not include the cost of new option awards that may be granted
in
future periods nor any changes in the Company’s forfeiture
percentage.
Prior
to
the adoption of SFAS No. 123(R), the Company classified all tax benefits
resulting from the exercise of stock options as operating cash flows in the
statements of cash flows. SFAS No. 123(R) requires the cash flows from the
tax
benefits resulting from tax deductions in excess of the compensation cost
recognized for those options (excess tax benefits) to be classified as financing
cash flows. There were no such excess tax benefits resulting from the exercise
of stock options for the fiscal year ended June 30, 2006.
SFAS
No.
123(R) requires the Company to continue to provide the pro forma disclosures
in
accordance with SFAS No. 123, as amended, for all prior periods presented in
which share-based payments to employees are accounted for under APB Opinion
No.
25.
The
following table illustrates the effect on net income and net income per share
for the fiscal years ended June 30, 2005 and 2004 if the Company had applied
the
fair value recognition provisions of SFAS No. 123(R) to share-based employee
compensation.
|
|
(in
thousands,
except
per
share data)
|
|
(in
thousands,
except
per
share data)
|
|
|
|
2005
(Restated)
|
|
2004
|
|
Net
income, as reported
|
|
$
|
4,818
|
|
$
|
1,730
|
|
Add:
Stock-based compensation included in reported net income, net of
tax effects
|
|
|
20
|
|
|
50
|
|
Deduct:
Total stock-based compensation expense determined under fair
value based method for awards,
net
of
related tax effects (restated)
|
|
|
(1,068
|
)
|
|
(435
|
)
|
Pro
forma net income (restated)
|
|
$
|
3,770
|
|
$
|
1,345
|
|
|
|
|
|
|
|
|
|
Net
income per common share - basic:
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
0.69
|
|
$
|
0.28
|
|
Pro
forma (restated)
|
|
$
|
0.54
|
|
$
|
0.22
|
|
|
|
|
|
|
|
|
|
Net
income per common share - diluted:
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
0.65
|
|
$
|
0.27
|
|
Pro
forma (restated)
|
|
$
|
0.51
|
|
$
|
0.21
|
|
In
connection with our adoption of SFAS No. 123(R), we re-examined our
Black-Scholes assumptions and determined the expected option term assumption
was
erroneously used in years prior to adoption. The tabular presentation
above includes corrections to the expected option term, from weighted average
2.0 years to 4.1 years, and the resulting change in volatility percentage and
risk-free rate, from 75% to 62% and 3.6% to 3.5%, respectively, for the fiscal
year ended June 30, 2005. These assumption corrections increased the pro-forma
compensation expense for the fiscal year ended June 30, 2005 by $277,000 and
decreased basic and diluted net income per share by $0.04 and $0.03,
respectively from the previously reported amounts of $791,000, $0.58 (basic)
and
$0.54 (diluted) per share, respectively. We determined that there was no
material impact on fiscal 2004 as a result of our correction to the prior year
Black-Scholes assumptions.
Net
Income Per Share
We
compute net income per share in accordance with SFAS No. 128, Earnings
Per Share. SFAS
No. 128 requires the presentation of basic and diluted earnings per share.
Basic net income per share is computed by dividing net income attributable
to
common stockholders by the weighted-average number of common shares outstanding
during the periods presented. Diluted net income per share is computed by
dividing net income attributable to common stockholders by the weighted-average
number of common and common equivalent shares outstanding during the periods
presented assuming the exercise of all outstanding stock options and other
dilutive securities. However, options with exercise prices that exceed the
average market price of the Company’s shares for the period for which the
calculation of diluted net income per share is made are disregarded, because
they are non-dilutive in their effect.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
The
following table sets forth the computation of basic and diluted net income
per
common share (in thousands except per share data):
|
|
2006
|
|
2005
|
|
2004
|
|
Income
from continuing operations
|
|
$
|
3,404
|
|
$
|
4,758
|
|
$
|
2,798
|
|
Income
(loss) from discontinued operations, net of gain on sales of discontinued
businesses
(net of income taxes)
|
|
|
296
|
|
|
60
|
|
|
(1,068
|
)
|
Net
income
|
|
$
|
3,700
|
|
$
|
4,818
|
|
$
|
1,730
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per basic share:
|
|
|
|
|
|
|
|
|
|
|
From
continuing operations
|
|
$
|
0.40
|
|
$
|
0.68
|
|
$
|
0.45
|
|
Income
(loss) from discontinued operations, net of gain on sales of discontinued
businesses
(net
of
income taxes)
|
|
|
0.04
|
|
|
0.01
|
|
|
(0.17
|
)
|
Net
income
|
|
$
|
0.44
|
|
$
|
0.69
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per diluted share:
|
|
|
|
|
|
|
|
|
|
|
From
continuing operations
|
|
$
|
0.39
|
|
$
|
0.64
|
|
$
|
0.44
|
|
Income
(loss) from discontinued operations, net of gain on sales
of discontinued
businesses
(net
of
income taxes)
|
|
|
0.03
|
|
|
0.01
|
|
|
(0.17
|
)
|
Net
income
|
|
$
|
0.42
|
|
$
|
0.65
|
|
$
|
0.27
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
8,473
|
|
|
7,013
|
|
|
6,170
|
|
Effect
of dilutive shares
|
|
|
309
|
|
|
439
|
|
|
293
|
|
Diluted
|
|
|
8,782
|
|
|
7,452
|
|
|
6,463
|
|
Options
and warrants to purchase approximately 689,000, 406,000 and 624,000 shares
of
common stock for the years ended June 30, 2006, 2005 and 2004, respectively,
at
exercise prices up to $24.00 per share, were not included in the computation
of
diluted earnings per share because the respective exercise prices of those
options and warrants were greater than the average market price for the
respective period.
Comprehensive
Income
The
Company does not have any items of other comprehensive income requiring separate
disclosure.
Goodwill
and Other Intangible Assets
In
accordance with SFAS No. 142, Goodwill
and Other Intangible Assets, the
Company is required to evaluate the carrying value of its goodwill and certain
indefinite-lived intangible assets at least annually for impairment, or more
frequently if facts and circumstances indicate that an impairment has occurred.
Management intends to formally evaluate the carrying value of its goodwill
and
other indefinite-lived intangible assets for impairment on the anniversary
date
of each of the acquisitions that gave rise to the recording of such assets.
Intangible assets acquired through acquisition, which have definite lives,
are
subject to amortization over their remaining useful lives. During fiscal year
2006, the Company completed a number of business acquisitions which resulted
in
the acquisition of goodwill and intangible assets with indefinite lives,
totaling $9,799,000 and $472,000, respectively. The Company also acquired
$3,972,000 of intangible assets through acquisition with definite lives and
capitalized $421,000 of certain software development costs, both of which are
subject to amortization over their remaining useful lives (see also related
discussion in note 3).
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
The
following table sets forth, by “reporting unit” as defined by SFAS No. 142, the
amounts classified as goodwill and intangible assets, net on the balance sheets
as of June 30, 2005 and 2006 in thousands of dollars:
|
|
Coins
|
|
Diamonds
|
|
Exchange
and Other
|
|
Total
|
|
Goodwill:
|
|
|
|
|
|
|
|
|
|
Balance
at June 30, 2005
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Acquired
during FY2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GCAL
acquisition
|
|
|
-
|
|
|
3,068
|
|
|
-
|
|
|
3,068
|
|
Gemprint
acquisition
|
|
|
-
|
|
|
5,099
|
|
|
-
|
|
|
5,099
|
|
CCE
acquisition
|
|
|
-
|
|
|
-
|
|
|
1,117
|
|
|
1,117
|
|
CoinFacts
acquisition
|
|
|
515
|
|
|
-
|
|
|
-
|
|
|
515
|
|
Balance
at June 30, 2006
|
|
$
|
515
|
|
$
|
8,167
|
|
$
|
1,117
|
|
$
|
9,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
Assets, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at June 30, 2005
|
|
$
|
79
|
|
$
|
-
|
|
$
|
-
|
|
$
|
79
|
|
Acquired
during FY2006 with indefinite lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GCAL
acquisition
|
|
|
-
|
|
|
53
|
|
|
-
|
|
|
53
|
|
Gemprint
acquisition
|
|
|
-
|
|
|
380
|
|
|
-
|
|
|
380
|
|
CCE
acquisition
|
|
|
-
|
|
|
-
|
|
|
39
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired
during FY2006 with definite lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gemprint
acquisition
|
|
|
-
|
|
|
3,064
|
|
|
-
|
|
|
3,064
|
|
CCE
acquisition
|
|
|
-
|
|
|
-
|
|
|
908
|
|
|
908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized
software costs
|
|
|
-
|
|
|
-
|
|
|
421
|
|
|
421
|
|
Less:
amortization for FY2006
|
|
|
(50
|
)
|
|
(132
|
)
|
|
(88
|
)
|
|
(270
|
)
|
Balance
at June 30, 2006
|
|
$
|
29
|
|
$
|
3,365
|
|
$
|
1,280
|
|
$
|
4,674
|
|
During
fiscal 2005 and 2004, $21,000 and $0 were recognized as amortization expense
related to intangible assets.
Recent
Accounting Pronouncements
In
March
2006, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 155, Accounting
for Certain Hybrid Financial Instruments
(an
amendment of FASB Statements No. 133 and 140) and SFAS No.156, Accounting
for Servicing of Financial Assets (an
amendment of FASB Statement No. 140). We do not expect the adoption of SFAS
No.
155 and SFAS No. 156 to have a material impact on our financial position or
results of operation.
In
July
2006, the FASB issued FASB Interpretation 48, Accounting
for Uncertainty in Income Taxes: an interpretation of FASB Statement No.
109.
Interpretation 48 clarifies Statement 109, Accounting
for Income Taxes,
to
indicate a criterion that an individual tax position would have to meet for
some
or all of the benefit of that position to be recognized in an entity’s financial
statements. Interpretation 48 is effective for fiscal years beginning after
December 31, 2006. We do not expect the adoption of Interpretation 48 to have
a
material impact on our financial position or results of operation.
Reclassifications
Certain
reclassifications have been made to the fiscal 2004 and 2005 financial
statements to conform to the fiscal 2006 presentation.
3 Business
Acquisitions
On
July
14, 2005, the Company acquired substantially all the assets of CoinFacts.com
(“CoinFacts”) for $500,000 in cash. CoinFacts.com operates an Internet website
on which it publishes detailed proprietary information and history on U.S.
Coins. The results of CoinFacts have been consolidated into our financial
statements from the date of its acquisition.
On
September 2, 2005, the Company acquired all of the common stock of Certified
Coin Exchange (“CCE”) and all of the common stock of an affiliated business,
computertradingpost.com, Inc. (“CTP”), for an aggregate purchase price of
$2,180,000. In addition, there was a provision for a working capital adjustment
that was determined to be $37,000. CCE is a subscription-based dealer-to-dealer
Internet bid-ask market for third-party certified coins. CCE’s operating results
have been consolidated into our operating results from the date of its
acquisition.
The
Company was required to purchase CTP as a condition to its acquisition of CCE.
At the time it consummated the CCE acquisition, the Company intended to dispose
of CTP, and, effective November 30, 2005, disposed of CTP. In accordance with
SFAS No. 144, the results of operations of CTP from the date of acquisition
through November 30, 2005, which included revenue of approximately $120,000
and
operating income of $38,000, were consolidated as part of income from
discontinued operations in the accompanying consolidated statement of operations
for the fiscal year ended June 30, 2006, and the loss on the sale of CTP is
included in the gain on the sale of discontinued operations for the fiscal
year
ended June 30, 2006 (see note 4 below).
On
November 8, 2005, the Company acquired Gem Certification & Appraisal Lab
(“GCAL”), a forensic gemological certification and grading laboratory. As part
of that transaction, the Company also acquired all of the common stock of
Diamond Profile Laboratory, Inc. (“DPL”), a scientific diamond light performance
analysis laboratory, and all publishing and other rights to “Palmieri’s Market
Monitor,” an educational and informative industry publication currently
published by the Gemological Appraisal Association, Inc. (“GAA”). The Company
paid an aggregate acquisition price of $3,000,000 in cash for GCAL, DPL and
the
publishing and other rights to “Palmieri’s Market Monitor,” plus the assumption
of $50,000 of certain transaction-related costs.
On
December 22, 2005, the Company acquired the business and substantially all
of
the assets of Gemprint Corporation (“Gemprint”). These assets consist primarily
of a patented technology for non-invasive diamond identification which Gemprint
used to digitally capture the unique refractive light pattern (or “Gemprint”) of
each diamond that is processed with that technology. The acquisition was
consummated pursuant to an asset purchase agreement. Under that agreement,
the
Company paid a purchase price consisting of $7,500,000 in cash, and assumed
certain pre-acquisition liabilities and a lease commitment at closing, and
agreed to pay $1 for each diamond that the Company registers using the Gemprint
process in excess of 100,000 registrations during any year in the five-year
period ending December 22, 2010.
GCAL
has
incorporated the Gemprint process into its GCAL business process, so that each
GCAL authenticated and graded diamond can also carry a Gemprint image stored
in
GCAL’s registered database; thereby enabling GCAL to provide an additional
measure of protection by enabling it to detect misrepresentations of diamond
quality that can occur by, for example, switching a diamond grading certificate
issued for a higher quality diamond to a lower quality diamond.
The
Company has performed its purchase price allocation with respect to each of
these acquisitions in
accordance with the purchase method of accounting for business combinations.
The
purchase method of accounting allocates the amount paid for an acquisition
over
the fair value of the assets and liabilities acquired, and measures the excess
of the purchase price over the fair value as goodwill.
BUSINESS
ACQUISITIONS (CONT’D)
The
following table sets forth the Company’s purchase price allocation with respect
to each of these acquisitions:
|
|
(in
thousands)
|
|
|
|
CCE
|
|
Coin
Facts
|
|
GCAL
|
|
Gemprint
|
|
Total
|
|
Cost
of Investment:
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
price
|
|
$
|
2,217
|
|
$
|
500
|
|
$
|
3,000
|
|
$
|
7,500
|
|
$
|
13,217
|
|
Liabilities
assumed
|
|
|
-
|
|
|
-
|
|
|
50
|
|
|
125
|
|
|
175
|
|
Direct
costs
|
|
|
160
|
|
|
15
|
|
|
218
|
|
|
453
|
|
|
846
|
|
Investment
banking fees
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
417
|
|
|
417
|
|
Lease
obligation assumed
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
88
|
|
|
88
|
|
|
|
|
2,377
|
|
|
515
|
|
|
3,268
|
|
|
8,583
|
|
|
14,743
|
|
Value
Assigned to Assets and Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
93
|
|
|
-
|
|
|
44
|
|
|
110
|
|
|
247
|
|
Fixed
assets
|
|
|
-
|
|
|
-
|
|
|
125
|
|
|
50
|
|
|
175
|
|
Current
liabilities
|
|
|
(38
|
)
|
|
-
|
|
|
(22
|
)
|
|
(120
|
)
|
|
(180
|
)
|
Deferred
revenue
|
|
|
(73
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(73
|
)
|
Assets
Sold: CTP
|
|
|
600
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
600
|
|
Deferred
taxes
|
|
|
(296
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(296
|
)
|
Transition
services
|
|
|
27
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
27
|
|
Intangible
Assets with Finite Lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
list
|
|
|
676
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
676
|
|
Software/Technology
|
|
|
207
|
|
|
-
|
|
|
-
|
|
|
1,199
|
|
|
1,406
|
|
Covenants
not to compete
|
|
|
25
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
25
|
|
Patents
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,865
|
|
|
1,865
|
|
Intangible
Assets with Indefinite Lives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
name and marks
|
|
|
39
|
|
|
-
|
|
|
53
|
|
|
131
|
|
|
223
|
|
Database
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
249
|
|
|
249
|
|
Excess
of purchase price over fair value of
net assets acquired (goodwill)
|
|
$
|
1,117
|
|
$
|
515
|
|
$
|
3,068
|
|
$
|
5,099
|
|
$
|
9,799
|
|
Intangible
assets with finite lives in the amount of $3,972,000 are being amortized over
their estimated useful lives, as follows:
|
|
CCE
|
|
Gemprint
|
|
Customer
List
|
|
|
15
years
|
|
|
-
|
|
Software/Technology
|
|
|
2
years
|
|
|
7
years
|
|
Covenant
not to compete
|
|
|
5
years
|
|
|
-
|
|
Patent
|
|
|
-
|
|
|
20
years
|
|
Based
on
these useful lives, annual amortization expense for each of the next five years
will be approximately $265,000 for Gemprint. Amortization expense for CCE will
be approximately $219,000, $50,000, $50,000, $50,000 and $46,000 for fiscal
years 2007 - 2011, respectively.
BUSINESS
ACQUISITIONS (CONT’D)
The
following pro forma financial data presents the unaudited pro-forma consolidated
statements of income for the Company for the fiscal years ended June 30, 2006
and 2005 based on the assumption that the Coinfacts, CCE, GCAL and Gemprint
acquisitions had been consummated on July 1, 2004, rather than on the actual
dates of their acquisition. These pro forma unaudited statements of operations
do not purport to represent what the Company’s actual results of operations
would have been had these acquisitions been consummated on July 1, 2004 and
are
not necessarily indicative of the Company’s results of operations for any
subsequent fiscal year.
|
|
Unaudited
|
|
|
|
Fiscal
Year Ended June 30,
|
|
|
|
(In
thousands,
except
per share data)
|
|
|
|
2006
|
|
2005
|
|
Revenue
|
|
$
|
37,308
|
|
$
|
35,358
|
|
Operating
income
|
|
|
3,681
|
|
|
6,995
|
|
Interest
income, net
|
|
|
2,346
|
|
|
906
|
|
Other
income (expense), net
|
|
|
22
|
|
|
26
|
|
Income
before provision for income taxes
|
|
|
6,049
|
|
|
7,927
|
|
Provision
for income taxes
|
|
|
(2,693
|
)
|
|
(3,152
|
)
|
Income
from continuing operations
|
|
|
3,356
|
|
|
4,775
|
|
Income
from discontinued operations
|
|
|
309
|
|
|
116
|
|
Net
income
|
|
$
|
3,665
|
|
$
|
4,891
|
|
|
|
|
|
|
|
|
|
Net
income per diluted share:
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
0.38
|
|
$
|
0.64
|
|
Income
from discontinued operations
|
|
$
|
0.04
|
|
$
|
0.02
|
|
Net
income
|
|
$
|
0.42
|
|
$
|
0.66
|
|
4. Discontinued
Operations
On
December 4, 2003, the Company’s Board of Directors authorized management to
implement a plan to focus the Company’s financial and management resources, and
collectibles expertise, on the operations and growth of its grading and
authentication businesses, and to divest the Company’s collectibles auctions and
direct sales businesses.
Accordingly,
in accordance with SFAS No. 144, the assets and related liabilities of the
collectibles sales businesses, which included the Bowers and Merena, Superior
Sports Auctions, Kingswood Coin Auctions, Odyssey Publications, Lyn Knight
Currency Auctions, DHRC and computertradingpost.com, Inc.(“CTP”), have been
classified as held for sale in the accompanying consolidated balance sheets
at
June 30, 2005 and 2006; and the related operating results have been classified
as discontinued operations in the accompanying consolidated statements of
operations for the fiscal years ended June 30, 2006, 2005 and 2004.
On
February 19, 2004 we sold the businesses and certain assets of our Bowers &
Merena Auction, Kingswood Coin Auction and Superior Sports Auction divisions
(collectively the “BK&S Divisions”) to Spectrum Numismatics International,
Inc. (“Spectrum”), a subsidiary of Greg Manning Auctions, Inc. We retained
ownership of the collectibles inventories and the then outstanding accounts
receivables of the BK&S Divisions and Spectrum assumed certain outstanding
contractual obligations of those businesses.
The
consideration for the sale of those businesses was $2,500,000 in cash. We also
were entitled to receive additional consideration in an amount to be determined
on the basis of the sales revenues of the BK&S Divisions over the two-year
period following February 19, 2004. We recorded a pre-tax gain of $1,872,000
on
the sale of the BK&S Divisions in the year ended June 30, 2004. We were
entitled to recognize any additional consideration in future periods as and
to
the extent the amounts became determinable. However, there were no additional
amounts received and determinable in fiscal 2005 or 2006.
DISCONTINUED
OPERATIONS (CONT’D)
In
furtherance of our strategy to focus our business on the provision of value
added collectibles services and to dispose of the collectibles sales businesses,
in March 2003 we discontinued the business of selling coins, at retail, under
the name “David Hall Rare Coins” (or “DHRC”). In connection with the operation
of that business, we had utilized certain intangible assets and trade secrets
obtained under a license agreement from an affiliate of David Hall and Van
Simmons, two of the Company’s largest stockholders and also two of its
directors. In connection with the discontinuance of the DHRC business, and
with
the approval of the disinterested members of our Board of Directors, we
terminated that license agreement. We retained the operating inventory,
receivables and liabilities of DHRC at the time of the termination of the
license and discontinuance of that business. By June 30, 2005, we had disposed
of the remaining net assets and liabilities of this business.
In
the
fourth quarter of 2004, we disposed of our Odyssey related auction and
publications businesses for $190,000 cash, of which $130,000 was paid at the
time of sale and the remaining $60,000 was payable in eight (8) equal quarterly
installments, all of which have been received by June 30, 2006. We also accrued
for Odyssey’s share of the commissions it generated in a fourth quarter 2004
auction. In addition, we retained certain assets and liabilities of these
businesses and we are in the process of liquidating these assets and paying
down
those liabilities.
On
September 17, 2003, we sold certain assets of our currency auction business,
operated by a wholly-owned subsidiary, Lyn Knight Currency Auctions, Inc.,
to
Collectible Properties, Inc., a private company owned by Lyn F. Knight who,
until that sale, had been president of that subsidiary and had managed that
business for the Company. We retained ownership of the inventory of collectible
currencies and the then outstanding accounts receivable, and Collectible
Properties, Inc. assumed certain outstanding contractual obligations, of this
business. The consideration received from that sale was equal to the net book
value of the assets sold plus an additional amount which will be determined
on
the basis of the future sales revenue of Collectible Properties, Inc. Through
June 30, 2006, we recognized approximately $424,000 in fiscal 2006, $248,000
in
fiscal 2005, and $127,000 in fiscal 2004, respectively, of additional
consideration based on the revenues of Collectible Properties, Inc. If we
receive any additional consideration, it will be recorded at the time the amount
of that additional consideration becomes determinable.
In
connection with and as a condition of our acquisition of CCE in September 2005,
we were required to purchase the common stock of CTP, an entity affiliated
with
the owner of CCE. Our intent at the date of acquisition was to dispose of CTP,
and we disposed of CTP in November 2005. The operating results of CTP are
classified as part of discontinued operations from the date of its acquisition
through the date of its disposal, and we recognized a loss of $16,000 on the
disposal of CTP. As part of the consideration for the sale of CTP, we recorded
a
note receivable of $458,000, bearing interest at 10% per annum and payable
over
five years. We have a security interest in the assets of CTP and certain
personal assets of the purchaser. At June 30, 2006, the carrying value of the
note was $413,000, of which the current portion, approximately $92,000, is
included as part of the current portion of receivables from sale of net assets
of discontinued operations.
The
operating results of the discontinued collectible sales businesses and CTP
are
included in the accompanying consolidated statements of operations, are as
follows (in thousands):
|
|
Years
Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Net
revenues
|
|
$
|
480
|
|
$
|
472
|
|
$
|
27,101
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
161
|
|
|
(277
|
)
|
|
(3,468
|
)
|
Gain
on sale of discontinued businesses
|
|
|
408
|
|
|
202
|
|
|
2,245
|
|
|
|
|
569
|
|
|
(75
|
)
|
|
(1,223
|
)
|
Income
tax expense (benefit)
|
|
|
273
|
|
|
(135
|
)
|
|
(155
|
)
|
Income
(loss) from discontinued operations
|
|
$
|
296
|
|
$
|
60
|
|
$
|
(1,068
|
)
|
DISCONTINUED
OPERATIONS (CONT’D)
The
following table contains summary balance sheet information (in thousands) with
respect to the net assets and liabilities of the collectible sales businesses
held for sale that are included in the accompanying consolidated balance sheets:
|
|
June
30,
|
|
|
|
2006
|
|
2005
|
|
Current
assets:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
10
|
|
$
|
58
|
|
Inventories
|
|
|
37
|
|
|
189
|
|
Consignment
advances
|
|
|
-
|
|
|
30
|
|
Notes
receivable
|
|
|
36
|
|
|
88
|
|
|
|
$
|
83
|
|
$
|
365
|
|
Non-current
assets:
|
|
|
|
|
|
|
|
Notes
receivable, net of current portion
|
|
|
-
|
|
|
46
|
|
|
|
$ |
-
|
|
$
|
46
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Consignors
payable
|
|
$
|
1
|
|
$
|
1
|
|
Other
current liabilities
|
|
|
7
|
|
|
26
|
|
|
|
$
|
8
|
|
$
|
27
|
|
Inventories
consist of the following at June 30:
|
|
(in
thousands)
|
|
|
|
2006
|
|
2005
|
|
Coins
|
|
$
|
346
|
|
$
|
276
|
|
Other
collectibles
|
|
|
37
|
|
|
37
|
|
Grading
raw materials consumable inventory
|
|
|
160
|
|
|
157
|
|
|
|
|
543
|
|
|
470
|
|
Less
inventory reserve
|
|
|
(106
|
)
|
|
(34
|
)
|
|
|
$
|
437
|
|
$
|
436
|
|
The
inventory reserve represents a valuation allowance on certain items of our
coins
and other collectibles inventories based upon our review of the current market
value of such coins and collectibles.
6.
|
Customer
Notes Receivable
|
During
the fourth quarter of 2005, our wholly-owned subsidiary, Collectors Finance
Corporation, implemented a Dealer Financing Program, pursuant to which it offers
short term loans to collectibles dealers and customers with established credit
histories that are willing to collateralize the loans with coins or other
collectibles that have been authenticated and graded by us in the past or will
be graded as collateral. The customers are required to repay the loan at
maturity or, if sooner, on return of the coins or collectibles to them (see
note
10, Line of Credit). During 2005, we made short-term cash advances to two of
our
largest customers, secured by certain collectible coins that the customers
had
submitted to us for authentication and grading. Principal reduction payments
are
required at the time the Company returns the authenticated and graded coins
to
the customer. Current advances bear interest at a rate based on the Prime Rate.
The total principal amount of advances and short term loans made to customers
in
2005 was $6,078,000, of which $4,518,000 had been repaid by June 30, 2005,
which
left a remaining unpaid balance as of that date of $1,560,000, all of which
was
repaid in fiscal year 2006.
During
fiscal year 2006, the total principal amount of advances and short-term loans
made to customers was $4,283,000 of which $470,000 was repaid by June 30, 2006,
leaving a remaining unpaid balance as of that date of $3,813,000. At June 30,
2006, we provided for a $16,000 reserve for customer notes receivable reflecting
a deficiency in collateral value provided by one customer, resulting in a net
balance on customer notes receivable of $3,797,000 at June 30, 2006.
7.
|
Property
and Equipment
|
Property
and equipment consist of the following at June 30:
|
|
(in
thousands)
|
|
|
|
2006
|
|
2005
|
|
Coins
and stamp grading reference sets
|
|
$
|
62
|
|
$
|
62
|
|
Computer
hardware and equipment
|
|
|
1,271
|
|
|
988
|
|
Computer
software
|
|
|
972
|
|
|
900
|
|
Equipment
|
|
|
2,020
|
|
|
1,330
|
|
Furniture
and office equipment
|
|
|
793
|
|
|
689
|
|
Leasehold
improvements
|
|
|
607
|
|
|
438
|
|
Trading
card reference library
|
|
|
52
|
|
|
52
|
|
|
|
|
5,777
|
|
|
4,459
|
|
Less
accumulated depreciation and amortization
|
|
|
(3,880
|
)
|
|
(3,602
|
)
|
Property
and equipment, net
|
|
$
|
1,897
|
|
$
|
857
|
|
Depreciation
and amortization expense relating to property and equipment for fiscal 2006,
2005 and 2004 was $486,000, $443,000 and $647,000, respectively.
Accrued
liabilities consisted of the following at June 30:
|
|
(in
thousands)
|
|
|
|
2006
|
|
2005
|
|
Warranty
reserve
|
|
$
|
710
|
|
$
|
609
|
|
Professional
fees
|
|
|
189
|
|
|
211
|
|
Other
|
|
|
1,144
|
|
|
743
|
|
|
|
$
|
2,043
|
|
$
|
1,563
|
|
Warranty
reserve activity and balances related to fiscal years 2006, 2005 and 2004,
were
as follows (in
thousands):
Warranty
reserve, June 30, 2003
|
|
$
|
304
|
|
Charged
to cost of revenues
|
|
|
646
|
|
Payments
|
|
|
(458
|
)
|
Warranty
reserve June 30, 2004
|
|
|
492
|
|
Charged
to cost of revenues
|
|
|
530
|
|
Payments
|
|
|
(413
|
)
|
Warranty
reserve at June 30, 2005
|
|
|
609
|
|
Charged
to cost of revenues
|
|
|
492
|
|
Payments
|
|
|
(391
|
)
|
Warranty
reserve at June 30, 2006
|
|
$
|
710
|
|
Set
forth
below are the provision (benefit) for income taxes for the years ended June
30:
|
|
(in
thousands)
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
2,360
|
|
$
|
2,738
|
|
$
|
1,595
|
|
State
|
|
|
9
|
|
|
63
|
|
|
62
|
|
|
|
|
2,369
|
|
|
2,801
|
|
|
1,657
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(172
|
)
|
|
(117
|
)
|
|
(216
|
)
|
State
|
|
|
536
|
|
|
457
|
|
|
140
|
|
|
|
|
364
|
|
|
340
|
|
|
(76
|
)
|
Total
provision for income taxes
|
|
$
|
2,733
|
|
$
|
3,141
|
|
$
|
1,581
|
|
The
reconciliation of the provision (benefit) for income taxes computed at federal
statutory rates to the provision (benefit) for income taxes for the years ended
June 30, was as follows:
|
|
(in
thousands)
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Provision
at federal statutory rates
|
|
$
|
2,087
|
|
$
|
2,685
|
|
$
|
1,542
|
|
State
income taxes, net
|
|
|
356
|
|
|
340
|
|
|
132
|
|
Other,
net
|
|
|
290
|
|
|
116
|
|
|
(93
|
)
|
|
|
$
|
2,733
|
|
$
|
3,141
|
|
$
|
1,581
|
|
Deferred
income taxes reflect the net tax effect of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes
and
the amounts used for income tax purposes. Significant components of deferred
taxes as of June 30, 2006 and 2005, were as follows:
|
|
(in
thousands)
|
|
|
|
2006
|
|
2005
|
|
Deferred
tax assets:
|
|
|
|
|
|
Supplier
compensation costs
|
|
$
|
510
|
|
$
|
553
|
|
Reserves
|
|
|
1,077
|
|
|
816
|
|
Goodwill
and intangibles
|
|
|
-
|
|
|
136
|
|
Net
operating loss carryforward
|
|
|
-
|
|
|
1,504
|
|
State
credits
|
|
|
661
|
|
|
919
|
|
Other
|
|
|
21
|
|
|
63
|
|
Total
deferred tax assets
|
|
|
2,269
|
|
|
3,991
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
Goodwill
and intangibles
|
|
|
(408
|
)
|
|
-
|
|
Property
and equipment
|
|
|
(32
|
)
|
|
(34
|
)
|
Other
|
|
|
(73
|
)
|
|
(52
|
)
|
Total
deferred tax liabilities
|
|
|
(513
|
)
|
|
(86
|
)
|
Net
deferred tax assets
|
|
|
1,756
|
|
|
3,905
|
|
Less:
Current portion
|
|
|
(1,414
|
)
|
|
(2,854
|
)
|
|
|
$
|
342
|
|
$
|
1,051
|
|
At
June
30, 2006, the Company had $1,001,000 related to California Enterprise Zone
Credits. These credits have no expiration dates.
To
provide a source of funds for its Dealer Financing Program, in June 2005 CFC
entered into a two-year revolving bank line of credit agreement, that permits
CFC to borrow, at any one time, up to the lesser of (i) $7,000,000 or (ii)
an
amount equal to 85% of the aggregate principal amount of customer receivables
that meet the bank’s eligibility criteria. Borrowings under this credit line
bear interest at rates based on the bank’s Prime Rate or LIBOR, as applicable,
and are secured by substantially all the assets of CFC (including customer
receivables and CFC’s security interests in customer owned loan collateral).
Costs
of
approximately $340,000 (comprising a loan agreement fee, bank fees and legal
fees) were incurred in connection with this line of credit. At June 30, 2005,
these costs were capitalized and the unamortized balance of approximately
$170,000 was included in prepaid expenses and other current assets in the
accompanying consolidated balance sheet at June 30, 2006. These debt issue
costs
are amortized to interest expense using the effective interest method over
the
term of the revolving bank line of credit agreement, which is two years, ending
in June 2007. On a quarterly basis, CFC incurs an unused line fee at a rate
of
0.25% per annum, based on the average daily unused portion of the total facility
during the quarter.
CFC’s
obligations under this line of credit have been guaranteed by the Company
pursuant to a Continuing Guaranty Agreement with the bank lender. The terms
of
that Agreement require the Company to be in compliance with certain financial
and other restrictive covenants, and require the consent of the lender
(i) for the Company to pay cash dividends or repurchase shares of its
common stock in amounts exceeding its annual net income in any year, and
(ii) to consummate more than $5,000,000 of business acquisitions in any
year. The Company was in compliance with all covenants at June 30, 2006 and
received the required consents from the lender for the purchase of the Gemprint
business, repurchases of the Company’s stock under the Stock Buyback Program,
and the payment of dividends during 2006.
11.
Employee
Benefit Plans
We
established an employee benefit plan, effective July 1992, that features a
401(k) salary reduction provision covering all employees who meet the
eligibility requirements of the plan. Eligible employees are able to defer
up to
the lesser of 15% of their base compensation or the statutorily prescribed
annual limit.
On
July
5, 2000, the Company implemented the 2000 Employee Stock Purchase Plan (the
“Plan”) covering all employees who met certain eligibility requirements. The
Plan, which was approved by our stockholders, permitted employees to elect,
at
the beginning of each six-month period (each, a “purchase period”), to authorize
withholdings from payroll of up to 15% of their compensation that would be
used
to purchase shares of the Company’s common stock at the end of the six-month
period. The Plan provided that the purchase price would be 85% of the closing
price of the Company’s shares on NASDAQ on (i) the first day of the
six-month period, or (ii) the last day of the six-month period, whichever
price was lower. Participating employees were entitled to revoke their elections
to participate in the purchase of shares at any time prior to the end of a
purchase period, in which event the amounts withheld to the date of such
revocation were paid to the employee, without interest. This Plan was terminated
effective as of July 1, 2005.
During
fiscal 2005 and 2004, we issued 5,000 and 12,000 shares of common stock,
respectively, under this Plan at an average purchase price of $12.80 and $7.94,
respectively.
12. Stockholders’
Equity
Equity
Offering
In
March
2005, the Company completed a public offering of a total of 3,450,000 shares
of
its common stock, of which a total of 2,195,856 shares were sold by the Company,
and the remaining shares were sold by David G. Hall and Van D. Simmons, at
a
public offering price of $17.50 per share. Messrs. Hall and Simmons, who founded
the Company in 1986, are directors of the Company, and Mr. Hall also is the
Company’s President and Chief Operating Officer. The proceeds to the Company,
net of the underwriting discount and offering expenses of approximately
$650,000, were approximately $35,657,000. The Company did not receive any of
the
proceeds from the sale of shares by Messrs. Hall and Simmons.
Dividends
On
May
31, 2006, the Company announced that its Board of Directors had adopted a
dividend policy that calls for the payment of an expected total annual cash
dividend of $0.32 per common share, payable in the amount of $0.08 per share
per
quarter. At the same time, the Board of Directors declared the first of the
quarterly cash dividends under this policy of $0.08 per share, which was paid
on
June 28, 2006 in the aggregate amount of $674,000 to stockholders of record
on
June 14, 2006.
The
declaration of cash dividends in the future, pursuant to the Company’s new
dividend policy, is subject to final determination each quarter by the Board
of
Directors based on a number of factors, including the Company’s financial
performance and its available cash resources, its cash requirements and
alternative uses of cash that the Board may conclude would represent an
opportunity to generate a greater return on investment for the Company. For
these reasons, as well as others, there can be no assurance that the amount
of
the quarterly cash dividends will not be reduced or that the Board of Directors
will not decide to suspend or discontinue the payment of cash dividends in the
future (see also note 18, Subsequent Events).
Stock
Buyback Program
On
December 6, 2005, the Company announced that its Board of Directors had approved
a $10 million Stock Buyback Program. The program authorizes the Company to
make
up to $10,000,000 of stock purchases in the open market or private transactions,
in accordance with applicable SEC rules. The Company is under no obligation
to
repurchase any shares under this program, and the timing, actual number and
value of shares that may be repurchased under this program will depend on a
number of factors, including the Company’s future financial performance, the
Company’s available cash resources and competing uses for the cash that may
arise in the future, prevailing market prices of the Company’s common stock and
the number of shares that become available for sale at prices that the Company
believes are attractive. During the year ended June 30, 2006, the Company
repurchased and retired 182,000 shares of its common stock pursuant to this
program for an aggregate purchase price totaling approximately $2,628,000
(including transaction costs). Common stock at par value and additional paid-in
capital were reduced by the $2,628,000.
Treasury
Stock
Pursuant
to a program approved by the Board of Directors in 2000, the Company had
purchased 125,000 of its shares at an average price of $8.16 per share during
the period from September 25, 2000 to December 28, 2000 at an aggregate cost
of
$1,021,000.
Consulting
Agreement
In
July
1997, we granted options to an individual to purchase 133,000 shares of our
common stock at an exercise price of $1.32 per share as consideration for a
five-year consulting agreement that commenced on July 1, 1997. The options
vested in five annual installments of 20% of the shares beginning on December
31, 1997 and continuing through December 31, 2001. The options will terminate
if
not exercised by June 30, 2007, and all of the options are outstanding at June
30, 2006.
STOCKHOLDERS’
EQUITY (CONT’D)
Supplier
Compensation Cost
During
fiscal 1999, the Company granted warrants to purchase up to an aggregate of
150,000 shares of common stock, at an exercise price of $20.00 per share, to
collectible experts providing content for our websites. These warrants vested
immediately and are exercisable over a ten-year term. The fair value of these
warrants was expensed in fiscal 1999, and all of these warrants are outstanding
at June 30, 2006.
In
January 1999, we adopted the PCGS 1999 Stock Incentive Plan (the “PCGS Plan”).
The PCGS Plan, which was assumed by the Company at the time of its acquisition
of PCGS, covers an aggregate of 269,250 shares of our common stock. In February
1999, we adopted the 1999 Stock Incentive Plan (the “1999 Plan”), which provides
for grants of incentive stock options, nonstatutory stock options, and
restricted stock grants to directors, officers, employees and consultants of
Collectors Universe who provide valuable services to Collectors Universe,
entitling them to purchase up to 437,250 shares of our common stock. On December
5, 2000, the stockholders, at the Company’s Annual Meeting, approved an
amendment to the 1999 Plan to increase the authorized number of shares of our
common stock that are issuable under this Plan from 437,250 to 749,750 shares.
The
Company’s stockholders also have approved a 2003 Incentive Plan (the “2003
Plan”) and a 2005 Incentive Plan (the “2005” Plan), which authorize the grant of
options, and the issuance of restricted rights, to purchase up to an aggregate
of 500,000 shares and 230,000 shares, respectively, of the Company’s common
stock to officers and other employees, non-employee directors and service
providers of the Company and its subsidiaries.
The
PCGS
Plan and the 1999 Plan provide that the option exercise price per share may
not
be less than 100% of the fair market value of a share of common stock on the
grant date, as determined by the Board of Directors, for incentive stock options
and 85% of fair market value for nonstatutory stock options. The 2003 and 2005
Plan provides that the exercise price of all options (whether incentive or
non-statutory), and the purchase price of shares issued pursuant to restricted
stock purchase rights, may not be less than 100% of the fair market value of
the
shares subject to such options or rights (as the case may be) on the date of
grant. However, the exercise price of incentive stock options granted under
any
of the Plans to any individual possessing 10% or more of the voting power of
all
classes of our stock may not be less than 110% of the fair market value of
a
share of common stock on the grant date. The timing of exercise for individual
option grants is at the discretion of the Board of Directors, and the options
expire no later than ten years after the grant date (five years in the case
of
incentive stock options granted to individuals possessing 10% or more of the
voting power of all classes of our stock). In the event of a change in control
of the Company, an option or award of shares under these Plans will become
fully
exercisable if an agreement is not reached that provides for the surviving
corporation to assume such options or awards or to substitute comparable options
or awards for the options and awards granted under these Plans.
STOCK
OPTION PLANS (CONT’D)
The
following is a summary of stock option activity for fiscal 2006, 2005 and 2004
under the PCGS Plan, the 1999 Plan, the 2003 Plan and the 2005 Plan. No rights
to purchase restricted shares have been granted to date.
|
|
(In
thousands, except per share data)
|
|
|
|
|
|
Number
of Shares
|
|
Exercise
Price
Per Share
|
|
Weighted
Average Exercise Price Per Share
|
|
Options
outstanding at June 30, 2003
|
|
|
702
|
|
$
|
2.55
|
|
|
-
|
|
$
|
30.52
|
|
$
|
8.27
|
|
Granted
|
|
|
405
|
|
|
3.79
|
|
|
-
|
|
|
13.73
|
|
|
11.14
|
|
Cancelled
|
|
|
(81
|
)
|
|
2.79
|
|
|
-
|
|
|
30.52
|
|
|
8.16
|
|
Exercised
|
|
|
(204
|
)
|
|
2.55
|
|
|
-
|
|
|
8.00
|
|
|
4.25
|
|
Options
outstanding at June 30, 2004
|
|
|
822
|
|
|
2.55
|
|
|
-
|
|
|
30.52
|
|
|
10.56
|
|
Granted
|
|
|
295
|
|
|
11.58
|
|
|
-
|
|
|
20.10
|
|
|
17.09
|
|
Cancelled
|
|
|
(70
|
)
|
|
3.08
|
|
|
-
|
|
|
30.52
|
|
|
17.70
|
|
Exercised
|
|
|
(71
|
)
|
|
2.55
|
|
|
-
|
|
|
12.00
|
|
|
3.99
|
|
Options
outstanding as June 30, 2005
|
|
|
976
|
|
|
2.55
|
|
|
-
|
|
|
24.00
|
|
|
12.49
|
|
Granted
|
|
|
42
|
|
|
12.90
|
|
|
-
|
|
|
14.00
|
|
|
13.73
|
|
Cancelled
|
|
|
(82
|
)
|
|
3.08
|
|
|
-
|
|
|
20.00
|
|
|
15.52
|
|
Exercised
|
|
|
(47
|
)
|
|
2.55
|
|
|
-
|
|
|
13.73
|
|
|
5.20
|
|
Options
outstanding at June 30, 2006
|
|
|
889
|
|
$
|
3.08
|
|
|
-
|
|
$
|
24.00
|
|
$
|
12.65
|
|
The
total
pre-tax intrinsic value of options exercised during fiscal years 2006, 2005
and 2004 were $462,000, $956,000 and $796,000, respectively. Total fair
value of options vested during 2006, 2005 and 2004 were $671,000,
$1,372,000 and $883,000,
respectively.
The
following table summarizes information about stock options outstanding at June
30, 2006:
|
|
|
|
Outstanding
Options
|
|
Exercisable
Options
|
|
Range
of Exercise Price
|
|
Number
of Shares Outstanding
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
Weighted
Average
Exercise
Price
|
|
($000’s)
Aggregate
Intrinsic
Value
|
|
Number
of Shares Exercisable
|
|
Weighted
Average Exercise Price
|
|
($000’s)
Aggregate
Intrinsic Value
|
|
$
3.08
|
|
$
|
3.80
|
|
|
154
|
|
|
6.50
|
|
$
|
3.36
|
|
$
|
1,633
|
|
|
129
|
|
$
|
3.37
|
|
$
|
1,366
|
|
$
5.28
|
|
$
|
7.60
|
|
|
64
|
|
|
7.32
|
|
$
|
7.48
|
|
|
417
|
|
|
64
|
|
$
|
7.48
|
|
|
417
|
|
$
8.00
|
|
$
|
12.00
|
|
|
182
|
|
|
6.99
|
|
$
|
10.40
|
|
|
651
|
|
|
105
|
|
$
|
10.01
|
|
|
417
|
|
$
13.24
|
|
$
|
19.60
|
|
|
389
|
|
|
8.48
|
|
$
|
16.05
|
|
|
47
|
|
|
178
|
|
$
|
17.33
|
|
|
6
|
|
$
20.00
|
|
$
|
20.00
|
|
|
61
|
|
|
2.78
|
|
$
|
20.00
|
|
|
-
|
|
|
61
|
|
$
|
20.00
|
|
|
-
|
|
$
20.10
|
|
$
|
24.00
|
|
|
39
|
|
|
4.68
|
|
$
|
22.99
|
|
|
-
|
|
|
31
|
|
$
|
23.69
|
|
|
-
|
|
|
|
|
|
|
|
889
|
|
|
7.19
|
|
|
|
|
$
|
2,748
|
|
|
568
|
|
|
|
|
$
|
2,206
|
|
At
June
30, 2006, there were stock options outstanding to purchase a total of 889,000
shares of our common stock at a weighted average exercise price of $12.65,
of
which options to purchase 568,000 shares were exercisable at a weighted average
price of $12.34. The aggregate intrinsic values set forth in the above table
represent the total pre-tax intrinsic values, based on our closing stock price
of $13.98 as of June 30, 2006, and assuming all the optionees had exercised
their options as of that date. Also, at June 30, 2006, approximately 324,000
of
the 568,000 exercisable options were “in-the-money-options” based on the closing
price as of that date. By comparison, at June 30, 2005, exercisable options
to
purchase a total of 527,000 shares were outstanding at a weighted-average
exercise price of $11.93 per share; and at June 30, 2004, exercisable options
to
purchase a total of 385,000 shares were outstanding at a weighted average
exercise price of $10.17 per share. The weighted average remaining contractual
life of those options exercisable at June 30, 2006 was 6.63 years.
STOCK
OPTION PLANS (CONT’D)
At
July
1, 2005, approximately 448,000 stock options were unvested with a weighted
average fair value of $8.31 per option. At June 30, 2006, approximately 320,000
stock options were unvested with a weighted average fair value of $8.15. During
the fiscal year ended June 30, 2006, approximately 42,000 stock options were
granted with a weighted average fair value of $6.57, approximately 73,000
options were forfeited prior to vesting with a weighted average of $9.77 and
approximately 97,000 options were vested with a weighted average of
$6.97.
At
June
30, 2006, the unvested stock option total of approximately 320,000 had a
weighted average contractual remaining life and exercise price of 8.18 years
and
$13.21, respectively. As of the same date, the aggregate intrinsic value of
the
unvested options was approximately $542,000. At June 30, 2006, and based upon
the estimated forfeiture rate of 10.5% per annum and the remaining vesting
terms
of these options, the expected number of options to vest over their remaining
vesting terms was approximately 245,000 options.
The
weighted-average fair values of stock options granted during fiscal 2006, 2005
(restated) and 2004 were $6.57, $8.55 and $7.10 per option share,
respectively.
14.
|
Related-Party
Transactions
|
A
member
of the Board of Directors is also a partner in a professional services firm
providing service to the Company. For each of the years ended June 30, 2006,
2005 and 2004, the member was paid $37,500, $31,250 and $35,000, respectively,
as Board fees; and the professional services firm was paid $189,000, $588,000,
and $390,000, respectively, for services rendered. At June 30, 2006, amounts
payable to this firm were approximately $41,000.
In
May
2003, the Company entered into a license agreement with DHRCC, Inc., which
is
wholly owned by David Hall and Van Simmons who are two of the Company’s
stockholders and two of the directors of the Company. Pursuant to that
Agreement, the Company obtained (i) an exclusive license to use, for up to
a
four year period ending May 31, 2007, a customer list owned and compiled by
DHRCC, and certain other intangible assets owned by DHRCC, and (ii) a
non-exclusive license to use, in perpetuity, a coin inventory control software
program owned by DHRCC, both for use by the Company’s David Hall Rare Coins
(“DHRC”) Division, which was engaged in the business of selling collectible
coins at retail. Under that agreement, the Company agreed to pay DHRCC, for
the
use of the DHRCC customer list, a royalty equal to one and one half percent
(1.5%) of the net revenues of the Company’s David Hall Rare Coins (“DHRC”)
Division, on a quarterly basis, but in no event to exceed (i) twenty percent
(20%) of the quarterly pre-tax profits of that division, or (ii) an aggregate
of
$500,000 per year, whichever was less. The Company also paid DHRCC a one-time
fee of $5,000 for use of the other intangible assets licensed by the Company,
including the coin inventory software program. The license agreement was
terminable by either party at any time, without cause, on 30 days prior written
notice to the other. The license agreement was terminated by the Company as
a
result of its decision, made in fiscal 2004, to discontinue its collectibles
sales businesses. See note 4.
DHRCC
had
been engaged in the business of selling collectible coins at retail until June
2000. As a result of the Company’s decision to discontinue that business, DHRCC
elected to resume selling collectible coins at retail and in connection
therewith DHRCC purchased certain fixed assets, that had been used by the
Company’s DHRCC division, for a purchase price of $13,000, which was equal to
the net book value of those assets on the Company’s books at March 31, 2003.
DHRCC also has subleased from the Company, through November 6, 2009,
approximately 2,200 square feet of office space, located at the Company’s
offices in Santa Ana, California, at a rent equal to between $1.50 and $1.75
per
square foot per month. That rent, per square foot, is equal to the rent that
was
being paid to the Company by a prior unaffiliated subtenant for comparable
space
in the same building under a sublease entered into by the Company in March
2004.
Rent received under the DHRCC sublease, which commenced on March 1, 2004,
totaled $41,059 in fiscal 2006, $40,000 in fiscal 2005 and $13,000 in fiscal
2004.
In
connection with its discontinuance of its retail coin sales business, effective
March 1, 2004 the Company engaged DHRCC to sell the Company’s remaining
inventory of collectible coins that had been held for sale at retail by the
Company’s DHRC division. Sales of collectible coins by DHRCC pursuant to this
engagement totaled $0, $11,000 and $840,000, respectively, for the periods
ended
June 30, 2006, 2005 and 2004, and the Company paid DHRCC commissions of $0,
$1,000 and $84,000, respectively, in connection with those sales.
RELATED-PARTY
TRANSACTIONS (CONT’D)
All
of
the above-described transactions with DHRCC were approved by the disinterested
members of the Company’s Board of Directors.
During
2005, the Company charged DHRCC approximately $29,000 for advertising fees,
and
approximately $26,000 for grading and authentication fees, which were comparable
to the fees charged by the Company in the ordinary course of its business to
unaffiliated customers for similar services. During 2005, the Company also
reimbursed DHRCC for warranty claims of approximately $11,000 in accordance
with
its standard authentication and grading warranty, and paid DHRCC approximately
$9,000 for the purchase of certain coin inventory.
During
2006, the Company charged DHRCC approximately $29,000 for advertising fees,
approximately $3,000 for grading and authentication fees, approximately $53,000
in warranty claims and paid $0 for the purchase of certain coin
inventory.
As
part
of the acquisition of GCAL in November 2005, the Company acquired certain assets
from Gemological Appraisal Association (“GAA”), a business owned and managed by
the current President of GCAL. As part of the acquisition agreement, GAA entered
into a sublease agreement with GCAL, which expires in May 2008, to sublease
50%
of the leased premises of GCAL and also reimburse GCAL for 50% of other
occupancy costs. From the date of acquisition to June 30, 2006, GAA paid
approximately $25,000 under the sub-lease agreement, and approximately $6,000
for reimbursable occupancy expenses.
15.
|
Commitments
and Contingencies
|
Leases
The
Company has various operating lease commitments for facilities and equipment
that expire through December 2015. During fiscal 2006, the Company subleased
office space that was in excess of its current requirements to an unaffiliated
third party and also to two related parties (see note 14). Such lease for office
space contains escalations over the term of the lease. In accordance with SFAS
No. 13, rent expense is recognized on a straight-line basis over the lease
period. Total rent expense, net of sublease income, was approximately
$1,629,000, $1,349,000 and $1,462,000, respectively, for the years ended June
30, 2006, 2005 and 2004. At June 30, 2006, deferred rent (representing the
cumulative difference between rent paid and the rent expense recognized) was
$402,000. On October 1, 2005, the sublease to the unaffiliated third party
was
cancelled. Future minimum lease payments under these agreements are as
follows:
|
|
(In
thousands)
|
|
|
|
Company’s
Gross
Payment
|
|
Sublease
Income
|
|
Net
|
|
2007
|
|
$
|
1,491
|
|
$
|
81
|
|
$
|
1,410
|
|
2008
|
|
|
1,674
|
|
|
80
|
|
|
1,594
|
|
2009
|
|
|
1,630
|
|
|
45
|
|
|
1,585
|
|
2010
|
|
|
855
|
|
|
15
|
|
|
840
|
|
2011
|
|
|
393
|
|
|
-
|
|
|
393
|
|
Thereafter
|
|
|
1,756
|
|
|
-
|
|
|
1,756
|
|
|
|
$
|
7,799
|
|
$
|
221
|
|
$
|
7,578
|
|
Upon
acquisition of GCAL, the Company assumed obligations under a property lease
that
expires on May 31, 2008. Such lease provides for minimum annual payments of
approximately $76,000, of which 50% of this space is subleased to a company
affiliated with the current president of GCAL. On July 1, 2006, GCAL leased
and
occupied additional space in the same building. Under the terms of the new
lease
agreement, GCAL will lease the facility from July 1, 2006 to December 1, 2015.
Minimum lease payments for the new space, which are included in the commitments
table for fiscal years 2007 to 2011, are expected to be $170,000, $329,000,
$339,000, $349,000 and $360,000, respectively. In addition, the Company has
initiated construction within this facility for the purpose of leasehold
improvements for which it expects to incur costs of approximately $773,000
during the three months ending September 30, 2006.
COMMITMENTS
AND CONTINGENCIES (CONT’D)
Employment
Agreements
The
Company has entered into employment agreements with certain executive officers
and other key employees. The employment agreements provide for minimum salary
levels, incentive compensation and severance benefits, among other
items.
Guarantees
As
discussed in note 10, the Company has guaranteed the obligations of CFC under
its line of credit. However, since CFC is a wholly-owned, consolidated
subsidiary of the Company, its line of credit borrowings, which the Company
has
guaranteed, are required to be set forth on our consolidated balance sheet.
There were no such borrowings outstanding at June 30, 2006.
Indemnification
Obligations
The
Company from time to time
enters into certain types of contracts that contingently require the Company
to
indemnify parties against third-party claims. These contracts primarily relate
to (i) agreements pursuant to which the Company has sold its discontinued
collectibles sales businesses and which require the Company to indemnify the
purchasers from certain contingent liabilities that might arise from the
operation of those businesses prior to their sale by the Company, which is
customary in business sale transactions such as these; (ii) certain real
estate leases under which the Company may be required to indemnify property
owners for environmental or other liabilities and other claims arising from
the
Company’s use of the applicable premises; and (iii) certain agreements with
the Company’s officers and directors, under which the Company may be required to
indemnify such persons for liabilities arising out of their relationships as
officers or directors of the Company. The terms of such indemnification
obligations vary by contract and in most instances a specific or maximum dollar
amount is not explicitly stated therein. Historically, the Company has not
been
obligated to make significant payments under, and no liabilities have been
recorded in the accompanying consolidated balance sheets for, these
indemnification obligations.
Legal
Settlement
As
previously reported, the Company was named as a co-defendant in a lawsuit
brought by Real Legends Inc, (“Plaintiff”), against When It Was a Game
(“WIWAG”), a sports card dealer. In the lawsuit, Plaintiff was seeking alleged
damages to its business of $4 million, alleged to have arisen out of actions
taken by WIWAG, together with punitive damages. Plaintiff also alleged that
the
Company was liable for those damages, because a Company employee had introduced
WIWAG to Plaintiff.
On
January 26, 2005, the Company and Plaintiff settled that lawsuit. Pursuant
to
the settlement, all claims against the Company were released by Plaintiff and
the Company paid Plaintiff the sum of $600,000 on or about February 23, 2005.
The cost of the settlement to the Company, net of $100,000 insurance
reimbursement, was $500,000, which was recorded as part of operating expenses
in
the Company’s consolidated statements of operations for the year ended June 30,
2005.
Other
Legal Matter
Bill
Miller v. Collectors Universe, Inc.
As
previously reported, the Company was a defendant in this legal action, which
was
brought in the Superior Court of California, County of Orange, by Bill Miller,
a
former employee of the Company, who was president of one of the Company’s
collectibles sales businesses that was sold in 2004 and an expert in the
authentication of autographs and memorabilia. Miller alleged that the Company
had issued authentication certificates bearing his name without his consent,
in
violation of a California statute prohibiting unauthorized appropriation of
a
person’s name, signature or likeness. The statute provides that a person whose
name, signature or likeness has been misappropriated, in violation of the
statute, is entitled to recover the greater of $750 or the actual damages
suffered as a result of the unauthorized use, and any profits from that were
attributable to that unauthorized use that are not taken into account in
computing the actual damages. The Company denied Miller’s allegations and
asserted that he was not entitled to any recovery under the statute in excess
of
his actual damages and that he had not suffered any actual damages as a result
of the issuance of the certificates.
COMMITMENTS
AND CONTINGENCIES (CONT’D)
As
also
previously reported, at the conclusion of the trial, which took place in October
2005, (i) the jury found that the Company had used Miller’s name without
his consent on 14,060 authentication certificates, but that Miller had sustained
actual damages from that use totaling $14,060; and (ii) the parties entered
into a stipulated judgment in the case, which, among other things, provides
that
Miller’s statutory damages arising from the actions of the Company were zero.
The court left unresolved and for future determination the issue of which party,
if any, was the prevailing party in the lawsuit, which would determine which
party, if any, is entitled to recover its attorney’s fees from the other
party.
In
December 2005, Miller filed a Notice of Appeal seeking an appellate court
review, a reversal of the judgment entered by the trial court and a finding,
that as a matter of law, he is entitled to statutory damages equal to $750
for
each use of his name by the Company, or more than $10 million in total. Miller
filed an opening brief in August 2006, and we expect that various responsive
briefs will be filed through February 2007. The Company has been informed by
its
trial counsel that, in California, it sometimes takes as long as two years,
from
the filing of an appeal of a damage award, before the appeal is actually heard
by an appellate court.
The
Company continues to believe that it will not incur any material liability
to
Miller in this case. However, there is little interpretive history with respect
to the measure of damages in a case such as the Miller case, creating a number
of relatively novel legal issues. As a result, it is not possible to predict,
with certainty, how an appellate court will ultimately rule on the issue of
damages.
Other
Legal Actions
The
Company is named from time to time, as a defendant in lawsuits that arise in
the
ordinary course of business. Management of the Company believes that none of
those lawsuits currently pending against it is likely to have a material adverse
effect on the Company.
16.
|
Segment,
Geographic and Major Customer
Information
|
Operating
segments are defined as components of an enterprise about 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 and in assessing performance. The Company’s chief operating
decision maker is its Chief Executive Officer. The operating segments of the
Company are organized based on the services it offers. Similar operating
segments have been aggregated to reportable operating segments based on having
similar products or services, types of customers, and other criteria under
SFAS
No. 131, Disclosures
About Segments of an Enterprise and Related Information.
For
our
continuing operations, we operate principally in four service segments: coins,
sportscards, diamonds and other high-value collectibles. Services provided
by
these segments include authentication, grading, publication, advertising and
subscription-based revenues. The other collectibles segment includes autographs,
stamps, currency and the CCE subscription businesses, none of which meet the
quantitative thresholds to qualify as a separate segment, as defined in SFAS
No.
131.
We
allocate operating expenses to each service segment based upon activity levels.
Stock-based compensation is recognized by segment for those employees of the
reported segment. We do not allocate specific assets to those service segments.
All of our sales and identifiable assets are located in the United States.
No
individual customer accounted for 10% or more of revenue in any of the years
ended June 30, 2006, 2005 and 2004.
SEGMENT,
GEOGRAPHIC AND MAJOR CUSTOMER INFORMATION (CONT’D)
|
|
Year
Ended June 30
(in
thousands)
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Net
revenues from external customers
|
|
|
|
|
|
|
|
Coins
|
|
$
|
23,829
|
|
$
|
23,203
|
|
$
|
17,474
|
|
Sportscards
|
|
|
8,461
|
|
|
8,143
|
|
|
7,126
|
|
Diamonds
|
|
|
373
|
|
|
-
|
|
|
-
|
|
Other
|
|
|
4,251
|
|
|
2,261
|
|
|
1,820
|
|
Total
revenue
|
|
|
36,914
|
|
|
33,607
|
|
|
26,420
|
|
Operating
income before unallocated expenses
|
|
|
|
|
|
|
|
|
|
|
Coins
|
|
|
11,542
|
|
|
12,183
|
|
|
8,837
|
|
Sportscards
|
|
|
1,153
|
|
|
1,344
|
|
|
968
|
|
Diamonds
|
|
|
(1,459
|
)
|
|
-
|
|
|
-
|
|
Other
|
|
|
6
|
|
|
(704
|
)
|
|
(117
|
)
|
Total
|
|
|
11,242
|
|
|
12,823
|
|
|
9,688
|
|
Unallocated
operating expenses
|
|
|
(7,473
|
)
|
|
(5,356
|
)
|
|
(5,419
|
)
|
Settlement
of lawsuit
|
|
|
-
|
|
|
(500
|
)
|
|
-
|
|
Consolidated
operating income
|
|
$
|
3,769
|
|
$
|
6,967
|
|
$
|
4,269
|
|
|
|
|
|
|
|
|
|
|
|
|
17.
Quarterly
Reports of Operations (Unaudited)
The
following table presents quarterly unaudited consolidated financial information
for the eight quarters in the period ended June 30, 2006. Such information
is
presented on the same basis as the annual information presented in the
accompanying consolidated financial statements. In management’s opinion, this
information reflects all adjustments that are necessary for a fair presentation
of the results for these periods.
|
|
Quarters
Ended
(In
thousands, except per share data)
|
|
|
|
Sept.
30,
2004
|
|
Dec.
31,
2004
|
|
Mar.
31
2005
|
|
June
30,
2005
|
|
Sept.
30,
2005
|
|
Dec.
31,
2005
|
|
Mar.
31
2006
|
|
June
30,
2006 (1)
|
|
Statement
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenues
|
|
$
|
8,195
|
|
$
|
7,982
|
|
$
|
8,955
|
|
$
|
8,475
|
|
$
|
8,825
|
|
$
|
7,447
|
|
$
|
10,022
|
|
$
|
10,620
|
|
Cost
of revenues
|
|
|
2,826
|
|
|
2,998
|
|
|
3,263
|
|
|
3,152
|
|
|
3,372
|
|
|
3,118
|
|
|
4,088
|
|
|
4,312
|
|
Gross
profit
|
|
|
5,369
|
|
|
4,984
|
|
|
5,692
|
|
|
5,323
|
|
|
5,453
|
|
|
4,329
|
|
|
5,934
|
|
|
6,308
|
|
SG&A
expenses
|
|
|
3,244
|
|
|
3,040
|
|
|
3,464
|
|
|
4,153
|
|
|
4,310
|
|
|
3,944
|
|
|
4,632
|
|
|
5,369
|
|
Settlement
of lawsuit
|
|
|
-
|
|
|
500
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Operating
income
|
|
|
2,125
|
|
|
1,444
|
|
|
2,228
|
|
|
1,170
|
|
|
1,143
|
|
|
385
|
|
|
1,302
|
|
|
939
|
|
Interest
and other income, net
|
|
|
64
|
|
|
112
|
|
|
225
|
|
|
531
|
|
|
550
|
|
|
616
|
|
|
596
|
|
|
606
|
|
Income
before income taxes
|
|
|
2,189
|
|
|
1,556
|
|
|
2,453
|
|
|
1,701
|
|
|
1,693
|
|
|
1,001
|
|
|
1,898
|
|
|
1,545
|
|
Provision
for income taxes
|
|
|
878
|
|
|
628
|
|
|
981
|
|
|
654
|
|
|
714
|
|
|
447
|
|
|
804
|
|
|
768
|
|
Income
from continuing operations
|
|
|
1,311
|
|
|
928
|
|
|
1,472
|
|
|
1,047
|
|
|
979
|
|
|
554
|
|
|
1,094
|
|
|
777
|
|
Income
(loss) from discontinued operations,
net of gain on sales of
discontinued businesses
(net
of income taxes)
|
|
|
(69
|
)
|
|
(7
|
)
|
|
(3
|
)
|
|
139
|
|
|
(12
|
)
|
|
181
|
|
|
-
|
|
|
127
|
|
Net
income
|
|
$
|
1,242
|
|
$
|
921
|
|
$
|
1,469
|
|
$
|
1,186
|
|
$
|
967
|
|
$
|
735
|
|
$
|
1,094
|
|
$
|
904
|
|
Net
income per basic share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
0.21
|
|
$
|
0.15
|
|
$
|
0.21
|
|
$
|
0.12
|
|
$
|
0.11
|
|
$
|
0.07
|
|
$
|
0.13
|
|
$
|
0.09
|
|
Income
(loss) from discontinued operations,
net of gain on sales of
discontinued businesses
(net of income taxes)
|
|
|
(0.01
|
)
|
|
-
|
|
|
-
|
|
|
0.02
|
|
|
-
|
|
|
0.02
|
|
|
-
|
|
|
0.02
|
|
Net
income
|
|
$
|
0.20
|
|
$
|
0.15
|
|
$
|
0.21
|
|
$
|
0.14
|
|
$
|
0.11
|
|
$
|
0.09
|
|
$
|
0.13
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per diluted share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$
|
0.20
|
|
$
|
0.14
|
|
$
|
0.19
|
|
$
|
0.12
|
|
$
|
0.11
|
|
$
|
0.06
|
|
$
|
0.12
|
|
$
|
0.09
|
|
Income
(loss) from discontinued operations,
net of gain on sales of discontinued
businesses
(net
of income taxes)
|
|
|
(0.01
|
)
|
|
-
|
|
|
-
|
|
|
0.01
|
|
|
-
|
|
|
0.02
|
|
|
-
|
|
|
0.01
|
|
Net
income
|
|
$
|
0.19
|
|
$
|
0.14
|
|
$
|
0.19
|
|
$
|
0.13
|
|
$
|
0.11
|
|
$
|
0.08
|
|
$
|
0.12
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
6,214
|
|
|
6,242
|
|
|
7,113
|
|
|
8,479
|
|
|
8,486
|
|
|
8,488
|
|
|
8,485
|
|
|
8,433
|
|
Diluted
|
|
|
6,569
|
|
|
6,695
|
|
|
7,571
|
|
|
8,902
|
|
|
8,806
|
|
|
8,803
|
|
|
8,822
|
|
|
8,750
|
|
(1)
During
the fourth quarter of 2006, the Company determined that assumptions used in
the
Black-Scholes option pricing model related principally to the expected term
of
an option and the forfeiture rate used in the determination of stock-based
compensation expense (see related discussion in note 2) during fiscal 2006
were
incorrect. We determined that the stock-based compensation expense recognized
during the interim periods of 2006 was understated by approximately $35,000
in
each of the first three quarters of 2006, or approximately $105,000 for the
nine
month period ended March 31, 2006. We also determined that the understatement
of
expense in each of the interim periods of 2006 was immaterial to each quarter,
and, accordingly, in the fourth quarter of 2006, we recorded a correcting
adjustment of $105,000 to stock-based compensation expense, or approximately
$0.01 per diluted share. Accordingly, this adjustment is reflected in cost
of
revenues ($47,000) and selling, general and administrative expense
($58,000).
18. Subsequent
Events
On
July
11, 2006, the Company acquired all of the outstanding membership units of Expos
Unlimited LLC (“Expos”), a California limited liability company, for $2,400,000
in cash, of which $2,370,000 was paid to the former members on or about July
12,
2006. Depending on the future financial performance of Expos, the Company may
become obligated to make contingent payments to the former members up to an
aggregate of $750,000 over the next five years. Expos owns and operates the
Long
Beach Coin, Stamp & Collectibles Expo (“Long Beach”) and the Santa Clara
Coin, Stamp & Collectibles Expo (“Santa Clara”), which comprise, in total,
of five trade shows held annually. At both the Long Beach and Santa Clara expos,
leading numismatic, philatelic and collectibles dealers offer rare and valuable
collectibles to the public, while auctions of coins and currency are conducted
alongside exhibitions of major numismatic and collectible interest.
On
August
15, 2006, the Board of Directors declared a regular quarterly dividend of $0.08
per common share, which was paid on September 12, 2006 to stockholders of record
on August 29, 2006. The aggregate amount of such dividend was approximately
$670,000.
On
August
18, 2006, the Company acquired American Gemological Laboratories (AGL), an
international forensic colored gemstone certification and grading laboratory.
AGL is one of the leading third party authentication and grading services for
colored gemstones, including colored gemstones that are sold at auction through
Sotheby’s and Christies and by jewelry retailers such as Cartier and Fred
Leighton. The Company paid an aggregate acquisition price of $3.5 million in
cash for AGL, and,
depending on the future financial performance of AGL; the Company may become
obligated to make payments of up to an aggregate of an additional $3.5 million
over the next five years.
Schedule
II
Valuation
and Qualifying Accounts
Description
|
|
Balance
at Beginning of
Period
|
|
Charged
to Operating Expenses
|
|
Charged
to Cost of Revenues
|
|
Net
Deductions
|
|
Balance
at
End
of
Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$
|
29,000
|
|
$
|
31,000
|
|
$
|
-
|
|
$
|
(30,000
|
)
|
$
|
30,000
|
|
Inventory
reserve
|
|
|
-
|
|
|
-
|
|
|
53,000
|
|
|
-
|
|
|
53,000
|
|
Total
at June 30, 2004
|
|
$
|
29,000
|
|
$
|
31,000
|
|
$
|
53,000
|
|
$
|
(30,000
|
)
|
$
|
83,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$
|
30,000
|
|
$
|
17,000
|
|
$
|
-
|
|
$
|
(9,000
|
)
|
$
|
38,000
|
|
Inventory
reserve
|
|
|
53,000
|
|
|
-
|
|
|
26,000
|
|
|
(45,000
|
)
|
|
34,000
|
|
Total
at June 30, 2005
|
|
$
|
83,000
|
|
$
|
17,000
|
|
$
|
26,000
|
|
$
|
(54,000
|
)
|
$
|
72,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$
|
38,000
|
|
$
|
23,000
|
|
$
|
-
|
|
$
|
(24,000
|
)
|
$
|
37,000
|
|
Allowance
for customer notes receivable
|
|
|
-
|
|
|
16,000
|
|
|
-
|
|
|
-
|
|
|
16,000
|
|
Inventory
reserve
|
|
|
34,000
|
|
|
-
|
|
|
72,000
|
|
|
-
|
|
|
106,000
|
|
Total
at June 30, 2006
|
|
$
|
72,000
|
|
$
|
39,000
|
|
$
|
72,000
|
|
$
|
(24,000
|
)
|
$
|
159,000
|
|
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL
DISCLOSURE
|
As previously
reported in a Current Report on Form 8-K dated January 26, 2005, on that date
we
were informed by Deloitte & Touche LLP (“D&T”) that it had decided to
resign as the Company’s independent registered public accounting firm upon the
completion of D&T’s review of the Company’s interim financial information to
be included in its Quarterly Report on Form 10-Q for our second quarter that
ended on December 31, 2004. We were informed by D&T that its decision to
resign was not the result of any disagreements between us and D&T on matters
of accounting principles or practices, financial statement disclosure or
auditing scope or procedures.
The
audit
reports of D&T on our financial statements for fiscal year ended June 30,
2004 contained no adverse opinion or disclaimer of opinion, and were not
qualified or modified as to uncertainty, audit scope or accounting
principles.
During
the period from July 1, 2003, the beginning of fiscal 2004, to January 26,
2005,
there were no disagreements between us and D&T on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedures which, if not resolved to D&T’s satisfaction, would have caused
it to make reference to the subject matter of the disagreement in connection
with its reports.
During
the period from July 1, 2003 to January 26, 2005 there were no reportable events
as defined in Item 304(a)(1)(v) of Regulation S-K.
We
provided D&T with a copy of the disclosure we included in our Current Report
on Form 8-K reporting its resignation and, at our request D&T furnished us
with a letter addressed to the Securities and Exchange Commission stating
whether D&T agreed with the statements that we have made in that Current
Report. A copy of D&T’s letter was attached to that Report as Exhibit
16.1.
As
also
previously reported, in a Current Report on Form 8-K dated February 8, 2005,
that we had filed with the Securities and Exchange Commission, the Audit
Committee of the Company’s Board of Directors approved the appointment and
engagement of Grant Thornton LLP (“Grant Thornton”) as the Company’s independent
registered public accounting firm.
During
the period from July 1, 2003 to February 8, 2005 (the date Grant Thornton was
engaged), neither the Company, nor anyone acting on its behalf, consulted with
Grant Thornton regarding (i) the application of accounting principles to any
specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on the Company's financial statements, or (ii)
any of the matters or events set forth in Item 304(a)(2)(ii) of Regulation
S−K.
Disclosure
Controls and Procedures
Our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended) are designed to provide
reasonable assurance that information required to be disclosed in our reports
filed under that Act (the Exchange Act), such as this Annual Report on Form
10-K, is recorded, processed, summarized and reported within the time periods
specified in the rules of the Securities and Exchange Commission. Our disclosure
controls and procedures also are designed to ensure that such information is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, to allow timely decisions regarding
required disclosures.
Our
management, under the supervision and with the participation of our Chief
Executive Officer and the Chief Financial Officer, evaluated the effectiveness
of our disclosure controls and procedures in effect as of June 30, 2006. Based
on that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that, as of June 30, 2006, our disclosure controls and procedures
were
effective to provide reasonable assurance that material information, relating
to
the Company and its consolidated subsidiaries, required to be included in our
Exchange Act reports, including this Annual Report on Form 10-K, is made known
to management, including the Chief Executive Officer and Chief Financial
Officer, on a timely basis.
Changes
in Internal Control Over Financial Reporting
There
have been no changes in our internal control over financial reporting that
occurred during our fourth fiscal quarter ended June 30, 2006 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
Management’s
Report on Internal Control Over Financial Reporting
Management
of Collectors Universe, Inc. is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act. Our internal control over financial
reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with accounting principles generally
accepted in the United States of America. Internal control over financial
reporting includes those written policies and procedures that:
|
•
|
pertain
to the maintenance of records that, in reasonable detail, accurately
and
fairly reflect the transactions and dispositions of our assets;
|
|
•
|
provide
reasonable assurance that transactions are recorded as necessary
to permit
preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America;
|
|
•
|
provide
reasonable assurance that our receipts and expenditures are being
made
only in accordance with authorization of our management and directors;
and
|
|
•
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of assets that could
have a
material effect on our consolidated financial statements.
|
Internal
control over financial reporting includes the controls themselves, monitoring
and internal auditing practices and actions taken to correct deficiencies as
identified.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risks that controls may
become inadequate because of changes in conditions or because the degree of
compliance with the policies or procedures may deteriorate.
Management’s
Assessment and Determination
Our
management assessed the effectiveness of Collectors Universe’s internal control
over financial reporting as of June 30, 2006, based on criteria for effective
internal control over financial reporting described in “Internal Control -
Integrated Framework” issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Management’s assessment included an evaluation of the
design and the testing of the operational effectiveness of Collectors Universe’s
internal control over financial reporting. Management reviewed the results
of
its assessment with the Audit Committee of our Board of Directors.
Based
on
that assessment, management determined that, as of June 30, 2006, Collectors
Universe, Inc. maintained effective internal control over financial reporting.
Grant
Thornton LLP, independent registered public accounting firm, which audited
and
reported on our consolidated financial statements for the fiscal year ended
June
30, 2006 which are included in this Annual Report on Form 10-K, has issued
an
attestation report on management’s assessment of internal control over financial
reporting, which is set forth below.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON
INTERNAL CONTROL OVER FINANCIAL REPORTING
Board
of
Directors and Stockholders
Collectors
Universe, Inc. and Subsidiaries:
We
have
audited management’s assessment, included in the accompanying Collectors
Universe, Inc. and subsidiaries Management’s Report on Internal Control Over
Financial Reporting, that Collectors Universe, Inc. and subsidiaries maintained
effective internal control over financial reporting as of June 30, 2006, based
on criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Collectors Universe, Inc. and subsidiaries’ management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management’s assessment and an
opinion on the effectiveness of the Company’s internal control over financial
reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management’s assessment, testing and evaluating
the design of the operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, management’s assessment that Collectors Universe, Inc. and subsidiaries
maintained effective internal control over financial reporting as of June 30,
2006, is fairly stated, in all material respects, based on criteria established
in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, Collectors
Universe, Inc. and subsidiaries maintained, in all material respects, effective
internal control over financial reporting as of June 30, 2006, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet of Collectors
Universe, Inc. and subsidiaries as of June 30, 2006 and 2005, and the related
consolidated statements of operations, stockholders’ equity, and cash flows for
the years then ended and our report dated September 7, 2006 expressed an
unqualified opinion thereon.
/s/
GRANT
THORNTON LLP
Irvine,
California
September
7, 2006
None
PART
III
Except
for information concerning the Company's executive officers, which is included
in Part I of this Annual Report, the information required by Item 10 is
incorporated by reference from the Company's definitive proxy statement,
expected to be filed with the Commission on or before October 28,
2006,
for the
Company’s 2006 annual stockholders' meeting.
The
information required by Item 11 is incorporated herein by reference from the
Company's definitive proxy statement, expected to be filed with the Commission
on or before October 28, 2006, for the Company’s 2006 annual stockholders'
meeting.
Except
for the information below regarding our equity compensation plans, the
information required by Item 12 is incorporated herein by reference from
the Company's definitive proxy statement, expected to be filed with the
Commission on or before October 28, 2006, for the Company’s 2006 annual
stockholders' meeting.
The
following table provides information relating to our equity compensation plans
as of June 30, 2006
|
|
Column
A
|
|
Column
B
|
|
Column
C
|
|
|
|
Number
of Securities to be Issued Upon Exercise of Outstanding Options and
Warrants
|
|
Weighted-Average
Exercise Price of Outstanding Options and Warrants
|
|
Number
of Securities Remaining Available for Future Issuance under Equity
Compensation Plans (Excluding
Securities Reflected in Column A)
|
|
Equity
compensation plans approved
by shareholders
|
|
|
876,000
|
|
$
|
12.69
|
|
|
437,000
|
|
Equity
compensation not approved by
shareholders (1)
|
|
|
295,000
|
|
|
11.18
|
|
|
-
|
|
Total
|
|
|
1,171,000
|
|
$
|
12.31
|
|
|
437,000
|
|
|
(1)
|
Warrants
to purchase common stock granted to non-employee service providers
in the
fiscal years ended June 30, 1997 and 1999.
|
The
information required by Item 13 is incorporated herein by reference from the
Company's definitive proxy statement, expected to be filed with the Commission
on or before October 28, 2006, for the Company’s 2006 annual stockholders’
meeting.
The
information required by Item 14 is incorporated herein by reference from the
Company's definitive proxy statement, expected to be filed with the Commission
on or before October 28, 2006, for the Company’s 2006 annual stockholders’
meeting.
PART
IV
|
(a)(1)
|
Financial
Statements
|
The
following financial statements are included in Item 8 of Form 10-K:
Report
of Grant Thornton LLP, Independent Registered Public Accounting
Firm
|
|
Report
of Deloitte & Touche, LLP, Independent Registered Public Accounting
Firm
|
|
Consolidated
Balance Sheets as of June 30, 2006 and 2005
|
|
Consolidated
Statements of Operations for the years ended June 30, 2006, 2005
and
2004
|
|
Consolidated
Statements of Stockholders’ Equity for the years ended June 30, 2006, 2005
and 2004
|
|
Consolidated
Statements of Cash Flows for the years ended June 30, 2006, 2005
and
2004
|
|
Notes
to the Consolidated Financial
Statements
|
|
(a)(2)
|
Financial
Statement Schedule
|
Schedule
II Valuation and Qualifying Accounts
|
|
The
other
schedules are omitted because the required information is either inapplicable
or
has been disclosed in the consolidated financial statements and notes
thereto.
(a)(3) Exhibits
See
Index to Exhibits
immediately following the Signature Page of this Annual Report for a list of
the
Exhibits required, pursuant to Item 601 of Regulation S-K, to be filed with
this
Annual Report.
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the
registrant has duly caused this Annual Report to be signed on its behalf by
the
undersigned thereunto duly authorized.
|
COLLECTORS
UNIVERSE, INC
|
|
|
Date: September
13, 2006
|
By: /s/
JOSEPH J. WALLACE
|
|
Joseph
J. Wallace, Chief Financial Officer
|
POWER
OF ATTORNEY
Each
person whose signature to this Annual Report appears below hereby appoints
Michael R. Haynes, Joseph J. Wallace and Michael J. Lewis, and any of them,
individually, to act severally as attorneys-in-fact and agents, with power
of
substitution and resubstitution, for each of them, to sign on his behalf,
individually and in the capacities stated below, and to file, any and all
amendments to this Annual Report, which amendment or amendments may make changes
and additions as such attorneys-in-fact may deem necessary or
appropriate.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this Annual Report
has been signed by the following persons on behalf of the Registrant and in
the
capacities and on the dates indicated.
Signature
|
|
Title
|
|
Date
|
/s/
A. CLINTON ALLEN
A.
Clinton Allen
|
|
Chairman
of the Board and Director
|
|
September
13, 2006
|
/s/
MICHAEL R. HAYNES
Michael
R. Haynes
|
|
Chief
Executive Officer and Director
(Principal
Executive Officer)
|
|
September
13, 2006
|
/s/
DAVID HALL
David
G. Hall
|
|
President
and Director
|
|
September
13, 2006
|
/s/
JOSEPH J. WALLACE
Joseph
J. Wallace
|
|
Chief
Financial Officer
(Principal
Financial and Accounting Officer)
|
|
September
13, 2006
|
/s/
BEN A. FRYDMAN
Ben
A. Frydman
|
|
Director
|
|
September
13, 2006
|
/s/
VAN D. SIMMONS
Van
D. Simmons
|
|
Director
|
|
September
13, 2006
|
/s/
A. J. BERT MOYER
A.
J. Bert Moyer
|
|
Director
|
|
September
13, 2006
|
/s/
DEBORAH A. FARRINGTON
Deborah
A. Farrington
|
|
Director
|
|
September
13, 2006
|
|
|
|
|
|
Exhibit
No.
|
|
Description
|
|
|
|
1.1
|
|
Form
of Underwriting Agreement.*
|
1.2
|
|
Form
of Underwriting Agreement between Collectors Universe and Thomas
Weisel
Partners LLC, Needham & Company, Inc. and Roth Capital Partners LLC.
Incorporated by reference to Exhibit 1.1 to Amendment No. 1 to the
Company’s Registration Statement on Form S-3 (File No. 333-122129), filed
on February 14, 2005.
|
3.2
|
|
Amended
and Restated Certificate of Incorporation of Collectors Universe.
Incorporated by reference to Exhibit 3.2 to the Company’s Registration
Statement on Form S-3 (File No. 333-122129), filed on January 19,
2005.
|
3.2.1
|
|
Certificate
of Amendment to Amended and Restated Certificate of Incorporation
of
Collectors Universe. Incorporated by reference to Exhibit 3.2.1 to
the
Company’s Registration Statement on Form S-3 (File No. 333-122129), filed
on January 19, 2005.
|
3.3
|
|
Amended
and Restated Bylaws of Collectors Universe, as adopted September
1,
1999.*
|
4.1
|
|
Registration
Rights Agreement.*
|
4.2
|
|
Form
of Registration Rights Agreement for Stockholders pursuant to private
placement.*
|
5.1
|
|
Opinion
of Stradling Yocca Carlson & Rauth, a Professional
Corporation.*
|
10.1
|
|
Collectors
Universe 1999 Stock Incentive Plan.*
|
10.2
|
|
Form
of Stock Option Agreement for the Collectors Universe 1999
Plan.*
|
10.4
|
|
PCGS
1999 Stock Incentive Plan.*
|
10.5
|
|
Form
of Stock Option Agreement for the PCGS 1999 Plan.*
|
10.6
|
|
Employee
Stock Purchase Plan.*
|
10.7
|
|
Form
of indemnification Agreement.*
|
10.8
|
|
Asset
Acquisition Agreement dated January 25, 1999 between Professional
Coin
Grading Service, Inc.,
Info
Exchange, Inc. and Brent Gutenkunst.*
|
10.9
|
|
Collectors
Universe/eBay Mutual Services Term Sheet dated February 10, 1999,
between
the Company and eBay, Inc.*
|
10.10
|
|
Net
Lease between Orix Searls Santa Ana Venture and Collectors Universe,
dated
June, 1999.*
|
10.11
|
|
Agreement
for the Sale of Goods and Services dated March 31,1999, between the
Company and DNA Technologies, *
|
10.12
|
|
Contribution
and Acquisition Agreement dated February 3, 1999, between the Company
and
Hugh Sconyers.*
|
10.13
|
|
Contribution
and Acquisition Agreement dated February 3, 1999, between the Company
and
BJ Searls.*
|
10.14
|
|
Contribution
and Acquisition Agreement dated February 3, 1999, between the Company
and
Greg Bussineau.*
|
10.15
|
|
Contribution
and Acquisition Agreement dated February 3, 1999, between the Company
and
Lyn F. Knight Rare Coins*
|
10.16
|
|
Contribution
and Acquisition Agreement dated February 3, 1999, between the Company,
Kingswood
Coin Auction, LLC and the Members of Kingswood.*
|
10.17
|
|
Contribution
and Acquisition Agreement dated February 3, 1999, between the Company
and
Professional Coin Grading Service, Inc.*
|
10.18
|
|
Employment
Agreement dated March 1999, between Superior Sportscard Auctions,
LLC and
Greg Bussineau.*
|
10.19
|
|
Employment
Agreement dated March 5, 1999, between Lyn F. Knight, Lyn Knight
Currency
Auctions, Inc.
and
Collectors Universe.*
|
10.24
|
|
Asset
Purchase Agreements between Collectors Universe, Inc. and Auctions
by
Bowers and Merena, Inc., Bowers and Merena Galleries, Inc. and Bowers
and
Merena Research, Inc. (Incorporated by reference to Exhibit 10.1
to
Registrant’s Current Report on Form 8-K, dated March 21, 2000).*
|
10.25
|
|
Asset
Purchase Agreements dated February 19, 2004 between Collectors Universe,
Inc. and Spectrum Numismatics, Inc. (Incorporated by reference to
Exhibit
10.1 to Registrant’s Current Report on Form 8-K, dated February 19,
2004).
|
INDEX
TO EXHIBITS
(Continued)
Exhibit
No.
|
|
Description
|
|
|
|
10.26
|
|
Non-Competition
Agreement dated February 19, 2004 between Collectors Universe, Inc.
and
Spectrum Numismatics, Inc. (Incorporated by reference to Exhibit
10.2 to
Registrant’s Current Report on Form 8-K, dated February 19,
2004).
|
10.27
|
|
Collectors
Universe 2003 Stock Incentive Plan. Incorporated by reference to
Exhibit
10.1 to the Company’s Registration Statement on Form S-8 (File No.
333-121035), filed on December 6, 2004.
|
10.28
|
|
Form
of Stock Option Agreement for 2003 Stock Incentive Plan. Incorporated
by
reference to Exhibit 10.2 to the Company’s Registration Statement on Form
S-8 (File No. 333-121035), filed on December 6, 2004.
|
10.29
|
|
Form
of Restricted Stock Purchase Agreement for 2003 Stock Incentive Plan.
Incorporated by reference to Exhibit 10.3 to the Company’s Registration
Statement on Form S-8 (File No. 333-121035), filed on December 6,
2004.
|
10.30
|
|
Employment
Agreement, dated January 1, 2003, between the Company and Michael
Haynes.
Incorporated by reference to Exhibit 10.30 to the Company’s Registration
Statement on Form S-3 (File No. 333-122129), filed on January 19,
2005.
|
10.30.1
|
|
First
Amendment to Employment Agreement, dated October 1, 2003, between
the
Company and Michael Haynes. Incorporated by reference to Exhibit
10.30.1
to the Company’s Registration Statement on Form S-3 (File No. 333-122129),
filed on January 19, 2005.
|
10.30.2
|
|
Second
Amendment to Employment Agreement, dated November 1, 2004, between
the
Company and Michael Haynes. Incorporated by reference to Exhibit
10.30.2
to the Company’s Registration Statement on Form S-3 (File No. 333-122129),
filed on January 19, 2005.
|
10.31
|
|
2005
Management Bonus Plan. Incorporated by reference to Exhibit 10.99
to the
Company’s Quarterly Report on
Form
10-Q for the quarter ended December 31, 2004, filed with the Commission
on
February 14, 2005
|
10.32
|
|
Loan
and Security Agreement between Collectors Finance Corporation and
California Bank & Trust
dated
as of June 30, 2005.
|
10.33
|
|
Continuing
Guaranty issued as of June 30, 2005 by Collectors Universe, Inc.
to
California Bank & Trust.
|
10.34
|
|
Asset
Purchase Agreement among Collectors universe, inc., Gemprint Corporation,
CVF Technologies Corporation, Heptagon Investments Ltd. and 1456733
Ontario, Inc., dated November 25, 2005, providing for the Company’s
acquisition of the assets of Gemprint Corporation. Incorporated by
reference to Exhibit 10.34 to the Company’s Quarterly Report on Form 10-Q
for the quarter ended December 31, 2005, filed with the Commission
on
February 9, 2006.
|
10.35
|
|
Employment
Agreement Extension between Collectors Universe, Inc. and Michael
R.
Haynes. Incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K dated March 17, 2006 and filed with the Commission
on
March 23, 2006.
|
10.36
|
|
2006
Management Bonus Plans. Incorporated by reference to Exhibit 10.1
to the
Company’s Current Report on Form 8-K dated March 17, 2006 and filed with
the Commission on March 23, 2006.
|
21.1
|
|
Subsidiaries
of the Registrant.
|
23.1
|
|
Consent
of Grant Thornton LLP, Independent Registered Public Accounting
Firm
|
23.2
|
|
Consent
of Deloitte & Touche LLP, Independent Registered Public Accounting
Firm
|
31.1
|
|
Certifications
of CEO Under Section 302 Of The Sarbanes-Oxley Act.
|
31.2
|
|
Certifications
of CFO Under Section 302 Of The Sarbanes-Oxley Act.
|
32.1
|
|
CEO
Certification of Periodic Report Under Section 906 of the Sarbanes-Oxley
Act.
|
32.2
|
|
CFO
Certification of Periodic Report Under Section 906 of the Sarbanes-Oxley
Act.
|
*
|
Incorporated
by reference to the same numbered exhibit to the Company’s Registration
Statement (No. 333-86449) on Form S-1 filed with the Commission
on
September 2, 1999.
|