UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
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(Mark
One)
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ý
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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, 2007
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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)
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Delaware
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33-0846191
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(State
or other jurisdiction of
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(I.R.S.
Employer Identification No.)
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Incorporation
or organization)
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1921
E. Alton Avenue, Santa Ana, California
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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. o
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition
of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act, (check one):
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Large
accelerated filer o
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Accelerated
filer ý
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Non-accelerated
filer o
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Indicate
by check mark whether the Registrant is a shell company (as defined in
Securities Exchange Act Rule 12b-2). YES [ ] NO x
As
of
December 29, 2006, the aggregate market value of the Common Stock held by
non-affiliates was approximately $111,552,000 based on the per share closing
price of $13.40 of Registrant’s Common Stock as of such date as reported by the
Nasdaq Global Market.
As
of
September 7, 2007, a total of 8,518,312 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 29, 2007, for its Annual Meeting of Stockholders scheduled to
be
held on December 5, 2007.
COLLECTORS
UNIVERSE, INC.
FORM
10-K
FOR
THE FISCAL YEAR ENDED JUNE 30, 2007
TABLE
OF CONTENTS
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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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29
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Item
2.
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35
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Item
3.
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35
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Item
4.
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36
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37
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PART
II
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Item
5.
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38
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Item
6.
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39
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Item
7.
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42
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Item
7A.
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63
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Item
8.
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64
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65
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66
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67
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68
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69
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71
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Item
9.
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100
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Item
9A
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100
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Item
9B
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104
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PART
III
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Item
10.
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104
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Item
11.
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104
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Item
12.
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104
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Item
13.
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104
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Item
14.
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104
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PART
IV
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Item
15.
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105
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S-1
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E-1
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i
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 wholesale and retail dealers of diamonds and colored
gemstones.
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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•
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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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•
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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,
sportscards, currency and stamps bearing our brands. We do not warrant our
authenticity determinations for autographs.
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1
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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.
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1
Diamonds
and Colored Gemstones. In November 2005, we began offering
diamond authentication and grading services to wholesale and retail dealers
of
diamonds as a result of our acquisition of Gem Certification & Appraisal Lab
(GCAL), an independent diamond certification and grading
laboratory. In August 2006, we began offering identification,
authentication and grading services to wholesale and retail dealers of high
value colored gemstones, including emeralds, rubies and sapphires, as a result
of our acquisition of American Gemological Laboratories (AGL), an independent
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. The market
values of colored gemstones depend primarily on their color, tone, and clarity
and the presence of and type of enhancements, which are made to almost all
colored gemstones to improve their color or clarity or both. The
market value of a colored gemstone also can be affected by its country of
origin.
Our
customers, who usually consist of wholesale and retail dealers and auction
companies, submit diamonds and colored gemstones to us for:
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•
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Confirmations,
by our independent experts, that the diamonds or colored gemstones
are, in
fact, natural (as opposed to synthetically manufactured) diamonds
and
colored gemstones; and
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•
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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
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, country of
origin.
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Our
Diamond Grading and Certification Services. 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 that 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”), that we store in our computer
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 provides a limited warranty with respect to the
color and clarity grades that GCAL assigns to the diamonds it
certifies.
We
believe that Gemprint process provided by GCAL is the only a non-intrusive
diamond identification service offered by any diamond certification company
and
that no diamond certification company, except GCAL, warrants the color and
clarity grades they assign to the diamonds they certify.
Our
Colored Gemstone Grading and Certification Services. AGL offers
different levels of service to its customers:
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·
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Its
“Prestige” Service, which is designed for grading and certification of
colored gemstones whose weight and market value justify the costs
of a
higher level and more comprehensive suite of grading and certification
services; and
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·
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Its
“Fast Track” Service, which is designed for lower weight and less valuable
colored gemstones.
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2
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GCAL,
Gemprint and AGL and each of the logos associated with their respective
names, are registered service marks of the
Company.
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2
AGL’s
Prestige Service provides the customer with a comprehensive quality analysis
and
report that sets forth the identification, weight, cut, color, tone and clarity
grades assigned to the gemstone, along with the description of the quality
enhancements that had been made to the gemstone and, in some cases, its country
of origin. A high resolution color image of the colored gemstone is
included on the certificate for identification purposes.
AGL’s
Fast Track Service allows the customer to select from among a variety of grading
services that includes, for a minimum fee, information relating to the
identification, weight and cut of the gemstone, which is set forth on a small
plastic card, similar in size and materials to a credit card. Fast
Track customers also may order one or more supplemental services that will
provide them with information regarding the color, tone, clarity and/or country
of origin of the gemstone, for additional fees that will vary based on the
extensiveness of the services ordered.
AGL
warrants the identification and enhancement information with respect to the
colored gemstones it certifies, but does not warrant information relating to
the
color, clarity or country of origin of the colored gemstone.
Benefits
Provided by our Authentication and Grading Services. 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 informed and
more
confident about, and more willing to make such a purchase, particularly
“sight-unseen,” on Internet auction sites such as those operated by eBay and
Blue Nile and even in higher value assets as may be offered by
Sotheby’s. We also believe that dealers who sell collectibles,
diamonds or colored gemstones that have been authenticated and graded by us
are
more readily able to sell, and are more likely to obtain higher prices for,
those items than if they had not been authenticated and graded by us, because
our services give prospective buyers the confidence to purchases those
collectible, diamonds or colored gemstones from those dealers.
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. At the time we launched our independent third
party stamp grading service, the concept of grading the quality of stamps,
in
addition to authenticating them, was relatively novel. Since that
time, our stamp grading standards have become increasingly accepted, especially
for higher value stamps.
The
standards and methodologies we use in grading diamonds are generally accepted
in
the diamond market. Those standards and methodologies were developed by the
Gemological Institute of America, a non-profit educational
corporation. However, we believe that the diamond grading services we
offer differ from those that are available from competing diamond grading
services primarily in terms of the rigorousness and consistency with which
we
apply those grading standards. For that reason, among others, Blue
Nile, which is the largest seller of diamonds on the Internet, has chosen GCAL
to certify all of Blue Nile’s Signature Collection which, according to Blue
Nile, includes the world's most brilliant round diamonds, as well as the world's
first and only princess, emerald, and Asscher diamonds, cut to Blue Nile’s
finest ideal standards.
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:
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•
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“PCGS”
(Professional Coin Grading Service), which is the brand name for
our
independent coin authentication and grading
service;
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•
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“PSA”
(Professional Sports Authenticator), which is the brand name for
our
independent sports and trading cards authentication and grading
service;
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3
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•
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“PSA/DNA”
(PSA/DNA Authentication Services), which is the brand name for our
independent authentication and grading service for vintage autographs
and
memorabilia;
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•
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“PSE”
(Professional Stamp Experts), which is the brand name for our independent
stamp authentication and grading
service;
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•
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“PCGS
Currency” the brand name for our currency authentication and grading
service;
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•
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“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 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 we believe it is the only diamond certification 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 and the only service that offers a warranty with respect to the
quality grades relating to the diamond’s color and clarity. 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, 2007, we had authenticated and
graded more than 14 million coins. In 1991, we launched our PSA
sportscard authentication and grading service and, through June 30, 2007, had
authenticated and graded over 10 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 2005
to
2007, 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,
the number of diamonds we authenticated and graded since the acquisition of
GCAL, our diamond authentication and grading service, in the second quarter
of
fiscal 2006 and the number of colored gemstones we authenticated and graded
since the acquisition of AGL, our colored gemstone authentication and grading
service, in the first quarter of fiscal 2007.
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Units
Processed
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||||||||||||||||||||||||
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2007
|
2006
|
2005
|
||||||||||||||||||||||
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Coins
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1,559,000
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50 | % |
1,789,000
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55 | % |
1,670,000
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58 | % | |||||||||||||||
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Sportscards
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1,262,000
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41 | % |
1,199,000
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37 | % |
1,084,000
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38 | % | |||||||||||||||
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Autographs
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170,000
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5 | % |
181,000
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6 | % |
77,000
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3 | % | |||||||||||||||
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Stamps
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66,000
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2 | % |
38,000
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1 | % |
26,000
|
1 | % | |||||||||||||||
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Currency(1)
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36,000
|
1 | % |
29,000
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1 | % |
3,000
|
-
|
||||||||||||||||
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Diamonds(2)
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25,000
|
1 | % |
5,000
|
-
|
-
|
-
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|||||||||||||||||
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Colored
Gemstones(3)
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1,000
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-
|
-
|
-
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-
|
-
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||||||||||||||||||
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Total
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3,119,000
|
100 | % |
3,241,000
|
100 | % |
2,860,000
|
100 | % | |||||||||||||||
4
The
following table sets forth the estimated values at which our customers insured
the collectibles, diamonds and colored gemstones that they submitted to us
for
grading or authentication.
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Declared
Values (000)
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||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||||||
|
Coins
|
$ |
1,435,000
|
82 | % | $ |
1,613,000
|
90 | % | $ |
1,191,000
|
91 | % | ||||||||||||
|
Sportscards
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88,000
|
5 | % |
75,000
|
4 | % |
66,000
|
5 | % | |||||||||||||||
|
Autographs
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24,000
|
1 | % |
15,000
|
1 | % |
26,000
|
2 | % | |||||||||||||||
|
Stamps
|
12,000
|
-
|
21,000
|
1 | % |
17,000
|
1 | % | ||||||||||||||||
|
Currency(1)
|
32,000
|
2 | % |
43,000
|
2 | % |
8,000
|
1 | % | |||||||||||||||
|
Diamonds(2)
|
97,000
|
6 | % |
27,000
|
2 | % |
-
|
-
|
||||||||||||||||
|
Colored
Gemstones(3)
|
62,000
|
4 | % |
-
|
-
|
-
|
-
|
|||||||||||||||||
|
Total
|
$ |
1,750,000
|
100 | % | $ |
1,794,000
|
100 | % | $ |
1,308,000
|
100 | % | ||||||||||||
3 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
3 We
commenced the authentication and grading of colored gemstones in the first
quarter of 2007, when we acquired
AGL.
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 2007, our authentication and
grading fees averaged $10.65. 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 $25
to $2,500 based on whether the customer requests our Prestige Service or our
Fast Track Service, the weight of the colored gemstone and whether the customer
requests that we certify the country of origin of the colored
gemstone.
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;
(iv) monthly subscription fees associated with our Internet-based, dealer
to dealer exchange “CCE” (Certified Coin Exchange) for certified coins; and
(v) trade show management fees associated with our trade show management
company, Expos Unlimited LLC (“Expos”), which promotes and manages two of
the larger and better known coin, stamp and collectibles shows in Long Beach
and
Santa Clara, California, respectively. 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.
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
5
value
and, therefore, in price. For example, a 1952 Mickey Mantle baseball card that
received a PSA grade from us of 9 on our PSA grading scale of 1-to-10 was sold
at public auction in 2006 for $282,588. By comparison, a similar 1952 Mickey
Mantle baseball card that received a PSA grade of 8 was sold at public auction
also 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 $69,000 - $78,880. 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 -
$12,480. 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 - $20,250. 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
$3,600 – $4,800. 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 by 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.
6
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 or 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.
7
These
conditions created a need and the demand for independent authentication and
grading services from which sellers, purchasers and collectors could
obtain:
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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;
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representations
of quality based on uniform standards applied by independent, third
party
experts; and
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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:
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its
rarity;
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its
quality or grade; and
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its
historical and recent selling
prices.
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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) reduce transaction costs; (iv) allow trading at all
hours; and (v) provide 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:
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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; and
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Blue
Nile’s use of GCAL’s services to certify all of the diamonds comprising
its Signature Collection, which are the highest quality diamonds
that Blue
Nile sells, even when those diamonds have already been certified
by other
diamond certification services.
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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 22 experts who have an average
of 27 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,
8
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 14 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
22 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 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 5 stamp graders, and use another
expert on a part-time basis. Those graders have an average of 29
years of experience in the collectible stamp market.
9
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 3 Currency
experts with 15 years of experience and use the services of 2 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 has any non-intrusive 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, along with the warranty of the quality determinations of color
and
clarity, provide it with a competitive advantage that we are promoting as a
means of increasing GCAL’s share of the diamond grading
market. Currently, we employ 9 diamond graders who have an average of
18 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, express color and hue combinations using a 1 to 10 scale in
half-point increments, describe tone on a scale of 0-100 and identify 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 of over 5,000 colored gemstone samples,
which we believe is 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. Currently, we employ 4 grading experts with an average of 25
years of experience.
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 200,000 bid
and ask prices for certified coins at www.certifiedcoinexchange.com and
over 100,000 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. With the continued growth of CCE and
Collectors Corner, we believe we can become the preeminent website for all
coins
sold by dealers to other dealers, on CCE, and coins bought and sold
10
between
dealers and consumers on Collectors Corner. We are in the process of
extending the concepts and systems developed for CCE into other markets where
the Company offers certification services such as the currency, 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 Rare Coin Market Report, which we publish on a monthly
basis primarily for distribution to approximately 5,500 PCGS Collectors Club
members, Sports Market Report, which we publish on a monthly basis
primarily for distribution to approximately 7,800 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 255,000, 227,000 and 167,000 unique
visitors per week during the fiscal years ended June 30, 2007, 2006 and 2005,
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:
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increase
the values and liquidity of the high value collectibles and other
high
value assets;
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enable
and facilitate transactions in high value collectibles and other
high
value assets;
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generally
enhance interest, activity and trading in high value collectibles
and
other high value assets; and
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achieve
profitable growth, build long-term value for our stockholders and
provide
rewarding opportunities for our
employees.
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Our
Growth Strategy
Our
growth strategies include:
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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
GCAL’s 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 which emphasize the benefits of the GCAL grading
certificate, and the faster turnaround service and the more competitive
pricing of services offered by
GCAL;
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Increasing
AGL’s share of the middle and high-end of the colored gemstone market
by
offering enhanced grading services, such as a guarantee of identification
and enhancements, primarily to dealers and high net worth consumers,
and
offering a lower priced authentication and grading certificate, with
accurate identification and disclosure of 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, PSE and PCGS Currency. We use those brands 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 14 million coins since the inception
of PCGS and over 10 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 105,000 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 11% are independently
authenticated and graded. Additionally, 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:
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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;
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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;
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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;
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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;
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developed
and linked coin buying demand from our successful Set Registry program
to
Collectors Corner to increase the referral of PCGS coin buyers to
CCE
dealer-subscribers, thereby enhancing the value of the CCE subscription
and increasing the preference for PCGS graded coins in the market;
and
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increased
the promotion of our Collectors Clubs to attract and to provide incentives
for collectors to use our services.
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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 2007, we
held ten
dealer invitationals.
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Participation
at Collectibles Trade Shows. Each year we participate in
approximately 50 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 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 and Print Advertising. We sell advertising in
our publications and 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, 2007, 2006
and 2005,
on a combined basis, our five websites attracted, on average, over
255,000, 227,000, and 167,000 visitors, respectively, per
week.
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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®” and First Day of Issue Programs. Every year since
1992, the U.S. Mint has produced, in limited quantities, issues of
gold
bullion coins, and beginning in 1997, silver bullion coins, changing
the
dies each year that strike the coins so that the current year is
minted on
the coins. Because the detail of the coin as struck by new dies
is an important collector characteristic, in 2005, PCGS introduced
a new
“First Strike” designation to identify those coins that were
submitted for certification, or which could be verified as having
been
released by the U.S. Mint in sealed containers, in January of each
year. We inaugurated our First Strike program to
provide dealers and collectors with independent verification of the
release of those coins in the first month of the year. During
fiscal year 2007, the U.S. Mint began releasing the new designs of
Presidential One Dollar coins under
a
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13
program
authorized by the U.S. Congress. This program provides for a
Presidential Dollar coin, to be released every 10 weeks, with a new design
bearing the image of a former U.S. President. The Presidential
Dollars designs are being released in the order that the President served in
office. On February 15, 2007, PCGS began offering a service,
concurrent with the release of each new Presidential One Dollar coin by the
U.S.
Mint, beginning with the coin bearing the image of President George Washington,
which designates the coin as the First Day of Issue coin. To
qualify for PCGS’ First Day of Issue designation, the Presidential One
Dollar coins must be submitted to PCGS on the first day that the coin is
released to the public. In fiscal year 2007, we graded and
authenticated 117,000 coins with the “First Strike” designation and
41,400 coins with the First Day of Issue designation.
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, the warranty of color and
clarity grades it issues and the services that GCAL is able to offer that are
not available from its competitors. Additionally, we believe that
only about 50% of the diamonds larger than 0.50 carat are offered with third
party authentication and grading services and we 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. As a result, we believe that the opportunity exists for us
to grow the demand for GCAL’s services and enable us to increase its market
share. According to the U.S. Geological Survey 2005 Minerals
Yearbook, the United States imported 17 million carats of polished diamonds,
of
which 6.0 million carats were of 0.5 carats or larger.
To
take
advantage of this opportunity, since acquiring GCAL, we have:
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Enhanced
and established GCAL as a brand providing high quality and consistent
authentication and grading
services.
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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.
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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:
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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, thereby 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
two years 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 equal to the color and clarity grades assigned
on
the diamond’s original grading. Due to the grading process
employed by GCAL, the grading experts who re-grade a diamond are
not able
to determine the original grades assigned to the diamond and, therefore,
the rating assigned on re-grading cannot be affected by the original
grades given to the diamond. 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.
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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.
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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, because authentication and grading services are requested on less than
1% of all the colored gemstones purchased for $500 or more. According to
the U.S. Geological Survey 2005 Minerals Yearbook, imports into the United
States of cut and unset colored gemstones included 2.6 million carats of
emeralds, 4.4 million carats of rubies and 7.7 million carats of sapphires,
along with 1.6 billion carats of other colored gemstones. We estimate
that, in the high-value market, served by auctioneers such as Sotheby’s and
Christies, third party authentication and grading is requested for 30% to 50%
of
the colored gemstones sold at those auctions. We also estimate that
AGL’s share of the certification services purchased by sellers or purchasers of
colored gemstones at those auctions is approximately 50%. In the lower-end
general market, colored gemstones are generally sold at retail in similar stores
and in similar venues as diamonds, providing a selling environment
already
15
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 where those
enhancements (a) are not permanent or may not be permanent; (b) create
special care requirements; or (c) have a significant effect on the stone’s
value. Because most retailers do not have sufficient information or
expertise to make the determination required to satisfy these disclosure
requirements, we believe we can increase the volume of our colored gemstone
certification 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. As
a result of those cross-marketing efforts, Christies will soon begin including,
in its diamond auction catalogues, descriptions or copies of GCAL certificates
for the GCAL-certified diamonds it offers at its auctions.
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:
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Antique
silver
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Musical
instruments
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Art
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Political
memorabilia
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Art
glass
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Postcards
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Comic
books
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Rare
books
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Entertainment
memorabilia
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Watches
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Estate
jewelry
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Wine
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We
intend
to consider the following criteria in selecting markets for future
expansion:
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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;
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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;
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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;
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Availability
of Experts. The availability of experts needed to succeed
in entering a target market; and
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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.
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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.
16
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 14 million coins. We now
authenticate and grade approximately 1.5 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,
2007, our fee per coin averaged approximately $13.74. 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, 2007, had authenticated and graded over 10 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 2007. 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
17
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 2007 for
approximately $2.35 million and resold in September 2007 for $2.8
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. Additional
verification can be obtained by a chemical analysis of the ink to verify the
unique DNA code used by PSA/DNA is, in fact, applied to the item. 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 the 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 2007,
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.
18
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, in addition to industry standards and
various technologies, a combination of standards, systems and terminology that
were developed by AGL in grading and certifying colored gemstones. To
identify, authenticate and examine enhancements of colored gemstones, we use
one
or more technologies including multi-channel spectroscopy, Fourier Transform
Infrared Spectrometer, Raman Spectrometer, x-ray fluorescence, ultra-violet
near
visible infrared spectroscopy, 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.
19
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:
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•
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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.
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•
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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.
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•
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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.
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•
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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.
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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.
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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
services and brands to the retail consumers who are interested in buying a
diamond or colored gemstone, principally by communicating over the Internet
to
this target market through our websites, to which consumers are linked when
making search engine inquiries for information on diamonds or colored gemstones,
diamond and colored gemstone pricing, purchasing assistance and other
searches. We believe that our websites are distinctive because they
offer third party education, information and price guides that are not
associated with the sale of diamonds, diamond jewelry or colored gemstones
and,
therefore, are attractive to consumers who are seeking independent and unbiased
information that will make them more educated and better
consumers. Since most diamond submissions come from
20
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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—
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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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—
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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.
21
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 57,000
sets were registered on our Set Registries as of June 30, 2007, which represents
a 38% increase over the number registered as of June 30, 2006.
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•
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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
$230, 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, 2007,
there were approximately 18,000 members in our Collectors
Clubs.
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• |
Certified
Coin Exchange Business-to-Business Website. The Certified
Con Exchange (CCE) website, which we purchased in 2005, is a
business-to-business website for recognized dealers in the trade.
Currently, there are over 200,000 certified coins being offered at
bid and
ask at an aggregate value of over $200 million, an increase in excess
of
100% of the number of items offered on average in the previous
year. The liquidity afforded the units traded on CCE increases
the demand for PCGS certified
coins.
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• |
Collectors
Corner Business-to-Consumer Website. We have launched
Collectors Corner (www.collectorscorner.com), a business-to-consumer
website where consumers can visit, identify, search, select and sort
over
100,000 coins offered for sale by dealers, an increase of over nine
times
the number of coins offered on average at Collectors Corner in fiscal
2006. All coins on Collectors Corner are offered by members of
the business-to-business website CCE. In addition, we launched
the functional ability for PCGS Set Registry participants to automatically
search Collectors Corner for specific coins that would increase the
value
of the participant’s set on Set Registry by either filling a void in the
set or by upgrading the quality of a coin currently a part of the
participant’s set. Collectors Corner has advantages over other
business-to-consumer websites in that the counterparties to the consumer
are members of the largest and best known coin exchange and the coins
listed are at fixed prices with the opportunity to negotiate lower
prices. The increased turnover offered for coins on Collectors
Corner in conjunction with the relative simplicity of the improvement
of a
set in Set Registry provides for increased brand preference for PCGS
authenticated and graded coins.
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• |
Diamond
Trade Buyer Website. We have launched
the GCAL diamond website, which is directed to the trade to provide
information on our services and processes. The website includes
details about our service levels and our unique warranty and Gemprint
application, along with videos of our processes in the
laboratory. During the three month period ended June 30, 2007,
we had (on average) approximately 700 unique visitors a week to this
trade-oriented website.
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• |
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.
Currently there are several co-branding programs in process
including programs with retailers Bailey Banks & Biddle, a unit of
Zale Corporation and Blue Nile, and product manufacturer Vision Cut
for
the Cushette brand diamond.
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Certified
Diamond Exchange Business-to-Business Website. In the very
near future, we expect to launch the Certified Diamond Exchange,
a
business-to-business website for GCAL certified diamonds. This
website is targeted to diamond buyers comprised of more than 20,000
independent, U.S. based jewelry retailers that are members of the
Jewelers
Board of Trade, a credit scoring business in the jewelry markets.
The
targeted sellers are the diamond dealers who have loose diamond inventory
for sale. We believe that by making GCAL certified diamonds
more widely available to the
independent jewelers, we can increase demand for GCAL
certifications. Buyers are admitted to the website at no cost,
and during the launch phase, sellers will not have to pay any
fees to list GCAL certified diamonds on our Certified Diamond
Exchange. Similar websites offering diamonds require a fee to
be paid by both the buyer and the seller.
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22
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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 retailers and
customers with information about the AGL brand and its prominence
for high
value colored gemstones.
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Colored
Gemstone Trade Buyer Website. We have launched the AGL colored
gemstone website directed to the trade that provides information
on our
services and processes. The website includes details about our
service levels and our two key levels of service: Prestige
Services and Fast Track Services.
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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 May
2007 issue of New York Diamonds for the introduction of GCAL
services by the company. 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 utilizes
these
same communication channels in trade publications, trade show appearances
and educational seminars. This increased utilization of the existing
communications links, allows for significant synergy between GCAL
and AGL
with respect to the time, energy, messaging and expenses in these
venues.
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•
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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. At the same time, 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 certifications, including the grading
warranties offered by GCAL and the security benefits of Gemprint,
we
believe we can cross-market GCAL to the AGL relationships. As a
result of those cross-marketing efforts, Christies, which is a long-time
AGL customer, will soon begin including, in its diamond auction
catalogues, descriptions or copies of GCAL grading certificates to
promote
the sale of GCAL certified-diamonds at its
auctions.
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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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•
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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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24
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:
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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, 2007, we employed 47 experts in our authentication and grading
operations, who have from 3 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
25
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
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 two years 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 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 24 person staff, to providing personalized
customer service and support in a timely manner handling approximately 400
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 5:00 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.
26
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 important a 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 C#, 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, physical product movement, accounting and financial functions,
data
warehousing and other tasks. During the fiscal year ended June 30, 2007, these
systems tracked the authentication and grading process and generated records
and
data for over 3.1 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
over
50 Dell PowerEdge Servers with RAID protected storage, along with multiple
fully
redundant SQL Server 2000 and 2005 high-availability database clusters
supporting over four terabytes of storage. The majority of this 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
27
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 with an aggregate of
47
megabits of total Internet bandwidth using multiple layers of Internet firewall
protection, including five Cisco PIX firewalls (across multiple locations).
We
maintain a multi-tiered antivirus and anti-spam SMTP infrastructure scanning
all
incoming mail through multiple different AV engines. Critical systems are backed
up nightly using a backup infrastructure with a thirty terabyte capacity
(expandable through drive upgrades to hundreds of terabytes). The network
servers and infrastructure are managed by administrators certified by Microsoft,
Cisco and CompTIA.
Although
we have limited redundancy with our remote computer systems in both the New
York, NY and Santa Barbara, CA offices, we do not have real-time fully redundant
computer systems at a location that is remote from Southern California, where
our primary 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, primarily at
multi-venue auctions. 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.
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 $599,000, 751,000 and $2,332,000 in
fiscal years ended June 30, 2007, 2006 and 2005, 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, 2007, we had 248 full-time employees and 46 part-time employees, of
which 201 were employed in our authentication and grading-related businesses,
including our 47 experts and 24 customer service and support personnel. The
other employees included 15 in information services, 5 in marketing, 3 in our
CCE subscription business, 25 in our Expos business, of which 24 were
part-time employees, and 45 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.
28
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, which are 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 the requests we receive 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. For example, the number of coins submitted to us for
grading declined during 2007 relative to 2006 and 2005, due in part to a decline
in the popularity of certain coin grading programs.
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 and related services accounted for approximately
58%,
65% and 69% of our net revenues in fiscal 2007, 2006 and 2005,
respectively. In fiscal 2005, coin grading was the segment of our
authentication and grading business that experienced the most significant
increases in net revenues; whereas during
29
fiscal
2006 and 2007, coin grading revenues experienced essentially no growth. We
believe that the fluctuations in coin grading submissions have been due, at
least in part, to the volatility of and uncertainties regarding the performance
of the stock markets, the level of interest rates, and fluctuations in the
value of the U.S. Dollar, which can lead investors to shift some of their
investments between stocks and bonds and 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 14% of our total net
revenues.
During
the year ended June 30, 2007, five of our coin authentication and grading
customers accounted for approximately 14% of our total net
revenues. As a result, the loss of any of those customers, or a lower
level of grading submissions by any of those customers, may cause our net
revenues to decline and, therefore, could harm our profitability.
Our currency,
diamond and colored gemstone 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 and colored gemstone businesses in November 2005
and August 2006, respectively, and we started our currency authentication and
grading business in March 2005. These businesses have yet to make a
material contribution to our net revenues. To date,
our currency, diamond and colored gemstone 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, in fiscal 2007, we acquired
two
other businesses, a colored gemstone grading business and a trade show
management company. The purchase of these new businesses will present
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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•
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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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•
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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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•
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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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•
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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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•
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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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30
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.
|
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 on September 30,
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 plan to seek a renewal of the existing line of
credit or to establish a new line of credit at the time the existing line of
credit expires at September 30, 2007. However, there is no assurance
that we will succeed in doing so.
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
31
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 which provides that, if a diamond graded by us is
submitted for re-grading within two years and, on re-grading 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, as
we 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.
32
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, to
date, 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. Therefore, we are currently evaluating new vendors, as an
alternative source of supply for certain of our high-volume
holders. 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.
33
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 continue to incur 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 accounting fees
and
other personnel costs 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:
|
|
•
|
increases
or decreases in number of collectibles or diamonds graded from period
to
period;
|
|
|
•
|
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;
|
|
|
•
|
general
economic conditions that affect the availability of disposable income
among collectors and consumers; and
|
|
|
•
|
the
actions of our competitors.
|
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 called 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. We subsequently increased the
dividend on two occasions, initially to $0.48 per common share per year, payable
in the amount of $0.12 per share per quarter, and in June 2007 to an annual
dividend rate of $1.00 per common share, payable in the amount of $0.25 per
share per quarter, beginning with the first quarter of fiscal year
2008. 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.
34
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:
|
|
•
|
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;
|
|
|
•
|
there
are limitations on who can call special meetings of our stockholders;
and
|
|
|
•
|
stockholders
may not take action by written
consent.
|
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. We lease approximately 7,300 and 2,133 square feet
in New York City under operating leases through November 2015 in connection
with our diamond grading business and through June 2007 with our colored
gemstone grading business, respectively. Following June 2007, the
operating lease for our colored gemstone business is on a month-to-month basis,
and we are in the process of renewing this lease. In connection with
our Expos shows management business, we lease approximately 1,000 square feet
in
Santa Barbara, CA under a lease agreement with a related party that commenced
on
July 1, 2006 and continues for a period of 3 years until June 30,
2009.
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, provided
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 was entitled to statutory damages that should be
determined by multiplying $750 times the 14,060 authentication certificates
on
which his name appeared without his consent, or approximately $10.5 million
in
total.
35
Oral
arguments took place at the Court of Appeals on June 26, 2007. On
August 30, 2007, the Appellate Court issued it decision in which it ruled that,
contrary to his assertions, Miller was not entitled to statutory damages of
$10.5 million. In reaching that decision, the Appellate Court found
that the use of Miller’s name by the Company constituted, at most, a single
violation of the statute in question and, therefore, Miller is not entitled
to
multiply $750.00 by the number of times his name was used. The Appellate
Court also ruled that Miller has the right to file a new trial in an effort
to
recover damages for the use by the Company of his name; however, in that lawsuit
he must prove that Collectors Universe violated the statute at issue or common
law and, if he succeeds in proving such a violation, he must show how, if at
all, and in what amount, if any, he was damaged as a result of that
violation. However, the Appellate Court ruled that in any new trial
that Miller might file, he cannot seek, as a measure of damages, to multiply
$750.00 by the number of times, if any, that Collectors Universe used his name
without his consent. We cannot predict whether Miller will file a new
trial.
The
Appellate Court's decision becomes final 30 days from the date it was
issued. Prior to that date, Miller could petition the Appellate Court to
reconsider its decision. At the end of the 30-day period, Miller will have
a period of 10 days within which to file a petition for review by the California
Supreme Court.
The
Company believes that, even if Miller does file a new trial, it will not incur
any material liability to Miller.
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.
36
|
Name
|
Age
|
Positions
|
||
|
Michael
R. Haynes
|
56
|
Chief
Executive Officer
|
||
|
David
G.
Hall
|
60
|
President
|
||
|
Joseph
J.
Wallace
|
47
|
Chief
Financial Officer
|
||
|
Michael
J.
Lewis
|
63
|
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.
37
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 and the cash dividends that we paid to our stockholders,
in
each of the fiscal quarters in the fiscal years ended June 30, 2007 and
2006:
|
Closing
Share Prices
|
Cash
Dividends
|
|||||||||||
|
Fiscal
2007
|
High
|
Low
|
Per
Share
|
|||||||||
|
First
Quarter
|
$ |
14.28
|
$ |
12.28
|
$ |
0.08
|
||||||
|
Second
Quarter
|
14.39
|
12.34
|
0.08
|
|||||||||
|
Third
Quarter
|
14.21
|
12.73
|
0.12
|
|||||||||
|
Fourth
Quarter
|
15.29
|
13.46
|
0.12
|
|||||||||
|
Closing
Share Prices
|
Cash
Dividends
|
|||||||||||
|
Fiscal
2006
|
High
|
Low
|
Per
Share
|
|||||||||
|
First
Quarter
|
$ |
17.54
|
$ |
12.58
|
$ |
-
|
||||||
|
Second
Quarter
|
16.14
|
11.78
|
-
|
|||||||||
|
Third
Quarter
|
17.56
|
13.73
|
-
|
|||||||||
|
Fourth
Quarter
|
16.18
|
13.44
|
0.08
|
|||||||||
The
Company had 108 holders of record of its common stock and approximately 2,134
beneficial owners on June 30, 2007.
Dividends. On
May 31, 2006, the Company adopted a dividend policy that called for the payment
of quarterly cash dividends of $0.08 per common share, for an expected annual
cash dividend of $0.32 per share. The first such quarterly cash dividend was
paid in the fourth quarter of fiscal 2006, and quarterly cash dividends of
$0.08
per share also were paid in the first and second quarters of fiscal 2007. The
quarterly cash dividend was increased to $0.12 per share, in the third quarter,
and dividends in that amount per share were paid in both the third and fourth
quarters of 2007.
In
June
2007, the Board of Directors approved another increase in the quarterly cash
dividend to $0.25 per common share, for an expected annual cash dividend to
stockholders of $1.00 per common share. The first of such quarterly
cash dividends of $0.25 per share was paid on September 7, 2007 to all
stockholders of record as of August 24, 2007.
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 stock buyback program that authorized 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
38
Company’s
common stock and the number of shares that become available for sale at prices
that the Company believes are attractive. During the years ended June
30, 2007 and 2006, the Company repurchased and retired 72,517 and 181,851
shares, respectively, for which it paid a total of approximately $949,000 and
approximately $2,628,000, respectively. No shares were purchased
pursuant to this program prior to March 2006.
No
shares
were purchased pursuant to this program during the quarter ended June 30, 2007
and, as of that date, the total dollar value of shares that could be purchased
in the future under this program was $6,437,285.
The
selected operating data for the fiscal years ended June 30, 2007, 2006 and
2005,
and the selected balance sheet data at June 30, 2007 and 2006, 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, 2004 and 2003 and the related
balance sheet data at June 30, 2005, 2004 and 2003 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 and $15,000 in other
directly-related costs. 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 $2,377,000.
On
November 8, 2005, the Company acquired Gem Certification & Appraisal Lab
(“GCAL”), a 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 $3,268,000 in cash for GCAL, DPL and the
publishing and other rights to Palmieri’s Market Monitor.
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 an
aggregate purchase price for Gemprint’s business and assets of $8,583,000 in
cash, which included 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.
Effective
July 1, 2006, the Company acquired the business of Expos Unlimited LLC
(“Expos”), a trade show management company that operates the Long Beach and the
Santa Clara, California coins, stamp and collectibles
expositions. The aggregate purchase price paid for this business was
$2,475,000 in cash. Based on the future revenues of Expos, the
Company may be obligated to make contingency payments up to an aggregate of
$750,000 after five years, or July 2011.
On
August
18, 2006, the Company acquired American Gemological Laboratories (“AGL”), an
international colored gemstone certification and grading
laboratory. The Company paid an aggregate acquisition price of
$3,947,000 in cash for AGL, and, depending on AGL’s future revenues, may become
obligated to make contingent payments up to an aggregate of $3,500,000 over
the
next five years.
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 2,195,856 shares of our common stock at a public offering price of
$17.50 per share The net proceeds to us from the sale of the shares
in the offering, after payment of underwriting commissions and offering
expenses, were approximately $35,657,000.
39
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, 2007 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 2003 through 2007, 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 included the operations of CTP (a
business we acquired as part of the CCE acquisition) for the three month period
ended November 30, 2005, when we sold that business.
40
|
Years
Ended June 30,
|
||||||||||||||||||||
|
(in
thousands, except per share data)
|
||||||||||||||||||||
|
2007(1)
|
2006(1)
|
2005
|
2004
|
2003
|
||||||||||||||||
|
Consolidated
Statement of Operations Data:
|
||||||||||||||||||||
|
Net
revenues
|
$ |
40,452
|
$ |
36,914
|
$ |
33,607
|
$ |
26,420
|
$ |
20,337
|
||||||||||
|
Cost
of revenues
|
19,297
|
14,890
|
12,239
|
10,322
|
8,754
|
|||||||||||||||
|
Gross
profit
|
21,155
|
22,024
|
21,368
|
16,098
|
11,583
|
|||||||||||||||
|
Selling,
general and administrative expenses
|
23,137
|
17,986
|
14,380
|
11,829
|
11,492
|
|||||||||||||||
|
Amortization
of intangible assets
|
950
|
269
|
21
|
-
|
-
|
|||||||||||||||
|
Operating
income
(loss)
|
(2,932 | ) |
3,769
|
6,967
|
4,269
|
91
|
||||||||||||||
|
Interest
income, net
|
2,144
|
2,346
|
906
|
135
|
94
|
|||||||||||||||
|
Other
income (expense), net
|
6
|
22
|
26
|
(25 | ) | (6 | ) | |||||||||||||
|
Income
(loss) before provision (benefit) for income taxes
|
(782 | ) |
6,137
|
7,899
|
4,379
|
179
|
||||||||||||||
|
Provision
(benefit) for income taxes
|
(39 | ) |
2,733
|
3,141
|
1,581
|
(557 | ) | |||||||||||||
|
Income
(loss) from continuing operations
|
(743 | ) |
3,404
|
4,758
|
2,798
|
736
|
||||||||||||||
|
Income
(loss) from discontinued operations, net of gain
on
sales of discontinued
businesses (net of income taxes)
|
228
|
296
|
60
|
(1,068 | ) | (2,202 | ) | |||||||||||||
|
Cumulative
effect of accounting change (net of income taxes)
|
-
|
-
|
-
|
-
|
(8,973 | ) | ||||||||||||||
|
Net
income (loss)
|
$ | (515 | ) | $ |
3,700
|
$ |
4,818
|
$ |
1,730
|
$ | (10,439 | ) | ||||||||
|
Net
income (loss) per basic share:
|
||||||||||||||||||||
|
Income
(loss) from continuing operations
|
$ | (0.09 | ) | $ |
0.40
|
$ |
0.68
|
$ |
0.45
|
$ |
0.12
|
|||||||||
|
Income
(loss) from discontinued operations, net of gain
on
sales of discontinued
businesses (net of income taxes)
|
0.03
|
0.04
|
0.01
|
(0.17 | ) | (0.35 | ) | |||||||||||||
|
Cumulative
effect of accounting change (net of income taxes)
|
-
|
-
|
-
|
-
|
(1.45 | ) | ||||||||||||||
|
Net
income (loss)
|
$ | (0.06 | ) | $ |
0.44
|
$ |
0.69
|
$ |
0.28
|
$ | (1.68 | ) | ||||||||
|
Net
income (loss) per diluted share:
|
||||||||||||||||||||
|
Income
(loss) from continuing operations
|
$ | (0.09 | ) | $ |
0.39
|
$ |
0.64
|
$ |
0.44
|
$ |
0.12
|
|||||||||
|
Income
(loss) from discontinued operations, net of gain on sales
of
discontinued businesses (net of income taxes)
|
0.03
|
0.03
|
0.01
|
(0.17 | ) | (0.35 | ) | |||||||||||||
|
Cumulative
effect of accounting change (net of income taxes)
|
-
|
-
|
-
|
-
|
(1.43 | ) | ||||||||||||||
|
Net
income
(loss)
|
$ | (0.06 | ) | $ |
0.42
|
$ |
0.65
|
$ |
0.27
|
$ | (1.66 | ) | ||||||||
|
Weighted
average shares outstanding:
|
||||||||||||||||||||
|
Basic
|
8,367
|
8,473
|
7,013
|
6,170
|
6,205
|
|||||||||||||||
|
Diluted
|
8,367
|
8,782
|
7,452
|
6,463
|
6,294
|
|||||||||||||||
|
Cash
dividends paid on common stock(2)
|
$ |
3,350
|
$ |
674
|
$ |
-
|
$ |
-
|
$ |
-
|
||||||||||
|
Cash
dividends paid per share of common stock
|
$ |
0.40
|
$ |
0.08
|
$ |
-
|
$ |
-
|
$ |
-
|
||||||||||
|
Balance
Sheet Data:
|
||||||||||||||||||||
|
Cash
and cash equivalents
|
$ |
42,386
|
$ |
52,110
|
$ |
65,439
|
$ |
21,454
|
$ |
4,482
|
||||||||||
|
Working
capital - continuing operations
|
42,208
|
54,812
|
68,576
|
22,308
|
4,566
|
|||||||||||||||
|
Working
capital – discontinued operations
|
-
|
75
|
338
|
991
|
13,803
|
|||||||||||||||
|
Goodwill
and Intangibles – continuing
|
23,249
|
14,473
|
79
|
-
|
-
|
|||||||||||||||
|
Total
assets – continuing operations
|
78,101
|
78,138
|
75,123
|
32,690
|
15,926
|
|||||||||||||||
|
Total
assets – discontinued operations
|
-
|
83
|
411
|
1,384
|
16,365
|
|||||||||||||||
|
Stockholders'
equity
|
68,891
|
71,906
|
70,566
|
29,366
|
26,319
|
|||||||||||||||
|
1.
|
Effective
July 1, 2005, the Company adopted SFAS 123R, using the modified
prospective transition method. Accordingly, in fiscal year
2006, cost of revenues and selling, general and administrative costs
include $302,000 and $368,000, respectively, of stock-based compensation
expense that was not required to be recognized as an expense in prior
years. During fiscal year 2007, cost of revenues and selling, general
and
administrative costs include $194,000 and $532,000, respectively,
of
stock-based compensation expense that was not required to be recognized
prior to FY2006. In addition, $164,000 was recognized during
fiscal year 2007 as general and administrative expenses for restricted
shares issued during FY 2007.
|
|
2.
|
The
payment of quarterly cash dividends commenced in the fourth quarter
of
fiscal year 2006 and cash dividends were paid in each of the four
quarters
of fiscal year 2007. See “Market for Common Stock and Related
Stockholders Matters – Dividends” in Item 5 of this Report
above.
|
41
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 grading and authentication services to
dealers and collectors of high-value coins, sportscards, autographs, stamps,
and
vintage U.S. currency notes and to sellers and purchasers of diamonds and
colored gemstones. We believe that our authentication and grading
services add value to these collectibles and to diamonds and colored gemstones
by enhancing their marketability and, thereby, providing increased liquidity
to
the dealers, collectors and consumers that own, buy and sell them.
We
principally generate revenues from the fees paid for our authentication and
grading services. To a much lesser extent, we generate revenues from:
the sale of advertising on our websites; the sale of printed publications and
collectibles price guides and advertising in such publications; the sale of
Collectors Club membership subscriptions; from subscriptions to our CCE
dealer-to-dealer Internet bid-ask market for certified coins; and the
collectibles trade show conventions that we conduct.
Recent
Business Acquisitions. 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 an aggregate purchase price of $515,000.
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 $2,377,000.
On
November 8, 2005, the Company acquired Gem Certification & Appraisal Lab
(“GCAL”), a 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 $3,268,000 in cash for GCAL, DPL and the
publishing and other rights to Palmieri’s Market Monitor.
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 an
aggregate purchase price for Gemprint’s business and assets of $8,583,000 in
cash, 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.
42
Effective
July 1, 2006, we acquired all of the outstanding ownership interests of Expos
Unlimited LLC (“Expos”), a California limited liability company engaged in the
business of owning and conducting collectibles trade shows and conventions,
for
an aggregate purchase price of $2,475,000 in cash. Depending on the
future revenue performance of Expos, the Company may become obligated to make
contingent payments to those former owners of up to an aggregate of $750,000
in
July 2011. Expos owns and operates the Long Beach Coin, Stamp &
Collectibles Expo (“Long Beach”) and the Santa Clara Coin, Stamp &
Collectibles Expo (“Santa Clara”), which comprise, in total, five trade shows
that are held annually. At both the Long Beach and Santa Clara Expos,
leading numismatic, philatelic and collectibles dealers offer rare and valuable
collectibles to the public, while auctions of coins and currency are conducted
by third party auction companies alongside exhibitions of major numismatic
and
collectible interest. We offer on-site authentication and grading
services for the collectibles exhibited and bought and sold at those shows,
with
same day turnaround.
On
August
18, 2006, we acquired American Gemological Laboratories (“AGL”), an
international 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 $3,947,000 in cash for AGL, and, depending on the future revenue
performance of AGL, the Company may become obligated to make payments of up
to
an aggregate of an additional $3,500,000 over the next five years.
The
operating results of these acquired businesses have been consolidated into
our
operating results from the respective dates of their acquisition
Discontinued
Operations. As previously disclosed, the remaining activities
resulting from our divestiture of our collectibles auctions and sales businesses
have been classified as discontinued operations and the discussion that follows
focuses almost entirely on our authentication and grading businesses, which
comprise substantially all of our continuing operations. During the
year ended June 30, 2007, we generated cash of $599,000 from the sales of our
discontinued collectibles sales businesses and the liquidation of the
inventories and accounts receivable of those businesses that were not included
in those sales. All of the remaining assets of those businesses,
which totaled approximately $83,000 at June 30, 2006, were either liquidated
during the fiscal year ended June 30, 2007 or fully reserved for on our balance
sheet at June 30, 2007.
Factors
That Can Affect our Financial Position and Operating
Results
Factors
that Can Affect our Revenues. Our revenues are comprised of
(i) fees generated by the authentication and grading of high-value
collectibles, and other high value assets consisting of diamonds and colored
gemstones, and (ii) to a lesser extent, revenues from sales of collectibles
club memberships; advertising on our websites and in printed publications and
collectibles price guides; subscription-based revenues primarily related to
our
CCE dealer-to-dealer Internet bid-ask market for certified coins; and fees
earned from the management, operation and promotion of collectibles trade shows
and conventions.
Our
authentication and grading revenues, which accounted for approximately 84%
of
our total net revenues in the fiscal year ended June 30, 2007, are primarily
affected by (i) the volume and mix, among coins, sportscards and other
collectibles and high value assets, of authentication and grading submissions;
(ii) in the case of coins and sportscards, the “turn-around” times
requested by our customers, because we charge higher fees for faster service
times and (iii) the mix of authentication and grading submissions between
vintage or “classic” coins and sportscards, on the one hand, and modern coins
and sportscards, on the other hand, because dealers generally request faster
turn-around times for vintage or classic coins and sports cards than they do
for
modern submissions, as vintage or classic collectibles are of significantly
higher value and are more saleable by dealers than modern coins and
sportscards.
Five
of
our coin authentication and grading customers accounted for approximately 14%
and 22%, respectively, of our total net revenues in the fiscal years ended
June
30, 2007 and 2006. 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 fiscal year ended June 30, 2007, revenue
earned from our trade show related activities decreased by approximately
$1,660,000 as a result of a lower volume of authentication and grading
submissions at trade shows primarily by these customers. We believe
that this decline was primarily the result of lower gold prices in the first
quarter of the current fiscal year, compared with the three months ended June
30, 2006, which reduced the volume of coin transactions and, therefore, the
demand for our services at those shows. However, trade show activity
can vary depending on a number of factors, including the timing of the shows
or
short-term decisions made by dealers during shows.
43
Factors
Affecting our Gross Profit Margins. The gross profit margins on
authentication and grading submissions also are primarily affected by
(i) the volume and mix, among coins, sportscards and other collectibles and
high value assets, of authentication and grading submissions, because we
generally realize higher margins on coin submissions than on submissions of
other collectibles and high-value assets; (ii) in the case of coins and
sportscards, the “turn-around” times requested by our customers, because we
charge higher fees for faster service times, (iii) the mix of
authentication and grading submissions between vintage or “classic” coins and
sportscards, on the one hand, and modern coins and sportscards, on the other
hand, because dealers generally request faster turn-around times for vintage
or
classic coins and sports cards than they do for modern submissions, and
(iv) the stage of development and the seasonality of our newly acquired
businesses. Furthermore, because a significant proportion of our
direct costs are fixed in nature, our gross profit is also affected by the
overall volume of collectibles authenticated and graded in any
period.
Impact
of Economic Conditions on Financial Performance. We generate
substantially all of our revenues from the collectibles and the diamond and
colored gemstone markets. Accordingly, our operating results are
affected by the financial performance of those markets, which depends to a
great
extent on (i) discretionary consumer spending and, hence, on the
availability of disposable income, (ii) on other economic conditions, including
prevailing interest and inflation rates, which affect consumer confidence,
and
(iii) the performance and volatility of the gold and other precious metals
markets and the stock markets. These conditions primarily affect the
volume of purchases and sales of collectibles which, in turn, affects the volume
of authentication and grading submissions to us, because our services facilitate
commerce in collectibles. Accordingly, factors such as improving
economic conditions which usually result in increases in disposable income
and
consumer confidence, and volatility in and declines in the prices of stocks
and
a weakening in the value of the U.S. Dollar, which often lead investors to
increase their purchases of precious metals, such as gold bullion and other
coins and collectibles, usually result in increases in submissions of
collectibles for our services. By contrast, the volume of
collectibles sales and purchases and, therefore, the volume of authentication
and grading submissions, usually decline during periods characterized by
recessionary economic conditions and by declines in disposable income and
consumer confidence or by increasing stock prices and relative stability in
the
stock markets.
44
The
following table provides information regarding the respective number of coins,
sportscards, autographs, currency, diamonds and colored gemstones that we graded
or authenticated in the fiscal years ended June 30, 2007, 2006, and 2005 and
their estimated values, which are the amounts at which those coins, sportscards
and stamps and other high value assets were insured by the dealers and
collectors who submitted them to us for grading and authentication.
|
Units
Processed
|
||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||||||
|
Coins
|
1,559,000
|
50 | % |
1,789,000
|
55 | % |
1,670,000
|
58 | % | |||||||||||||||
|
Sportscards
|
1,262,000
|
41 | % |
1,199,000
|
37 | % |
1,084,000
|
38 | % | |||||||||||||||
|
Autographs
|
170,000
|
5 | % |
181,000
|
6 | % |
77,000
|
3 | % | |||||||||||||||
|
Stamps
|
66,000
|
2 | % |
38,000
|
1 | % |
26,000
|
1 | % | |||||||||||||||
|
Currency(1)
|
36,000
|
1 | % |
29,000
|
1 | % |
3,000
|
-
|
||||||||||||||||
|
Diamonds(2)
|
25,000
|
1 | % |
5,000
|
-
|
-
|
-
|
|||||||||||||||||
|
Colored
Gemstones(3)
|
1,000
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||
|
Total
|
3,119,000
|
100 | % |
3,241,000
|
100 | % |
2,860,000
|
100 | % | |||||||||||||||
|
Declared
Values (000)
|
||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||||||
|
Coins
|
$ |
1,435,000
|
82 | % | $ |
1,613,000
|
90 | % | $ |
1,191,000
|
91 | % | ||||||||||||
|
Sportscards
|
88,000
|
5 | % |
75,000
|
4 | % |
66,000
|
5 | % | |||||||||||||||
|
Autographs
|
24,000
|
1 | % |
15,000
|
1 | % |
26,000
|
2 | % | |||||||||||||||
|
Stamps
|
12,000
|
-
|
21,000
|
1 | % |
17,000
|
1 | % | ||||||||||||||||
|
Currency(1)
|
32,000
|
2 | % |
43,000
|
2 | % |
8,000
|
1 | % | |||||||||||||||
|
Diamonds(2)
|
97,000
|
6 | % |
27,000
|
2 | % |
-
|
-
|
||||||||||||||||
|
Colored
Gemstones(3)
|
62,000
|
4 | % |
-
|
-
|
-
|
-
|
|||||||||||||||||
|
Total
|
$ |
1,750,000
|
100 | % | $ |
1,794,000
|
100 | % | $ |
1,308,000
|
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 acquiredGCAL
and Gemprint.
|
|
|
|
|
3.
|
We
commenced the authentication and grading of colored gemstones in
the first
quarter of 2007, when we acquired
AGL.
|
45
Overview
of Fiscal 2007 Operating Results
As
the
following table indicates, we sustained an operating loss of nearly
$3.0 million in fiscal 2007 as compared to operating income of nearly
$3.8 million in fiscal 2006, despite a 9.6% increase in net 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
administrative expenses and amortization of intangible assets. As a
result we sustained a loss from continuing operations of $743,000 in fiscal
2007
as compared to income from continuing operations of $3.4 million in fiscal
2006,
primarily as a result of the above factors that impacted operating income,
as
well as decreased interest income earned in fiscal 2007.
|
2007
|
2006
|
2007
vs 2006
|
||||||||||||||||||
|
Amount
|
%
|
Amount
|
%
|
%
of Change
|
||||||||||||||||
|
Net
revenues
|
$ |
40,452
|
100.0 | % | $ |
36,914
|
100.0 | % | 9.6 | % | ||||||||||
|
Cost
of revenues
|
19,297
|
47.7 | % |
14,890
|
40.3 | % | 29.6 | % | ||||||||||||
|
Gross
profit
|
21,155
|
52.3 | % |
22,024
|
59.7 | % | (3.9 | )% | ||||||||||||
|
Selling
and marketing expenses
|
7,497
|
18.5 | % |
4,918
|
13.4 | % | 52.4 | % | ||||||||||||
|
General
and administrative expenses
|
15,640
|
38.7 | % |
13,068
|
35.4 | % | 19.7 | % | ||||||||||||
|
Amortization
of intangible assets
|
950
|
2.3 | % |
269
|
0.7 | % | 253.1 | % | ||||||||||||
|
Operating
income (loss)
|
(2,932 | ) | (7.2 | )% |
3,769
|
10.2 | % | (177.8 | )% | |||||||||||
|
Interest
income, net
|
2,144
|
5.3 | % |
2,346
|
6.3 | % | (8.6 | )% | ||||||||||||
|
Other
income
|
6
|
-
|
22
|
0.1 | % | (72.7 | )% | |||||||||||||
|
Income
before provision for income taxes
|
(782 | ) | (1.9 | )% |
6,137
|
16.6 | % | (112.7 | )% | |||||||||||
|
Provision
(benefit) for income taxes
|
(39 | ) | (0.1 | )% |
2,733
|
7.4 | % | (101.4 | )% | |||||||||||
|
Income
(loss) from continuing operations
|
(743 | ) | (1.8 | )% |
3,404
|
9.2 | % | (121.8 | )% | |||||||||||
|
Income
from discontinued operations(1)
|
228
|
0.5 | % |
296
|
0.8 | % | (23.0 | )% | ||||||||||||
|
Net
income (loss)
|
$ | (515 | ) | (1.3 | )% | $ |
3,700
|
10.0 | % | (113.9 | )% | |||||||||
|
Net
income (loss) per diluted share:
|
||||||||||||||||||||
|
Income
from continuing operations
|
$ | (0.09 | ) | $ |
0.39
|
(123.2 | )% | |||||||||||||
|
Income
from discontinued operations(1)
|
0.03
|
0.03
|
-
|
|||||||||||||||||
|
Net
income
(loss)
|
$ | (0.06 | ) | $ |
0.42
|
(114.2 | )% | |||||||||||||
|
(1)
|
Net
of gain on sales of discontinued businesses (net of income
taxes).
|
The
decline in our gross margin in fiscal 2007 was due primarily to (i) an
increase in coin grader-related compensation costs, which are classified as
costs of revenues in our statements of operations, (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) the early stage of our diamond and colored gemstone
businesses, as we build capacity in anticipation of increased revenues in future
periods.
The
increase in selling and marketing costs in fiscal 2007 was primarily due to
(i) costs of approximately $1,863,000, primarily related to the promotion
and marketing of our new businesses; and (ii) increased collectibles
trade-show expenses and promotional expenses, due primarily to an increase
in
the number of collectibles trade shows in which we participated in fiscal 2007
and increased resources allocated to each show.
The
increase in general and administrative expenses in fiscal 2007, was primarily
attributable to expenses incurred in connection with (i) the acquisition
and operation of newly acquired businesses, (ii) investments in
infrastructure to support our expanded operations, and (iii) stock-based
compensation costs arising from new option grants and the issuance of restricted
shares in fiscal 2007.
The
increase in amortization of intangible assets, primarily reflects amortization
expense from (i) business acquisitions; and (ii) capitalized software
projects.
These,
as
well as other factors affecting our operating results in fiscal 2007, are
described in more detail below.
46
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 and notes receivable and inventories, we must make
judgments, 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 circumstances on which our 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 or conditions, such as 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.
During
fiscal year 2006 and in the first quarter of fiscal year 2007, we acquired
certain businesses and, in accordance with GAAP, we accounted for those
acquisitions using the purchase method of accounting. That accounting
method required us to allocate the amount paid for those businesses in excess
of
the fair value of the assets and liabilities acquired and assumed, and to
classify that excess as goodwill. In accordance with GAAP, we
evaluate goodwill for impairment at least annually or more frequently if we
believe that goodwill has been impaired in the interim due to changing facts
or
events (see “Long-Lived Assets” below). Other intangible
assets that are separable from goodwill and have definite lives are subject
to
amortization over their remaining useful lives. Indefinite-lived
intangible assets are subject to on-going evaluation for
impairment. Management formally evaluates the carrying value of its
goodwill and other indefinite-lived intangible assets for impairment on the
anniversary date of each of the acquisitions that gave rise to the recording
of
such assets. In the event it was determined, from any such impairment
analysis, that the estimated fair value of any such asset had declined below
its
carrying value, we would be required to recognize an impairment charge that
would have the effect of reducing our income in the period when that charge
was
recognized.
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.
47
Revenue
Recognition Policies. We generally record revenue at the time of
shipment of the authenticated and graded collectible or high-value assets to
the
customer. Many of our authentication and grading customers prepay our
authentication and grading fees when they submit their collectible items to
us
for authentication and grading. We record those prepayments as
deferred revenue until their graded collectibles are shipped back to
them. At that time, we record the revenues from the authentication
and grading services we have performed for the customer and deduct this amount
from deferred revenue. For certain dealers to whom we extend open account
privileges, we record revenue at the time of shipment of the authenticated
and
graded collectible to the dealer.
With
respect to our Expos trade show business, we recognize revenue generated by
the
promotion, management and operation of collectibles conventions and trade shows
in the periods in which the shows take place.
A
portion
of our net revenues are comprised of subscription fees paid by customers for
a
membership in our Collectors Club. Those memberships entitle members
access to our on-line and printed publications, and sometimes also to vouchers
for free grading services. We record revenue for this multi-element
service arrangement in accordance with EITF 00-21, Accounting
for Revenue Arrangements With Multiple Deliverables, by recognizing
approximately 60% of the subscription fee in the month following the membership
purchase, on the basis that Collectors Club members typically utilize their
vouchers for free grading services within 30 days of subscribing for
memberships. The balance of the membership fee is recognized as
revenue over the life of the membership, which can range from one to two
years. We evaluate, at least semi-annually, the relative fair values
of the deliverables and the percentage factors used to allocate the membership
fee between the grading and the publication services provided under this
membership service.
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 or distributors who submit collectibles or high-value assets to us
for
authentication and grading on a recurring basis. In addition,
primarily in connection with our coin dealer financing programs, we make
advances or extend credit under notes receivable arrangements. We
regularly review our accounts and notes receivable, estimate the amount of,
and
establish an allowance for, uncollectible amounts in each quarterly
period. The amount of that allowance is based on several factors,
including the age and extent of significant past due amounts, and in the case
of
notes receivable, the current value of the collateral we hold as security for
the payment obligations under the notes receivable, and known conditions or
trends that may affect the ability of account debtors or note obligors to pay
their accounts or notes receivable balances. Each quarter we review
estimates of uncollectible amounts and such economic or other conditions or
trends in order to enable us to determine whether or not to adjust the amount
of
the allowance. For example, if the financial condition of certain
dealers or economic conditions were to deteriorate, adversely affecting their
ability to make payments on their accounts or notes, increases in the allowance
may be required. Since the allowance is created by recording a charge
against income that is reflected in general and administrative expenses, an
increase in the allowance will cause a decline in our operating results in
the
period when the increase is recorded.
Inventory
Valuation Reserve. Our collectibles inventories are valued at
the lower of cost or fair value and have been reduced by an inventory valuation
allowance to provide for potential declines in the value of those
inventories. The amount of the allowance is determined and is
periodically adjusted on the basis of market knowledge, historical experience
and estimates concerning future economic conditions or trends that may impact
the sale value of the collectibles inventories. Additionally, due to
the relative uniqueness of some of the collectibles included in our collectibles
inventory, valuation of such collectibles often involves judgments that are
more
subjective than those that are required when determining the market values
of
more standardized products.
If
there
were to be an economic downturn or there were to
occur other events or circumstances that are likely to
make it more difficult to sell, or that would lead us to reduce the
sales prices of, those collectibles,
it may become necessary to increase the reserve. Increases in this
reserve will cause a decline in operating results, because such increases are
recorded by charges against income.
Grading
Warranty Costs. We offer a limited warranty covering the coins,
sportscards, stamps and currency that we authenticate and
grade. Under the warranty, if any collectible that was previously
authenticated and graded by us is later submitted to us for re-grading and
either (i) receives a lower grade upon that resubmittal or (ii) is
determined not to have been authentic, we will offer to purchase the collectible
or pay the difference in value of the item at its original grade as compared
with its lower grade. However, this warranty is voided if the
collectible, upon
48
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 two
years’ 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 a definitive-lived asset is impaired, we make an
estimate of the future undiscounted cash flows expected to result from the
use
of that asset and its eventual disposition 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. During fiscal 2007, we recognized approximately
$55,000 in impairment charges related to fixed assets.
Stock-Based
Compensation. We recognize share-based compensation expense
based on the fair value recognition provision of SFAS No. 123(R),
Share-Based Payment, using the Black-Scholes option valuation
method. Under that method, assumptions are made with respect to the
expected lives of the options or other stock awards 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
an estimated forfeiture rate that we expect will occur over the vesting period,
which we estimate on the basis of historical forfeiture experience or other
factors that could affect future forfeitures. Once we determine the
compensation expense of a stock award, that expense is recognized in our
Consolidated Statements of Operations over its vesting period using the
straight-line attribution method. During fiscal 2007, we issued
restricted shares to outside members of the Board of Directors and to our CEO
and, accordingly, we recognized stock-based compensation over the vesting period
of such restricted shares, based upon the closing stock prices of the shares
on
their respective dates of the grant, net of an estimated forfeiture
rate.
Capitalized
Software. In the fiscal year 2007 and 2006, we capitalized
approximately $1,483,000 and $421,000, respectively, of software development
costs related to a number of in-house software development projects, in
accordance with Statement of Position (“SOP”) 98-1, Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use. SOP
98-1 requires that certain costs incurred, either from internal or external
sources, be capitalized as part of intangible assets and amortized on a
straight-line basis over the useful life of the software. Planning,
training, support and maintenance costs incurred either prior to or following
the implementation phase are recognized as expense in the period in which they
are incurred. During the fiscal year ended June 30, 2007 and 2006, we
recorded approximately $193,000 and $11,000, respectively, as amortization
expense related to such capitalized software projects. We evaluate
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.
Income
Taxes and Deferred Tax Assets. 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 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. At June 30, 2006 and 2007,
approximately $1,756,000 and $1,020,000, respectively, were recorded as deferred
tax assets, and management believes that it is more likely than not that these
deferred tax assets will be realized in the future. As of June 30,
2006 and 2007, there was $0 and $22,000, respectively, recorded as a valuation
allowance. At June 30, 2007, we recorded a deferred tax liability in
the amount of $869,000, primarily related to the acquisition of
AGL.
49
Results
of Operations
The
following table sets forth certain financial data, expressed as a percentage
of
net revenues, derived from our Consolidated Statements of Operations for the
respective periods indicated below:
|
Fiscal
Years Ended June 30,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Net
revenues
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||
|
Cost
of revenues
|
47.7 | % | 40.3 | % | 36.4 | % | ||||||
|
Gross
profit
|
52.3 | % | 59.7 | % | 63.6 | % | ||||||
|
Operating
expenses:
|
||||||||||||
|
Selling
and marketing
expenses
|
18.5 | % | 13.4 | % | 10.5 | % | ||||||
|
General
&
administrative
expenses
|
38.7 | % | 35.4 | % | 32.3 | % | ||||||
|
Amortization
of intangible
assets
|
2.3 | % | 0.7 | % | 0.1 | % | ||||||
|
Total
operating expenses
|
59.5 | % | 49.5 | % | 42.9 | % | ||||||
|
Operating
income (loss)
|
(7.2 | )% | 10.2 | % | 20.7 | % | ||||||
|
Interest
income, net
|
5.3 | % | 6.4 | % | 2.7 | % | ||||||
|
Other income
|
-
|
-
|
0.1 | % | ||||||||
|
Income
(loss) before provision for income taxes
|
(1.9 | )% | 16.6 | % | 23.5 | % | ||||||
|
Provision
(benefit) for income taxes
|
(0.1 | )% | 7.4 | % | 9.3 | % | ||||||
|
Income
(loss) from continuing operations
|
(1.8 | )% | 9.2 | % | 14.2 | % | ||||||
|
Income
from discontinued operations, net of gain on sales of discontinued
businesses (net of income taxes)
|
0.5 | % | 0.8 | % | 0.1 | % | ||||||
|
Net
income (loss)
|
(1.3 | )% | 10.0 | % | 14.3 | % | ||||||
Net
Revenues. Grading and authentication fees consist primarily of
fees generated from the authentication and grading of high-value collectibles
and high-value assets. Fees generated from the authentication and
grading of collectibles include coins, sportscards, autographs, stamps and
currency and for high-value assets, diamonds and colored
gemstones. To a lesser extent, we generate other-related service
revenues from sales of collectibles club memberships; the sale of advertising
on
our websites and in printed publications and collectibles price guides;
subscription-based revenues primarily related to our CCE dealer-to-dealer
Internet bid-ask market for certified coins; and fees earned from promoting,
managing and operating collectibles conventions. Net revenues are
determined net of discounts and allowances.
The
following tables set forth our total net revenues for the fiscal years ended
June 30, 2007, 2006 and 2005, broken out between grading and authentication
services and other related services:
|
2007
vs. 2006
|
||||||||||||||||||||||||
|
2007
|
2006
|
Increase
(Decrease)
|
||||||||||||||||||||||
|
Amount
|
%
of Net
Revenues
|
Amount
|
%
of Net
Revenues
|
Amount
|
%
of Net
Revenues
|
|||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||
|
Grading
and authentication fees
|
$ |
34,003
|
84.1 | % | $ |
33,221
|
90.0 | % | $ |
782
|
2.4 | % | ||||||||||||
|
Other
related services
|
6,449
|
15.9 | % |
3,693
|
10.0 | % |
2,756
|
74.6 | % | |||||||||||||||
|
Total
net revenues
|
$ |
40,452
|
100.0 | % | $ |
36,914
|
100.0 | % | $ |
3,538
|
9.6 | % | ||||||||||||
|
2006
vs. 2005
|
||||||||||||||||||||||||
|
2006
|
2005
|
Increase
(Decrease)
|
||||||||||||||||||||||
|
Amount
|
%
of Net
Revenues
|
Amount
|
%
of Net
Revenues
|
Amount
|
%
of Net
Revenues
|
|||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||
|
Grading
and authentication fees
|
$ |
33,221
|
90.0 | % | $ |
30,955
|
92.1 | % | $ |
2,266
|
7.3 | % | ||||||||||||
|
Other
related services
|
3,693
|
10.0 | % |
2,652
|
7.9 | % |
1,041
|
39.2 | % | |||||||||||||||
|
Total
net revenues
|
$ |
36,914
|
100.0 | % | $ |
33,607
|
100.0 | % | $ |
3,307
|
9.8 | % | ||||||||||||
50
The
following tables set forth certain information regarding the increases or
decreases in net revenues in our larger markets (which are inclusive of revenues
from our other related services) and in the numbers of collectibles and diamonds
and colored gemstones that we authenticated and graded in the fiscal years
ended
June 30, 2007, 2006 and 2005:
|
2007
vs. 2006
|
||||||||||||||||||||||||||||||||
|
2007
|
2006
|
Increase
(Decrease)
|
||||||||||||||||||||||||||||||
|
%
of Net
|
%
of Net
|
Revenues
|
Units
Processed
|
|||||||||||||||||||||||||||||
|
Amount
|
Revenues
|
Amount
|
Revenues
|
Amounts
|
Percent
|
Number
|
Percent
|
|||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||||
|
Coins
|
$ |
23,317
|
57.6 | % | $ |
23,829
|
64.6 | % | $ | (512 | ) | (2.1 | )% | (230,000 | ) | (12.9 | )% | |||||||||||||||
|
Sportscards
|
8,797
|
21.8 | % |
8,461
|
22.9 | % |
336
|
4.0 | % |
63,000
|
5.3 | % | ||||||||||||||||||||
|
Other
(1)
|
8,338
|
20.6 | % |
4,624
|
12.5 | % |
3,714
|
80.3 | % |
45,000
|
17.8 | % | ||||||||||||||||||||
| $ |
40,452
|
100.0 | % | $ |
36,914
|
100.0 | % | $ |
3,538
|
9.6 | % | (122,000 | ) | (3.8 | )% | |||||||||||||||||
|
2006
vs. 2005
|
||||||||||||||||||||||||||||||||
|
2006
|
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
|
104.5 | % |
147,000
|
138.7 | % | ||||||||||||||||||||
| $ |
36,914
|
100.0 | % | $ |
33,607
|
100.0 | % | $ |
3,307
|
9.8 | % |
381,000
|
13.3 | % | ||||||||||||||||||
|
(1)
|
Consists
of revenues from the authentication and grading of autographs, stamps,
currency businesses and our CFC dealer financing business during
all
periods presented. Also includes revenues from (i) the CCE
subscription business from September 2, 2005, (ii) the authentication
and
grading of diamonds from November 2005, when we completed our acquisition
of GCAL, (iii) the collectibles convention business from July 2006,
when we completed our acquisition of Expos, and (iv) the
authentication and grading of colored gemstones from August 2006,
when we
completed our acquisition of AGL.
|
Fiscal
2007 vs. 2006
Revenues
increased by $3,538,000 or 9.6% to $40,452,000 in fiscal year 2007, compared
to
$36,914,000 in fiscal year 2006. This increase was attributable
primarily to (i) an increase of approximately $2,756,000, or 74.6%, in
revenues generated primarily by the non-grading related services, primarily
related to businesses we acquired in the fiscal year 2006 and first three months
of fiscal 2007, and (ii) an increase of approximately $782,000, or 2.4%, in
grading and authentication revenues. The increase in grading and
authentication revenues was largely attributable to increases in the volume
of
submissions of sportscards, other collectibles and diamonds and colored
gemstones, which more than offset a decline in coin authentication and grading
revenues. Approximately $2,200,000 of the increase in our fiscal 2007
revenues was generated by the collectibles convention business and our colored
gemstone grading business, AGL, both of which we acquired in the first three
months of fiscal 2007. Excluding the contribution made by those two
businesses, revenues grew by 3.6% in 2007 as compared to fiscal
2006.
The
74.6%
increase in revenues generated by our non-grading related service businesses
in
2007, as compared to fiscal 2006, was primarily attributable to
(i) increased sales of Collectors Club memberships and CCE subscriptions,
(ii) an increase in interest earned as a result of an increase in the
average amount of loans outstanding to dealers under our dealer finance program,
and (iii) revenues generated by our collectibles convention business that
was acquired at the beginning of fiscal 2007.
The
2.4%
increase in grading and authentication revenues was driven by a 6.4% increase
in
the average service price per unit for our grading and authentication
businesses, compared to the prior fiscal year, offset by a 3.8% decrease in
total units graded. Coin grading revenues decreased by 4.3% and the
number of units graded decreased by 12.9%, primarily driven by (i) a $1,660,000
decrease in show and invitational revenues (ii) a net $170,000 decrease in
revenue attributable to a decrease in First Strike/Bulk units graded, partially
offset by an
51
increase
in the average service fees earned on those units; (iii) a $880,000 increase
in
revenue due to an increase in the volume of vintage collectibles submissions;
and (iv) increases in other coin-related services. We believe the
reduction in the First Strike submissions was due to a number of factors,
including a dispute related to PCGS’ trademarked First Strike designation, which
has since been resolved.
For
sportscards, the 5.3% increase in the number of units graded was partially
offset by a 14.9% decrease in advertising revenue, and resulted in a 4.0%
increase in net revenues.
A
17.8%
increase in units graded and authenticated for other collectibles and diamonds
and colored gemstones resulted in a 35.5% increase in the grading and
authentication revenues generated by those businesses in 2007, as compared
to
2006, primarily driven by increases in the volume of diamond and stamp grading
submissions, as well as the contribution to our revenues of our colored gemstone
authentication and grading business, which we acquired in August of
2006.
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
(i) an increase of $2,266,000, or 7%, in grading and authentication
revenues, and (ii) an increase in revenues from other services that we sell
of approximately $1,041,000, or 39%, that was primarily attributable to revenues
generated by the 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 in
2006, excluding those four businesses, was 5% over fiscal 2005.
The
7%
increase in grading and authentication revenues in fiscal 2006 was driven by
a
13% increase in the number of units graded and authenticated, compared to the
prior fiscal year. Coin grading revenues increased by 2%, compared to
a 7% increase in the number of units graded, because modern coin grading
submissions (on which we earn a lower service fee) represented a higher
proportion of total coins graded in fiscal year 2006, compared to fiscal 2005,
primarily as a result of increased submissions attributable to the Company’s
First Strike program in fiscal 2006. The number of
sportscards graded increased by 11% in 2006, while sportscard grading revenues
increased by 4%, reflecting a decrease in the average grading service fee due
to
a higher proportion of sportscards graded at special pricing than in
2005. The number of other collectibles graded and authenticated in
2006 increased by 139%, while grading and authentication revenues attributable
to grading submissions of such collectibles increased by 70%, primarily
reflecting a reduction in pricing of our autograph authentication services
to
make those services more attractive to a larger number of dealers and
collectors.
The
number of coins graded and authenticated in fiscal 2006 increased by 7%, as
compared to the prior year, due primarily to an increase in coin submissions
under the Company’s First Strike program. That increase more
than offset a reduction in the number of units submitted by 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.
Gross
Profit
Gross
profit is calculated by subtracting the cost of revenues from net
revenues. Gross profit margin is gross profit stated as a percent of
net revenues. The costs of authentication and grading revenues
consist primarily of labor to authenticate and grade collectibles, production
costs, credit card fees, warranty expense, occupancy, security and insurance
costs that directly relate to providing authentication and grading
services. Cost of revenues also includes printing and other direct
costs of the revenues generated by our other (non-grading) service
businesses. In addition, costs of revenues include stock-based
compensation earned by employees whose compensation is classified as part of
the
cost of authentication and grading revenues.
52
Set
forth
below is information regarding our gross profits in the fiscal years ended
June
30, 2007, 2006 and 2005.
|
Fiscal
Year Ended June 30,
(Dollars
in thousands)
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Gross
profit
|
$ |
21,155
|
$ |
22,024
|
$ |
21,368
|
||||||
|
Gross
profit margin
|
52.3 | % | 59.7 | % | 63.6 | % | ||||||
2007
vs. 2006. The decline in our gross profit margin to 52.3% in the
fiscal year ended June 30, 2007, from 59.7% in fiscal 2006, was attributable
to
a number of different factors, including the following: (i) a decline in
the gross margin on coin authentication and grading, due primarily to an
increase in costs resulting from the addition of new coin grading capacity
in
anticipation of increased volumes of submissions and to reduce the turnaround
times within which coins are authenticated and graded; (ii) a decline in
the gross margin realized on sportscard authentication and grading services,
due
primarily to a decrease in sportscard related advertising revenues and higher
production costs incurred due to a change in the mix of sportscard units graded
in 2007 as compared to 2006; (iii) a change in the mix of our
authentication and grading revenues to a lower proportion of coin authentication
and grading revenues, on which we have historically realized higher margins
than
on the authentication and grading of other collectibles, as coin revenues
represented approximately 58% of total net revenues in the fiscal 2007, compared
to approximately 65% of total net revenues in fiscal 2006; and (iv) the
early stage of our diamond and colored gemstone grading businesses as we build
our diamond grading capacity in anticipation of increased revenues in future
periods. The decline was partially offset by a $108,000 decrease in
the stock-based compensation costs classified as cost of revenues in fiscal
2007, from $302,000 in fiscal 2006.
2006
vs. 2005. The decline in our gross profit margin to 59.7% in
fiscal year 2006 from 63.6% in fiscal 2005, was primarily attributable to
(i) a modest decline in the average service fees for coin authentication
and grading services due to a change in the mix of coin submissions in 2006
as
compared to 2005; (ii) a $410,000 increase in coin grader-related
compensation costs in fiscal 2006, as a result of an increase in the number
of
graders and the implementation of changes to their compensation structure;
(iii) a change in the mix of collectibles and diamonds graded to a lower
proportion of coins, on which we realize higher margins than on the
authentication and grading of other collectibles and diamonds; and (iv)
stock-based compensation expense of $302,000 for fiscal 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.
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)
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Selling
and marketing expenses
|
$ |
7,497
|
$ |
4,918
|
$ |
3,534
|
||||||
|
As
a percentage of net revenues
|
18.5 | % | 13.4 | % | 10.5 | % | ||||||
2007
vs. 2006. The increases in selling and marketing expenses of
$2,579,000 in absolute dollars and 5.1% as a percentage of net revenues, in
fiscal 2007, compared to the prior fiscal year, were primarily attributable
to
(i) an increase of approximately $1,863,000 in sales and marketing costs to
market and promote our new businesses, including our diamond grading business
(which we acquired in November 2005), our colored gemstone grading business
(which we acquired in August 2006), and our CCE auction subscription business
(which we acquired in September 2005); (ii) a $339,000 increase
in sales and marketing costs primarily to promote our coin and sportscard
authentication and grading services at trade shows (including an increase in
the
number of trade shows attended) and in other channels; and (iii) increases
in general marketing costs, including an increase in marketing-related
compensation costs attributable to the hiring, in November 2006, of a chief
marketing officer for our diamond and colored gemstone grading
businesses.
53
2006
vs. 2005. The increase of $1,384,000 in selling and marketing
expenses in fiscal year 2006, compared to fiscal year 2005, was primarily
attributable to (i) costs of approximately $850,000 incurred in fiscal 2006
in
connection with the commencement of marketing programs for the businesses that
we acquired in the first six months of fiscal year 2006, including $600,000
that
was used to market our new diamond grading business, and the launch of the
Company’s currency grading division; (ii) an increase of approximately
$330,000 in marketing expenses incurred to promote our coin and sportscard
grading services at trade shows, including an increase in the number of trade
shows at which we offered those services to dealers and collectors, as compared
to the number in 2005; (iii) increased advertising and promotional expenses
of approximately $220,000 incurred primarily to promote the Company’s First
Strike program; and (iv) increases in personnel costs in our customer
service departments. We made the decision to increase expenditures to
promote our grading and authentication services at trade shows and to increase
the number of trade shows at which we offer those services, because we are
able
to generate higher average coin and sportscard grading service fees at trade
shows due to the faster turnaround times demanded by dealers and collectors
attending those shows.
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. Since fiscal 2006, G&A expenses
also have included stock-based compensation costs arising from the grant of
stock awards to executive management, finance and accounting, information
technology personnel, in accordance with SFAS No. 123(R) which, in the case
of the Company, became effective as of July 1, 2005.
|
Fiscal
Year Ended June 30,
(Dollars
in thousands)
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
General
& administrative expenses
|
$ |
15,640
|
$ |
13,068
|
$ |
10,846
|
||||||
|
As
a percentage of net revenues
|
38.7 | % | 35.4 | % | 32.3 | % | ||||||
2007
vs. 2006. The increase in G&A expenses of $2,572,000 in
fiscal 2007, compared to prior fiscal year, was primarily attributable to
(i) expenses, totaling approximately $1,723,000, incurred in connection
with initiatives to grow our recently acquired diamond, colored gemstone, and
trade show businesses; (ii) increased costs of approximately $560,000, to
upgrade and expand our internal systems to support an increased volume of
business and our entry into new markets; and (iii) increased business
development costs of approximately $300,000, incurred in connection with our
coin authentication and grading business. Such cost increases were
partially offset by a reduction in litigation-related costs in fiscal 2007,
compared to the same periods of fiscal 2006, during which we incurred legal
fees
and expenses in connection with the Miller trial. Stock-based
compensation costs (including $164,000 of amortization expense related to
restricted stock awards) included in general and administrative expenses for
fiscal 2007 were $688,000, compared with $367,000 for fiscal 2006.
2006
vs. 2005. The increase in general and administrative expenses of
$2,222,000 in fiscal 2006 was primarily attributable to expenses incurred in
connection with the acquisition and integration into our operations of the
businesses we acquired in the first half of 2006, investments 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 totaled approximately $840,000. We also incurred
approximately $300,000 in connection with the implementation of our business
acquisition and expansion program in fiscal 2006. The increased
infrastructure costs of approximately $650,000 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. These
costs were partially offset by the $500,000 decrease in settlement of a lawsuit
expense (as discussed below). Stock-based compensation costs
recognized pursuant to SFAS 123(R) and included in general and administrative
expenses for fiscal 2006 were $367,000, as compared to fiscal 2005 during which
no stock-based compensation costs were required to be recognized.
54
Also
included in general and administrative expenses in 2005 is a settlement of
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 that settlement was $500,000, or 1.5% of our fiscal 2005
net revenues.
Amortization
of Intangible Assets
|
Fiscal
Year Ended June 30,
(Dollars
in thousands)
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Amortization
Expense
|
$ |
950
|
$ |
269
|
$ |
21
|
||||||
|
As
a percentage of net revenues
|
2.3 | % | 0.7 | % | 0.1 | % | ||||||
The
increases in amortization expense are due primarily to an increase in intangible
assets that resulted from the business acquisitions that we consummated in
fiscal 2006 and in the first quarter of fiscal 2007 and the amortization of
capitalized software. Those assets are being amortized over their
estimated useful lives as described in note 2 to our Consolidated Financial
Statements included in Item 8 of this Report.
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 $890,000 and $670,000 during fiscal 2007 and 2006,
respectively. That stock-based compensation was recorded as part of
(i) costs of sales, in the case of stock awards granted to employees in our
authentication and grading businesses, (ii) selling and marketing expenses
in the case of stock awards granted to marketing and sales personnel and
(iii) general and administrative expenses in the case of stock awards
granted to directors, executive and financial management and administrative
personnel, as follows:
|
Year
Ended
June
30,
|
Year
Ended
June
30,
|
|||||||
|
2007
|
2006
|
|||||||
|
Cost
of revenues
|
$ |
194,000
|
$ |
302,000
|
||||
|
Selling
and marketing expenses
|
8,000
|
1,000
|
||||||
|
General
and administrative expenses
|
688,000
|
367,000
|
||||||
| $ |
890,000
|
$ |
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 or
purchase price of the options or stock awards. However, we have
disclosed, in the notes to our Consolidated Financial Statements, pro forma
net
earnings and pro forma net earnings per share for fiscal year 2005 as if the
fair value of all stock options and other stock awards, 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 notes to our Consolidated
Financial Statements.
55
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, 2007.
We
issue
stock options or make restricted stock grants 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 shorter periods for director awards, reflecting their
service periods, although awards are sometimes granted with immediate
vesting.
During
fiscal 2007, we issued a total of approximately 57,000 shares of restricted
stock to our CEO and the non-management members of the Board of Directors,
which
required us to recognize stock-based compensation expense of approximately
$164,000 during fiscal 2007. No shares of restricted stock were
issued in fiscal 2006 and no stock-based compensation related to restricted
shares was recognized in 2006. The shares of restricted stock issued to our
CEO
and our Board members have vesting periods of four years and one year,
respectively. Compensation cost is determined based on the closing
price of our stock, as reported by NASDAQ, as of the date of the grant and
is
recognized as stock-based compensation expense over the vesting period on a
straight-line basis, net of an estimated forfeiture rate of 7%. No shares of
restricted stock were issued in fiscal 2006.
We
calculate stock-based compensation by estimating the fair value of stock options
as of the date granted using the Black-Scholes option valuation model and
various assumptions that are described in note 2 to our Consolidated Financial
Statements included in Item 8 of this 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 years 2007 and 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 adoption date of SFAS No. 123(R),
and compensation costs for options that were granted following July 1, 2005
to
June 30, 2007, prorated from their respective grant dates to June 30,
2007. Compensation costs, as determined, were adjusted for estimated
forfeitures in accordance with SFAS No. 123(R). Options to purchase a
total of 65,000 and 42,000 shares of our common stock were granted to employees
during fiscal 2007 and 2006, respectively. These options are in
addition to the restricted stock grants made in 2007, as described
above.
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. During
fiscal 2007, we revised our forfeiture rate for stock options from 10.5% for
fiscal 2006 to 9% for 2007.
A
total
of $1,672,000 of compensation expense related to unvested stock-based
compensation awards remained unrecognized as of June 30, 2007 and will be
recognized as compensation expense as follows:
|
Year
Ending June 30,
|
Amount
|
|||
|
2008
|
$ |
864,000
|
||
|
2009
|
486,000
|
|||
|
2010
|
233,000
|
|||
|
2011
|
89,000
|
|||
|
Total
|
$ |
1,672,000
|
||
These
amounts, which are non-cash expenses, 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 award forfeiture
percentage.
56
Interest
Income, Net
Interest
income is generated on cash balances that we have invested, primarily in highly
liquid money market accounts, short-term bank certificates of deposit, auction
rate securities and commercial paper instruments. Such interest
income does not include the interest that we generate on loans we make pursuant
to our dealer-finance program, which are included in net revenues.
|
Fiscal
Year Ended June 30,
(Dollars
in thousands)
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Interest
income,
net
|
$ |
2,144
|
$ |
2,346
|
$ |
906
|
||||||
|
Percent
of net
revenue
|
5.3 | % | 6.4 | % | 2.7 | % | ||||||
2007
vs. 2006. The reduction in interest income, net to $2,144,000 in
fiscal 2007, from $2,346,000 in fiscal 2006, was primarily due to decreases
in
our average cash, cash equivalents and short-term investment balances during
fiscal 2007, reflecting our use of cash to fund (i) business acquisitions
in fiscal year 2007; (ii) capital expenditures, primarily for purchase of
fixed assets; (iii) the payment of quarterly cash dividends to our
stockholders; and (iv) repurchases of our common stock under our stock
buyback program, which more than offset cash generated from operations and
the
effect on interest income of increases in prevailing interest rates in fiscal
year 2007, as compared to fiscal 2006.
2006
vs. 2005. The increase in interest income, net to $2,346,000 in
fiscal 2006 from $906,000 in fiscal 2005, was primarily attributable to
increases in our average cash, cash equivalents and short-term investment
balances, as a result of (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; (ii) cash
generated from the disposition of our collectibles sales businesses; and
(iii) cash generated by operations, which more than offset cash expended
for business acquisitions completed in fiscal year 2006. Also
contributing to the increase in interest income, net in fiscal 2006 was an
increase in prevailing interest rates, as compared to fiscal 2005.
Provision
(Benefit) for Income Taxes
|
Fiscal
Year Ended June 30,
(Dollars
in thousands)
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Provision
(benefit) for income taxes
|
$ | (39 | ) | $ |
2,733
|
$ |
3,141
|
|||||
The
income tax benefit recorded in fiscal 2007 reflects a pre-tax loss in fiscal
2007 and an increase in permanent differences between the Company’s income for
book purposes and for tax purposes, due primarily to the non-deductibility
of
stock based compensation costs related to the grant of incentive stock
options. For fiscal 2006 and 2005, our effective tax rates were 45%
and 40%, respectively, reflecting increased permanent differences in fiscal
2006, between the Company’s income for book purposes and tax purposes, primarily
related to the non-deductibility of compensation costs on incentive stock
options, which the Company was required to recognize for the first time in
fiscal 2006.
Discontinued
Operations
|
Fiscal
Year Ended June 30,
(Dollars
in thousands)
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Income
from discontinued operations, net of gains on sales
of discontinued businesses
(net
of income
taxes)
|
$ |
228
|
$ |
296
|
$ |
60
|
||||||
57
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 were classified as held for sale and their related operating
results for the fiscal years 2007, 2006 and 2005 have been classified as
discontinued operations in the Consolidated Financial Statements included in
this Annual Report. The income from discontinued operations includes
(i) the losses or gains recognized on the sales of those businesses and the
disposition of those assets of those businesses that we retained (consisting
primarily of inventories and accounts receivables); and (ii) for fiscal
2006 the results of CTP from September 2, 2005 to November 30, 2005 (the date
of
its disposition). The gain on disposal of the discontinued
businesses related to additional consideration on the sales of those businesses
that became determinable in fiscal 2005, 2006 and 2007, as the terms of the
sales of some of those businesses provided for the payment to us of future
consideration based on the performance of those businesses for periods
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, 2005 and ending on June 30,
2007. The information has been derived from our unaudited quarterly
financial statements, which have been prepared by us on a basis consistent
with
our audited Consolidated 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 quarterly
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.
Generally,
the revenues generated by our collectibles grading and authentication businesses
are lower during our second quarter, which ends on December 31, than in other
quarterly periods. On the other hand, diamond and colored gemstone
grading businesses (which we acquired in November 2005 and August 2006,
respectively), generate higher revenues in our second quarter, which coincides
with the winter holiday season, than in other quarterly periods. Our
expectation is that, over time, our diamond and colored gemstone revenues will
represent a higher proportion of total revenues and will reduce the effect
of
seasonality in the second fiscal quarter.
Our
collectibles convention business, which we acquired in July 2006, adds to the
variability in our quarter-to quarter operating results, as its revenues vary
based on the timing of the collectibles conventions it
holds. Revenues for this business unit were significantly higher in
the first, third and fourth quarters of 2007, as compared to the second quarter
ended December 31, 2006, because both its Long Beach and the Santa Clara
collectibles conventions took place during the first, third and fourth quarters,
whereas only the Santa Clara convention took place during the second quarter
of
2007.
In
the
third and fourth quarters of fiscal 2006, the Company’s coin grading revenues
benefited from the success of our First Strike program. However, in
the third and fourth quarters of fiscal 2007, First Strike revenues decreased
by
$820,000, due to a number of factors, including a dispute over rights to the
“First Strike” designation that we had used for this
program. Although we expect that revenues from the First Strike will
improve in fiscal 2008, as compared to fiscal 2007, as the dispute related
to
the First Strike designation has now been resolved, there is no assurance that
revenues from this program will be concentrated in our third and fourth fiscal
quarters in future periods, as in previous years, or will be comparable to
the
revenues generated by this program in fiscal 2006 or 2005.
58
The
$1,105,000 decrease in revenue in the second quarter ended December 31, 2006,
as
compared to the immediately preceding quarter ended September 30, 2006, is
net
of a $185,000 increase in revenues generated by our diamond and colored gemstone
grading and authentication businesses in that second quarter.
|
Quarterly
Reports of Operations
|
Quarters
Ended
(In
thousands, except per share data)
|
|||||||||||||||||||||||||||||||
|
Sept.
30,
2005
|
Dec.
31,
2005
|
Mar.
31,
2006
|
June
30,
2006
|
Sept.
30,
2006
|
Dec.
31,
2006
|
Mar.
31,
2007
|
June
30,
2007
|
|||||||||||||||||||||||||
|
Statement
of Operations Data:
|
||||||||||||||||||||||||||||||||
|
Net
revenues
|
$ |
8,825
|
$ |
7,447
|
$ |
10,022
|
$ |
10,620
|
$ |
9,898
|
$ |
8,793
|
$ |
11,081
|
$ |
10,680
|
||||||||||||||||
|
Cost
of revenues
|
3,372
|
3,118
|
4,088
|
4,312
|
4,356
|
4,367
|
5,138
|
5,436
|
||||||||||||||||||||||||
|
Gross
profit
|
5,453
|
4,329
|
5,934
|
6,308
|
5,542
|
4,426
|
5,943
|
5,244
|
||||||||||||||||||||||||
|
SG&A
expenses
|
4,290
|
3,909
|
4,530
|
5,257
|
5,241
|
5,114
|
6,140
|
6,642
|
||||||||||||||||||||||||
|
Amortization
of intangible assets
|
20
|
35
|
102
|
112
|
171
|
187
|
219
|
373
|
||||||||||||||||||||||||
|
Operating
income (loss)
|
1,143
|
385
|
1,302
|
939
|
130
|
(875 | ) | (416 | ) | (1,771 | ) | |||||||||||||||||||||
|
Interest
and other income, net
|
550
|
616
|
596
|
606
|
571
|
548
|
513
|
518
|
||||||||||||||||||||||||
|
Income
(loss) before income taxes
|
1,693
|
1,001
|
1,898
|
1,545
|
701
|
(327 | ) |
97
|
(1,253 | ) | ||||||||||||||||||||||
|
Provision
(benefit) for income taxes
|
714
|
447
|
804
|
768
|
318
|
(147 | ) |
165
|
(375 | ) | ||||||||||||||||||||||
|
Income
(loss) from continuing
operations
|
979
|
554
|
1,094
|
777
|
383
|
(180 | ) | (68 | ) | (878 | ) | |||||||||||||||||||||
|
Income
from discontinued
operations,
net
of gain on sales
of
discontinued businesses
(net
of income
taxes)
|
(12 | ) |
181
|
-
|
127
|
11
|
80
|
99
|
38
|
|||||||||||||||||||||||
|
Net
income
(loss)
|
$ |
967
|
$ |
735
|
$ |
1,094
|
$ |
904
|
$ |
394
|
$ | (100 | ) | $ |
31
|
$ | (840 | ) | ||||||||||||||
|
Net
income (loss) per basic share:
|
||||||||||||||||||||||||||||||||
|
From
continuing
operations
|
$ |
0.11
|
$ |
0.07
|
$ |
0.13
|
$ |
0.09
|
$ |
0.05
|
$ | (0.02 | ) | $ | (0.01 | ) | $ | (0.10 | ) | |||||||||||||
|
From
discontinued operations,
net
of gain on sales of
discontinued businesses
(net
of income taxes)
|
-
|
0.02
|
-
|
0.02
|
-
|
0.01
|
0.01
|
-
|
||||||||||||||||||||||||
|
Net
income
(loss)
|
$ |
0.11
|
$ |
0.09
|
$ |
0.13
|
$ |
0.11
|
$ |
0.05
|
$ | (0.01 | ) | $ |
0.00
|
$ | (0.10 | ) | ||||||||||||||
|
Net
income (loss) per diluted share:
|
||||||||||||||||||||||||||||||||
|
From
continuing
operations
|
$ |
0.11
|
$ |
0.06
|
$ |
0.12
|
$ |
0.09
|
$ |
0.04
|
$ | (0.02 | ) | $ | (0.01 | ) | $ | (0.10 | ) | |||||||||||||
|
From
discontinued operations,
net
of gain on sales of
discontinued businesses
(net
of income taxes)
|
-
|
0.02
|
-
|
0.01
|
-
|
0.01
|
0.01
|
-
|
||||||||||||||||||||||||
|
Net
income (loss)
|
$ |
0.11
|
$ |
0.08
|
$ |
0.12
|
$ |
0.10
|
$ |
0.04
|
$ | (0.01 | ) | $ |
0.00
|
$ | (0.10 | ) | ||||||||||||||
|
Weighted
average shares outstanding
|
||||||||||||||||||||||||||||||||
|
Basic
|
8,486
|
8,488
|
8,485
|
8,433
|
8,351
|
8,309
|
8,381
|
8,433
|
||||||||||||||||||||||||
|
Diluted
|
8,806
|
8,803
|
8,822
|
8,750
|
8,628
|
8,309
|
8,587
|
8,433
|
||||||||||||||||||||||||
|
Quarters
Ended
(In
thousands)
|
||||||||||||||||||||||||||||||||
|
Sept.
30,
2005
|
Dec.
31,
2005
|
Mar.
31,
2006
|
June
30,
2006
|
Sept.
30,
2006
|
Dec.
31,
2006
|
Mar.
31,
2007
|
June
30,
2007
|
|||||||||||||||||||||||||
|
Selected
Operating Data:
|
||||||||||||||||||||||||||||||||
|
Units
authenticated or graded
|
||||||||||||||||||||||||||||||||
|
Coins
|
395
|
357
|
474
|
563
|
482
|
281
|
400
|
396
|
||||||||||||||||||||||||
|
Sportscards
|
283
|
275
|
315
|
326
|
321
|
296
|
321
|
324
|
||||||||||||||||||||||||
|
Autographs
|
55
|
34
|
45
|
47
|
34
|
44
|
40
|
52
|
||||||||||||||||||||||||
|
Stamps
|
9
|
7
|
10
|
12
|
12
|
18
|
17
|
19
|
||||||||||||||||||||||||
|
Currency
|
9
|
5
|
9
|
6
|
9
|
7
|
9
|
11
|
||||||||||||||||||||||||
|
Diamonds
|
-
|
1
|
1
|
3
|
6
|
9
|
5
|
5
|
||||||||||||||||||||||||
|
Colored
gemstones
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1
|
||||||||||||||||||||||||
|
Total
|
751
|
679
|
854
|
957
|
864
|
655
|
792
|
808
|
||||||||||||||||||||||||
59
Liquidity
and Capital Resources
At
June
30, 2007, we had cash and cash equivalents of $42,836,000, as compared to
$52,110,000 at June 30, 2006, as we used cash in fiscal 2007 to fund
(i) business acquisitions; (ii) capital expenditures, primarily for
purchases of fixed assets; (iii) the payment of quarterly cash dividends to
our stockholders and (iv) repurchases of shares of our common stock under
our stock buyback program.
Historically,
we have relied on internally-generated funds, rather than borrowings, as our
primary source of funds to support our operations. We expect our
authentication and grading services and our subscription services to provide
us
with positive operating 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 or subscribe for our
subscription-based services, and (ii) we expect that, in the event of an
on-going decline in authentication and grading submissions, we will be able
to
reduce certain of our costs and thereby reduce the impact on our cash flows
of
such a decline.
During
fiscal 2007, operating activities of our continuing operations provided net
cash
of $3,523,000, compared with $7,593,000 generated in fiscal 2006.
Investing
activities used net cash of $9,338,000 during fiscal 2007, of which we used
(i) $6,293,000 to fund the purchase of businesses that we acquired during
the fiscal year 2007; and (ii) $3,073,000 and $1,483,000, primarily for the
purchase of fixed assets and software development costs; and (iii) $5,038,000
in
advances on customer notes receivables offset by $6,416,000 proceeds from
customer notes receivables attributed to Collectors Finance
Corporation.
In
fiscal
2007, financing activities used net cash of $4,023,000, including $3,350,000
to
pay cash dividends to stockholders and $949,000 to repurchase shares of our
common stock under our stock buyback program, partially offset by proceeds
of
$276,000 from the exercise of employee stock options.
Bank
Line of Credit. As previously reported, in fiscal 2005, we
organized Collectors Finance Corporation (“CFC”), as a wholly-owned subsidiary,
to engage in the business of making loans primarily to coin or sportscards
dealers. All such loans are required to be collateralized by the
delivery to us of collectibles that have a fair market value of at least the
amount of the loans. The loans are required to be repaid to us when
those collectibles are returned to the dealers. To provide a source
of funding for those loans, in June 2005, CFC obtained a revolving bank line
of
credit for the original term of two years 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, the term of
which was extended to September 30, 2007, which had a term of two years ending
in June 2007, are to bear interest at rates based on the bank’s prime rate or
LIBOR, as applicable, and are to be secured by the loan receivables due
CFC. There were no borrowings outstanding under that line of credit
during the fiscal year ended or at June 30, 2007. We expect to secure
a comparable line of credit by September 30, 2007.
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, 2007 and received the required consents and a formal waiver from the
lender for the purchases of Expos Unlimited and American Gemological
Laboratories businesses, the repurchase of the Company’s common stock, and the
payment of cash dividends during fiscal 2006 and 2007.
60
Outstanding
Financial Obligations. We had the following outstanding
obligations under operating leases, net of sublease income at June 30, 2007,
for
years ending June 30:
|
2008
|
$ |
1,789,000
|
||
|
2009
|
1,803,000
|
|||
|
2010
|
898,000
|
|||
|
2011
|
433,000
|
|||
|
2012
|
415,000
|
|||
|
Thereafter
|
1,385,000
|
|||
| $ |
6,723,000
|
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, 2007 and CFC does not expect to incur any such borrowings during the
quarter ending September 30, 2007.
Stock
Buyback Program. In December 2005, our Board of Directors
approved a stock buyback program that authorizes 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, its 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 and
2007, the Company repurchased a total of 181,851 and 72,517 shares,
respectively, of its common stock under this program for an aggregate purchase
price of approximately $2,628,000 and $949,000, respectively (which includes
transaction costs of approximately $10,000). Additional information
regarding these share repurchases is set forth in Item 5 of this
Report.
Dividends. In
the fourth quarter of fiscal 2006, the Board of Directors adopted a dividend
policy that called for the payment of quarterly cash dividends of $0.08 per
common share, for an expected annual cash dividend of $0.32 per common
share. The first such quarterly cash dividend was paid in the fourth
quarter of fiscal 2006 and quarterly cash dividends in that same per share
amount were paid in the first and second quarters of fiscal 2007. The
quarterly cash dividend was increased to $0.12 per share, in the third quarter
of fiscal 2007 and dividends in that same per share amount were paid in both
the
third and fourth quarters of 2007.
In
June
2007, the Board of Directors approved another increase in the quarterly cash
dividend to $0.25 per common share, for an expected annual cash dividend to
stockholders of $1.00 per common share. The first of such quarterly
cash dividends of $0.25 per share was paid on September 7, 2007 in the first
quarter of fiscal 2008 to all stockholders of record as of August 24,
2007.
Dividends
paid in fiscal 2007 totaled $3,350,000 and, assuming that we continue to pay
quarterly cash dividends of $0.25 per share during the balance of fiscal 2008,
we estimate that we will pay an aggregate of approximately $8,500,000 in cash
dividends in fiscal 2008. We expect to fund those dividends with
internally generated funds and available cash balances.
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.
61
Uses
and Sources of Cash. We plan to use our cash resources,
consisting of internally generated cash flow and available cash and cash
equivalent balances, 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) continue paying dividends to
our stockholders, as determined by the Board of Directors, (v) 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, 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
July
2006, the FASB issued FASB Interpretation 48, Accounting for Uncertainty in
Income Taxes: an Interpretation of FASB Statement No. 109
(FIN48). Interpretation 48 clarifies Statement 109,
Accounting for Income Taxes, to indicate a criterion that an individual
tax position would have to meet for some or all of the benefit of that position
to be recognized in an entity’s financial statements. Interpretation
48 is effective for fiscal years beginning after December 15,
2006. Management is currently completing the process of evaluating
the effect of FIN48 on its Consolidated Financial Statements, as of the
beginning of the period of adoption, July 1, 2007. The Company
currently believes that the adoption of FIN48 will not have a material effect
on
the Company’s financial position and results of operation.
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements,
which defines fair value, establishes a framework for measuring fair value
in
generally accepted accounting principles (GAAP) and expands disclosure about
fair value measurements. The statement emphasizes that fair value is
a market-based measurement, not an entity-specific measurement. SFAS
No. 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal
years. We do not expect the adoption of SFAS No. 157 to have a
material impact on our financial position or results of operation.
In
September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for
Defined Benefit Pension and Other Post Retirement Plans (an amendment of
FASB Statement No. 87, 88, 106 and 132R). SFAS No. 158 requires an
employer to recognize the over funded or under funded status of a defined
benefit postretirement plan (other than a multiemployer plan) as an asset or
liability in its statement of financial position and to recognize changes in
that funded status in the year in which the changes occur through comprehensive
income. As the Company currently does not sponsor one or more
single-employer defined benefit plans, we do not expect the adoption of SFAS
No.
158 to have a material impact on our financial position or results of
operation.
In
September 2006, the SEC staff issued Staff Accounting Bulletin (“SAB”) No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements.” SAB 108 was
issued to provide consistency between how registrants quantify financial
statements. Historically, there have been two widely-used methods for
quantifying the effects of financial statement misstatements. These
methods are referred to as the “roll-over” and “iron curtain”
method. The roll-over method quantifies the amount by which the
current year income statement is misstated. Exclusive reliance on an
income statement approach can result in the accumulation of errors on the
balance sheet that may not have been material to any individual income
statement, but which may misstate one or more balance sheet
accounts. The iron curtain method quantifies the error as the
cumulative amount by which the current year balance sheet is
misstated. Exclusive reliance on a balance sheet approach can result
in disregarding the effects of errors in the current year income statement
that
results from the correction of an error existing in previously issued financial
statements. SAB 108 established an approach that requires quantification of
financial statement misstatements based on the effects of the misstatement
on
each of the Company’s financial statements and the related financial statement
disclosures. This approach is commonly referred to as the “dual
approach” because it requires quantification of errors under both the roll-over
and iron curtain methods. SAB 108 allows registrants to initially
apply the dual approach either by (1) retroactively adjusting prior financial
statements as if the dual approach had always been used or by (2) recording
the
cumulative effect of initially applying the dual approach as adjustments to
the
carrying values of assets and liabilities as of July 1, 2006 with an offsetting
adjustment recorded to the opening balance of retained earnings (accumulated
deficit). Use of this “cumulative effect” transition method requires
detailed disclosure of the nature and amount of each individual error being
corrected through the cumulative adjustment and how and when it arose. We do
not
expect the initial application of SAB 108 to have a material impact on the
Company’s financial position or results of operation.
62
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115, which permits entities to choose to
measure many financial instruments and certain other items at fair value. The
objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex
hedge
accounting provisions. This Statement is expected to expand the use of fair
value measurement, which is consistent with the FASB’s long-term measurement
objectives for accounting for financial instruments. This Statement is effective
as of the beginning of an entity’s first fiscal year that begins after November
15, 2007. Early adoption is permitted as of the beginning of a fiscal year
that
begins on or before November 15, 2007, provided the entity also elects to apply
the provisions of FASB Statement No. 157, Fair Value Measurements. As
described above, we do not expect that the adoption of SFAS No. 157 or No.
159
will have a material impact on our financial position or results of
operations.
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, 2007, we had
$42,386,000 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.
63
Index
to Consolidated Financial Statements
|
Page
|
|
|
Report
of Independent Registered Public Accounting
Firm
|
65
|
|
Consolidated
Balance Sheets at June 30, 2007 and
2006
|
66
|
|
Consolidated
Statements of Operations for the Years Ended June 30, 2007, 2006
and
2005
|
67
|
|
Consolidated
Statements of Stockholders’ Equity For the Years Ended June 30, 2007, 2006
and 2005
|
68
|
|
Consolidated
Statements of Cash Flows for the Years Ended June 30, 2007, 2006
and
2005
|
69
|
|
Notes
to Consolidated Financial Statements For the Years Ended June 30,
2007,
2006 and 2005
|
71
|
64
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, 2007 and 2006, and the
related consolidated statements of operations, stockholders’ equity and cash
flows for each of the three years ended June 30, 2007. 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 financial position of Collectors Universe,
Inc. and subsidiaries as of June 30, 2007 and 2006 and the results of their
operations and their cash flows for each of the three years ended June 30,
2007
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, 2007, 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 10, 2007, expressed an unqualified opinion thereon.
/s/
GRANT
THORNTON LLP
Irvine,
California
September
10, 2007
65
COLLECTORS
UNIVERSE, INC. AND SUBSIDIARIES
(in
thousands, except per share data)
|
June
30,
|
||||||||
|
ASSETS
|
2007
|
2006
|
||||||
|
Current
assets:
|
||||||||
|
Cash
and cash
equivalents
|
$ |
42,386
|
$ |
52,110
|
||||
|
Accounts
receivable, net of
allowance of $60 in 2007 and $37 in 2006
|
1,276
|
1,753
|
||||||
|
Refundable
income
taxes
|
1,220
|
-
|
||||||
|
Inventories,
net
|
442
|
437
|
||||||
|
Prepaid
expenses and other current
assets
|
1,060
|
1,010
|
||||||
|
Customer
notes receivable, net of
allowance of $23 in 2007 and $16 in 2006
|
2,536
|
3,797
|
||||||
|
Net
deferred income tax
asset
|
1,020
|
1,414
|
||||||
|
Receivables
from sale of net
assets of discontinued operations
|
92
|
196
|
||||||
|
Current
assets of discontinued
operations held for sale
|
-
|
83
|
||||||
|
Total
current
assets
|
50,032
|
60,800
|
||||||
|
Property
and equipment,
net
|
4,081
|
1,897
|
||||||
|
Goodwill
|
12,884
|
9,799
|
||||||
|
Intangible
assets,
net
|
10,365
|
4,674
|
||||||
|
Note
receivable from sale of
discontinued operation
|
229
|
321
|
||||||
|
Net
deferred income tax
asset
|
-
|
342
|
||||||
|
Other
assets
|
510
|
388
|
||||||
| $ |
78,101
|
$ |
78,221
|
|||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ |
1,435
|
$ |
907
|
||||
|
Accrued
liabilities
|
2,154
|
2,043
|
||||||
|
Accrued
compensation and
benefits
|
1,988
|
1,075
|
||||||
|
Income
taxes
payable
|
14
|
496
|
||||||
|
Deferred
revenue
|
2,233
|
1,384
|
||||||
|
Current
liabilities of
discontinued operations held for sale
|
-
|
8
|
||||||
|
Total
current
liabilities
|
7,824
|
5,913
|
||||||
|
Deferred
rent
|
477
|
402
|
||||||
|
Other
long-term liabilities
|
40
|
-
|
||||||
|
Net
deferred income tax liability
|
869
|
-
|
||||||
|
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: 8,496 in 2007 and
8,475 in 2006;
|
||||||||
|
Shares
outstanding: 8,496 in 2007
and 8,350 (net of treasury stock) in 2006
|
9
|
8
|
||||||
|
Additional
paid-in
capital
|
76,737
|
76,909
|
||||||
|
Accumulated
deficit
|
(7,855 | ) | (3,990 | ) | ||||
|
Treasury
stock, at cost (0 shares
in 2007 and 125 shares in 2006)
|
-
|
(1,021 | ) | |||||
|
Total
stockholders’
equity
|
68,891
|
71,906
|
||||||
| $ |
78,101
|
$ |
78,221
|
|||||
The
accompanying notes are an integral part of these consolidated financial
statements.
66
COLLECTORS
UNIVERSE, INC. AND SUBSIDIARIES
(in
thousands, except per share data)
|
Year
Ended June 30,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Net
revenues:
|
||||||||||||
|
Grading,
authentication and
related services
|
$ |
40,452
|
$ |
36,914
|
$ |
33,607
|
||||||
|
Cost
of revenues:
|
||||||||||||
|
Cost
of grading, authentication
and related services
|
19,297
|
14,890
|
12,239
|
|||||||||
|
Gross
profit
|
21,155
|
22,024
|
21,368
|
|||||||||
|
Operating
expenses:
|
||||||||||||
|
Selling
and marketing
expenses
|
7,497
|
4,918
|
3,534
|
|||||||||
|
General
and administrative
expenses
|
15,640
|
13,068
|
10,846
|
|||||||||
|
Amortization
of intangible
assets
|
950
|
269
|
21
|
|||||||||
|
Total
operating
expenses
|
24,087
|
18,255
|
14,401
|
|||||||||
|
Operating
income (loss)
|
(2,932 | ) |
3,769
|
6,967
|
||||||||
|
Interest
income, net
|
2,144
|
2,346
|
906
|
|||||||||
|
Other
income, net
|
6
|
22
|
26
|
|||||||||
|
Income
(loss) before provision for income taxes
|
(782 | ) |
6,137
|
7,899
|
||||||||
|
Provision
(benefit) for income taxes
|
(39 | ) |
2,733
|
3,141
|
||||||||
|
Income
(loss) from continuing operations
|
(743 | ) |
3,404
|
4,758
|
||||||||
|
Income
from discontinued operations, net of gain on sales of discontinued
businesses (net of income taxes)
|
228
|
296
|
60
|
|||||||||
|
Net
income (loss)
|
$ | (515 | ) | $ |
3,700
|
$ |
4,818
|
|||||
|
Net
income (loss) per basic share:
|
||||||||||||
|
Income
(loss) from continuing
operations
|
$ | (0.09 | ) | $ |
0.40
|
$ |
0.68
|
|||||
|
Income
from discontinued
operations, net of gain on sales of discontinued
businesses (net of income taxes)
|
0.03
|
0.04
|
0.01
|
|||||||||
|
Net
income
(loss)
|
$ | (0.06 | ) | $ |
0.44
|
$ |
0.69
|
|||||
|
Net
income (loss) per diluted share:
|
||||||||||||
|
Income
(loss) from continuing
operations
|
$ | (0.09 | ) | $ |
0.39
|
$ |
0.64
|
|||||
|
Income
from discontinued
operations, net of gain on sales of discontinued
businesses (net of income taxes)
|
0.03
|
0.03
|
0.01
|
|||||||||
|
Net
income
(loss)
|
$ | (0.06 | ) | $ |
0.42
|
$ |
0.65
|
|||||
|
Weighted
average shares outstanding:
|
||||||||||||
|
Basic
|
8,367
|
8,473
|
7,013
|
|||||||||
|
Diluted
|
8,367
|
8,782
|
7,452
|
|||||||||
|
Dividends
declared per common share
|
$ |
0.40
|
$ |
0.08
|
$ |
-
|
||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
67
COLLECTORS
UNIVERSE, INC. AND SUBSIDIARIES
(in
thousands)
|
Common
Stock
|
Additional
Paid-in
|
Accumulated
|
Treasury
Stock
|
||||||||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Deficit
|
Shares
|
Amount
|
Total
|
|||||||||||||||||||||||
|
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 expense
|
-
|
-
|
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
|
||||||||||||||
|
Exercise
of stock options
|
161
|
1
|
275
|
-
|
-
|
-
|
276
|
||||||||||||||||||||||
|
Stock
compensation expense
|
-
|
-
|
726
|
-
|
-
|
-
|
726
|
||||||||||||||||||||||
|
Issuance
of restricted shares
|
57
|
-
|
164
|
-
|
-
|
-
|
164
|
||||||||||||||||||||||
|
Tax
benefit on exercise of
stock options
|
-
|
-
|
633
|
-
|
-
|
-
|
633
|
||||||||||||||||||||||
|
Shares
repurchased and cancelled under the Stock Repurchase Plan
|
(72 | ) |
-
|
(949 | ) |
-
|
-
|
-
|
(949 | ) | |||||||||||||||||||
|
Net
loss
|
-
|
-
|
-
|
(515 | ) |
-
|
-
|
(515 | ) | ||||||||||||||||||||
|
Retirement
of treasury shares
|
(125 | ) |
-
|
(1,021 | ) |
-
|
125
|
1,021
|
-
|
||||||||||||||||||||
|
Dividends
paid ($0.40 per share)
|
-
|
-
|
-
|
(3,350 | ) |
-
|
-
|
(3,350 | ) | ||||||||||||||||||||
|
Balance
at June 30, 2007
|
8,496
|
$ |
9
|
$ |
76,737
|
$ | (7,855 | ) |
-
|
$ |
-
|
$ |
68,891
|
||||||||||||||||
The
accompanying notes are in integral part of these consolidated financial
statements.
68
COLLECTORS
UNIVERSE, INC.
(in
thousands)
|
Year
ended June 30,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||
|
Net
income
(loss)
|
$ | (515 | ) | $ |
3,700
|
$ |
4,818
|
|||||
|
Adjustments
to reconcile
net income (loss) to net cash provided
|
||||||||||||
|
by
operating
activities:
|
||||||||||||
|
Depreciation
and amortization
expense
|
2,012
|
919
|
443
|
|||||||||
|
Stock-based
compensation
expense
|
890
|
670
|
33
|
|||||||||
|
Impairment
of long-lived
assets
|
55
|
-
|
-
|
|||||||||
|
Tax
benefit from exercise of
stock options
|
633
|
29
|
338
|
|||||||||
|
Loss
on termination of
sublease
|
-
|
83
|
-
|
|||||||||
|
Loss
on intangible
asset
|
16
|
-
|
-
|
|||||||||
|
Discontinued
operations
|
(228 | ) | (296 | ) | (60 | ) | ||||||
|
Provision
for bad debts and
returns
|
27
|
55
|
38
|
|||||||||
|
Provision
(recovery) for
inventory write-down
|
(4 | ) |
72
|
-
|
||||||||
|
(Gain)
loss on sale of property
and equipment
|
-
|
8
|
(10 | ) | ||||||||
|
Deferred
income
taxes
|
400
|
1,853
|
2,474
|
|||||||||
|
Changes
in operating assets and
liabilities:
|
||||||||||||
|
Accounts
receivable
|
552
|
(115 | ) | (756 | ) | |||||||
|
Inventories
|
10
|
(73 | ) |
16
|
||||||||
|
Prepaid
expenses and
other
|
(219 | ) | (63 | ) | (321 | ) | ||||||
|
Refundable
income
taxes
|
(1,220 | ) |
-
|
13
|
||||||||
|
Other
assets
|
(72 | ) | (278 | ) | (88 | ) | ||||||
|
Accounts
payable and accrued
liabilities
|
488
|
403
|
510
|
|||||||||
|
Accrued
compensation and
benefits
|
913
|
(164 | ) |
133
|
||||||||
|
Income
taxes
payable
|
(671 | ) |
496
|
-
|
||||||||
|
Deferred
revenue
|
381
|
278
|
(224 | ) | ||||||||
|
Deferred
rent
|
75
|
16
|
(15 | ) | ||||||||
|
Other
long-term
liabilities
|
-
|
-
|
105
|
|||||||||
|
Net
cash provided by operating
activities
|
3,523
|
7,593
|
7,447
|
|||||||||
|
Net
cash provided by operating
activities of discontinued businesses
|
114
|
390
|
784
|
|||||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||
|
Proceeds
from sale of property
and equipment
|
-
|
8
|
11
|
|||||||||
|
Capital
expenditures
|
(3,073 | ) | (1,366 | ) | (256 | ) | ||||||
|
Purchase
of businesses, net of
cash acquired
|
(6,293 | ) | (14,582 | ) |
-
|
|||||||
|
Purchase
of other intangible
assets
|
(352 | ) |
-
|
-
|
||||||||
|
Advances
on customer notes
receivable
|
(5,038 | ) | (4,283 | ) | (6,078 | ) | ||||||
|
Proceeds
from collection of
customer notes receivable
|
6,416
|
2,030
|
4,518
|
|||||||||
|
Capitalized
software
|
(1,483 | ) | (421 | ) |
-
|
|||||||
|
Cash
received from sale of net
assets of discontinued operations
|
485
|
361
|
1,548
|
|||||||||
|
Net
cash used in investing activities
|
(9,338 | ) | (18,253 | ) | (257 | ) | ||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||
|
Proceeds
from employee stock
purchase plan
|
-
|
-
|
70
|
|||||||||
|
Proceeds
from sale of common
stock, net
|
-
|
-
|
35,657
|
|||||||||
|
Proceeds
from exercise of stock
options
|
276
|
243
|
284
|
|||||||||
|
Payments
for retirement of
common stock
|
(949 | ) | (2,628 | ) |
-
|
|||||||
|
Dividends
paid to common
stockholders
|
(3,350 | ) | (674 | ) |
-
|
|||||||
|
Net
cash provided by (used in)
financing activities
|
(4,023 | ) | (3,059 | ) |
36,011
|
|||||||
|
Net
increase (decrease) in cash
and cash equivalents
|
(9,724 | ) | (13,329 | ) |
43,985
|
|||||||
|
Cash
and cash equivalents at
beginning of year
|
52,110
|
65,439
|
21,454
|
|||||||||
|
Cash
and cash equivalents at end
of year
|
$ |
42,386
|
$ |
52,110
|
$ |
65,439
|
||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
69
COLLECTORS
UNIVERSE, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS (continued)
(in
thousands)
|
Year
ended June 30,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
||||||||||||
|
Income
taxes paid
|
$ |
743
|
$ |
624
|
$ |
213
|
||||||
|
Interest
paid
|
$ |
19
|
$ |
16
|
$ |
3
|
||||||
|
Effective
July 14, 2005, the Company acquired CoinFacts.com in a
transactionsummarized 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
ofGemprintCorporation
in a transaction summarized as follows:
|
||||||||||||
|
Fair
value of net assets
acquired
|
$ |
-
|
$ |
40
|
$ |
-
|
||||||
|
Intangible
assets
|
-
|
3,444
|
-
|
|||||||||
|
Goodwill
|
1
|
5,099
|
-
|
|||||||||
|
Purchase
price
|
$ |
1
|
$ |
8,583
|
$ |
-
|
||||||
|
Effective
July 1, 2006, the Company acquired Expos Unlimited, LLC (Expos)
in
a transaction summarized as follows:
|
||||||||||||
|
Fair
value of net liabilities
assumed
|
$ | (385 | ) | $ |
-
|
$ |
-
|
|||||
|
Intangible
assets
|
1,810
|
-
|
-
|
|||||||||
|
Goodwill
|
1,001
|
-
|
-
|
|||||||||
|
Purchase
price, net of $49 cash
acquired
|
$ |
2,426
|
$ |
-
|
$ |
-
|
||||||
|
Effective
August 18, 2006, the Company acquired American Gemological Laboratories,
Inc. (AGL)
in a transaction summarized as follows:
|
||||||||||||
|
Fair
value of net liabilities
assumed
|
$ | (42 | ) | $ |
-
|
$ |
-
|
|||||
|
Deferred
tax liability recognized
at acquisition
|
(1,205 | ) |
-
|
-
|
||||||||
|
Intangible
assets
|
3,030
|
-
|
-
|
|||||||||
|
Goodwill
|
2,083
|
-
|
-
|
|||||||||
|
Purchase
price, net of $81 cash
acquired
|
$ |
3,866
|
$ |
-
|
$ |
-
|
||||||
|
SUPPLEMENTAL
DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
|
||||||||||||
|
In
connection with the sale of CTP in November, 2005, the Company
received
a
note receivable of $458,000, of which $321,000 and $413,000 were
still
outstanding at June 30, 2007 and 2006, respectively.
In
September 2006, the Company recorded a note receivable from a customer
due
in December 2007 in the amount of $114,000.
In
July 2006, the Company acquired partial rights to a patent application
and
recognized a liability due to the seller of $40,000 that matures
no later
than July 2011.
|
||||||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
70
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
year 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
year 2006, the Company acquired the following businesses, the results of
operations of which have been consolidated into the financial statements of
the
Company from their respective dates of acquisition:
|
Business
|
Acquisition
Date
|
Purchase
Price
|
|
CoinFacts.com
|
July
14, 2005
|
$ 0.5
million
|
|
Certified
Coin Exchange
|
September
2, 2005
|
$ 2.4
million
|
|
Gem
Certification & Appraisal Lab, LLC
|
November
8, 2005
|
$ 3.3
million
|
|
Gemprint
Corporation
|
December
22, 2005
|
$ 8.6
million
|
During
fiscal year 2007, the Company acquired the following businesses, the results
of
operation of which have been consolidated into the financial statements of
the
Company from their respective dates:
|
Business
|
Acquisition
Date
|
Purchase
Price
|
|
Expos
Unlimited LLC
|
July
1, 2006
|
$ 2.5
million
|
|
American
Gemological Laboratory
|
August
18, 2006
|
$ 3.9
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.
71
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, 2007, such operating subsidiaries
were Professional Coin Grading Services, Inc., Collectors Finance Corporation,
Certified Asset Exchange, Inc., and Gem Certification and Assurance Lab, Inc.,
Expos Unlimited, Inc., and American Gemological Laboratories, 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). All significant
intercompany accounts and transactions have been eliminated in
consolidation.
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 could differ from those
estimates, and such differences could 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, 2007 and 2006, we had approximately $42.4 million and $52.1 million,
respectively, classified as cash and cash equivalents on the consolidated
balance sheets, of which approximately $40.9 million and $51.6 million,
respectively, of our cash and cash equivalents were invested primarily in money
market funds. During fiscal 2006 and 2005, the Company’s cash and
cash equivalents were primarily invested in high-quality commercial paper and
certificates of deposit issued by U.S. or foreign companies, money market funds,
and bank certificates of deposit. Under the Company’s investment
policy, the minimum credit quality of a 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.
72
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
Concentrations
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk at June 30, 2007 consisted primarily of cash and cash
equivalents, accounts receivables and notes receivables.
Financial
Instruments and Cash Balances. At June 30, 2007 and 2006, the Company had
funds of approximately $40,900,000 and $51,500,000, respectively, in money
market funds and in high quality commercial paper. In addition, at
June 30, 2007 and 2006, the Company had approximately $1,500,000 and $600,000
in
a non-interest bearing bank accounts for general day-to-day
operations.
Accounts
Receivable. A substantial portion of accounts receivable is due
from collectibles dealers. At June 30, 2007, accounts receivable from
one customer represented 13% of the Company’s total gross accounts receivable
balances. At June 30, 2006, accounts receivable from two customers
represented 31% 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 $60,000 and $37,000 at June 30, 2007 and June 30, 2006,
respectively.
Customers. The
authentication and grading of collectible coins and related services accounted
for approximately 58%, 65% and 69% of our net revenues for the years ended
June
30, 2007, 2006 and 2005, respectively.
Customer
Notes Receivable. At June 30, 2007 and 2006, the outstanding principal
amount of customer notes receivable, which evidenced primarily short term
advances made to customers by CFC, totaled $2,536,000 and $3,797,000,
respectively, net of allowances for uncollectible amounts of $23,000 and
$16,000, respectively. Two of these notes, each greater than 10% of the total
respective year ending balances for all notes outstanding represented a total
of
68% and 92% of the total principal amounts of the short-term customer advances
that were outstanding at June 30, 2007 and 2006, respectively.
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 manufacturing 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 should the need to do so
arise.
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 $91,000 and $106,000
at June 30, 2007 and 2006,
73
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
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
which could require us to increase that allowance.
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.
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 undiscounted cash flows expected to result from the use of that asset
and
its eventual disposition. If these cash flows are less than the
carrying amount of the asset, an impairment loss 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. During fiscal year 2007, $55,000 was recognized as impairment
of long-lived assets and was classified as part of general and administrative
expenses on the Consolidated Statement of Operations for that year.
Revenue
Recognition
Net
revenues consist primarily of fees generated from the authentication and grading
of coins, sportscards, autographs, currency, stamps, diamonds and colored
gemstones. With the acquisition of Expos, we recognize revenues
earned from the promotion management and operation of collectibles trade shows
and conventions in the respective periods that such shows and conventions are
conducted. 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.
A
portion
of our net revenues are comprised of subscription fees paid by customers for
a
membership in our Collectors Club. Those memberships entitle members
access to our on-line and printed publications, and sometimes also to vouchers
for free grading services. We record revenue for this multi-element
service arrangement in accordance with EITF 00-21, Accounting
for Revenue Arrangements With Multiple Deliverables, by recognizing
approximately 60% of the subscription fee in the month following the membership
purchase, on the basis that Collectors Club members typically utilize their
vouchers for free grading services within 30 days of subscribing for
memberships. The balance of the membership fee is recognized as
revenue over the life of the membership, which can range from one to two
years. We evaluate, at least semi-annually, the relative fair values
of the deliverables and the percentage factors used to allocate the membership
fee between the grading and the publication services provided under this
membership service.
Shipping
and Handling Costs
Shipping
and handling costs incurred to
return to our customers their collectibles property submitted to us for grading
or authentication are recorded as costs of revenues, net of amounts received
from such customers.
74
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
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 years ended
June
30, 2007 and 2006.
Warranty
Costs
We
offer
a 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 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-resistant holder in which
it
was placed at the time we last graded it. We also offer a similar
grading warranty of two years’ 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. 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.
Advertising
Costs
Advertising
costs are expensed as incurred and amounted to approximately $1,122,000,
$620,000 and $260,000 in the fiscal years ended June 30, 2007, 2006 and 2005,
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 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. Approximately $22,000 was
recognized as a valuation allowance at June 30, 2007, and $0 at June 30,
2006.
Capitalized
Software
Through
June 30, 2007, the Company had capitalized approximately $1,700,000 as
capitalized software net of accumulated amortization of $204,000 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 2007, the Company recorded approximately $193,000 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 is determined
to have occurred. At June 30, 2006, approximately $410,000 was
capitalized as internally-developed software, net of accumulated amortization
of
$11,000. There were no costs capitalized in fiscal year
2005.
75
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
Stock-Based
Compensation
During
the second quarter of fiscal year 2007, the Company adopted and our stockholders
approved the 2006 Equity Incentive Plan (“2006 Plan”), which provides for the
grant of stock options, stock appreciation rights (commonly referred to as
“SARs”), restricted stock purchase rights and restricted stock units
(collectively, “stock awards”), to officers and other employees and non-employee
directors of and consultants to the Company or its subsidiaries. At
the time of the adoption of the 2006 Plan, there were three other stock
incentive plans in existence (the “Existing Plans”), under which a total of
444,000 shares of common stock were still available for the future grant of
stock options and restricted stock purchase awards. Pursuant to the
provisions of the 2006 Plan, those 444,000 shares were “rolled over” into and
become available for grants of stock awards only under the 2006 Plan and the
right to grant additional stock awards under the Existing Plans
terminated. In addition, while the stock options and restricted
shares that were outstanding under the Existing Plans, which covered a total
of
911,000 shares at the time the 2006 Plan was approved, were unaffected by the
adoption of the 2006 Plan, in the event any of those stock awards were to
terminate or any shares that were subject to outstanding restricted stock grants
under the Existing Plans were to be reacquired by the Company, those shares
would become available for future grants of stock awards under the 2006 Plan,
rather than under the Existing Plans. As a result, the adoption of
the 2006 Plan did not increase the number of shares authorized for issuance
under the Company’s stock incentive plans. Instead, the 2006 Plan was
adopted to provide greater flexibility to the Company in terms of the types
of
stock incentives that could be granted to eligible participants. At
June 30, 2007, a total of 390,000 shares of common stock were available for
future grants under the 2006 Plan and no shares were available for new grants
under any of the other Plans.
Prior
to
July 1, 2005, the Company accounted for stock awards granted under its stock
incentive 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, with the exception of $33,000 recognized as
compensation expense in fiscal 2005 in connection with an Employee Stock
Purchase Plan, was recognized in the Consolidated Statements of Operations
for
fiscal years prior to June 30, 2005, 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, which was 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 method, compensation cost recognized in each of
the fiscal years ended June 30, 2006 and 2007 includes: (a) compensation cost
for all share-based payments granted and not 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).
Since
stock-based compensation expense recognized in the Consolidated Statement of
Operations for the fiscal year ended June 30, 2007 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. The Company considers
historical forfeiture rates to be the best indicator of future forfeitures
and,
accordingly, reduced the forfeiture rate from 10.5% at June 30, 2006 to 9%
at
June 30, 2007.
During
fiscal year 2007, the Company awarded an aggregate of 56,760 shares of
restricted stock to the CEO and the non-management directors, and recorded,
as
part of general administrative expenses in the consolidated statement of
operations for the year ended June 30, 2007, approximately $164,000 in
stock-based compensation expenses net of a 7% forfeiture
rate. Compensation expense is determined for the issuance of
restricted shares to employees or non-employee directors by
amortizing over the requisite service period, or the vesting period, the
aggregate fair value of the restricted shares awarded based on the closing
price
of the Company’s common stock effective on the date the award is
made.
76
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
For
stock
option grants, 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 options, 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 Black-Scholes option pricing model may not
provide an accurate measure of the fair value of the Company’s outstanding 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 fair value also may not be indicative of the fair value that would be
paid
in a willing buyer/willing seller market transaction.
The
Company issues stock options and restricted stock to employees and outside
directors whose only condition for vesting is continued employment or service
during the related vesting period. Typically, the vesting period is
four years for employee awards and six months to one year for director awards,
although awards are sometimes granted with immediate vesting or longer vesting
periods. The contractual expiration period for options generally is
ten years.
The
calculated compensation cost, net of estimated forfeitures, is recognized on
a
straight-line basis over the vesting period of the option beginning as of the
adoption date of SFAS No. 123(R), which was of July 1, 2005, or the date the
option was granted, whichever date occurred later.
The
weighted-average grant date fair value of employee stock options granted during
the fiscal years ended June 30, 2007 and 2006 was $5.56 and $6.57, respectively,
using the Black-Scholes option pricing model with the following weighted-average
assumptions:
|
2007
|
2006
|
2005
|
||||||||||
|
Dividend
yield
|
2.6
|
% | 2.3 | % |
-
|
|||||||
|
Expected
volatility
|
51 | % | 58 | % | 62 | % | ||||||
|
Risk-free
interest rate
|
4.6 | % | 4.7 | % | 3.5 | % | ||||||
|
Expected
lives
|
5.1 years
|
5.1 years
|
4.1 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.
For
fiscal year 2007 as a result of the adoption of SFAS No. 123(R), the Company’s
net loss before income tax expense was $726,000 more than what the amount would
have been under APB Opinion No. 25, or a pretax loss of approximately $56,000
for fiscal year 2007. Of the $726,000 of such compensation expense recognized
during fiscal year 2007, $194,000 was recognized as part of cost of revenues,
$8,000 was recognized as part of selling and marketing expenses and $524,000
was
recognized as part of general and administrative expenses. Basic and
diluted earnings, per share, would have been $0.02 and $0.02, respectively,
if
the Company had not adopted the provisions of SFAS No. 123(R), compared to
reported basic and diluted loss, per share, of $0.06 and $0.06,
respectively.
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 expected annual dividend of $0.32 per share of common
stock. In the third quarter of
77
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
2007,
the
quarterly dividend rate was increased to $0.12 per share of common stock ($0.48
per year) Partly as a result, the dividend yield assumption increased
from 2.3% for fiscal year 2006 to 2.6% for those stock option grants made during
fiscal 2007.
The
total
amount of compensation expense related to unvested stock option and restricted
stock awards not yet recognized at June 30, 2007 was $1,672,000 and that amount
will be recognized as compensation expense as follows:
|
Fiscal
Year Ending June 30,
|
Amount
|
|||
|
2008
|
864,000
|
|||
|
2009
|
486,000
|
|||
|
2010
|
233,000
|
|||
|
2011
|
89,000
|
|||
| $ |
1,672,000
|
|||
However,
such amounts do not include the cost of new stock options or stock 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 years ended June 30, 2007 and
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 year ended June 30, 2005 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)
|
||||
|
2005
|
||||
|
Net
income, as reported
|
$ |
4,818
|
||
|
Add:
Stock-based compensation included in reported net income, netof tax
effects
|
20
|
|||
|
Deduct:
Total stock-based compensation expense determined under fair
value based method for awards, net of related tax effects
|
(1,068 | ) | ||
|
Pro
forma net income
|
$ |
3,770
|
||
|
Net
income per common share – basic:
|
||||
|
As
reported
|
$ |
0.69
|
||
|
Pro
forma
|
$ |
0.54
|
||
|
Net
income per common share – diluted:
|
||||
|
As
reported
|
$ |
0.65
|
||
|
Pro
forma
|
$ |
0.51
|
||
Net
Income Per Share
We
compute net income or loss 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
78
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
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.
The
following table sets forth the computation of basic and diluted net income
(loss) per common share (in thousands except per share data):
|
2007
|
2006
|
2005
|
||||||||||
|
Income
(loss) from continuing operations
|
$ | (743 | ) | $ |
3,404
|
$ |
4,758
|
|||||
|
Income
from discontinued operations, net of gain on sales ofdiscontinued
businesses (net of income taxes)
|
228
|
296
|
60
|
|||||||||
|
Net
income (loss)
|
$ | (515 | ) | $ |
3,700
|
$ |
4,818
|
|||||
|
Net
income (loss) per basic share:
|
||||||||||||
|
From
continuing
operations
|
$ | (0.09 | ) | $ |
0.40
|
$ |
0.68
|
|||||
|
From
discontinued operations,
net of gain on sales of discontinued
businesses (net of income taxes)
|
0.03
|
0.04
|
0.01
|
|||||||||
|
Net
income
(loss)
|
$ | (0.06 | ) | $ |
0.44
|
$ |
0.69
|
|||||
|
Net
income (loss) per diluted share:
|
||||||||||||
|
From
continuing
operations
|
$ | (0.09 | ) | $ |
0.39
|
$ |
0.64
|
|||||
|
From
discontinued operations,
net of gain on sales ofdiscontinued businesses (net of income
taxes)
|
0.03
|
0.03
|
0.01
|
|||||||||
|
Net
income
(loss)
|
$ | (0.06 | ) | $ |
0.42
|
$ |
0.65
|
|||||
|
Weighted-average
shares outstanding:
|
||||||||||||
|
Basic
|
8,367
|
8,473
|
7,013
|
|||||||||
|
Effect
of dilutive
shares
|
-
|
309
|
439
|
|||||||||
|
Diluted
|
8,367
|
8,782
|
7,452
|
|||||||||
Options
and warrants to purchase approximately 689,000 and 406,000 shares of common
stock for the years ended June 30, 2006 and 2005, 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. For 2007, approximately 1,062,000 options and warrants were
excluded from the computation of diluted earnings, as they would have been
anti-dilutive in the calculation of earnings per share.
Comprehensive
Income
The
Company does not have any items of other comprehensive income requiring separate
disclosure.
Goodwill
and Other Intangible Assets
In
accordance with SFAS No. 142, Goodwill and Other Intangible Assets, the
Company is required to evaluate the carrying value of its goodwill and certain
indefinite-lived intangible assets at least annually for impairment, or more
frequently if facts and circumstances indicate that impairment has
occurred. Management formally evaluates the carrying value of its
goodwill and other indefinite-lived intangible assets for impairment on the
anniversary date of each of the acquisitions that gave rise to the recording
of
such assets. During fiscal year 2007, we completed our annual review of the
carrying value of goodwill acquired with the acquisitions of CoinFacts, Inc.
(“CFI”), Certified Coin Exchange (“CCE”), Gem Certification & Appraisal Lab,
LLC (“GCAL”), and Gemprint Corporation (“Gemprint”), which were consummated
during fiscal year 2006 and, on the basis of those reviews, determined that
no
impairments had occurred. Intangible assets acquired through acquisition, which
have definite lives such as customer lists, are subject to amortization over
their remaining useful lives.
79
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
During
fiscal year 2007, the Company acquired two businesses, AGL and Expos, and
purchased an asset, Diamond I.D., which resulted in the acquisition of goodwill
and intangible assets with indefinite lives in the aggregate amounts of
approximately $3,085,000 and $2,654,000, respectively, net of a $16,000 loss
on
the AGL colored gemstone reference set that occurred following the acquisition
date of August 18, 2006. The Company also acquired through the same
business acquisitions during fiscal year 2007, approximately $2,502,000 of
intangible assets with definite lives. Separately, the Company capitalized
$1,483,000 of the cost of certain internally-developed software during fiscal
year 2007. Both the acquired intangible assets and the internally-developed
software are subject to amortization over their remaining useful
lives.
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, 2006 and 2007 in thousands of dollars:
|
Coins
|
GCAL
&
Gemprint
|
AGL
|
Expos
|
CCE
and
Other
|
Total
|
|||||||||||||||||||
|
Goodwill:
|
||||||||||||||||||||||||
|
Balance
at June 30, 2006
|
$ |
515
|
$ |
8,167
|
$ |
-
|
$ |
-
|
$ |
1,117
|
$ |
9,799
|
||||||||||||
|
Acquired
during FY2007:
|
||||||||||||||||||||||||
|
AGL
|
-
|
-
|
2,083
|
-
|
-
|
2,083
|
||||||||||||||||||
|
Expos
Unlimited
|
-
|
-
|
-
|
1,001
|
-
|
1,001
|
||||||||||||||||||
|
Gemprint
|
-
|
1
|
-
|
-
|
-
|
1
|
||||||||||||||||||
|
Balance
at June 30, 2007
|
$ |
515
|
$ |
8,168
|
$ |
2,083
|
$ |
1,001
|
$ |
1,117
|
$ |
12,884
|
||||||||||||
|
Intangible
Assets, Net:
|
||||||||||||||||||||||||
|
Balance
at June 30, 2006
|
$ |
29
|
$ |
3,365
|
$ |
-
|
$ |
-
|
$ |
1,280
|
$ |
4,674
|
||||||||||||
|
Acquired
during FY2007 with indefinite lives:
|
||||||||||||||||||||||||
|
AGL,
net of $16
loss
|
-
|
-
|
1,914
|
-
|
-
|
1,914
|
||||||||||||||||||
|
Expos
Unlimited
|
-
|
-
|
-
|
740
|
-
|
740
|
||||||||||||||||||
|
Acquired
during FY2007 with definite lives:
|
||||||||||||||||||||||||
|
AGL
|
-
|
-
|
1,100
|
-
|
-
|
1,100
|
||||||||||||||||||
|
Expos
Unlimited
|
-
|
-
|
-
|
1,070
|
-
|
1,070
|
||||||||||||||||||
|
Diamond
I.D.
|
-
|
332
|
-
|
-
|
-
|
332
|
||||||||||||||||||
|
CCE
|
-
|
-
|
-
|
-
|
2
|
2
|
||||||||||||||||||
|
Capitalized
software costs during FY2007
|
523
|
658
|
-
|
-
|
302
|
1,483
|
||||||||||||||||||
|
Less:
amortization for FY2007
|
(140 | ) | (342 | ) | (98 | ) | (110 | ) | (260 | ) | (950 | ) | ||||||||||||
|
Balance
at June 30, 2007
|
$ |
412
|
$ |
4,013
|
$ |
2,916
|
$ |
1,700
|
$ |
1,324
|
$ |
10,365
|
||||||||||||
80
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
Amortization
expense for each of the five succeeding years relating to intangible assets
with
definite lives currently recorded in the Consolidated Balance Sheets is
estimated to be as follows at June 30:
|
2008
|
$ |
1,162,000
|
||
|
2009
|
$ |
1,188,000
|
||
|
2010
|
$ |
1,021,000
|
||
|
2011
|
$ |
600,000
|
||
|
2012
|
$ |
559,000
|
Approximately
$9.6 million of the $12.9 million classified as goodwill on the Consolidated
Balance Sheets at June 30, 2007 is amortizable and deductible for tax purposes
over a period of 15 years.
Recent
Accounting Pronouncements
In
July
2006, the FASB issued FASB Interpretation 48, Accounting for Uncertainty in
Income Taxes: an Interpretation of FASB Statement No. 109
(FIN48). Interpretation 48 clarifies Statement 109,
Accounting for Income Taxes, to indicate a criterion that an individual
tax position would have to meet for some or all of the benefit of that position
to be recognized in an entity’s financial statements. Interpretation
48 is effective for fiscal years beginning after December 15,
2006. Management is currently completing the process of evaluating
the effect of FIN48 on its Consolidated Financial Statements, as of the
beginning of the period of adoption, July 1, 2007. The Company
currently believes that the adoption of FIN48 will not have a material effect
on
the Company’s financial position and results of operation.
In
September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements. SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
and expands disclosure about fair value measurements. The statement
emphasizes that fair value is a market-based measurement, not an entity-specific
measurement. SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. We do not expect the adoption of SFAS No.
157 to have a material impact on our financial position or results of
operation.
In
September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for
Defined Benefit Pension and Other Post Retirement Plans (an amendment of
FASB Statement No. 87, 88, 106 and 132R). SFAS No. 158 requires an
employer to recognize the over funded or under funded status of a defined
benefit postretirement plan (other than a multiemployer plan) as an asset or
liability in its statement of financial position and to recognize changes in
that funded status in the year in which the changes occur through comprehensive
income. As the Company currently does not sponsor one or more
single-employer defined benefit plans, we do not expect the adoption of SFAS
No.
158 to have a material impact on our financial position or results of
operation.
In
September 2006, the SEC staff issued Staff Accounting Bulletin (“SAB”) No. 108,
Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements. SAB 108 was
issued to provide consistency in the manner in which registrants quantify
financial statement misstatements. Historically, there have
been two widely-used methods for quantifying the effects of financial statement
misstatements. These methods are referred to as the “roll-over”
method and the “iron curtain” method, respectively. The roll-over
method quantifies the amount by which the current year income statement is
misstated. Exclusive reliance on this income statement approach can
result in the accumulation of errors on the balance sheet that may not have
been
material to any individual income statement, but which may misstate one or
more
balance sheet accounts. The iron curtain method quantifies the error
as the cumulative amount by which the current year balance sheet is
misstated. Exclusive reliance on this balance sheet approach can
result in disregarding the effects of errors in the current year income
statement that result from the correction of an error existing in previously
issued financial statements. SAB 108 established an approach that
requires quantification of financial statement misstatements based on the
effects of the misstatement on each of the Company’s financial statements and
the related financial statement disclosures. This approach is
commonly referred to as the “dual approach” because it requires quantification
of errors under both the roll-over and iron curtain methods. SAB 108
allows registrants to initially apply the dual approach either by (1)
retroactively adjusting prior financial statements as if the dual approach
had
always been used or by (2) recording the cumulative effect of initially applying
the dual approach as adjustments to
81
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
the
carrying values of assets and liabilities as of July 1, 2006 with an offsetting
adjustment recorded to the opening balance of retained earnings (accumulated
deficit). Use of this “cumulative effect” transition method requires
detailed disclosure of the nature and amount of each individual error being
corrected through the cumulative adjustment and how and when it arose. The
application of SAB 108 did not have a material impact on the Company’s financial
position or results of operation.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115, which permits entities to choose to
measure many financial instruments and certain other items at fair value. The
objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex
hedge
accounting provisions. This Statement is expected to expand the use of fair
value measurement, which is consistent with the FASB’s long-term measurement
objectives for accounting for financial instruments. This Statement is effective
as of the beginning of an entity’s first fiscal year that begins after November
15, 2007. Early adoption is permitted as of the beginning of a fiscal year
that
begins on or before November 15, 2007, provided the entity also elects to apply
the provisions of FASB Statement No. 157, Fair Value Measurements. As
described above, we do not expect that the adoption of SFAS No. 157 or No.
159
will have a material impact on our financial position or results of
operations.
3.
Business
Acquisitions
On
July
14, 2005, the Company acquired substantially all the assets of CoinFacts.com
for
$500,000 in cash and $15,000 in directly-related costs. CoinFacts.com
operates an Internet website on which it publishes detailed proprietary
historical information on U.S. coins. The amount of $515,000 was
classified as goodwill at June 30, 2006 and 2007.
On
September 2, 2005, the Company acquired all of the common stock of Certified
Coin Exchange and all of the common stock of an affiliated business,
computertradingpost.com, Inc. (“CTP”), for an aggregate purchase price of
$2,217,000 in cash and directly-related costs of $160,000. At June
30, 2006 and 2007, $1,117,000 was classified as goodwill based upon the purchase
price of $2,377,000 allocated over net tangible assets acquired of $313,000
and
intangible assets acquired of $947,000. CCE is a subscription-based
dealer-to-dealer Internet bid-ask market for third-party certified
coins.
The
Company was required to purchase CTP as a condition to its acquisition of
CCE. At the time it consummated the CCE acquisition, the Company
intended to dispose of CTP, and effective November 30, 2005, disposed of
CTP. In accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, the results of operations of
CTP from the date of its acquisition through November 30, 2005, which included
revenue of approximately $120,000 and operating income of $38,000, were
consolidated as part of income from discontinued operations in the Consolidated
Statement of Operations for the twelve months ended June 30, 2006, and a loss
on
the sale of CTP was included in the gain on the sale of discontinued operations
for the fiscal year ended June 30, 2006.
On
November 8, 2005, the Company acquired Gem Certification & Appraisal Lab,
LLC, a 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, the
assumption of $50,000 of certain transaction-related costs and directly-related
costs of $218,000 for an aggregate purchase price of $3,268,000. At
June 30, 2006 and 2007, $3,068,000 was classified as goodwill based upon the
purchase price of $3,268,000 allocated over net tangible assets acquired of
$147,000 and intangible assets acquired of $53,000.
82
BUSINESS
ACQUISITIONS (CONT’D)
On
December 22, 2005, the Company acquired the business and substantially all
of
the assets of Gemprint Corporation. These assets consisted primarily
of a patented technology for non-invasive diamond identification which Gemprint
used to digitally capture the unique refractive light pattern (or “Gemprint”) of
each diamond that is processed with that technology. The Company paid
a purchase price for that business and those assets, consisting of $7,500,000
in
cash, assumed certain pre-acquisition liabilities and a lease commitment at
closing in the aggregate amount of $213,000, incurred directly-related costs
of
$870,000 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. At June 30, 2006 and 2007,
$5,099,000 and $5,100,000 were classified as goodwill, respectively, based
upon
the aggregate purchase price of $8,583,000 allocated over net tangible assets
acquired of $40,000 and intangible assets acquired of $3,444,000.
GCAL
has
incorporated the Gemprint process into its GCAL business process, so that each
GCAL authenticated and graded diamond can also carry a Gemprint image stored
in
GCAL’s registered database. The Gemprint process enables GCAL to
provide an additional measure of protection by enabling it to detect
misrepresentations of diamond quality that can occur by, for example, switching
a diamond grading certificate issued for a higher quality diamond to a lower
quality diamond.
Effective
July 1, 2006, the Company acquired the assets and business of Expos Unlimited
LLC (“Expos”), a trade show management company that operates the Long Beach and
the Santa Clara, California coin, stamp and collectibles expositions. The
purchase price for this business was $2,400,000 in cash. Based on the
future revenues of Expos, the Company may be obligated to make contingent
payments up to an aggregate of $750,000 after five years, or July
2011. The Company completed a purchase price allocation based upon an
acquisition price of $2,400,000 and other direct costs of approximately
$75,000. A fair value of $1,810,000 has been assigned to identifiable
intangible assets, and $193,000 and $529,000 was allocated to net assets
acquired and assumed liabilities, respectively.
Under
the
purchase method of accounting for business combinations, the excess of the
purchase price that we paid for Expos over the fair values of net assets
acquired and liabilities assumed, which totaled $1,001,000,was recorded as
goodwill during the fiscal year ended June 30, 2007. During the
fourth quarter of fiscal year 2007, the Company finalized the purchase price
allocation for this acquisition, which resulted in a cumulative increase to
amortization expense of identifiable intangible assets with definite lives
of
approximately $21,000, a decrease in the carrying value of goodwill of $906,000,
an increase in the fair value of identifiable intangible assets of $822,000,
and
an $84,000 increase in the values assigned to net assets
acquired. The Company, which authenticates and grades collectibles at
trade shows as part of its collectibles authentication and grading business,
believes that there exists synergistic benefits between the Company’s core
collectibles authentication and grading businesses and the Expos collectibles
trade show businesses.
On
August
18, 2006, the Company acquired all the common stock of American Gemological
Laboratories (“AGL”), an international colored gemstone certification and
grading laboratory. AGL is a third party authentication and grading services
for
colored gemstones, including colored gemstones that are sold at auctions and
by
jewelry retailers. The Company paid an acquisition price of $3,500,000 in cash
for AGL, and, depending on AGL’s future revenues, may become obligated to make
contingent payments of up to an aggregate of $3,500,000 over the next five
years. The Company is in the process of completing a purchase price
allocation based on the AGL acquisition price of $3,500,000, plus approximately
$233,000 of other directly-related costs and $214,000 representing a payment
to
settle a loan obligation of AGL to the seller of AGL. During the fourth quarter
of fiscal year 2007, the Company revised its previously reported allocation
of
the purchase price for AGL over the net assets acquired, including intangible
assets, such that goodwill was revised from $3,397,000 at March 31, 2007 to
$2,083,000 at June 30, 2007. Similarly, during the fourth quarter of
2007, the allocation of the purchase price to intangible assets with indefinite
and definite lives was revised from $522,000 and $124,000, respectively, at
March 31, 2007 to $1,930,000 and $1,100,000, respectively, at June 30, 2007.
The
fair value of net liabilities assumed was also increased by $1,068,000 from
$98,000 at March 31, 2007 to $1,166,000 at June 30, 2007 due to an increase
in a
deferred tax liability in the amount of $1,068,000 in the fourth quarter of
2007. Due to the increased allocation of the purchase price to intangible assets
with definite lives and revisions to the remaining useful lives of these assets,
the
83
BUSINESS
ACQUISITIONS (CONT’D)
cumulative
amount of amortization expense was increased by $78,000 in the fourth quarter
of
2007. The purchase price allocation was incomplete at June 30, 2007 due to
the
preliminary nature of the estimated fair value of $500,000 assigned to AGL’s
colored gemstone reference set. We expect to finalize the fair value assigned
to
the reference set and the purchase price allocation for AGL during the first
quarter of fiscal year 2008.
The amount recognized as goodwill for AGL at June 30, 2007 of $2,083,000 is
based on the Company’s expectations that future growth and profit opportunities
exist in this undeveloped market segment.
The
operating results of each of these acquired businesses were consolidated into
the Company's financial statements from the respective dates of their
acquisition.
On
September 21, 2006, the Company acquired an existing patent and other intangible
assets from Diamond I.D., Inc. (“DID”) for $332,000, which includes other direct
costs of approximately $37,000, and presented these assets as part of intangible
assets, net, on the Consolidated Balance Sheet at June 30, 2007. The
acquisition of those assets did not constitute a business
combination. During the fiscal year 2007, approximately $33,000 was
recorded as amortization expense with respect to these assets.
The
following table sets forth the fiscal year 2007 purchase price allocations
with
respect to the Expos and AGL business acquisitions, and the Diamond
I.D. asset acquisition and the goodwill acquired in fiscal year 2006 in the
CCE,
GCAL, CoinFacts, and Gemprint business acquisitions:
|
(in
thousands)
|
||||||||||||||||||||
|
Gemprint
|
Expos
|
AGL
|
DID
|
Total
|
||||||||||||||||
|
Cost
of Investment:
|
||||||||||||||||||||
|
Purchase
Price
|
$ |
-
|
$ |
2,400
|
$ |
3,500
|
$ |
295
|
$ |
6,195
|
||||||||||
|
Other
direct
costs
|
1
|
75
|
183
|
37
|
296
|
|||||||||||||||
|
Investment
banking
fees
|
-
|
-
|
50
|
-
|
50
|
|||||||||||||||
|
Liability
assumed
|
-
|
-
|
214
|
-
|
214
|
|||||||||||||||
|
1
|
2,475
|
3,947
|
332
|
6,755
|
||||||||||||||||
|
Value
Assigned to Assets and Liabilities:
|
||||||||||||||||||||
|
Cash
|
-
|
49
|
81
|
-
|
130
|
|||||||||||||||
|
Current
assets
|
-
|
86
|
27
|
-
|
113
|
|||||||||||||||
|
Current
liabilities
|
-
|
(59 | ) | (69 | ) |
-
|
(128 | ) | ||||||||||||
|
Customer
deposits
|
-
|
(470 | ) |
-
|
-
|
(470 | ) | |||||||||||||
|
Property,
plant and
equipment
|
-
|
57
|
-
|
-
|
57
|
|||||||||||||||
|
Other
assets
|
-
|
1
|
-
|
-
|
1
|
|||||||||||||||
|
Deferred
tax
liabilities
|
-
|
-
|
(1,205 | ) |
-
|
(1,205 | ) | |||||||||||||
|
Intangible
Assets with Finite Lives:
|
||||||||||||||||||||
|
Exhibitor
relationships
|
-
|
790
|
-
|
-
|
790
|
|||||||||||||||
|
Customer
relationships
|
-
|
-
|
460
|
-
|
460
|
|||||||||||||||
|
Acquired
technology
|
-
|
-
|
440
|
-
|
440
|
|||||||||||||||
|
Auctioneer
relationships
|
-
|
150
|
-
|
-
|
150
|
|||||||||||||||
|
Covenant
not to
compete
|
-
|
130
|
200
|
32
|
362
|
|||||||||||||||
|
Patent
|
-
|
-
|
-
|
300
|
300
|
|||||||||||||||
|
Intangible
Assets with Indefinite Lives:
|
||||||||||||||||||||
|
Reference
set
|
-
|
-
|
500
|
-
|
500
|
|||||||||||||||
|
Trade
name
|
-
|
740
|
1,430
|
-
|
2,170
|
|||||||||||||||
|
Excess
for the acquisitions completed in fiscal 2007
|
$ |
1
|
$ |
1,001
|
$ |
2,083
|
$ |
-
|
$ |
3,085
|
||||||||||
|
Goodwill
acquired in fiscal year 2006 for:
|
||||||||||||||||||||
|
CCE
|
$ |
1,117
|
||||||||||||||||||
|
CoinFacts
|
515
|
|||||||||||||||||||
|
GCAL
|
3,068
|
|||||||||||||||||||
|
Gemprint
|
5,099
|
|||||||||||||||||||
|
9,799
|
||||||||||||||||||||
| $ |
12,884
|
|||||||||||||||||||
84
BUSINESS
ACQUISITIONS (CONT’D)
Intangible
assets with finite lives for the acquisitions completed in fiscal years 2006
and
2007 are being amortized on a straight-line basis over their estimated useful
lives, as follows:
|
CCE
|
Gemprint
|
Expos
|
AGL
|
DID
|
|||||
|
Customer
relationships
|
15
years
|
-
|
-
|
10
years
|
-
|
||||
|
Software/Acquired
technology
|
2
years
|
7
years
|
-
|
10
years
|
-
|
||||
|
Covenant
not to compete
|
5
years
|
-
|
8
years
|
8.5
years
|
2
years
|
||||
|
Patents
|
-
|
20
years
|
-
|
-
|
11
years
|
||||
|
Auctioneer
relationships
|
-
|
-
|
10
years
|
-
|
-
|
||||
|
Exhibitor
relationships
|
-
|
-
|
10
years
|
-
|
-
|
The
following pro forma financial data presents the unaudited pro-forma consolidated
statements of operations for the Company for the fiscal years ended June 30,
2007, 2006 and 2005 based on the assumption that the Coinfacts, CCE, GCAL and
Gemprint acquisitions had been consummated on July 1, 2004, and that AGL and
Expos acquisitions had been completed as of July 1, 2005, 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 or 2005 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)
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Revenue
|
$ |
40,529
|
$ |
39,693
|
$ |
35,358
|
||||||
|
Operating
income
(loss)
|
(2,948 | ) |
3,712
|
6,995
|
||||||||
|
Interest
income,
net
|
2,123
|
1,958
|
906
|
|||||||||
|
Other
income
|
6
|
24
|
26
|
|||||||||
|
Income
(loss) before provision for income taxes
|
(819 | ) |
5,694
|
7,927
|
||||||||
|
Provision
(benefit) for income
taxes
|
(53 | ) |
2,547
|
3,152
|
||||||||
|
Income
(loss) from continuing operations
|
(766 | ) |
3,147
|
4,775
|
||||||||
|
Income
from discontinued
operations
|
228
|
309
|
116
|
|||||||||
|
Net
income
(loss)
|
$ | (538 | ) | $ |
3,456
|
$ |
4,891
|
|||||
|
Net
income (loss) per diluted share:
|
||||||||||||
|
Income
(loss) from continuing
operations
|
$ | (0.09 | ) | $ |
0.36
|
$ |
0.64
|
|||||
|
Income
from discontinued
operations
|
$ |
0.03
|
$ |
0.03
|
$ |
0.02
|
||||||
|
Net
income
(loss)
|
$ | (0.06 | ) | $ |
0.39
|
$ |
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 Auction,
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 Sheet
at June 30, 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, 2007, 2006 and 2005.
85
DISCONTINUED
OPERATIONS (CONT’D)
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, no additional amounts were
earned.
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 had been received by June 30, 2006. In
addition, we retained certain assets and liabilities of these businesses, and
we
are in the process of liquidating the remaining inventories, which are fully
reserved on the consolidated balance sheets at June 30, 2007.
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, 2007, we recognized
approximately $246,000 in fiscal 2007, $424,000 in fiscal 2006, and $248,000
in
fiscal 2005, respectively, of additional consideration based on the revenues
of
Collectible Properties, Inc.
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, 2007, the carrying value of the note was
$321,000, of which the current portion was approximately $92,000, is included
as
part of the current portion of receivables from sale of net assets of
discontinued operations.
86
DISCONTINUED
OPERATIONS (CONT’D)
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,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Net
revenues
|
$ |
84
|
$ |
480
|
$ |
472
|
||||||
|
Income
(loss) from
operations
|
140
|
161
|
(277 | ) | ||||||||
|
Gain
on sale of discontinued businesses
|
259
|
408
|
202
|
|||||||||
|
399
|
569
|
(75 | ) | |||||||||
|
Income
tax expense
(benefit)
|
171
|
273
|
(135 | ) | ||||||||
|
Income
from discontinued operations
|
$ |
228
|
$ |
296
|
$ |
60
|
||||||
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,
|
||||||||
|
2007
|
2006
|
|||||||
|
Current
assets:
|
||||||||
|
Accounts
receivable
|
$ |
-
|
$ |
10
|
||||
|
Inventories
|
-
|
37
|
||||||
|
Consignment
advances
|
-
|
-
|
||||||
|
Notes
receivable
|
-
|
36
|
||||||
| $ |
-
|
$ |
83
|
|||||
|
Non-current
assets:
|
||||||||
|
Notes
receivable, net of
current portion
|
-
|
-
|
||||||
| $ |
-
|
$ |
-
|
|||||
|
Current
liabilities:
|
||||||||
|
Consignors
payable
|
$ |
-
|
$ |
1
|
||||
|
Other
current
liabilities
|
-
|
7
|
||||||
| $ |
-
|
$ |
8
|
|||||
|
5.
|
Inventories
|
Inventories
consist of the following at June 30:
|
(in
thousands)
|
||||||||
|
2007
|
2006
|
|||||||
|
Coins
|
$ |
253
|
$ |
346
|
||||
|
Other
collectibles
|
33
|
37
|
||||||
|
Grading
raw materials consumable inventory
|
247
|
160
|
||||||
|
533
|
543
|
|||||||
|
Less
inventory
reserve
|
(91 | ) | (106 | ) | ||||
| $ |
442
|
$ |
437
|
|||||
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.
87
|
6.
|
Customer Notes Receivable
|
During
the fourth quarter of 2005, our wholly-owned subsidiary, Collectors Finance
Corporation (CFC), 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 or will be authenticated and graded by
us. A customer is required to repay the loan at maturity or, if
sooner, on return to the customer of the coins or other collectibles that
collateralize the loan. In the event that we return only a portion of
the coins or other collectibles being held as collateral for the loan, then
the
customer is required to make a principal reduction payment at that time to
maintain adequate collateral coverage for the loan. These short term
loans bear interest at a rate based on the prevailing Prime Rate at the time
the
loan is made. The total principal amount of advances and short term
loans made to customers under the Dealer Financing Program 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 such advances and short-term loans made to customers was $4,283,000,
of which $470,000 was repaid by June 30, 2006, which left an unpaid balance
remaining as of that date of $3,813,000, of which $3,790,000 was repaid during
fiscal year 2007. During fiscal year 2007, the total principal amount of
advances and short-term loans made to customers was $5,038,000, of which
$2,626,000 was repaid by June 30, 2007, which left an unpaid balance remaining
as of that date of $2,435,000.
In
addition to the principal amounts advanced by CFC, the Company recorded a note
receivable from a customer in September 2006 that matures in December 2007
in
the principal amount of $132,000. Because the stated interest rate on
the note is 0%; we discounted the note to a carrying value of approximately
$114,000 at September 30, 2006 using an imputed interest rate, per annum, of
11.25%, which was the interest rate applied to similar notes receivables held
by
CFC. At June 30, 2007, the carrying value of the note was
approximately $124,000, and, accordingly, $10,000 was recorded as interest
income.
The
Company routinely performs an analysis of the expected collectibility of
customer notes receivable based on several factors, including the age and extent
of significant past due amounts, economic conditions or trends that may
adversely affect the ability of customers to pay those notes and the value
of
the collateral securing the repayment of the outstanding balances and may
establish an allowance for possible losses on those notes based on those
analyses. At June 30, 2007 and 2006, we had allowances for
uncollectible amounts of $23,000 and $16,000, respectively, to cover a
deficiency in collateral value securing the notes of one customer for advances
made under the Dealer Financing Program.
|
7.
|
Property and Equipment
|
Property
and equipment consist of the following at June 30:
|
(in
thousands)
|
||||||||
|
2007
|
2006
|
|||||||
|
Coins
and stamp grading reference sets
|
$ |
222
|
$ |
62
|
||||
|
Computer
hardware and
equipment
|
1,664
|
1,271
|
||||||
|
Computer
software
|
1,027
|
972
|
||||||
|
Equipment
|
3,366
|
2,020
|
||||||
|
Furniture
and office
equipment
|
1,064
|
793
|
||||||
|
Leasehold
improvements
|
1,452
|
607
|
||||||
|
Trading
card reference
library
|
52
|
52
|
||||||
|
8,847
|
5,777
|
|||||||
|
Less
accumulated depreciation and amortization
|
(4,766 | ) | (3,880 | ) | ||||
|
Property
and equipment,
net
|
$ |
4,081
|
$ |
1,897
|
||||
Depreciation
and amortization expense relating to property and equipment for fiscal 2007,
2006 and 2005 was $891,000, $486,000 and $443,000, respectively.
88
|
8.
|
Accrued Liabilities
|
Accrued
liabilities consisted of the following at June 30:
|
(in
thousands)
|
||||||||
|
2007
|
2006
|
|||||||
|
Warranty
reserve
|
$ |
735
|
$ |
710
|
||||
|
Professional
fees
|
183
|
189
|
||||||
|
Other
|
1,236
|
1,144
|
||||||
| $ |
2,154
|
$ |
2,043
|
|||||
Warranty
reserve activity and balances related to fiscal years 2007, 2006 and 2005,
were
as follows (in
thousands):
|
Warranty
reserve, June 30, 2004
|
$ |
492
|
||
|
Charged
to cost of revenues
|
530
|
|||
|
Payments
|
(413 | ) | ||
|
Warranty
reserve June 30, 2005
|
609
|
|||
|
Charged
to cost of revenues
|
492
|
|||
|
Payments
|
(391 | ) | ||
|
Warranty
reserve at June 30, 2006
|
710
|
|||
|
Charged
to cost of revenues
|
389
|
|||
|
Payments
|
(364 | ) | ||
|
Warranty
reserve at June 30, 2007
|
$ |
735
|
|
9.
|
Income Taxes
|
Set
forth
below are the provision (benefit) for income taxes for the years ended June
30:
|
(in
thousands)
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | (613 | ) | $ |
2,360
|
$ |
2,738
|
|||||
|
State
|
29
|
9
|
63
|
|||||||||
| (584 | ) |
2,369
|
2,801
|
|||||||||
|
Deferred:
|
||||||||||||
|
Federal
|
705
|
(172 | ) | (117 | ) | |||||||
|
State
|
(160 | ) |
536
|
457
|
||||||||
|
545
|
364
|
340
|
||||||||||
|
Total
provision (benefit) for income taxes
|
$ | (39 | ) | $ |
2,733
|
$ |
3,141
|
|||||
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)
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Provision
at federal statutory rates
|
$ | (266 | ) | $ |
2,087
|
$ |
2,685
|
|||||
|
State
income taxes,
net
|
(99 | ) |
356
|
340
|
||||||||
|
Meals and
entertainment
|
94
|
76
|
59
|
|||||||||
|
Stock-based
compensation
|
227
|
214
|
-
|
|||||||||
|
Other
|
5
|
-
|
57
|
|||||||||
| $ | (39 | ) | $ |
2,733
|
$ |
3,141
|
||||||
89
INCOME
TAXES (CONT’D)
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, 2007 and 2006, were as follows:
|
(in
thousands)
|
||||||||
|
2007
|
2006
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Supplier
compensation
costs
|
$ |
496
|
$ |
510
|
||||
|
Reserves
|
1,037
|
1,077
|
||||||
|
Net
operating loss
carryforward
|
159
|
-
|
||||||
|
State
credits
|
802
|
661
|
||||||
|
Other
|
74
|
21
|
||||||
|
Less:
valuation
allowance
|
(22 | ) |
-
|
|||||
|
Total
deferred tax
assets
|
2,546
|
2,269
|
||||||
|
Deferred
tax liabilities:
|
||||||||
|
Goodwill
and
intangibles
|
(2,298 | ) | (408 | ) | ||||
|
Property
and
equipment
|
(31 | ) | (32 | ) | ||||
|
Other
|
(66 | ) | (73 | ) | ||||
|
Total
deferred tax
liabilities
|
(2,395 | ) | (513 | ) | ||||
|
Net
deferred tax
assets
|
151
|
1,756
|
||||||
|
Less:
Current
portion
|
(1,020 | ) | (1,414 | ) | ||||
| $ | (869 | ) | $ |
342
|
||||
At
June
30, 2007, the Company had $1,215,000 related to California Enterprise Zone
Credits. These credits have no expiration dates, and can only be
utilized to offset taxable income generated in the Enterprise
Zone. The Company also has state net operating losses of $2,181,000,
which will primarily begin to expire in 2017.
|
10.
|
Line of Credit
|
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. As of June 30, 2007 and 2006, no
borrowings had been made by CFC under this bank line. 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 (comprised of 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 $0 and $170,000 were included in prepaid expenses and other
current assets in the accompanying Consolidated Balance Sheets at June 30,
2007
and 2006, respectively. These debt issuance costs were amortized to
interest expense using the effective interest method over the term of the
revolving bank line of credit agreement, which was the two years ended June
30,
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. On June 28, 2007, the maturity date for
this revolving bank line of credit was extended to September 30, 2007 by mutual
agreement between the bank and CFC.
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,
2007 and 2006 and received the required consents and waivers 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 cash dividends during fiscal
2007
and 2006.
90
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, we issued 5,000 shares of common stock under this Plan at an
average purchase price of $12.80 per share.
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. 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 called for the payment of quarterly cash dividends, each
in
the amount of $0.08 per share for an expected total annual cash dividend of
$0.32 per common share. At the same time, the Board of Directors
declared the first of the quarterly cash dividends under this policy of $0.08
per share, which was paid on June 28, 2006 in the aggregate amount of $674,000
to stockholders of record on June 14, 2006. Similarly, pursuant to
that dividend policy, dividend payments of $0.08 per share were paid on
September 12, 2006 in the aggregate amount of approximately $668,000, and on
December 13, 2006, in the aggregate amount of approximately
$665,000.
On
December 5, 2006, the Board of Directors modified the dividend policy by
increasing the quarterly dividend from $0.08 per share of common stock to $0.12
per share and declared and paid dividends in the amounts of $999,000 and
$1,018,000 for the third and fourth quarter of fiscal year
2007. Pursuant to that modified policy, in June 2007, the Board of
Directors authorized an additional increase in the quarterly dividend rate
from
$0.12 per share to $0.25 per share, effective for the quarterly dividend
expected to be paid in the first quarter of fiscal 2008. That quarterly dividend
was paid, in the aggregate amount of $2,129,000, on September 7, 2007 to all
stockholders of record as of August 24, 2007 (see note 17).
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.
91
STOCKHOLDERS’
EQUITY (CONT’D)
Stock
Buyback Program
On
December 6, 2005, the Company announced that its Board of Directors had approved
a stock buyback program authorizing 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. During the years ended June 30, 2007 and 2006,
the Company repurchased and retired 72,000 and 182,000 shares, respectively,
of
its common stock, pursuant to this program for aggregate purchase prices
totaling approximately $949,000 and $2,628,000 (including transaction costs),
respectively. Common stock at par value and additional paid-in
capital were reduced by the $2,628,000 and $949,000, respectively. The Company
is under no obligation to repurchase any additional shares under this program,
and the timing, actual number and value of any additional 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, 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.
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. During the second quarter of 2007, the Company
retired all of these shares and recorded a decrease to additional paid-in
capital on the balance sheet during the second quarter of 2007. Prior
to that time, the repurchased shares were recorded as treasury shares on the
Company’s Consolidated Balance Sheets.
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 $1.31 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. In
January 2007, these options were fully exercised, and the related estimated
tax
benefit of $623,000 was recorded as part of $633,000 credited to stockholders’
equity in fiscal 2007, as a result of that option exercise.
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 were outstanding at June 30, 2007.
|
13.
|
Stock Option Plans
|
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, covered 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, or its subsidiaries, 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 approved a 2003 Incentive Plan (the “2003 Plan”) and
a 2005 Incentive Plan (the “2005” Plan), which authorized 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 provided 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
92
Directors,
for incentive stock options and 85% of fair market value for nonstatutory stock
options. The 2003 and 2005 Plan provided 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 granted at 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.
During
the second quarter of fiscal year 2007, the Board of Directors adopted and
our
stockholders approved the 2006 Equity Incentive Plan (“2006 Plan”), which
provides for the grant of stock options, stock appreciation rights (commonly
referred to as “SARs”), restricted stock purchase rights and restricted stock
units (collectively, “stock awards”), to officers and other employees and
non-employee directors of and consultants to the Company or its
subsidiaries. At the time of the adoption of the 2006 Plan, a total
of 444,000 shares of common stock were still available for the future grant
of
stock options and restricted stock purchase awards under the other Plans (the
“Existing Plans”). Pursuant to the provisions of the 2006 Plan, those
444,000 shares were “rolled over” into and became available for grants of stock
awards only under the 2006 Plan and the right to grant additional stock awards
under the Existing Plans terminated. In addition, while the stock
options and restricted shares that were outstanding under the Existing Plans,
which covered a total of 911,000 shares at the time the 2006 Plan was approved,
were unaffected by the adoption of the 2006 Plan, in the event any of those
stock awards were to terminate or any shares that were subject to outstanding
restricted stock grants under the Existing Plans were to be reacquired by the
Company, those shares will become available for future grants of stock awards
under the 2006 Plan, rather than under the Existing Plans. As a
result, the adoption of the 2006 Plan did not increase the number of shares
authorized for issuance under the Company’s stock incentive
plans. Instead, the 2006 Plan was adopted to provide greater
flexibility to the Company in terms of the types of stock incentives that could
be granted to eligible participants.
The
following is a summary of stock option activity for fiscal 2007, 2006 and 2005
under the 2006 Plan, PCGS Plan, the 1999 Plan, the 2003 Plan and the 2005
Plan.
|
(In
thousands, except per share data)
|
||||||||||||||||||||
|
Number
of Shares
|
Exercise
Price
Per Share
|
Weighted
Average Exercise Price Per Share
|
||||||||||||||||||
|
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
|
|||||||||||||||
|
Granted
|
65
|
13.70
|
-
|
14.09
|
13.67
|
|||||||||||||||
|
Cancelled
|
(13 | ) |
3.08
|
-
|
20.00
|
15.11
|
||||||||||||||
|
Exercised
|
(29 | ) |
3.08
|
-
|
11.58
|
3.56
|
||||||||||||||
|
Options
outstanding at June 30, 2007
|
912
|
$ |
3.08
|
-
|
$ |
24.00
|
$ |
12.98
|
||||||||||||
The
total pre-tax intrinsic value of
options exercised during fiscal years 2007, 2006 and 2005 were $285,000,
$462,000 and $956,000, respectively. Total fair value of options
vested during 2007, 2006 and 2005 were $656,000, $671,000 and $1,372,000,
respectively.
93
The
following table summarizes information about stock options outstanding at June
30, 2007:
|
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
|
128
|
5.5
|
$ |
3.38
|
$ |
1,521
|
128
|
$ |
3.38
|
$ |
1,521
|
||||||||||||||||||||
| $ |
5.28
|
$ |
7.60
|
62
|
6.4
|
$ |
7.54
|
478
|
62
|
$ |
7.54
|
478
|
||||||||||||||||||||||
| $ |
8.00
|
$ |
12.00
|
181
|
6.0
|
$ |
10.40
|
887
|
136
|
$ |
10.19
|
697
|
||||||||||||||||||||||
| $ |
13.24
|
$ |
19.60
|
442
|
7.7
|
$ |
15.73
|
394
|
215
|
$ |
17.09
|
79
|
||||||||||||||||||||||
| $ |
20.00
|
$ |
20.00
|
60
|
1.8
|
$ |
20.00
|
-
|
60
|
$ |
20.00
|
-
|
||||||||||||||||||||||
| $ |
20.10
|
$ |
24.00
|
39
|
3.7
|
$ |
22.99
|
-
|
34
|
$ |
23.42
|
-
|
||||||||||||||||||||||
|
912
|
6.4
|
$ |
12.98
|
$ |
3,280
|
635
|
$ |
12.53
|
$ |
2,775
|
||||||||||||||||||||||||
At
June
30, 2007, unvested stock options to purchase up to a total of approximately
277,000 shares were outstanding with a weighted average contractual remaining
life of 7.8 years and at a weighted average exercise price of
$14.00. As of the same date, the aggregate intrinsic value of the
unvested options (based on a closing price of our shares, as reported by Nasdaq,
of $15.29) was approximately $505,000. At June 30, 2007, and based
upon the estimated forfeiture rate of 9% per annum and the remaining vesting
terms of these options, the number of options expected to vest over their
remaining vesting terms was approximately 241,000 options. At June
30, 2006, unvested stock options to purchase up to a total of approximately
320,000 shares of our common stock were outstanding with a weighted average
contractual remaining life of 8.2 years and at a weighted average exercise
price
of $13.21. As of the same date, the aggregate intrinsic value of the
unvested options (based on a closing price of our shares, as reported by Nasdaq,
of $13.98) was approximately $542,000.
The
weighted-average fair values of stock options granted during fiscal 2007, 2006
and 2005 were $5.56, $6.57 and $8.55 per option share,
respectively.
The
following table presents the non-vested status of the restricted shares for
the
fiscal year ended June 30, 2007 and their respective weighted average grant
date
fair values. There were no restricted shares granted prior to fiscal
2007.
|
Non-Vested
Shares:
|
Shares
|
Weighted
Average
Grant-Date
Fair
Value
|
||||||
|
Non-vested
at June 30, 2006
|
-
|
$ |
-
|
|||||
|
Granted
|
56,760
|
13.65
|
||||||
|
Vested
|
(6,530 | ) |
13.40
|
|||||
|
Forfeited
or
Cancelled
|
-
|
-
|
||||||
|
Non-vested
at June 30, 2007
|
50,230
|
$ |
13.68
|
|||||
|
14.
|
Related-Party Transactions
|
A
former
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, 2007, 2006 and 2005, the member was paid $23,750, $37,500 and $31,250,
respectively, as Board fees; and the professional services firm was paid
$211,000, $189,000, and $588,000, respectively, for services
rendered. At June 30, 2007 and 2006, amounts payable to this firm
were approximately $53,000 and $41,000, respectively, and are included on the
Consolidated Balance Sheet in accounts payable and accrued liabilities,
respectively.
DHRCC,
which is wholly owned by David Hall, the President and a director and a
stockholder of the Company, and Van Simmons, who is a director and a stockholder
of the Company, 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,
94
RELATED
PARTY TRANSACTIONS (CONT’D)
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 $42,370
in
fiscal 2007, $41,059 in fiscal 2006 and $40,000 in fiscal 2005.
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, $0 and $11,000, respectively, for the periods
ended June 30, 2007, 2006 and 2005, and the Company paid DHRCC commissions
of
$0, $0 and $1,000, respectively, in connection with those sales.
All
of
the above-described transactions with DHRCC were approved by the disinterested
members of the Company’s Board of Directors.
During
fiscal years 2007, 2006 and 2005, the Company charged and DHRCC paid
approximately $35,000, $29,000 and $29,000 and for advertising fees,
approximately $1,000, $3,000 and $26,000 for grading and authentication fees
and
approximately $52,000, $53,000 and $11,000 for warranty claims, respectively.
During fiscal year 2007, DHRCC attended the Expos Long Beach shows and paid
approximately $5,200 in fees to Expos and also paid CCE $3,500 in monthly
subscriber fees during fiscal year 2007. In addition, in 2005, the
Company paid DHRCC $9,000 for the purchase of certain coin
inventory.
During
fiscal year 2007, David Hall paid $17,600 in grading and
authentication fees for personal sportscards submitted. Also, a
member of the immediate family of David Hall won a prize of $11,000 in the
PCGS
2006 World Series of Grading Contest. Separately, this individual
paid $13,600 in grading and authentication fees to PCGS. The grading
fees charged by the Company to both individuals, were comparable to the fees
charged by the Company in the ordinary course of business to unaffiliated
customers for similar services.
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. During fiscal year 2007, GAA
paid approximately $45,000 under the sub-lease agreement and approximately
$12,000 for reimbursable occupancy expenses. In the normal course of
business, GAA was charged and paid $2,500 in grading and consultation fees
by
GCAL during fiscal year 2007.
In
connection with the Company's acquisition of the business and assets of Expos,
the Company assumed a lease for the offices at which Expos conducts its
operations. The landlord under that lease is a trust of which the trustee is
the
former president of Expos, who has been retained to provide services to the
Company under a five year consulting agreement for consulting fees of $250,000
per year. The lease provides for lease payments by the Company of $3,000 per
month for a term of three years with a one-time security deposit of
$3,000. The lease is renewable for successive periods of one year
each, subject to the right of either party to terminate the lease prior to
commencement of any such one year renewal period. During fiscal year
2007, the Company paid $36,000 in lease payments for the Expos office site
and
$3,000 as a security deposit for the lease.
15. Commitments
and Contingencies
Leases
The
Company has various operating lease commitments for facilities and equipment
that expire through December 2015. On July 1, 2006, GCAL leased and
occupied additional space in the same building in which its operations were
located. 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
95
COMMITMENTS
AND CONTINGENCIES (CONT’D)
table
for
fiscal years 2008 to 2012, are expected to be $329,000, $339,000, $349,000,
$360,000 and $371,000, respectively. During fiscal 2007, the Company
subleased office space that was in excess of its current requirements 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, the Company’s total rent expense is recognized on a
straight-line basis over the lease period. Total rent expense, net of
sublease income, was approximately $2,226,000, $1,629,000 and $1,349,000,
respectively, for the years ended June 30, 2007, 2006 and 2005. At
June 30, 2007 and 2006, deferred rent (representing the cumulative difference
between rent paid and the rent expense recognized) was $477,000 and $402,000,
respectively. Future minimum lease payments under these agreements are as
follows:
|
(In
thousands)
|
||||||||||||
|
Company’s
Gross
Payment
|
Sublease
Income
|
Net
|
||||||||||
|
2008
|
$ |
1,883
|
$ |
94
|
$ |
1,789
|
||||||
|
2009
|
1,848
|
45
|
1,803
|
|||||||||
|
2010
|
913
|
15
|
898
|
|||||||||
|
2011
|
433
|
-
|
433
|
|||||||||
|
2012
|
415
|
-
|
415
|
|||||||||
|
Thereafter
|
1,385
|
-
|
1,385
|
|||||||||
| $ |
6,877
|
$ |
154
|
$ |
6,723
|
|||||||
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, 2007 or
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.
96
COMMITMENTS
AND CONTINGENCIES (CONT’D)
Legal
Actions and Settlements
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.
During
fiscal 2007, two legal settlements in the aggregate amount of $73,000 were
recognized in the Consolidated Statements of Operations.
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.
Also,
as
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 was entitled to statutory damages that should be
determined by multiplying $750 times the 14,060 authentication certificates
on
which his name appeared without his consent, or approximately $10.5 million
in
total.
Oral
arguments took place at the Court of Appeals on June 26, 2007. On
August 30, 2007, the Appellate Court issued it decision in which it ruled that,
contrary to his assertions, Miller was not entitled to statutory damages of
$10.5 million. In reaching that decision, the Appellate Court found
that the use of Miller’s name by the Company constituted, at most, a single
violation of the statute in question and, therefore, Miller is not entitled
to
multiply $750.00 by the number of times his name was used. The Appellate
Court also ruled that Miller has the right to file a new trial in an effort
to
recover damages for the use by the Company of his name; however, in that lawsuit
he must prove that Collectors Universe violated the statute at issue or common
law and, if he succeeds in proving such a violation, he must show how, if at
all, and in what amount, if any, he was damaged as a result of that
violation. However, the Appellate Court ruled that in any new trial
that Miller might file, he cannot seek, as a measure of damages, to multiply
$750.00 by the number of times, if any, that Collectors Universe used his name
without his consent. We cannot predict whether Miller will file a new
trial.
97
COMMITMENTS
AND CONTINGENCIES (CONT’D)
The
Appellate Court's decision becomes final 30 days from the date it was
issued. Prior to that date, Miller could petition the Appellate Court
to reconsider its decision. At the end of the 30-day period, Miller will
have a period of 10 days within which to file a petition for review by the
California Supreme Court.
The
Company believes that, even if Miller does file a new trial, it will not incur
any material liability to Miller.
Other
Legal Actions
From
time
to time, the Company is named as a defendant in lawsuits that arise in the
ordinary course of its 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.
|
Business Segments
|
Operating
segments are defined as the components or “segments” of an enterprise for which
separate financial information is available that is evaluated regularly by
the
Company’s chief operating decision maker, or decision-making group, in deciding
how to allocate resources to and in assessing performance of those components
or
“segments.” The Company’s chief operating decision-maker is its Chief
Executive Officer. The operating segments of the Company are
organized based on the respective services that they offer to customers of
the
Company. Similar operating segments have been aggregated to
reportable operating segments based on having similar services, types of
customers, and other criteria that are set forth in SFAS No. 131,
Disclosures About Segments of an Enterprise and Related
Information.
For
our
continuing operations, we operate principally in four reportable service
segments: coins, sportscards, jewelry and other high-end
collectibles. Services provided by these segments include
authentication, grading, publication advertising and subscription-based
revenues. The other collectibles segment includes autographs, stamps,
currency, the CCE subscription business and our collectibles conventions
business.
98
BUSINESS
SEGMENT (CONT’D)
We
allocate operating expenses to each service segment based upon activity
levels. The following tables set forth on a business segment basis,
including a reconciliation with the consolidated financial
statements, (i) external revenues, (ii) amortization and depreciation, (iii)
stock-based compensation expense as a significant other non-cash transaction,
and (iv) operating income for the fiscal years ended June 30, 2007, 2006 and
2005. Net identifiable assets and goodwill are provided by business segment
as
of June 30, 2007 and 2006. All of our sales and identifiable assets
are located in the United States.
|
Fiscal
Years Ended June 30,
|
||||||||||||
|
Net
revenues from external customers:
|
2007
|
2006
|
2005
|
|||||||||
|
Coins
|
$ |
23,317
|
$ |
23,829
|
$ |
23,203
|
||||||
|
Sportscards
|
8,797
|
8,461
|
8,143
|
|||||||||
|
Jewelry
|
1,235
|
373
|
-
|
|||||||||
|
Other
|
7,103
|
4,251
|
2,261
|
|||||||||
|
Total
revenue
|
$ |
40,452
|
$ |
36,914
|
$ |
33,607
|
||||||
|
Amortization
and depreciation:
|
||||||||||||
|
Coins
|
$ |
205
|
$ |
114
|
$ |
55
|
||||||
|
Sportscards
|
87
|
70
|
92
|
|||||||||
|
Jewelry
|
813
|
185
|
-
|
|||||||||
|
Other
|
591
|
265
|
3
|
|||||||||
|
Total
|
1,696
|
634
|
150
|
|||||||||
|
Unallocated
amortization and
depreciation
|
316
|
285
|
293
|
|||||||||
|
Consolidated
amortization and
depreciation
|
$ |
2,012
|
$ |
919
|
$ |
443
|
||||||
|
Stock-based
compensation:
|
||||||||||||
|
Coins
|
$ |
80
|
$ |
192
|
$ |
2
|
||||||
|
Sportscards
|
34
|
15
|
-
|
|||||||||
|
Jewelry
|
8
|
-
|
-
|
|||||||||
|
Other
|
124
|
129
|
-
|
|||||||||
|
Total
|
246
|
336
|
2
|
|||||||||
|
Unallocated
stock-based
compensation
|
644
|
334
|
31
|
|||||||||
|
Consolidated
stock-based
compensation
|
$ |
890
|
$ |
670
|
$ |
33
|
||||||
|
Operating
income (loss) before unallocated expenses:
|
||||||||||||
|
Coins
|
$ |
9,658
|
$ |
11,542
|
$ |
12,183
|
||||||
|
Sportscards
|
1,435
|
1,153
|
844
|
|||||||||
|
Jewelry
|
(5,557 | ) | (1,459 | ) |
-
|
|||||||
|
Other
|
417
|
6
|
(704 | ) | ||||||||
|
Total
|
5,953
|
11,242
|
12,323
|
|||||||||
|
Unallocated
operating
expenses
|
(8,885 | ) | (7,473 | ) | (5,356 | ) | ||||||
|
Consolidated
operating income
(loss)
|
$ | (2,932 | ) | $ |
3,769
|
$ |
6,967
|
|||||
99
BUSINESS
SEGMENT (CONT’D)
|
At
June 30,
|
||||||||
|
Identifiable
Assets:
|
2007
|
2006
|
||||||
|
Coins
|
$ |
2,139
|
$ |
2,647
|
||||
|
Sportscards
|
632
|
541
|
||||||
|
Jewelry
|
20,435
|
12,611
|
||||||
|
Other
|
7,982
|
6,284
|
||||||
|
Total
|
31,188
|
22,083
|
||||||
|
Unallocated
assets
|
46,913
|
56,138
|
||||||
|
Consolidated
assets
|
$ |
78,101
|
$ |
78,221
|
||||
|
Goodwill:
|
||||||||
|
Coins
|
$ |
515
|
$ |
515
|
||||
|
Jewelry
|
10,251
|
8,168
|
||||||
|
Other
|
2,118
|
1,116
|
||||||
|
Consolidated
goodwill
|
$ |
12,884
|
$ |
9,799
|
||||
17. Subsequent
Events
On
August
10, 2007, the Company announced that the quarterly dividend of $0.25 per share
of common stock will be paid on September 7, 2007 to shareholders of record
as
of August 24, 2007 (see note 12). That quarterly dividend was paid,
in the aggregate amount of $2,129,000, on September 7, 2007.
|
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
|
$ |
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
|
|||||||||
|
Allowance
for doubtful accounts
|
$ |
37,000
|
$ |
-
|
$ |
42,000
|
$ | (19,000 | ) | $ |
60,000
|
|||||||||
|
Allowance
for customer notes receivable
|
16,000
|
7,000
|
-
|
-
|
23,000
|
|||||||||||||||
|
Inventory
reserve
|
106,000
|
-
|
-
|
(15,000 | ) |
91,000
|
||||||||||||||
|
Total
at June 30,
2007
|
$ |
159,000
|
$ |
7,000
|
$ |
42,000
|
$ | (34,000 | ) | $ |
174,000
|
|||||||||
NONE
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
100
SUBSEQUENT
EVENTS (CONT’D)
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 provide reasonable assurance 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,
2007. Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that, as of June 30, 2007, 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, 2007 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, 2007, 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.
101
SUBSEQUENT
EVENTS (CONT’D)
Based
on
that assessment, management determined that, as of June 30, 2007, 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, 2007 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.
102
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, 2007, 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,
2007, is fairly stated, in all material respects, based on criteria established
in Internal Control—Integrated Framework issued by COSO. Also in our
opinion, Collectors Universe, Inc. and subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of June 30,
2007, based on criteria established in Internal Control—Integrated Framework
issued by COSO.
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Collectors
Universe, Inc. and subsidiaries as of June 30, 2007 and 2006, and the related
consolidated statements of operations, stockholders’ equity, and cash flows for
each of the three years ended June 30, 2007 and our report dated September
10,
2007 expressed an unqualified opinion thereon.
/s/
GRANT
THORNTON LLP
Irvine,
California
September
10, 2007
103
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 29, 2007, for
the
Company’s 2007 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 29, 2007, for the Company’s 2007 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 29, 2007, for the Company’s 2007 annual
stockholders' meeting.
The
following table provides information relating to our equity compensation plans
as of June 30, 2007.
|
Column
A
|
Column
B
|
Column
C
|
||||||||||
|
Number
of Securities to be Issued Upon Exercise of Outstanding Options,
Warrants
and Restricted Shares
|
Weighted-Average
Exercise Price of Outstanding Options, Warrants and Restricted
Shares
|
Number
of Securities Remaining Available for Future Issuance under Equity
Compensation Plans(Excluding Securities Reflected in Column
A)
|
||||||||||
|
Equity
compensation plans approved
by stockholders
|
956,000
|
$ |
13.07
|
390,000
|
||||||||
|
Equity
compensation not approved by
stockholders (1)
|
163,000
|
19.26
|
-
|
|||||||||
|
Total
|
1,119,000
|
$ |
13.97
|
390,000
|
||||||||
|
(1)
|
Warrants
to purchase common stock granted to non-employee service providers
in the
fiscal year ended June 30, 1997, which is prior to the time that
the
Company became a reporting company under the Securities Exchange
Act of
1934, as amended.
|
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 29, 2007, for the Company’s 2007 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 29, 2007, for the Company’s 2007 annual stockholders’
meeting.
104
PART
IV
|
(a)(1)
|
Financial
Statements
|
The
following financial statements are included in Item 8 of Form 10-K:
|
Report
of Independent Registered Public Accounting Firm
|
|
Consolidated
Balance Sheets as of June 30, 2007 and 2006
|
|
Consolidated
Statements of Operations for the years ended June 30, 2007, 2006
and
2005
|
|
Consolidated
Statements of Stockholders’ Equity for the years ended June 30, 2007, 2006
and 2005
|
|
Consolidated
Statements of Cash Flows for the years ended June 30, 2007, 2006
and
2005
|
|
Notes
to the Consolidated Financial
Statements
|
|
(a)(2)
|
Financial
Statement Schedule
|
|
Schedule
II Valuation and Qualifying Accounts
|
|
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.
|
105
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, 2007
|
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 or her 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, 2007
|
||
|
/s/
MICHAEL R. HAYNES
Michael
R. Haynes
|
Chief
Executive Officer and Director
(Principal
Executive
Officer)
|
September
13, 2007
|
||
|
/s/
DAVID
HALL
David
G. Hall
|
President
and Director
|
September
13, 2007
|
||
|
/s/
JOSEPH J. WALLACE
Joseph
J. Wallace
|
Chief
Financial Officer
(Principal
Financial and
Accounting Officer)
|
September
13, 2007
|
||
|
/s/
VAN D. SIMMONS
Van
D. Simmons
|
Director
|
September
13, 2007
|
||
|
/s/
A. J. BERT MOYER
A.
J. Bert Moyer
|
Director
|
September
13, 2007
|
||
|
/s/
DEBORAH A. FARRINGTON
Deborah
A. Farrington
|
Director
|
September
13, 2007
|
||
|
/s/
MICHAEL J. MCCONNELL
Michael
J. McConnell
|
Director
|
September
13, 2007
|
||
|
/s/
BRUCE A. STEVENS
Bruce
A. Stevens
|
Director
|
September
13, 2007
|
S-1
|
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.*
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|
|
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.*
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|
|
10.9
|
Collectors
Universe/eBay Mutual Services Term Sheet dated February 10, 1999,
between
the Company and eBay, Inc.*
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|
|
10.10
|
Net
Lease between Orix Searls Santa Ana Venture and Collectors Universe,
dated
June, 1999.*
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|
|
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.*
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|
|
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).
|
E-1
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.
|
|
|
10.37
|
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 September 19,
2006.
|
|
|
10.38
|
Description
of 2007 Management Bonus Plan. Incorporated by reference to
Exhibit 99.1 to the Company’s Current Report on Form 8-K dated November
17, 2006.
|
|
|
10.39
|
Letter
Agreement dated July 23, 2007 with Michael J. McConnell, relating
to his
election to and service on the Collectors Universe, Inc. Board of
Directors. Incorporated by reference to Exhibit 99.1 to the
Company’s Current Report on Form 8-K dated July 20,
2007.
|
|
|
21.1
|
Subsidiaries
of the Registrant.
|
|
|
23.1
|
Consent
of 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.
|
E-2