Collectors Universe, Inc.
COLLECTORS UNIVERSE INC (Form: 10-K, Received: 09/04/2009 06:01:19)
 
 

 


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

(Mark One)
 
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended June 30, 2009
   
 
OR
   
q
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
   
 
For the transition period from _______ to _____
   
 
 
 

Commission file number 1-34240
COLLECTORS UNIVERSE, INC.
(Exact name of Registrant as specified in its charter)

Delaware
 
33-0846191
(State or other jurisdiction of
 
(I.R.S. Employer Identification No.)
Incorporation or organization)
   
1921 E. Alton Avenue, Santa Ana, California
 
92705
(Address of principal executive offices)
 
(Zip Code)
(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   ý    No o

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):
 

Large accelerated filer o
Accelerated filer o
Non-accelerated filer   ý
Smaller reporting company   o

 
Indicate by check mark whether the Registrant is a shell company (as defined in Securities Exchange Act Rule 12b-2).
YES   o    NO   x

As of December 31, 2008, the aggregate market value of the Common Stock held by non-affiliates was approximately $23,082,994 based on the per share closing price of $2.93 of Registrant’s Common Stock as of such date as reported by the Nasdaq Global Market.

As of August 12, 2009, a total of 7,408,516 shares of Registrant's Common Stock were outstanding.


DOCUMENTS INCORPORATED BY REFERENCE

Except as otherwise stated therein, Items 10, 11, 12, 13 and 14 in Part III of the Form 10-K are incorporated by reference from Registrant's Definitive Proxy Statement, which is expected to be filed with the Securities and Exchange Commission on or before October 28, 2009, for its Annual Meeting of Stockholders scheduled to be held on December 8, 2009.




 
 

 

COLLECTORS UNIVERSE, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2009
TABLE OF CONTENTS



PART I
   
Page
       
 
1
 
1
 
16
 
21
 
22
 
22
 
22
   
23
PART II
     
 
24
 
25
 
27
 
50
 
51
   
52
   
53
   
54
   
55
   
56
   
58
 
87
 
87
 
88
PART III
     
 
89
 
89
 
89
 
89
 
89
     
 
PART IV
90
   
SIGNATURES                                                                                                                                           
S-1
INDEX TO EXHIBITS                                                                                                                                           
E-1





 

 

FORWARD-LOOKING STATEMENTS

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 or markets, 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.  Those estimates or predictions 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 in Part I of this Annual Report under the caption “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, except as may be required by law or applicable Nasdaq rules.

PART I
ITEM 1.    BUSINESS

Overview

We provide authentication and grading services to dealers and collectors of high-value coins, trading cards, event tickets, autographs, memorabilia and stamps (“collectibles”).  We believe that our authentication and grading services add value to these collectibles by enhancing their marketability and thereby providing increased liquidity to the dealers, collectors and consumers that own and buy and sell them.

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 trading cards and event tickets, “PSA/DNA” for autographs and memorabilia and “PSE” for stamps.  Additionally, we warrant our certification of authenticity and the grade that we assign to the coins, trading cards and stamps bearing our brands.  We do not warrant our authenticity determinations for autographs or memorabilia.

We principally generate revenues from the fees paid for our authentication and grading services.  To a much lesser extent, we generate revenues from other related services, which consist of revenues from:  (i) the sale of advertising on our websites; (ii) the sale of printed publications and collectibles price guides and advertising in such publications; (iii) the sale of membership subscriptions in our Collectors Club, which is designed to attract interest in high-value collectibles among new collectors; (iv) the sale of subscriptions to our CCE dealer-to-dealer Internet bid-ask market for certified coins; and (v) collectibles trade show conventions that we conduct.  We also generate revenues from sales of our collectibles inventory, which is comprised primarily of collectible coins that we have purchased under our coin grading warranty program; however, these activities are not the focus, and we do not consider them to be an integral part of our business.

We have developed some of the leading brands in the collectibles markets in which we conduct our business:

§  
PCGS” (Professional Coin Grading Service), which is the brand name for our independent coin authentication and grading service;

§  
“PSA” (Professional Sports Authenticator), which is the brand name for our independent sports and trading cards authentication and grading service;

§  
“PSA/DNA” (PSA/DNA Authentication Services), which is the brand name for our independent authentication and grading service for vintage autographs and memorabilia; and

 
1

 

§  
“PSE” (Professional Stamp Experts), which is the brand name for our independent stamp authentication and grading service.

PCGS and PSA are among the leading independent authentication and grading services in the collectible coin and trading cards markets in the United States.  PSA/DNA and PSE also are among the leading independent authentication services in their respective markets.

We began offering our PCGS coin authentication and grading services in 1986 and, from inception through fiscal year ended June 30, 2009, we authenticated and graded more than 16 million coins.  In 1991, we launched our PSA trading cards authentication and grading service and, through June 30, 2009, authenticated and graded over 12 million trading cards.  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.

The following table provides information regarding the respective numbers of coins, trading cards, autographs and stamps that we authenticated or graded from 2007 to 2009:

   
Units Processed
 
   
2009
   
2008
   
2007
 
Coins
    1,456,100       52 %     1,474,900       48 %     1,558,700       51 %
Trading cards
    1,171,600       41 %     1,329,500       43 %     1,262,700       41 %
Autographs
    168,100       6 %     199,600       7 %     169,800       6 %
Stamps
    25,700       1 %     53,000       2 %     66,200       2 %
Total
    2,821,500       100 %     3,057,000       100 %     3,057,400       100 %

The following table sets forth the estimated values at which our customers insured the coins, trading cards, autographs and stamps that they submitted to us for authentication or grading.

   
Declared Values (000)
 
   
2009
   
2008
   
2007
 
Coins
  $ 1,119,000       91 %   $ 1,327,000       90 %   $ 1,435,000       92 %
Trading cards
    79,000       6 %     90,000       6 %     88,000       6 %
Autographs
    15,000       1 %     26,000       2 %     24,000       1 %
Stamps
    22,000       2 %     25,000       2 %     12,000       1 %
Total
  $ 1,235,000       100 %   $ 1,468,000       100 %   $ 1,559,000       100 %

Our revenues are comprised principally of our authentication and grading service fees.  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, and not the value of the collectible.  In fiscal 2009 our authentication and grading fees for all our businesses averaged $10.15 and, in the case of coins, ranged from $5 to $200 per coin, with an average fee of $12.94 per coin and, in the case of trading cards ranged from $4 to $50 per card, with an average fee of $5.81 per trading card.  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.

Recent Developments

Discontinued Operations .  In fiscal 2009, our Board of Directors approved a plan to discontinue and dispose of the Company’s diamond and colored gemstone (“jewelry”) authentication and grading businesses (which were discontinued effective March 2, 2009) and our Gemprint asset. We have substantially disposed of the assets of those businesses and have established certain accruals, primarily related to real estate lease obligations of the jewelry businesses at June 30, 2009.  In addition, we are in the process of selling our patented Gemprint identification technology that was used primarily by our diamond authentication and grading business to provide certain additional services to its customers.  In the second quarter of fiscal 2009, our Board of Directors approved a plan to dispose of our currency grading and authentication business and, pursuant to that plan, that business was sold in February 2009.

 
2

 

Accordingly, the remaining assets and liabilities of the jewelry (including Gemprint) and currency authentication and grading businesses have been classified as held for sale at June 30, 2009 and 2008, and the operations of those businesses have been reclassified as discontinued operations for all fiscal periods presented in this Annual Report.  In addition, we continue to classify as discontinued operations the remaining activities, consisting of the disposition of the remaining collectibles inventories of the collectibles auctions and sales businesses which we sold in fiscal 2004.  See Item 6 -- “Selected Consolidated Financial Data” and Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information regarding our discontinued operations.

Departure of Chief Executive Officer. On March 16, 2009, we announced the departure of the Chief Executive Officer, effective April 1, 2009 and our hiring of Michael McConnell, a director of the Company, as our interim Chief Executive Officer.  As a result of his service on the Board, Mr. McConnell is familiar with the Company’s businesses and, prior to his becoming our CEO, in his capacity as a director worked with our executive officers and other key management employees.

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 or other high-value assets, are their authenticity, quality and rarity.  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 quality of a collectible relates to its state of preservation relative to its original state of manufacture or creation.  The rarity of a collectible relates to its uniqueness and depends primarily on the number of identical collectibles of equivalent or better quality that become available for purchase from time to time.  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.  Quality and rarity directly affect value and price, usually on an exponential basis, with higher quality and rare collectibles generally attracting dramatically higher prices than those of lower quality and lesser rarity.  Even a relatively modest difference in quality can translate into a significant difference in perceived value and, therefore, in price.  For example, a 1952 Mickey Mantle baseball card that received a PSA grade from us of 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.

Until the advent of independent third-party authentication and grading, most prospective buyers, including experienced collectibles dealers and retailers, insisted on physically examining high-priced collectibles 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, quality or rarity, and hence the value, of high-priced collectibles, even when they had the opportunity to examine them physically.  Therefore, they had to rely on representations made by sellers regarding authenticity, quality and rarity.  For these reasons, “buyer beware” characterized the high-value collectibles markets, and “sight-unseen” markets for rare coins 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.  These markets were highly inefficient because:

§  
they were fragmented and localized, which limited both the variety of available collectibles and the number of potential buyers;

§  
transaction costs were often relatively high due to the number of intermediaries involved;

§  
buyers usually lacked the information needed to determine the authenticity and quality and, hence the value, of the collectibles being sold; and

§  
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, quality and rarity.


 
3

 

Coin Market .  In an effort to overcome some of these inefficiencies, approximately 30 years ago, professional coin dealers began using a numerical quality grading scale for 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.

Trading Cards Market .  Misrepresentations of authenticity, quality and rarity also operated as a barrier to the liquidity and growth of the collectibles market for trading cards.  Even experienced and knowledgeable dealers insisted on physically examining purportedly rare and higher priced trading cards.  Most collectors lacked the knowledge needed to purchase collectible trading cards with confidence, even when they had physically examined them.  Trading card 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 trading cards were the ones that assigned these grades, collectors remained vulnerable to misrepresentations as to the authenticity, quality and rarity of trading cards being sold or purchased by dealers.

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 trading cards, 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 trading cards, collectors were forced to depend on representations of authenticity, quality and rarity 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.

These conditions created a need and the demand for independent authentication and grading services from which sellers, purchasers and collectors could obtain:

§  
determinations, from independent, third-party experts, of the authenticity of the high-value collectibles that sellers, purchasers and collectors purchased, particularly “sight-unseen” or over the Internet;

§  
representations of quality based on uniform standards applied by independent, third-party experts; and

§  
authoritative information, compiled by a credible third party, to help purchasers and collectors understand the factors that affect an item’s perceived value and price, including:

—  
its rarity;
—  
its quality or grade; and
—  
its historical and recent selling prices.


 
4

 

The Impact of eBay and other e-Commerce Websites on the Collectible 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 eBay and Amazon, have overcome many of the inefficiencies that had characterized the traditional collectibles markets.  eBay and other online marketplaces (i) offer enhanced interaction between and greater convenience for sellers and buyers of high-value collectibles; (ii) eliminates or reduces the involvement of dealers and other “middlemen;” (iii) reduce transaction costs; (iv) allow trading at all hours; and (v) continually provide updated information.  However, Internet commerce still raises, and has even heightened, concerns about the authenticity and quality of the collectibles 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 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, without physical examination (“sight-unseen”), with the confidence of knowing that they are authentic and are of the quality represented by sellers.  The importance and value of our services to purchasers and collectors, we believe, are demonstrated by eBay’s inclusion, on its collectibles websites, of information that identifies, and encourages visitors to use, our independent third-party authentication and grading services, as well as similar services offered by some of our competitors.

Our Services

PCGS Coin Authentication and Grading Services .  Recognizing the need for third-party authentication and grading services, we launched Professional Coin Grading Service in 1986. PCGS employs expert coin graders, who are independent of coin buyers and sellers, to provide impartial authentication and grading services.  As of June 30, 2009, we employed 14 experts who have an average of 36 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 which bears our logo, so that any prospective buyer will know that it is a PCGS authenticated and graded coin.  We also provide a warranty as to the accuracy of our coin authentication and grading.

By providing an independent assessment by coin experts of the authenticity and quality of coins, we believe that PCGS has increased the liquidity of the trading market for collectible coins.  Following the introduction of our independent, third-party authentication and grading service, buyer confidence, even between dealers, increased to such a degree that coins authenticated and graded by PCGS were able to be traded “sight-unseen.”  As a result, PCGS facilitated the development, in 1990, of a dealer market, known as the “Certified Coin Exchange,” on which coin dealers traded rare coins “sight-unseen,” over a private satellite network, which now operates on the Internet and which we now own.

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 sight unseen on the Internet, is able to rely on a PCGS certification, as well as authoritative information about the coin that is accessible on our website, 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 Trading 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 trading cards.  Our independent trading card experts certify the authenticity of and assign grades to trading cards using a numeric system with a scale from 1-to-10 that we developed, together with an adjectival system to describe their condition.  At June 30, 2009, we employed 15 experts who have an average of 25 years of experience in the collectible trading card 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 trading cards, including over the Internet and at telephonic sports memorabilia auctions.

 
5

 

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 of such signatures; and (iii) a handwriting analysis.  As of June 30, 2009, we employed 3 autograph experts with an average of 24 years of experience in the autograph memorabilia market, as well as other consultants that we use 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 Professional Stamp Experts (PSE) as our 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 trading card dealers when we launched PSA.  In October 2005 the Philatelic Foundation, based in New York, began using the numerical grades assigned by PSE to stamps.  In the spring of 2006, Scott Publishing Company, the long-time publisher of the Scott Catalogs also began identifying the PSE numerical grades assigned to stamps that are included in its bi-annual valuing supplement to its catalogs.  These two events have established PSE’s numerical grading scale, and we believe has facilitated the continuing growth of third-party stamp authentication and grading, throughout the philatelic industry.  As of June 30, 2009, we employed 3 stamp graders, and use another expert on a part-time basis.  Those graders have an average of 26 years of experience in the collectible stamp market.

CCE Certified Coin Exchange and Collectors Corner.   In September 2005, we acquired the Certified Coin Exchange (CCE), a subscription-based, business-to-business 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 1960s.  The CCE website now features over 170,000 bid and ask prices for certified coins at www.certifiedcoinexchange.com The CCE provides liquidity in the geographically dispersed and highly fragmented market for rare coins.  In March 2007, we introduced the Collectors Corner, a business-to-consumer website that enables sellers on CCE to offer many certified coins simultaneously at wholesale prices on CCE and at retail prices on Collectors Corner (www.collectorscorner.com).  Registration on Collectors Corner is free for consumers, who can search for and sort coins listed on Collectors Corner.  Coin sellers must register and pay a fixed monthly fee to CCE for access to and to effectuate sale transactions on both CCE and Collectors Corner.  Currently, there are over 100,000 collectibles, consisting primarily of coins, trading cards and stamps that we have certified, which are offered for sale on Collectors Corner, with offering prices aggregating in excess of $85 million.  The enhanced liquidity provided by CCE and Collectors Corner for certified coins, trading cards, and certified stamps, has increased the volume and turnover of these items, which benefits us because, as a general rule, increases in sales and purchases of coins, trading cards and stamps increases the demand for our authentication and grading services.  If we succeed in growing CCE and Collectors Corner, we believe that the CCE/Collectors Corner websites can become the preeminent online markets for PCGS certified coins sold by dealers to other dealers, and for coins, trading cards and stamps certified by PCGS, PSA and PSE, respectively, bought and sold between dealers and consumers.

 
6

 

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. We publish Sports Market Report on a monthly basis primarily for distribution to approximately 7,000 PSA Collectors Club members and the Stamp Market Quarterly for distribution to approximately 1,500 stamp dealers and collectors.  We sell advertising to dealers and vendors for placement in our publications.  We manage a Collectors Universe website and individual websites for our authentication and grading services.  On those websites, we offer collectible content, relevant to the marketplace for that specific authentication and grading service, some of which is available for a fee and some of which is available without charge.  We believe our websites for PCGS in coins and PSA in trading cards have the highest number of visitors and web traffic in their respective markets.  We sell advertising to dealers and vendors on these two websites and on the websites we maintain for PSA/DNA in autographs, PSE in stamps and CCE and Collectors Corner in coins.

Our Mission

Our mission is to provide the finest available independent authentication and grading services to sellers and buyers of high-value collectibles in order to:
 
§  
increase the values and liquidity of high-value collectibles;

 
§  
enable and facilitate transactions in high-value collectibles;

 
§  
generally enhance interest, activity and trading in high-value collectibles; and

 
§  
achieve profitable growth, build long-term value for our stockholders and provide rewarding opportunities for our employees.
 
 
Our Growth Strategy

Our growth strategies include:

§  
Leveraging the strong-brand awareness that we have achieved in our existing collectibles markets by increasing 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 by introducing new value-added content to customers in our existing collectibles markets.

We are pursuing the following strategic initiatives in order to achieve these growth objectives:

Increasing the Demand for our Services in Existing Collectibles Markets .  We have established leading brands in our existing collectibles markets, including PCGS, PSA, PSA/DNA and PSE.  We use those brands to promote Collectors Universe as the premier independent 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 16 million coins since the inception of PCGS and over 12 million trading cards since the inception of PSA, we estimate that less than 10% of the vintage United States coins and vintage trading cards have been authenticated and graded.  According to recent data available on eBay’s websites, the number of coins available for sale at any one time on eBay generally exceeds approximately 250,000, of which only approximately 10% are authenticated and graded by a third-party authentication and grading service, such as ours. Similarly, the number of trading cards being sold at any one time on eBay generally exceeds approximately 400,000, of which only about 10% are independently authenticated and graded.  Additionally, we estimate that we have authenticated and graded less than 5% of the potential market of autographs and stamps in the United States.  Moreover, new collectibles are introduced each year into the markets in which we operate, some of which are authenticated and graded in the year of their introduction.  Over time, these collectibles will increase the supply of vintage items that are sold by dealers and

 
7

 

collectors and, which we expect that many of them will be submitted for independent third-party authentication and grading.

To take advantage of these market opportunities, we continue to:

§  
enhance 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;

§  
initiate 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;

§  
establish 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;

§  
develop and expand our Set Registry SM programs to increase demand for our collectible coin, trading card and stamp authentication and grading services among collectors and to increase traffic on our websites;

§  
develop and link buying and selling demand from our Set Registry program to Collectors Corner in order to increase the referral buyers to Collectors Corner dealer-subscribers, thereby enhancing the value of the subscription and increasing the preference of our brands in their respective markets;

§  
expand the offerings and markets in which Collectors Corner provides a business-to-consumer website for the sale of third-party collectibles certified by us;

§  
increase the promotion of our Collectors Clubs to attract and to provide incentives for collectors to use our services;

§  
participate at collectibles trade shows at which we offer on-site authentication and grading services to facilitate trading activity at the shows; and

§  
expand our website information services, including auction results, reference materials and on-going price guides and rarity reports.

Value-Added Content .  We publish authoritative price guides and rarity reports for coins, trading cards, sports autographs and memorabilia and stamps.  This information is available on our website and in our publications, generally for a fee.  These publications include:

 
§  
Price Guides .  We provide a wide variety of authoritative price guides for a number of collectible markets.  For example, we track the prices at which the 3,000 most actively-traded U.S. coins are sold, dating back to 1970, and compile and publish this information in a generally recognized collectible coin index, known as the CU3000 .

 
§  
Rarity Reports .  We compile and publish reports that list the total number of coins and trading cards 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, as to rarity and value, when purchasing particular coins.

 
§  
Articles .  Collecting is a passion for many and has nuances and anecdotes that are well suited to a library of articles for each category of collectibles.  We write informative articles and publish them on our websites.  A sense of community is also important to collectors.  We, therefore, encourage our customers to communicate and to write articles which we sometimes publish on our websites or include in our publications.

 
8

 

§  
Historical Content .  Collecting is often about history and, in many instances, historical events associated with a collectible enhances 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 fiscal 2006 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, as well as the most recent U.S. minted coins, such as the Fifty State Quarters™ and the One Ounce American Eagle Gold and Silver Bullion Coins currently being produced by the U.S. Mint.

 
§  
News .  We provide market news and information that are accessible to collectors and dealers on our websites.  The news and information most often relate to recent events, such as sales of collectibles at record prices, the introduction of new collectibles and trends and developments in the collectibles markets we serve.

Operations

We offer authentication and grading services for coins, trading cards, autographs and autographed memorabilia and stamps.  Our trained and experienced authentication and grading experts determine the authenticity of and, using uniform quality standards, assign a quality grade to these collectibles.

PCGS .  Since our inception in 1986, we have graded approximately 16 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, 2009, our fee per coin averaged approximately $12.94.  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 collectible  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 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 each coin into our proprietary computerized inventory system, which tracks the coin 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 have 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 identifying paperwork, 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 a bar code, and the PCGS hologram and brand name.

PSA .  We launched our PSA trading card authentication and grading service in 1991 and, through June 30, 2009, authenticated and graded over 12 million trading cards.  Our trading card 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 trading card 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 trading cards from dealers and collectors, we remove all packaging that identifies the submitter in any way and enter information regarding the trading cards into our proprietary computerized inventory system that enables us to track the trading cards throughout our authentication and grading process.  Only after the authentication and grading process is complete is the trading card reunited with its identifying paperwork, thus keeping the authentication and grading process independent of the identity of

 
9

 

the owner and the history of the trading card.  The trading card is then sonically sealed in our specially-designed, tamper-evident, clear plastic holder, which also encases a label that identifies the trading card, 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 trading cards and, to a lesser extent, football, basketball and hockey trading cards, as well as entertainment and other collectible cards.  We typically charge fees ranging between $4 and $50 per card, with an average fee of $5.81 per card in 2009.  As is the case with coin authentication and grading, trading card 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 trading cards submitted to us for authentication and grading include primarily (i) older or vintage trading cards, particularly of memorable or historically famous players, such as Honus Wagner, Joe DiMaggio, Ted Williams and Mickey Mantle, and (ii) modern or newly produced trading cards of current or new athletes who have become popular with sports fans or have achieved new records or milestones, such as Ken Griffey, Jr. and Derek Jeter.  These trading cards have, or are perceived to have, sufficient collectible value and are sold more frequently than are trading cards 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 trading cards, 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 trading cards 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 then 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 trading cards.  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 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 scales of 1-to-10, with 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-

 
10

 

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 (XF) 90, indicating its quality was “Extremely Fine,” and which 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 2009, relative to the number of coin and trading card 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.

Marketing

We employ both “pull” and “push” strategies in marketing our services to dealers and collectors of high-value collectibles.  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.  Therefore, our “ pull ” oriented marketing programs emphasize (i) the protections that collectors and retail customers will have if they purchase collectibles, 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 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:

§  
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 , Numismatic News and Linn’s Stamp News.   We make personal appearances at major, national-market and international trade shows around the World 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.

§  
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 trading cards, 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:

—  
to register their sets on our websites, which provides them with an off-site reference source for insurance and informational purposes;

—  
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


 
11

 

—  
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, trading cards or stamps.

The collectibles that may be registered on our Set Registries and included in our Set Registry competitions are limited to collectibles that have been authenticated and graded by us.  To register the collectibles to be included in a particular set, a collector is required to enter the unique certificate number that we had assigned to each of the collectibles when last authenticated and graded by us.  We use the certificate number to compare the information being submitted by the collector with our database of information to verify that the collectibles being registered by a participant for inclusion in a particular set qualify to be included in that set.  We have found that our Set Registry competitions (i) create a preference and increase demand among collectors for our brands, and (ii) promote the trading of collectibles authenticated and graded by us by set registrants seeking to improve the completeness and overall quality of their sets, which generally results in additional authentication and grading submissions to us.  Annual awards for set completeness and quality have been issued by PCGS and PSA each year since 2002 and by PSE beginning in 2004.  As an indication of the popularity of our Set Registry programs, more than 88,000 sets were registered on our Set Registries as of June 30, 2009, which represents a 22% increase over the number registered as of June 30, 2008.

§  
Collectors Clubs Subscription Program .  We also have established “Collectors Clubs” for coin, currency and trading card collectors.  For an annual membership fee, ranging from $50 to $200, collectors receive a number of benefits, including (i) the right to have, without any further charge, a specified number of collectibles authenticated and graded by us, a privilege that non-member collectors do not have; and (ii) access to certain proprietary data that we make available on our websites or in print.  As of June 30, 2009, there were approximately 18,000 members in our Collectors Clubs.

§  
Certified Coin Exchange Business-to-Business Website .  The Certified Coin Exchange (CCE) website, which we purchased in 2005, is a business-to-business website for recognized dealers in the trade. Currently, there are over 170,000 certified coins being offered at bid and ask at an aggregate value of approximately $200 million.  The liquidity afforded the units traded on CCE increases the demand for PCGS certified coins.

§  
Collectors Corner Business-to-Consumer Website .  We have launched Collectors Corner (www.collectorscorner.com), which is a business-to-consumer website where consumers can visit, identify, search, sort over and select for purchase coins, trading cards and items of currency that have been certified by us and are being offered for sale by dealers.  Currently, there are approximately 100,000 collectibles listed for sale on Collectors Corner.  All items on Collectors Corner are offered by dealer members who have applied for the right to offer such collectibles on Collectors Corner.  We believe that Collectors Corner has advantages over other business-to-consumer websites because the counterparties to the consumer have been accepted as sellers on the Collectors Corner website and are known members of the marketplace and selling community. Items listed are at fixed prices with the opportunity to negotiate lower prices.  We believe that the increased turnover offered for items listed on Collectors Corner, as well as the ability to use Collectors Corner to improve a trading card set in the PSA Set Registry, create increased brand preference for PCGS, PSA and PSE authenticated and graded items.

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 independent authentication and grading of those collectibles.  These marketing programs include:

§  
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 , Numismatic News and Linn’s Stamp New .  We also communicate with our dealers and with auctioneers by direct mail, email, and telephone.

§  
Trade Shows and Conventions .  There are numerous collectibles trade shows and conventions held annually in the United States, of which approximately 15 generally are considered to be the largest and most significant in the collectible coin, trading card, 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

 
12

 

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 trade show 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.

§  
Authorized Dealer Network .  We have implemented authorized dealer programs for coin and trading card 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 trading cards 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.

Intellectual Property

Our intellectual property consists primarily of trademarks, copyrights, proprietary software and trade secrets.  As part of our confidentiality procedures, we generally enter into agreements with our employees and consultants and limit access to, and distribution of, our software, documentation and other proprietary information.  The following table sets forth a list of our trademarks, both registered and unregistered, that are currently being used in the conduct of our business:

Registered Marks
 
Unregistered Marks
Collectors Universe
 
World Series of Grading
 
Coin Universe
PCGS
 
CU3000
 
Collectors.com
Professional Sports Authenticator
 
PSE
 
Record Universe
PSA
 
History in Your Hands
 
PCGS Currency
PSA/DNA
     
Set Registry
First Strike
     
Expos Unlimited
Quick Opinion
     
Long Beach Coin, Stamp and Collectibles Expo
Sports Market Report
     
Santa Clara Coin, Stamp and Collectibles Expo

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.

Collectibles Experts

As of June 30, 2009, we employed 35 experts in our authentication and grading operations, who have from 7 to 51 years, and an overall average of 29 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, or (ii) have been trained by us in our authentication and grading methodologies and procedures, and/or had 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.


 
13

 
Service Warranties

We issue an authenticity or grading warranty with every coin and trading card authenticated or graded by us.  Under the terms of the warranty, if a coin or trading card 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 trading card at the price paid by the then-owner of the coin or trading card 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 trading card 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 trading card at the price that the then-owner paid for that collectible.  We accrue for estimated warranty costs based on historical claims experience.  In the second quarter, and early in the third quarter of fiscal 2008, we incurred warranty claims that were significant in relation to our historical claims experience and, as a result, we recognized, in the second quarter of 2008, an additional expense of $822,000 for those claims.  We also decided to increase our warranty accrual rate, effective January 1, 2008, to reflect this higher warranty claims experience, and we will continue to monitor the adequacy of our warranty reserves on an on-going basis.  If warranty claims were to increase in relation to historical trends and experience, management would be required to increase the warranty reserves and incur additional charges that would have the effect of reducing income in those periods during which the warranty reserve is increased.  Before returning an authenticated or graded coin or trading card to our customer, we place the coin or trading card 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.

Customer Service and Support

We devote significant resources, including a 21-person staff, who provide personalized customer service and support in a timely manner handling approximately 200 customer service calls per day and support our Set Registry and trade show programs.  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 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 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-value 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.

Trading card Authentication and Grading .  We have two primary competitors in trading card authentication and grading: Beckett Trading card Grading Corporation, and Trading Card 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.


 
14

 
The principal competitive factors in our collectibles 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 trading cards because of their significantly lower values.  We believe that our PCGS, PSA, PSA/DNA, and PSE brands compete favorably with respect to all of these factors and are among the leaders in each of their respective markets.  Barriers to entry into the authentication and grading market are relatively low, especially in the trading card 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 experienced collectibles experts also operates as a barrier to entry or expansion.

Information Technology

We have developed proprietary software systems for use in our authentication and grading operations, principally for order tracking, processing and recordkeeping, as well as for 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 applications are written 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.  Additionally, we 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 ending June 30, 2009, our systems tracked the authentication and grading process, generating records and data for approximately 3,000,000 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, as well as for our Set Registry and certain of our other marketing programs.  As a result, we have over 55 Dell PowerEdge Servers with RAID protected storage, along with multiple fully redundant SQL Server 2000 and 2005 high-availability database clusters supporting over 10 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 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 5 Cisco PIX firewalls (across multiple locations).  We maintain a multi-tiered antivirus infrastructure.  We use the FrontBridge Anti-Spam managed service, which deploys multiple layers of technology to provide preventative and protective spam defense.  Critical systems are backed up nightly using a backup infrastructure with a 30 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.

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.

Employees

As of June 30, 2009, we had 180 full-time employees and 36 part-time employees (primarily security personnel), of which 160 were employed in our authentication and grading-related businesses, including our 35 experts and 21 customer service and support personnel.  The other employees included 4 in information services, 4 in marketing, 4 in our CCE subscription business, 24 in our Expos business, of which 23 were part-time employees, and 20 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.

 
15

 
ITEM 1A    RISK FACTORS

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.  Such risks and uncertainties also could 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.

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 and the confidence of collectors and dealers about future economic conditions are important factors that affect the willingness and ability of collectors and consumers to purchase, and the prices that they are willing to pay for, high-value collectibles.  Additionally, declines in the confidence and reductions in the cash flows of, and reductions in credit that is available to collectibles dealers, can adversely affect their ability to purchase high-value collectibles and to sell collectibles that may have declined in value due to adverse changes in economic conditions of this nature.   Declines in purchases and sales, and in the value of collectibles usually result, in turn, 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, trading cards and other collectibles for authentication and grading including, in particular, modern coins, trading cards and stamps, primarily because authentication and grading fees are relatively high in relation to the value of such collectibles; (ii) causing collectibles dealers and collectors to request longer turn-around times with respect to the collectibles they submit to us for grading, which would reduce our revenues, gross profit margin and operating results, and (iii) reducing the ability of customers to pay outstanding accounts receivable.

The continuing economic recession and credit crisis in the United States that adversely affected our revenues in fiscal 2009 may lead to continued declines in our revenues and financial results.

Revenues in all our grading and authentication businesses declined by 9% in fiscal year 2009, compared to fiscal year 2008, which we believe was primarily due to the economic recession and banking and credit crisis that prevailed throughout fiscal 2009 and which are continuing into fiscal 2010.  While our total coin grading and authentication revenues increased by 14% in the fourth quarter of fiscal 2009, compared to the fourth quarter of 2008, there is no assurance that this represents a trend that will continue into 2010 nor that our other grading and authentication businesses will continue to experience declines in revenues in the fourth quarter of fiscal 2009, compared to the same period of the prior year.  We believe, uncertain economic conditions and the lack of credit will continue to make business conditions challenging and could adversely affect our results of operations in fiscal 2010.


 
16

 
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 or the popularity of certain marketing programs 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.

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, related services and product sales accounted for approximately 58%, 58% and 60% of our net revenues in fiscal 2009, 2008 and 2007, respectively.  We believe fluctuations in coin grading submissions can be due, at least in part, to (i) economic downturns which can result in a decline in consumer confidence and disposable income and, therefore, the willingness of dealers and collectors to buy collectible coins, and (ii) 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 authentication and grading submissions for a majority of our net revenues make us more vulnerable to adverse changes in these economic conditions.  These adverse changes include fluctuations 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, gross margin and operating results.

Our top five customers account for approximately 10% of our total net revenues.

During the year ended June 30, 2009, five of our customers accounted, in the aggregate, for approximately 10% of our total net revenues.  As a result, the loss of any of those customers, each of which is a collectibles dealer, or a lower level of grading submissions by any of those customers, could cause our net revenues to decline and, therefore, could harm our operating results.  Moreover, historically, same day on-site authentication and grading submissions at trade shows, on which we realize higher margins than on other submissions, have represented a significant portion of the authentication and grading submissions we have received from these customers.  Consequently, a material decline in trade show attendance or submissions by these customers would adversely affect our revenues and gross margin and, therefore, our operating results in the future.

There are risks associated with new service offerings, with which we have little experience.

We seek to introduce new services that we might 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.

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 management 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 David G. Hall, our President, could have a negative effect on our reputation for expertise in the collectible coin market and could lead to a reduction in coin 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

 
17

 
unique skills and enjoy a reputation for being experts within the collectibles markets, and (ii) to implement personnel programs that will enable us to add collectibles experts, as necessary, to grow our business and offset employee turnover that can occur from time to time.  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.

We issue an authenticity or grading warranty with every coin, trading card and stamp that we authenticate or grade.  Those warranties provide that:

§  
if any coin, trading card or stamp that we 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

§  
if any coin, trading card or stamp that we graded 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.

We have no insurance coverage for claims made under these warranties and, therefore, we maintain reserves for such warranty claims based on historical experience.  However, there is no assurance that these warranty reserves will prove to be adequate and, if they are not, our gross margin and operating results could be harmed.  As a result, we monitor the adequacy of our warranty reserves on an on-going basis.  During 2008, we unexpectedly received certain coin grading warranty claims that were significant when compared to our prior warranty claims experience.  As a result, we recognized an additional expense of $822,000 in the second quarter of 2008 to provide for those claims.  We also increased our warranty accrual rate, effective January 1, 2008, to reflect this higher warranty claims experience.  Those actions contributed to an increase in our costs of sales in fiscal year 2008 and, therefore, reduced the earnings that we would otherwise have earned from our continuing operations.

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.  Increased competition in our collectibles markets could adversely affect our pricing and profit margins and our ability to achieve further growth, and we cannot provide assurances that we will continue to be successful in competing against existing or future competitors in our collectibles markets.  Also, if we were to enter into new collectibles markets, it is likely we would face intense competition from competitors in those markets who are likely to have greater brand name recognition and long term relationships with collectibles dealers and individual collectors in those markets than we will have.  Such competition could adversely affect our ability to generate profits and could cause us to incur losses in those markets and damage our financial condition.

We may be unable to sublet leased facilities that we no longer occupy in New York, which could adversely affect
our cash flows.

We continue to have obligations to pay rent and other charges under two leases for office facilities in New York City that had been occupied by our jewelry businesses prior to our discontinuance of and exit from those businesses in fiscal 2009.  The remaining duration of those leases is more than seven years ending in 2017, during which we are obligated to pay rent and other charges under those leases which, as of June 30, 2009, totaled approximately $7,800,000.  In an effort to reduce those financial obligations, we have engaged an independent commercial real estate brokerage firm to find subtenants for these offices.  The extent to which we will be able to reduce those obligations will depend primarily on the time it will take to sublet those offices and rents we will be able to charge the subtenants, which will be determined primarily by economic conditions in the New York City rental market over which we have no control.  As a result, we can not predict the extent to which we will be able to reduce those financial obligations and until such time as we are able to sublet these facilities, we will have to pay the rents and other charges under the leases for these facilities, which will reduce our cash flows and, therefore, could adversely affect our financial condition and increase the losses from discontinued operations that we will have to record in the future, which will have the effect of reducing our net earnings.

 
18

 
Due to the uncertainties regarding the extent to which we will be able to reduce the financial obligations under those leases by subletting the offices, we established accruals totaling $4,454,000 for the rents and other charges that we estimated we will have to pay through the expiration of the leases.  If conditions in the rental market in New York City were to continue to deteriorate, it would become necessary for us to increase the accrual by a charge to discontinued operations that would have the effect of reducing our net earnings.

Our reliance on a single source for principally all of our “tamper-evident,” clear plastic coin and trading card holders exposes us to potential supply and quality problems.

We place all of the coins, trading cards and currency notes, and sometimes also the stamps that we authenticate and grade, in tamper-evident, clear plastic holders.  In order to take advantage of volume pricing discounts, we 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 encounter financial or production problems.  If, in such an event, we were unable to obtain replacement holders in a relatively short period of time, we could lose customer orders, or incur additional production costs.  In addition, if the replacement holders were not of comparable quality to our existing supplier, we could expose ourselves to the potential for additional warranty claims in the event that tampering with our holders was not evident.  These occurrences could cause a decline in our net revenues and increases in our costs of sales which would 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 upon 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.  We do not have redundant computer systems at any locations that are 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 adequate or successful.

We rely on third parties for various Internet and processing services.

Our operations depend on a number of third parties for Internet access and delivery services.  We have limited control over these third parties and no long-term relationships with any of them.  For example, we do not own a gateway onto the Internet, but, instead, rely on Internet service providers to connect our website to the Internet.  Should the third parties that we rely on for Internet access or delivery services be unable to serve our needs for a sustained time period as a result of a strike, natural disaster or for any other reason, our revenues and business could be harmed.

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.

While we are not currently focused on business acquisitions, there may be opportunities that present themselves in the future to acquire existing businesses or commence new businesses that would give us the opportunity to offer additional services to our existing customers or enter into new markets and, thereby increase our revenues and our earnings.  The purchase or commencement of a new business presents a number of risks and uncertainties, including

 
19

 
(i) difficulties in integrating the new business into our existing operations, as a result of which we may incur increased operating costs that can adversely affect our operating results; (ii) the risk that our current and planned facilities, computer systems and personnel and controls will not be adequate to support our expanded operations; (iii) diversion of management time and capital resources from our existing businesses, which could adversely affect their performance and our operating results; (iv) dependence on key management personnel of the acquired or newly started businesses and the risk that we will be unable to integrate or retain such personnel; and (v) 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 or we may incur losses on our investment.

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 have documented and tested the effectiveness of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002 since fiscal 2005, we expect we will continue to incur costs in order to maintain compliance with that Section of the Sarbanes-Oxley Act.  Moreover, 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, or if our internal procedures applied for testing internal controls prove to be inadequate, our reputation may be harmed or we may be subject to litigation.

We depend on our ability to protect and enforce our intellectual property rights.

We believe that our patents, trademarks and other proprietary rights are important to our success and competitive position. We rely on a combination of patents, trademarks, copyright and trade secret laws to establish and protect our proprietary rights.  However, the actions we take to establish and protect our intellectual and other proprietary rights may prove to be inadequate to prevent imitation of our services or products or to prevent others from claiming violations of their intellectual and proprietary rights by us.  In addition, others may develop similar trade secrets or other intellectual property independently or assert rights in our intellectual and other proprietary rights that could lead them to seek to block sales of our services based on allegations that use of some of our marks or other intellectual property constitutes a violation of their intellectual property rights.

Our unregistered trademarks could conflict with trademarks of others.

We have not conducted an exhaustive search of possible prior users of our unregistered trademarks or service marks, including Coin Universe, Collectors.com and PSE.  Therefore, it is possible that our use of some of these trademarks or service marks may conflict with the rights of others.  As a result, we could face litigation or lose the use of some of these trademarks or service marks, which could have an adverse effect on our name recognition and result in a decrease in our revenues and an increase in our 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, trading cards and other collectibles that are submitted to us for authentication and grading.

The repurchase of our shares of common stock in July 2009 may reduce the public float for our shares, which may reduce trading activity and adversely affect the trading value and liquidity of our common stock.

In July 2009, we completed a modified “Dutch Auction” tender offer pursuant to which we repurchased a total of 1,749,828 of our outstanding shares of common stock, reducing the number of our shares that are outstanding to approximately 7,408,516.  Of those outstanding shares, affiliates of the Company own a total of approximately 1,275,000 shares, the salability of which is restricted under applicable securities laws and which are, as a result, not included in our public float.  As a result, the trading volume of our shares may decline, which would reduce the liquidity of our shares, making it more difficult for our stockholders to sell their shares and could depress, and make it more difficult to achieve increases in, the trading prices of our shares.

 
20

 

If our quarterly results are below the expectations of securities market analysts and investors, 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 and uncertain.  These factors include:

§  
increases or decreases in number of collectibles 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 and volatility in the prices of gold and other precious metals;

§  
changes in economic conditions that reduce the availability of disposable income and may cause collectors and collectibles dealers to reduce their purchases of collectibles, which could result in declines in the demand for the services we provide; and

§  
the actions of our competitors.

If, as a result of these or other conditions or factors, our quarterly operating results fall below expectations, 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.

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 additional 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 incentive plans may also discourage, delay or prevent a change in control or unsolicited acquisition proposals.

Furthermore, on January 9, 2009, the Company’s Board of Directors unanimously adopted a limited duration Stockholder Rights Plan, which could make a takeover attempt more costly for a potential acquirer and could delay or even prevent a change of control.

ITEM 1B.       UNRESOLVED STAFF COMMENTS

None


 
21

 
ITEM 2.          PROPERTIES

We lease approximately 46,000 square feet for our California-based headquarters under a nine-year lease that expires on March 31, 2019.  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 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 on a month-to-month basis.

Although we discontinued and exited our jewelry authentication and grading businesses in March 2009, we continue to be obligated to pay rent and other charges under two leases, expiring in 2017, for a total of approximately 12,000 square feet of office facilities that had formerly been occupied by those businesses in New York City.  We are seeking to sublet those offices in order to reduce our financial obligations under those leases.  However, there are no assurances that we will succeed in subletting those offices on terms that would significantly offset our financial obligations under the leases.  See Risk Factors -- We may be unable to sublet leased facilities that we no longer occupy in New York City, which could adversely affect our cash flows” in  Item 1A above and “Management Discussions and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- Outstanding Financial Obligations ” for additional information regarding these lease obligations.

ITEM 3.          LEGAL PROCEEDINGS

We are sometimes named as a defendant in lawsuits that arise in the ordinary course of business.  We do not believe that any of those lawsuits that are currently pending is likely to have a material adverse effect on our business, financial condition or results of operations.

ITEM 4.          SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.


 
22

 
EXECUTIVE OFFICERS OF REGISTRANT

Name
 
Age
 
Positions
         
Michael J. McConnell
 
43
 
Chief Executive Officer
David G. Hall                                
 
62
 
President
Joseph J. Wallace                                
 
49
 
Chief Financial Officer
 

 
MICHAEL J. MCCONNELL , has served as Chief Executive Officer since April 1, 2009.  He is a private investor. From 1998 to September 30, 2008, Mr. McConnell was a Managing Director of Shamrock Capital Advisors, Inc., which is a manager of private equity, real estate and direct investment funds, including the Shamrock Activist Value Funds.  Mr. McConnell also served as a member of that firm’s Executive Committee. Prior to joining Shamrock in 1994, Mr. McConnell held various positions at PepsiCo, Merrill Lynch and Kidder Peabody.  Mr. McConnell formerly served on the boards of Ansell Limited, Nuplex Industries, Force Corporation, iPass, Inc., and Port-link International. Mr. McConnell also serves on the Board of Governors of Opportunity International. Mr. McConnell received his B.A. in economics from Harvard University and his MBA degree (with distinction—Shermet Scholar) from the Darden School of the University of Virginia.

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 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 in September 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.  Mr. Wallace is a Fellow of the Institute of Chartered Accountants in Ireland, and a CPA in the State of California.

 
23

 
PART II

ITEM 5.          MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS

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, 2009 and 2008.  The stock prices and dividends per share have been retroactively adjusted for the 10% stock dividend issued in November 2008.

 
Fiscal 2009
 
Closing Share Prices
       
   
High
   
Low
   
Cash
Dividend
Per Share
 
First Quarter                                                
  $ 8.45     $ 5.88     $ 0.23  
Second Quarter                                                
    6.83       2.42       -  
Third Quarter                                                
    4.18       2.64       -  
Fourth Quarter                                                
    5.20       3.91       -  

 
Fiscal 2008
 
Closing Share Prices
       
   
High
   
Low
   
Cash
Dividend
Per Share
 
First Quarter                                                 
  $ 13.86     $ 11.39     $ 0.23  
Second Quarter                                                 
    12.32       9.20       0.23  
Third Quarter                                                 
    10.75       7.67       0.23  
First Quarter                                                 
  $ 9.26     $ 7.11     $ 0.23  

We had 73 holders of record and approximately 2,091 beneficial owners of our common stock as of June 30, 2009.

Dividends .  In the fourth quarter of fiscal 2006, our Board of Directors approved a dividend policy that called for the payment of regular quarterly cash dividends to our stockholders, initially in the amount of $0.07 per share per quarter, as adjusted retroactively for the aforementioned 10% stock dividend.   That quarterly dividend rate was subsequently increased on two occasions by our Board of Directors and, during fiscal 2008, we paid quarterly cash dividends of $0.23 per common shares, as adjusted retroactively for the aforementioned 10% stock dividend.   As a result, we paid cash dividends in fiscal 2008 totaling $8,517,000 .

As we had previously disclosed, the continued payment of cash dividends was subject to change or discontinuance based a number of factors, including our financial performance and changes in market and financial conditions.  On September 26, 2008, the Board of Directors determined that, due primarily to adverse market and economic conditions, including the liquidity crisis in the United States, the prudent course of action would be, and the Board of Directors voted, to suspend the future payment of cash dividends in order to preserve the Company’s cash resources.  At the same time, the Board of Directors approved a 10% stock dividend on the Company’s outstanding shares that was issued in November 2008.  During fiscal 2009, prior to that suspension of dividend payments, the cash dividends we had paid to our stockholders totaled $2,090,000.

Share Buyback Program .  In December 2005, our Board of Directors approved a share buyback program that authorized us to repurchase up to $10,000,000 of our shares of common stock in open market or privately negotiated transactions, in accordance with applicable Securities Exchange Commission (“SEC”) rules, when opportunities to make such repurchases, at attractive prices, became available.  During the fiscal years ended June 30, 2009, 2008 and 2007, we repurchased a total of 120,000, 232,152, and 72,517 shares, respectively, of our common stock under this program for aggregate purchase prices of approximately $484,000, $2,198,000 and $945,000, respectively (excluding transaction costs).   We currently have $3.7 million available for share purchases under the share buyback program.


 
24

 

ITEM 6.   SELECTED CONSOLIDATED FINANCIAL DATA

The selected operating data for the fiscal years ended June 30, 2009, 2008 and 2007, and the selected balance sheet data at June 30, 2009 and 2008 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, 2006 and 2005 and the related balance sheet data at June 30, 2007, 2006 and 2005 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.

Continuing Operations .  In fiscal 2009, with the approval and at the direction of our Board of Directors, we discontinued and disposed of our diamond and colored gemstone (“jewelry”) authentication and grading businesses effective as of March 2, 2009, which were operated by Gem Certification and Assurance Lab, Inc. (“GCAL”) and American Gemological Laboratories, Inc. (“AGL”) and sold our currency authentication and grading business effective as of February 4, 2009.

Consequently, the results of our continuing operations, as set forth in the table below, consist primarily of the results of operations of our collectible coin, trading card, autographs and memorabilia, and stamp authentication grading businesses for each of the fiscal years in the five year period ended June 30, 2009 and the results of operations of CoinFacts.com and Certified Coin Exchange (“CCE”), from their respective dates of acquisition in fiscal 2005 and Expos LLC (“Expos”), from the date of its acquisition in fiscal 2006.

Discontinued Operations .  The results of our discontinued operations reflect (i) the operating activities of GCAL (including Gemprint) and AGL from the dates of their acquisition in November 2005 and August 2006, respectively, impairment charges recognized in connection with those businesses in fiscal 2008 and 2009 and losses incurred in connection with the closure and sales of assets of those businesses in fiscal 2009, which include certain accruals for on-going real estate lease obligations of those businesses established in fiscal 2009, (ii) the operating activities of our currency authentication and grading business from the date of its commencement in fiscal 2005 and a loss incurred on its sale in February 2009, and (iii) to a much lesser extent, the remaining disposal activities following the disposition, in fiscal 2004, of our collectibles sales businesses.


 
25

 
 
Consolidated Statement of Operations Data:
 
Years Ended June 30,
 
   
2009
   
2008
   
2007
   
2006
   
2005
 
   
(In thousands, except per share data)
 
Net revenues (1)
  $ 35,914     $ 39,505     $ 38,686     $ 36,060     $ 33,540  
Cost of revenues
    16,385       19,779       16,736       14,074       12,172  
Gross profit (1)
    19,529       19,726       21,950       21,986       21,368  
Selling, general and administrative expenses
    15,921       17,930       18,444       16,567       14,177  
Impairment losses
    649       -       16       -       -  
Amortization of intangible assets
    871       490       505       17       -  
Operating income
    2,088       1,306       2,985       5,402       7,191  
Interest income, net
    284       1,138       2,149       2,349       906  
Other income, net
    14       6       7       26       26  
Income before income taxes
    2,386       2,450       5,141       7,777       8,123  
Provision for income taxes
    1,183       2,155       2,336       3,390       3,230  
Income from continuing operations
    1,203       295       2,805       4,387       4,893  
Loss from discontinued operations, net of loss on sales
  of discontinued businesses (net of income taxes) (2)
    (18,126 )     (15,927 )     (3,320 )     (687 )     (75 )
Net income (loss)
  $ (16,923 )   $ (15,632 )   $ (515 )   $ 3,700     $ 4,818  
                                         
Net income (loss) per basic share:
                                       
Income from continuing operations
  $ 0.13     $ 0.03     $ 0.30     $ 0.47     $ 0.63  
Loss from discontinued operations, net of loss on sales
    of discontinued businesses (net of income taxes)
    (1.99 )     (1.71 )     (0.36 )     (0.07 )     (0.01 )
Net income (loss)
  $ (1.86 )   $ (1.68 )   $ (0.06 )   $ 0.40     $ 0.62  
Net income (loss) per diluted share:
                                       
Income from continuing operations
  $ 0.13     $ 0.03     $ 0.30     $ 0.45     $ 0.60  
Loss from discontinued operations, net of loss
 on sales of discontinued businesses (net of income taxes)
    (1.98 )     (1.69 )     (0.35 )     (0.07 )     (0.01 )
Net income (loss)
  $ (1.85 )   $ (1.66 )   $ (0.05 )   $ 0.38     $ 0.59  
Weighted average shares outstanding:
                                       
Basic
    9,103       9,295       9,204       9,320       7,714  
Diluted
    9,135       9,419       9,462       9,660       8,197  
                                         
Cash dividends paid on common stock
  $ 2,090     $ 8,517     $ 3,350     $ 674     $ -  
Cash dividends paid per share of common stock
  $ 0.23     $ 0.91     $ 0.36     $ 0.07     $ -  
 
 
      At June 30,  
  Balance Sheet Data:     2009       2008        2007        2006        2005  
      (In thousands)   
Cash and cash equivalents
  $ 23,870     $ 23,345     $ 42,386     $ 52,110     $ 65,439  
Working capital – continuing operations
    23,108       26,771       42,720       54,844       68,565  
Working capital (deficit)– discontinued operations
    (1,725 )     (774 )     (511 )     44       349  
Goodwill and Intangibles – continuing
    5,402       6,661       5,935       2,866       79  
Goodwill and Intangibles – discontinued
    -       5,805       17,315       11,607       -  
Total assets – continuing operations
    35,989       42,567       57,315       65,470       75,092  
Total assets – discontinued operations
    284       9,451       20,786       12,751       442  
Stockholders' equity
    24,779       43,830       68,891       71,906       70,566  
 
 
1.
I nclude revenues from product sales, consisting primarily of sales of coins purchased under our warranty policy, of $394,000, $1,046,000 and $284,000 in fiscal 2009, 2008 and 2007, respectively, and less than $50,000 in each of fiscal 2005 and 2006.  Such product revenues are not considered an integral part of our on-going revenue generating activities.  The gross margin on product sales were (51)%, 7% and 33%, in fiscal 2009, 2008 and 2007, respectively.

2.
Discontinued operations include aggregate impairment losses in 2009 and 2008 of $7,695,000 and $11,233,000, respectively, and a loss on the closure of our jewelry businesses in fiscal 2009 of approximately $5,188,000, inclusive of an accrual for on-going real estate lease obligations of those businesses.  See note 4 to our Consolidated Financial Statements below in Item 8, Financial Statements and Supplementary Data.

 
26

 

ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

We provide grading and authentication services to dealers and collectors of high-value coins, trading cards, event tickets, autographs, memorabilia and stamps (“collectibles”).  We believe that our authentication and grading services add value to these collectibles by enhancing their marketability and thereby providing increased liquidity to the dealers, collectors and consumers that own, buy and sell them.

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 trading cards and event tickets, “PSA/DNA” for autographs and memorabilia and “PSE” for stamps.  Additionally, we warrant our certification of the authenticity and the quality grade that we assign to the coins, trading cards, currency and stamps bearing our brands.  We do not warrant the authenticity determinations we make with respect to autographs.

We principally generate revenues from the fees paid for our authentication and grading services.  To a much lesser extent, we generate revenues from other related services consisting of:  (i) the sale of advertising on our websites; (ii) the sale of printed publications and collectibles price guides and advertising in such publications and on our website; (iii) the sale of membership subscriptions in our Collectors Club, which is designed principally to attract interest in high-value collectibles among new collectors; (iv) the sale of subscriptions to our CCE dealer-to-dealer Internet bid-ask market for certified coins; and (v) the collectibles trade show conventions that we conduct. We also generate revenues from sales of our collectibles inventory, which is comprised primarily of collectible coins that we have purchased under our coin grading warranty program; however, these activities are not the focus of or an integral part of our business.

Acquired Businesses in our Continuing Operations .  On July 14, 2005, we purchased, for an aggregate purchase price of $515,000 in cash, substantially all the assets of CoinFacts.com, which operated an Internet website on which it published detailed proprietary information and history on U.S. Coins.

On September 2, 2005, we acquired, for an aggregate purchase price of $2,377,000 in cash, 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.  An affiliated, but unrelated business, CTP, was acquired as part of this acquisition and was disposed of by us in November 2005.

Effective July 1, 2006 we acquired, for an aggregate purchase price of $2,475,000 in cash, 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.

Discontinued Operations

During the period from fiscal 2006 through the latter part of fiscal 2009, we were also engaged in the business of authenticating and grading diamonds and colored gemstones (the “jewelry businesses”) and currency.

In the second quarter of fiscal 2009, the Board of Directors approved a plan to dispose of our currency grading and authentication business, which we sold in February, 2009.


 
27

 

In March, 2009 our Board of Directors adopted a plan to dispose of our jewelry businesses in order to focus our financial and managerial resources, and expertise, on our collectible coin, trading card, autographs and memorabilia and stamp authentication and grading businesses (our “collectibles businesses”).  The decision to implement this plan was based on a number of factors and considerations that included, among others, the continued operating losses of the jewelry businesses, which had proved to be disappointing and had not met expectations; the current economic climate prevailing in the United States, which has materially and adversely affected the jewelry and other luxury goods markets; and the additional capital that would be required to grow the jewelry businesses in comparison to the lower capital requirements of our collectibles grading and authentication businesses.  See BUSINESS—Recent Developments—Discontinued Operations of Collectibles Sales Businesses” in Part I of this Report.  Pursuant to that plan, in March 2009 we discontinued our jewelry businesses and have disposed of substantially all the assets of our jewelry businesses.

In the fourth quarter of fiscal 2009, the Board of Directors decided that we cease internal development of the business or assets of the Gemprint identification technologies, which we acquired in fiscal 2006, and we are currently in the process of selling the Gemprint assets.

In accordance with Statement of Financial Accounting Standard ("SFAS") No. 144, the assets and related liabilities of these businesses and their related operating results were classified as discontinued operations in our consolidated financial statements and prior period financial statements have been restated on that same basis.   See “Selected Financial Data” and our Consolidated Financial Statements contained in Item 8 in Part II of this Report.

Additionally, as a result of our divestiture of our jewelry and currency authentication and grading businesses and their classification as discontinued operations, our collectibles authentication and grading businesses comprise our continuing operations and the discussion that follows focuses almost entirely on those businesses

Factors That Can Affect Operating Results and our Financial Position

Factors that Can Affect our Revenues .  Our revenues generated by our continuing operations are comprised of (i) fees generated by our authentication and grading of high-value collectibles, and (ii) to a lesser extent, revenues from sales of collectibles club memberships, advertising on our websites and in printed publications and collectibles price guides, subscription-based revenues primarily generated by our CCE dealer-to-dealer Internet bid-ask market for collectible coins that have been authenticated and graded (collectively, “certified”) and fees earned from the management, operation and promotion of collectibles trade shows and conventions.  Our revenues also include revenues from sales of products, which consist primarily of coins that we purchase under our warranty policy.  However, those revenues, which vary from period to period depending on the volume and dollar amounts of the coin warranty claims we receive, are not the focus and do not constitute an integral part of our business.

Our authentication and grading fees accounted for approximately 80% of our total net revenues in the fiscal years ended June 30, 2009 and 2008, respectively, and 84% in fiscal 2007.  The amounts of such revenues are primarily affected by (i) the volume and mix of authentication and grading submissions among coins and trading cards, on the one hand, and other collectibles on the other hand, (ii) in the case of coins and trading cards, 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 trading cards, on the one hand, and modern coins and trading cards, on the other hand, because dealers generally request faster turn-around times for vintage or classic coins and trading cards than they do for modern submissions, as vintage or classic collectibles are of significantly higher value and are more saleable by dealers than modern coins and trading cards.

Our revenues also are affected by the level of coin authentication and grading submissions we receive at collectibles trade shows where we provide on-site authentication and grading services to show attendees, because they typically request higher priced same-day turn-around for the coins they submit at those shows.   The level of trade show submissions will vary from period to period depending upon a number of factors, including the number and the timing of the shows, the volume of collectible coins bought or sold at those shows by dealers and collectors, and short-term decisions made by dealers during shows,  In addition, the number of such submissions and, therefore, the revenues we generate from the authentication and grading of coins at trade shows can be impacted by short-term changes in the price of gold that sometimes occur around the time of the shows, which can affect the volume of coin transactions that take place at the shows.


 
28

 

Five of our coin authentication and grading customers accounted, in the aggregate, for approximately 10% of our total net revenues in the fiscal year ended June 30, 2009.  As a result, the loss of any of those customers, or a significant decrease in the volume of grading submissions from any of them to us, would cause our net revenues to decline and, therefore, could adversely affect our results of operations.

Factors Affecting our Gross Profit Margins .  The gross profit margins we earn on collectibles authentication and grading submissions also are primarily affected by (i) the volume and mix of those submissions among coins, trading cards and other collectibles, because we generally realize higher margins on coin submissions than on submissions of other collectibles; (ii) in the case of coins and trading cards, 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 trading cards, on the one hand, and modern coins and trading cards, on the other hand, because dealers generally request faster turn-around times for vintage or classic coins and trading cards than they do for modern submissions.  Furthermore, because a significant proportion of our costs of sales are fixed in nature in the short-term, our gross profit margin is also affected by the overall volume of collectibles that we authenticate and grade in any period.

Impact of Economic Conditions on our Financial Performance .  We generate all of our revenues from continuing operations from the collectibles markets.  As a result, the demand for our services and, therefore, our revenues, depend to a great extent on the volume of purchases and sales of the high-value collectibles that we authenticate, because dealers and collectors most often submit collectibles to us for authenticating and grading in anticipation of or in connection with their sales and purchases of those collectibles (“collectibles transactions”).  The volume of collectibles transactions is, in turn, primarily affected by (i) the disposable income available to collectors and their confidence about future economic conditions, because high-value collectibles are generally viewed as luxury goods and are purchased with disposable income; (ii) the cash flows generated by collectibles dealers and their confidence about future economic conditions, which affect the willingness of such dealers to purchase collectibles for resale; (iii) the availability and cost of borrowings because collectibles dealers often rely on borrowings to fund their purchases of collectibles, (iv) prevailing and anticipated rates of inflation, because the threat of and actual increases in inflation often lead investors and consumers to purchase gold and silver coins as a hedge against inflation, and (v) the performance and volatility of the gold and other precious metals markets and the stock markets, which affects the level of purchases and sales of collectible coins, because investors and consumers will often increase their purchases of gold coins if they believe that the market prices of gold will increase or the prices of stock will decline.  As a result, generally, collectibles transactions and, as a result, the demand for our authentication and grading services, increase during periods characterized by economic growth, accessibility to lower cost borrowings, or increases in inflation or in gold prices.  By contrast, collectibles transactions and, therefore, the demand for our services generally decline during periods characterized by economic downturns or recessions, declines in consumer and business confidence, an absence of inflationary pressure, or declines in the market prices of gold.  However, these conditions can sometimes counteract each other as it is not uncommon, for example, for investors to shift funds from gold to stocks during periods of economic growth and consumer and business confidence.

The current economic recession in the United States, continued uncertainty about the ultimate severity and duration of that recession, declines in cash flow that is available to collectibles dealers as a result of the credit crisis (which has made it difficult for collectibles dealers to obtain borrowings to fund their purchases) and the carrying costs of maintaining an inventory of high-value collectibles, combined to reduce the volume of collectibles transactions and the demand for our services during the fiscal year ended June 30, 2009.  As a result, during that year, we experienced declines in the demand for and in the revenues generated by all of our authentication and grading businesses.

The following tables provide information regarding the respective number of coins, trading cards, autographs and stamps that we graded or authenticated in the fiscal years ended June 30, 2009, 2008, and 2007.

   
Units Processed
 
   
2009
   
2008
   
2007
 
Coins
    1,456,100       52 %     1,474,900       48 %     1,558,700       51 %
Trading cards
    1,171,600       41 %     1,329,500       43 %     1,262,700       41 %
Autographs
    168,100       6 %     199,600       7 %     169,800       6 %
Stamps
    25,700       1 %     53,000       2 %     66,200       2 %
Total
    2,821,500       100 %     3,057,000       100 %     3,057,400       100 %


 
29

 

The following table sets forth the estimated values at which our customers insured the coins, trading cards, autographs and stamps that they submitted to us for grading or authentication.

   
Declared Values (000)
 
   
2009
   
2008
   
2007
 
Coins
  $ 1,119,000       91 %   $ 1,327,000       90 %   $ 1,435,000       92 %
Trading cards
    79,000       6 %     90,000       6 %     88,000       6 %
Autographs
    15,000       1 %     26,000       2 %     24,000       1 %
Stamps
    22,000       2 %     25,000       2 %     12,000       1 %
Total
  $ 1,235,000       100 %   $ 1,468,000       100 %   $ 1,559,000       100 %

Factors That Can Affect our Financial Position .  A substantial number of our authentication and grading customers prepay our authentication and grading fees when they submit their collectibles to us for authentication and grading.  As a result, historically, we have been able to rely on internally generated cash and have never incurred borrowings to fund our continuing operations.  We expect that internally generated cash flow will be sufficient to fund our continuing operations.

Besides the day to day operating performance of our business, our overall financial position can also be affected by the Company’s capital raising or stock buyback activities, the dividend policy adopted by the Board of Directors from time to time, and the Company’s decisions to invest in and to fund the acquisition of new established businesses and or early-stage businesses.  In addition, our financial position reflects the Company’s tax position in that the Company may only be required to pay minimum taxes, when it has net operating losses available to offset current period taxable income and the investment policy adopted for its cash balances, as this will impact the level of interest income earned on those cash balances.

Trends and Challenges in and Opportunities for our Businesses

The principal trends affecting our business are the economic recession and credit crisis, and uncertainties as to the ultimate severity and duration are continuing to adversely affect collectibles commerce and, as a result, the demand for our services and, hence, our revenues.

We do not know and cannot predict, with any level of assurance, the changes in the spending and savings habits of consumers and collectibles dealers and the effect of these changes on our business.  As a result, we will continue to focus on (i) achieving further reductions in our cost structure for cost of sales and our selling, general and administrative expenses during fiscal 2010 as a means to offset the potential impact of the economic recession and credit crisis on our net revenues and (ii) developing new sources of revenues within the collectibles market, in order to increase our net revenues and, together with costs savings, to increase our profitability.


 
30

 

Overview of Fiscal 2009 Operating Results

The following table sets forth comparative financial data for the years ended June 30, 2009 and 2008.

   
Year Ended June 30, 2009
   
Year Ended June 30, 2008
 
   
Amount
   
Percent of Revenues
   
Amount
   
Percent of
Revenues
 
 
Net revenues
  $ 35,914       100.0 %   $ 39,505       100.0 %
Cost of revenues
    16,385       45.6 %     19,779       50.1 %
Gross profit
    19,529       54.4 %     19,726       49.9 %
Selling and marketing expenses
    4,306       12.0 %     5,137       13.0 %
General and administrative expenses
    11,615       32.4 %     12,793       32.4 %
Impairment losses
    649       1.8 %     -       -  
Amortization of intangible assets
    871       2.4 %     490       1.2 %
Operating income
    2,088       5.8 %     1,306       3.3 %
Interest income, net
    284       0.8 %     1,138       2.9 %
Other income
    14       -       6       -  
Income before provision for income taxes
    2,386       6.6 %     2,450       6.2 %
Provision for income taxes
    1,183       3.3 %     2,155       5.5 %
Income from continuing operations
    1,203       3.3 %     295       0.7 %
Loss from discontinued operations
    (18,126 )     (50.4 )%     (15,927 )     (40.3 )%
Net loss
  $ (16,923 )     (47.1 )%   $ (15,632 )     (39.6 )%
Net loss per diluted share:
                               
Income from continuing operations
  $ 0.13             $ 0.03          
Loss from discontinued operations
    (1.98 )             (1.69 )        
Net loss
  $ (1.85 )           $ (1.66 )        

As the above table indicates, despite a $3.6 million, or 9.1% decrease in net revenues in fiscal 2009, as compared to fiscal 2008, our gross profits declined by only $197,000, or 1%, and our operating income (inclusive of an impairment loss of $649,000), increased by $782,000, or 60%, in fiscal 2009, compared with 2008.

Due primarily to an $854,000 decrease in interest income in fiscal 2009, as compared to 2008, which more than offset the increase in operating income that we achieved, our pre-tax income decreased by $64,000, or 2.6%, in 2009, compared to 2008.  That decrease in interest income was attributable to the combined effects of declines in our average cash balances and prevailing interest rates during fiscal 2009.

The improved operating performance primarily reflects cost reductions and efficiencies implemented in fiscal 2009 and the absence of the increased warranty costs of $822,000 that we recognized in fiscal 2008.  See “Critical Accounting Policies and Estimates – Grading Warranty Costs” below.

The loss from discontinued operations in fiscal 2009 of $18,126,000 was, primarily, the result of the operating losses, impairment losses and losses we recognized on the closure and disposal of our former jewelry authentication and grading businesses and our currency grading business that we exited in fiscal 2009.  The losses on the closure and disposal of our jewelry businesses included $4,000,000 for on-going lease commitments and other charges that we will have to pay under leases for office facilities, in New York City, that had been occupied by our jewelry businesses prior to our discontinuance of and exit from those businesses.  At June 30, 2009, the amount of such accrual was $4,454,000.
 
These, as well as other factors affecting our operating results in the fiscal 2009, are described in more detail below.  See “Results of Operations”.

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,

 
31

 

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 (for example) 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 their full effects 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.

During fiscal year 2006 and in the first quarter of fiscal year 2007, we acquired certain businesses and assets (some of which are now classified as part of discontinued operations, as we have closed, or disposed of or are in the process of selling such assets) and, in accordance with GAAP, we accounted for those acquisitions using the purchase method of accounting.  That accounting method required us to allocate amounts paid for those businesses in excess of the fair value of the assets acquired and the liabilities 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 “Goodwill” below).  Other intangible assets that are separable from goodwill and have definite lives are subject to amortization over their remaining useful lives (see “Long-Lived Assets Other Than Goodwill” below).  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 business acquisitions that gave rise to the recording of such assets.  In the event it is determined, from any such impairment analysis, that the estimated fair value of any such assets has declined below their carrying values, it would become necessary for us to recognize an impairment charge that would have the effect of reducing our income in the period when that charge is recognized.

We also estimate losses associated with the disposal of a business or the sale of assets when a decision has been made to dispose of or discontinue such business.  In accordance with GAAP, assets available for sale are stated at the lower of costs or their net realizable value.  In addition, the estimated fair value of liabilities for employee terminations is recognized as of the date such terminations are communicated to the affected employees and for lease obligations as of the date we cease using the real property or equipment subject to the lease.

In making our estimates and assumptions, we follow GAAP in order to enable us to make fair and consistent estimates of the fair value of assets and to establish adequate reserves or allowances for possible write-downs in the carrying values of our assets.

Set forth below is a summary of the accounting policies and critical estimates that we believe are material to an understanding of our financial condition and results of operations.

Revenue Recognition Policies .  We generally record revenue at the time of shipment of the authenticated and graded collectible to the customer.  Due to the insignificant delay between the completion of our grading and authentication services and the shipment of the collectible or high-value asset back to the customer, the time of shipment corresponds to the completion of our services.  Many of our authentication and grading customers prepay our authentication and grading fees when they submit their collectibles to us for authentication and grading.  We record those prepayments as deferred revenue until the collectibles have been authenticated and graded and shipped back to them.  At that time, we record the revenues from the authentication and grading services we have performed for the customer and

 
32

 

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 each of its collectibles conventions or trade shows in the fiscal period in which the convention or show takes place.

A portion of our net revenues is comprised of subscription fees paid by customers for memberships in our Collectors Club.  Those memberships entitle members to access our on-line and printed publications and, sometimes also to vouchers for free grading services from us.  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.  We review this estimate at least semi-annually by recalculating the percentage based on the relative values of the various elements in the Collectors Club offering and determining the appropriate percentage to attribute to the grading services and the remaining subscription.  Our estimates have proven to be consistently around 60% on an on-going basis.  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 recognize the revenue from the sale of a product when it is shipped to the customer and all the requirements of Staff Accounting Bulletin No. 104, Revenue Recognition , issued by the Securities and Exchange Commission (“SEC”), have been satisfied.  Such products consist primarily of collectible coins that we purchased pursuant to our coin authentication and grading warranty program and such sales are not considered an integral part of our on-going revenue generating activities.

Accrual for Losses on Facility Leases .  As a result of the discontinuance of and our exit from the jewelry authentication and grading businesses, we ceased the occupancy of facilities we had leased for their operations.  We have retained a commercial real estate broker to sublease those facilities on our behalf.  At March 31, 2009, we recorded an expense of approximately $3,100,000 to establish loss accruals totaling $3,740,000 for estimated losses under those leases.  The amount of those lease accruals was determined based on estimates on a discounted basis of (i) prevailing sublease rates in the real estate market where those facilities are located as compared to our rental obligations under the leases; (ii) the time we expect it will take to sublet those facilities; and (iii) other direct costs associated with the leases.  Such estimates were reviewed and updated to approximately $4,454,000 based on an updated market analysis at June 30, 2009.  Such estimates continue to be uncertain due to the economic recession which has led to substantial increases in vacancies and, therefore, in the space available for lease in commercial office buildings in the market where these facilities are located.  As a result, we will continue to review and, if necessary, make adjustments to the accruals on a quarterly basis.  If it becomes necessary to increase those accruals in the future as a result of, for example, changes in our estimate of market rents or our estimate of the time it will take to sublet the facilities, such increases will be classified as an increase in the loss from discontinued operations.

Accounts Receivable, Notes Receivable and the Allowance for Doubtful Accounts.   In the normal course of our authentication and grading business, we extend payment terms to many of the larger, more creditworthy dealers who submit collectibles to us for authentication and grading on an-going basis.  In addition, primarily in connection with our dealer financing program, we have made advances or extended credit under notes receivable arrangements with selected dealers.  We regularly review our accounts and notes receivable, estimate the amounts of, and establish an allowance for, uncollectible accounts or notes in each quarterly period.  The amount of that allowance is based on several factors, including the age and extent of significant past due accounts, and in the case of customer 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 our estimates of uncollectible amounts and, if necessary, adjust the allowance to take account of changes in economic or other conditions or trends that we believe will have an adverse effect on the ability of any of the account debtors or note obligors to pay their accounts or notes in full.  Since the allowance is increased 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.

Inventory Valuation Reserves.   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 below their carrying values.  The amount of the allowance is determined and is periodically adjusted on the basis of market

 
33

 

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 and special features of some of the collectibles included in our collectibles inventory and the volatility in the prices of precious metals, 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.  As a result, we review the market values of the collectibles in our inventory on a quarterly basis and make adjustments to the valuation reserve that we believe are necessary or prudent based on our judgments regarding these matters.  In the event that a collectible is sold for a price below its carrying value, we record a charge to operating income.

Grading Warranty Costs .  We offer a limited warranty covering the coins, trading cards and stamps that we authenticate and grade.  Under the warranty, if such a collectible that was previously authenticated and graded by us is later submitted to us for re-grading and either (i) receives a lower grade upon resubmittal or (ii) is determined not to have been authentic, we will offer to purchase the collectible for a price equal to the value of collectible at its original grade, or, at our option, pay the difference between the value of the collectible at its original grade as compared with the value at its lower grade.  However this warranty is voided if the collectible, upon resubmittal to us, is not in the same tamper-resistant holder in which it was placed at the time we last graded the item or if we otherwise determine that the collectible had been altered after we had authenticated and graded it.  If we purchase an item under a warranty claim, we recognize the difference in the value of the item at its original grade and its re-graded estimated value as a reduction in our warranty reserve.  We include the purchased item in our inventory at the estimated re-graded value of the collectible, which will be lower than the price we paid to purchase the item.  We accrue for estimated warranty costs based on historical trends and related experience.  Certain warranty claims were received by us in the second quarter and early in third quarter of fiscal 2008 that were significant in relation to our historical claims experience and, as a result, we recognized, in the second quarter of 2008, additional warranty expense of $822,000 in respect of those claims.  We also decided to increase our warranty accrual rate, effective January 1, 2008, to reflect this higher warranty claims experience, and we continue to monitor the adequacy of our warranty reserve on an on-going basis.  There also are a number of factors that can cause the estimated values of the collectibles purchased under our warranty program to change over time and, as a result, we review the market values of those collectibles (see Inventory Valuation Reserves above).  However, once we have classified such items as inventory and they have been held in inventory beyond the end of the fiscal quarter in which we purchased them, we classify any gains or losses on the subsequent disposal of such items as part of the gain or loss on product sales and not as an adjustment to our warranty reserves.

Long-Lived Assets Other Than Goodwill .  We regularly conduct reviews of property and equipment and other long-lived assets other than goodwill, including certain identifiable intangibles, for possible impairment.  Such reviews occur annually or more frequently if events or changes in circumstances indicate the carrying amount of the asset may not be recoverable in full.  In order to determine if the value of a definite-lived asset is impaired, we make an estimate of the future undiscounted cash flows expected to result from the use of that asset and its eventual disposition in order to determine if an impairment loss has occurred.  If the projected undiscounted cash flows are less than the carrying amount of the asset, an impairment loss is recorded to write down the asset to its estimated fair value.

We incurred significant operating losses in our two jewelry businesses subsequent to their respective dates of acquisition as those businesses failed to meet management’s revenue expectations and, as a result, we recognized initial impairment losses on our identifiable tangible and intangible assets in those businesses totaling $2,169,000 in the three months and for the year ended June 30, 2008.  In the three months ended December 31, 2008, we recognized additional impairment losses of $6,347,000 on our identifiable tangible and intangible assets in the jewelry authentication and grading businesses, due to continued uncertainties as to the level of revenues we could expect those businesses to generate in the future, worse than expected financial performance during the first six months of fiscal 2009 and the increasing severity of the economic recession and credit crisis which adversely affected the future prospects of those businesses.  In the three months ended March 31, 2009, we decided to exit those businesses, and, in the three months ended June 30, 2009, we decided to exit our related Gemprint business.  As a result, the impairment losses that were attributable to those jewelry businesses have been classified as part of discontinued operations in our consolidated financial statements.

In addition, in the fourth quarter of fiscal 2009, we reviewed the long-lived assets of our continuing businesses and concluded that certain capitalized software used in our autograph business was not recoverable in full due to technical and operational inefficiency issues.  As a result, we recognized an impairment loss of $649,000 in our continuing operations for the fourth quarter and fiscal year ended June 30, 2009.


 
34

 

Goodwill.   We test the carrying value of goodwill and other indefinite-lived intangible assets of our acquired businesses at least annually on their respective acquisition anniversary dates, or more frequently if indicators of impairment are determined to exist.  We apply a discounted cash flow model or an income approach in estimating the fair value of each of those businesses that we have determined constitutes a separate reporting unit, and we compare the estimated fair value of the reporting unit to its then carrying value.  If the fair value of the reporting unit exceeds its carrying value, no impairment of goodwill exists as of the measurement date.  If, instead, the fair value of the reporting unit is determined to be less than its carrying value, then there is the possibility of goodwill impairment and further testing and re-measurement of goodwill is required.

In accordance with GAAP, we considered the diamond grading business and the colored gemstone grading business as separate reporting units for the purpose of testing for the impairment of the goodwill.  We incurred significant operating losses in each of those reporting units subsequent to the respective dates of their acquisition, as those units failed to meet revenue expectations established for them by management.  As a result, in the three months and year ended June 30, 2008 we recognized initial impairment losses to the goodwill and other indefinite-lived intangible assets of these businesses totaling $9,063,000.  Due to continued uncertainties as to the future revenues of these businesses, their worse than expected financial performance during the first half of fiscal 2009 and the anticipated effects on those businesses of the increasing severity of the economic recession and credit crisis, in the three months ended December 31, 2008 we recognized additional goodwill impairment losses in those businesses totaling $1,348,000, which resulted in full impairment of goodwill in these businesses.  As a result of our decision, made in March 2009, to exit the jewelry grading and authentication businesses, these impairment losses have been classified as part of discontinued operations for the years ended June 30, 2009 and 2008.

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, we make assumptions with respect to the expected lives of the options or other stock awards that have been granted and are outstanding, the expected volatility and the dividend yield percentage of our common stock and the risk-free interest rate at the respective dates of grant.  In addition, under SFAS No. 123(R), we recognize and report share-based compensation expense net of a forfeiture rate with respect to outstanding awards that we expect will occur over their respective vesting periods, which we estimate on the basis of historical forfeiture experience or other factors that could affect the likelihood of forfeiture.  We monitor the forfeiture rate closely to ensure that all stock awards that vest are fully expensed over their respective vesting periods using the straight-line attribution method.  During the years ended June 30, 2009, 2008 and 2007, we awarded restricted shares to the outside members of the Board of Directors and to our senior management, and, accordingly, we recognize stock-based compensation over the respective vesting periods of such awards based upon the closing stock prices of the shares on their respective dates of the grant, net of an estimated forfeiture rate.  Upon termination of employment or service with the Company, unvested restricted shares are cancelled and those shares are returned to their status as unissued shares available for future stock awards.

Capitalized Software .  In fiscal years 2009, 2008 and 2007 we capitalized, for continuing operations, approximately $261,000, $1,220,000 and $761,000 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 .  In addition, during the fiscal years 2006 through 2009, we capitalized approximately $1,036,000 of software developments costs relating to our discontinued businesses.  SOP 98-1 requires that certain software development 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, which we believe is conservatively estimated at three years.  On the other hand, planning, training, support and maintenance costs incurred either prior to or following the implementation phase of a software development project are recognized as expense in the periods in which they are incurred.  During the fiscal years ended June 30, 2009, 2008 and 2007, we recorded approximately $710,000, $329,000 and $143,000, respectively, as amortization expense related to such capitalized software projects.  We evaluate the carrying values of capitalized software to determine if those values are impaired and, if necessary, we record an impairment charge in the period in which we determine that an impairment has occurred.  Based on such an evaluation, we concluded that as of June 30, 2009 certain capitalized software used in our autograph and memorabilia authentication and grading business was not recoverable in full due to technical and operational inefficiency issues.  As a result, we recognized an impairment loss of $649,000 in our continuing operations for the fourth quarter and fiscal year ended June 30, 2009.  See “ Long-Lived Assets Other Than Goodwill” above.


 
35

 

Income Taxes and Deferred Tax Assets .  We account for income taxes in accordance with SFAS No. 109 , Accounting for Income Taxes and FASB Interpretation 48, Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109 (“FIN48”).   SFAS No. 109 requires the recording of deferred tax assets and liabilities for the future consequences of events that have been recognized in the Company’s financial statements or tax returns.  Measurement of the deferred items is based on enacted tax laws.  In the event the future consequences of differences between financial reporting bases and tax bases of the Company’s assets or liabilities result in a deferred tax asset, SFAS No. 109 requires that we evaluate the probability of realizing the future income tax benefits comprising that asset based on a number of factors, which include projections of future taxable income and the nature of the tax benefits and the respective expiration dates of tax credits and net operating losses.  In the fourth quarter of fiscal 2008, due to the length of time and the extent of the taxable income required to fully realize the deferred tax assets related to impairment losses recognized in the fourth quarter of fiscal 2008, as well as certain California Enterprise Zone Credits, we recorded a valuation allowance of approximately $4.6 million against deferred tax assets totaling $6.0 million at June 30, 2008.  At that time we determined that it was more likely than not that we would realize the tax benefits comprising the remaining $1.4 million net deferred tax assets at June 30, 2008.  At June 30, 2009, due to the recognition of additional impairment losses in our jewelry businesses, and uncertainties of our future financial performance arising from the economic recession and credit crisis, we did not recognize any additional deferred tax assets for the losses related to the impairment and disposal of our discontinued businesses in fiscal 2009.  At June 30, 2009, we had established valuation allowances against the entirety of our deferred tax assets.

Included in our deferred tax asset balances at June 30, 2008 and December 31, 2008, were deferred tax assets of $495,000 related to compensation expense recorded in connection with the grant of non-employee supplier stock options in 1999.  Those options expired unexercised during fiscal 2009 and, as a result, the amount of that deferred tax asset was ultimately written down to zero at June 30, 2009.  In accordance with SFAS 123R and related interpretations, that write-down has been recognized as a reduction to additional paid-in capital of $495,000 at June 30, 2009.

We recorded a deferred income tax liability of $268,000 on our balance sheet at June 30, 2009, which arose out of timing differences for goodwill and other indefinite-lived intangible assets that are amortizable for income tax purposes but not for financial reporting purposes under GAAP.

FIN 48 clarifies the accounting for uncertainty in tax positions and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and, in addition, requires us to disclose our policy for the classification of interest and penalties in our statements of operations.  FIN 48 requires that we make adjustments in our financial statements to reflect only tax positions which we believe are more-likely-than-not to be sustained on audit, based on the technical merits of the positions.  FIN 48 requires that any necessary adjustment be recorded directly to the beginning balance of retained earnings or accumulated deficit in the period of adoption of FIN 48 and reported as a change in accounting principle, if material.  During the first quarter of fiscal 2008, the cumulative effects of applying FIN 48 were recorded as an increase of $170,000 to our accumulated deficit, an increase to income taxes payable of $279,000 and a decrease in deferred tax liabilities of $109,000.  We also recognized interest and penalties totaling $101,000 as of July 1, 2007, the date of the adoption of FIN 48, which were accounted for as part of the total adjustment to accumulated deficit of $170,000.  During the fiscal years ended June 30, 2009 and 2008, which followed the adoption of FIN 48, we recorded approximately $7,000 and $13,000, respectively, in interest and penalties as components of income tax expense.  At June 30, 2009, certain of these uncertain tax positions were resolved, and $96,000 (which was inclusive of accrual interest and penalties) was recognized as an income tax benefit in our Consolidated Statement of Operations in fiscal 2009.


 
36

 

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,
 
   
2009
   
2008
   
2007
 
Net revenues
    100.0 %     100.0 %     100.0 %
Cost of revenues
    45.6 %     50.1 %     43.3 %
Gross profit
    54.4 %     49.9 %     56.7 %
Operating expenses:
                       
Selling and marketing expenses
    12.0 %     13.0 %     12.7 %
General & administrative expenses
    32.4 %     32.4 %     34.9 %
Impairment losses
    1.8 %     -       0.1 %
Amortization of intangible assets
    2.4 %     1.2 %     1.3 %
Total operating expenses
    48.6 %     46.6 %     49.0 %
Operating income
    5.8 %     3.3 %     7.7 %
Interest income, net
    0.8 %     2.9 %     5.6 %
Income before provision for income taxes
    6.6 %     6.2 %     13.3 %
Provision for income taxes
    3.3 %     5.5 %     6.0 %
Income from continuing operations
    3.3 %     0.7 %     7.3 %
Loss from discontinued operations, net of loss on sales of discontinued businesses (net of income taxes)
    (50.4 )%     (40.3 )%     (8.6 )%
Net loss
    (47.1 )%     (39.6 )%     (1.3 )%

Net Revenues .  Our net revenues consist primarily of (i) fees that we generate from the authentication and grading of high-value collectibles, including coins, trading cards, autographs and stamps and (ii) to a lesser extent, collectibles related service revenues (referred to as “other related revenues”) generated by sales of Collectors Club memberships, advertising on our websites and in printed publications and collectibles price guides, fees that are paid to us by coin dealers to subscribe to our CCE dealer-to-dealer Internet bid-ask market for coins authenticated and graded by us (our “CCE Internet Coin Exchange”), interest earned by our CFC Dealer Financing business, and fees earned from promoting, managing and operating collectibles trade shows and conventions.  Net revenues also include, to a significantly lesser extent, revenues from the sales of products, consisting primarily of coins that we purchase under our warranty policy.  We do not consider revenues from product sales to be an integral part of our on-going revenue generating activities.

The following tables set forth our total net revenues for the fiscal years ended June 30, 2009, 2008 and 2007, broken out between the revenues generated by our authentication and grading services and other related services (inclusive of revenues from product sales), respectively:

               
2009 vs. 2008
 
   
2009
   
2008
   
Increase (Decrease)
 
   
Amount
   
% of Net
Revenues
   
Amount
   
% of Net
Revenues
   
Amount
   
Percent
 
   
(Dollars in thousands)
 
Grading and authentication fees
  $ 28,645       79.8 %   $ 31,587       80.0 %   $ (2,942 )     (9.3 )%
Other related products and services
    7,269       20.2 %     7,918       20.0 %     (649 )     (8.2 )%
Total net revenues
  $ 35,914       100.0 %   $ 39,505       100.0 %   $ (3,591 )     (9.1 )%

               
2008 vs. 2007
 
   
2008
   
2007
   
Increase (Decrease)
 
   
Amount
   
% of Net
Revenues
   
Amount
   
% of Net
Revenues
   
Amount
   
Percent
 
   
(Dollars in thousands)
 
Grading and authentication fees
  $ 31,587       80.0 %   $ 32,409       83.8 %   $ (822 )     (2.5 )%
Other related products and services
    7,918       20.0 %     6,277       16.2 %     1,641       26.1 %
Total net revenues
  $ 39,505       100.0 %   $ 38,686       100.0 %   $ 819       2.1 %


 
37

 

The following tables set forth certain information regarding the increases or decreases in (i) net revenues from the authentication and grading of collectible coins and trading cards and autographs, which are our two largest authentication and grading businesses, and (ii) net revenues from our other businesses which, for purposes of this table, include the authentication and grading of stamps and our non-grading businesses that generate our other related service revenues and product sales revenues.

               
2009 vs. 2008
 
   
2009
   
2008
   
Increase (Decrease)
 
         
% of Net
         
% of Net
   
Revenues
   
Units Processed
 
   
Amount
   
Revenues
   
Amount
   
Revenues
   
Amounts
   
Percent
   
Number
   
Percent
 
   
(Dollars in thousands)
             
Coins
  $ 20,549       57.2 %   $ 21,883       55.4 %   $ (1,334 )     (6.1 )%     (18,800 )     (1.3 )%
Cards and Autographs (1)
    10,190       28.4 %     11,518       29.2 %     (1,328 )     (11.5 )%     (189,400 )     (12.4 )%
Other (2)
    5,175       14.4 %     6,104       15.4 %     (929 )     (15.2 )%     (27,300 )     (51.5 %)
    $ 35,914       100.0 %   $ 39,505       100.0 %   $ (3,591 )     (9.1 )%     (235,500 )     (7.7 )%

               
2008 vs. 2007
 
   
2008
   
2007
   
Increase (Decrease)
 
         
% of Net
         
% of Net
   
Revenues
   
Units Processed
 
   
Amount
   
Revenues
   
Amount
   
Revenues
   
Amounts
   
Percent
   
Number
   
Percent
 
   
(Dollars in thousands)
             
Coins
  $ 21,883       55.4 %   $ 23,075       59.6 %   $ (1,192 )     (5.2 )%     (83,800 )     (5.4 )%
Cards and Autographs (1)
    11,518       29.2 %     10,966       28.4 %     552       5.0 %     96,600       6.7 %
Other (2)
    6,104       15.4 %     4,645       12.0 %     1,459       31.4 %     (13,200 )     (19.9 )%
    $ 39,505       100.0 %   $ 38,686       100.0 %   $ 819       2.1 %     (400 )     -  

(1)  
Consists of revenues from our PSA trading card authentication and grading  business and our PSA/DNA autograph authentication and grading business.

(2)  
Includes the revenues of our stamp authentication and grading business, CCE subscription fees, CFC; interest income, the revenues of our Expos convention business, and product sales revenues.

Fiscal 2009 vs. 2008.   In fiscal 2009, our net revenues declined by $3,591,000, or 9.1%, compared to fiscal 2008.  That decline was attributable, primarily, to (i) a $2,942,000, or 9.3%, decrease in authentication and grading fees, and (ii) a $649,000, or 8.2%, decrease in the revenues generated by other related service businesses and our product sales.  Excluding product sales, which we do not consider to be an integral part of our revenue generating activities, in fiscal 2009, revenues generated by our other related service businesses would have been substantially the same as in fiscal 2008 and our total net revenues would have declined by 7.6%, as compared to the total net revenues that we generated in fiscal 2008.
 
The 9.3% decrease in authentication and grading fees in fiscal 2009 was attributable to decreases in the fees generated by all of our authentication and grading businesses.  Coin, trading card and autograph and stamp authentication and grading fees decreased by approximately $1,200,000, or 6%, $1,200,000, or 12%, and approximately $500,000, or 34%, respectively, in fiscal 2009.  The decrease in coin authentication and grading fees was the result of (i) a $1.4 million or 30% decrease in the on-site authentication and grading fees generated at coin trade shows and (ii) a $0.3 million or 6% decrease in modern coin grading fees, which were partially offset by (iii) a $0.5 million or 5% increase in the fees generated from the authentication and grading of vintage coins, the submissions of which increased in fiscal 2009 as compared to fiscal 2008.

These decreases in authentication and grading fees were due primarily to decreases in coin, trading card and autograph and stamp authentication and grading submissions in 2009.  We believe those decreases were primarily the result of the economic recession and credit crisis in the United States, which caused declines in the confidence among dealers and collectors about future economic conditions and reduced the availability of business and consumer credit.  We also believe that uncertainties created by increases and greater volatility in gold prices made collectibles dealers and collectors reluctant to engage in collectible coin transactions, which resulted in declines in trade show authentication and grading submissions in fiscal 2009.

In the fourth quarter of fiscal 2009, however, our total authentication and grading revenues were approximately the same as in the same quarter of fiscal 2008 due primarily to a 12% increase in coin authentication and grading fees which more than offset decreases of 16% and 46% , respectively, in the fees from our authentication and grading of trading

 
38

 

cards and autographs and stamps.  The increase in coin authentication and grading fees was attributable, primarily, to an increase of the grading and authentication of modern coins in the quarter.  However, due to the continuing uncertainties about the duration and severity of the economic recession and credit crisis, we are not able to predict, with any assurance, whether or not the increase in coin authentication and grading revenues will continue into fiscal 2010, nor the level of authentication and grading revenues for trading cards, autographs and stamps in fiscal 2010.

Fiscal 2008 vs. 2007.   In fiscal 2008, our net revenues increased by $819,000, or 2.1%, compared to fiscal 2007.  That increase was due primarily to an increase in other related service and product sales revenues totaling $1,641,000, or 26%, partially offset by an $822,000, or 3%, decrease in authentication and grading fees.  If product sales are excluded, our other-related service revenues increased by $884,000, or 15%, in fiscal 2008, as compared to fiscal 2007; however, the increase in total revenues in fiscal 2008 would have been $62,000.  That increase in product sales revenue was attributable to an increase in the number and dollar amounts of coin warranty claims received in fiscal 2008 and, as a result, in the amount of coins we purchased in satisfaction of those claims and then sold.

The $884,000 increase in other-related service revenues in fiscal 2008, compared with fiscal 2007, was primarily the result of revenues that we generated from an increase in third party advertising in our coin and trading card publications and an increase in revenues generated by our CFC dealer financing programs.

The $822,000 decrease in authentication and grading fees in fiscal 2008, compared to fiscal 2007, was primarily attributable to a $1,355,000, or 6%, decrease in coin authentication and grading fees, which was partially offset by increases in revenues of $347,000, or 4%, and $186,000, or 15%, from the authentication and grading of trading cards and autographs and stamps, respectively.  The decline in coin authentication and grading revenues in 2008, compared to fiscal 2007, was the result of a 23% decrease in revenues generated at trade shows, as a result of (i) our attending two fewer collectibles trade shows in fiscal 2008 than in fiscal 2007, and (ii) a decrease in grading submissions at the trade shows we attended in the second half of fiscal 2008.  An increase in vintage coin submissions, on which we usually generate higher revenues due primarily to faster turn-around times requested by submitters, resulted in a 6% increase in revenues in fiscal 2008, as compared to fiscal 2007; however, that increase was largely offset by a 6% decrease in revenues from modern coins authentication and grading submissions in fiscal 2008.

Gross Profit

Gross profit is calculated by subtracting the cost of revenues from net revenues.  Gross profit margin is gross profit stated as a percent of net revenues.  The costs of authentication and grading revenues consist primarily of labor to authenticate and grade collectibles, production costs, credit card fees, warranty expense, occupancy, security, depreciation, amortization and insurance costs that directly relate to providing authentication and grading services.  Cost of revenues also includes printing, other direct costs of the revenues generated by our other related services businesses and the costs of product revenues, which represent the carrying value of the inventory of products (primarily collectible coins) that we sold.  In addition, costs of revenues include stock-based compensation attributable to stock incentive awards granted to employees whose compensation is classified as part of the costs of authentication and grading revenues.

Set forth below is information regarding our gross profits in the fiscal years ended June 30, 2009, 2008 and 2007.

   
Fiscal Year Ended June 30,
(Dollars in thousands)
 
   
2009
   
2008
   
2007
 
Gross profit
  $ 19,529     $ 19,726     $ 21,950  
Gross profit margin
    54.4 %     49.9 %     56.7 %

Fiscal 2009 vs. 2008 As indicated in the above table, our total gross profit margin increased from 49.9% in fiscal 2008 to 54.4% in fiscal 2009.  Excluding the effect of product revenues for all periods, which are not an integral part of our core revenues generating activities, and increased warranty costs of $822,000 in fiscal 2008 as a result of unexpected claims in significant dollar amounts that arose during that period, the gross profit margin for grading and authentication and other related services would have been 55.5% for fiscal 2009, compared with 53.2% for fiscal 2008.  The improvement in the gross profit margins are the result primarily of cost improvement programs, including headcount and publications direct costs reductions, implemented in our coin grading business in response to the decline in revenues in 2009, compared to 2008,  partially offset by a lower gross margin on cards and autographs.

 
39

 

In the fourth quarter of fiscal 2009, the gross profit margin, excluding the effect of coin sales, increased to 58%, compared to 52% in the fourth quarter of fiscal 2008.  That increase was due the combined effects of the increase in coin authentication and grading revenues and the cost savings, as discussed above.

However, we are not able to predict whether these improvements in gross margin represent the beginning of a trend, due to the continued uncertainties for our business created by the continuing economic recession and credit crisis.

Fiscal 2008 vs. 2007.   As indicated in the above table, our total gross profit margin declined from 56.7% in fiscal 2007 to 49.9% in fiscal 2008.  Excluding the unusually higher warranty costs of $822,000 in 2008 and the effects of product sales on gross margin both in fiscal 2008 and 2007, our gross profit margin would have been 53.2% in fiscal 2008 as compared to 56.9% in fiscal 2007.  That decline was primarily attributable to (i) a decrease in coin authentication and grading revenues in fiscal 2008 that was due to a decrease in the number of coins graded and a change in the mix of coin authentication and grading submissions to a higher proportion of modern coin submissions on which we realize lower margins because the average service fee earned on modern coins is lower than on vintage coins, and (ii) an increase in personnel, travel, printing, and on-going warranty costs in support of our coin grading activities.

Selling and Marketing Expenses

Selling and marketing expenses are comprised primarily of advertising and promotions costs, trade-show expenses, customer service personnel costs, depreciation and third-party consulting costs.

   
Fiscal Year Ended June 30,
(Dollars in thousands)
 
   
2009
   
2008
   
2007
 
Selling and marketing expenses
  $ 4,306     $ 5,137     $ 4,924  
As a percentage of net revenues
    12.0 %     13.0 %     12.7 %

Fiscal 2009 vs. 2008 .  In fiscal 2009, selling and marketing expenses decreased by $831,000 and as a percentage of net revenues, notwithstanding the 9.1% decrease in net revenues in fiscal 2009.  That decrease was primarily attributable to the implementation of a cost savings program that included reductions in personnel, media costs and the expenses of providing on-site grading services at collectibles trade shows, as well as a reduction in fiscal 2009, as compared to fiscal 2008, in the mix of trade shows at which we offered on-site trading card and stamp authentication and grading services.

Fiscal 2008 vs. 2007 .   The $213,000 increase in selling and marketing expenses in fiscal 2008, compared with fiscal 2007, was primarily attributable to an increase in business development activities primarily by our collectibles grading and subscription divisions, which included an increase in expenditures for promotional programs and increase in the number of trade shows at which we offered on-site trading card and stamp authentication and grading services.

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 personnel and information technology personnel, facilities management costs, depreciation, amortization and other miscellaneous expenses.  G&A expenses also include stock-based compensation costs, determined in accordance with SFAS No. 123(R), arising from the grant of stock awards to general and administrative personnel.

The following table compares our G&A expenses that we incurred in fiscal 2009 to the G&A expenses we incurred in fiscal 2008 and 2007.

   
Fiscal Year Ended June 30,
(Dollars in thousands)
 
   
2009
   
2008
   
2007
 
General & administrative expenses
  $ 11,615     $ 12,793     $ 13,520  
As a percentage of net revenues                                                   
    32.4 %     32.4 %     34.9 %


 
40

 

The decrease in G&A expenses of $1,178,000 in fiscal 2009 compared to fiscal 2008, was due primarily to cost reduction measures implemented in fiscal 2009 to bring G&A expenses more into line with revenues.  Those measures, which included, among others, workforce reductions and reductions in professional fees, enabled us to keep G&A expenses, as a percentage of revenues, at 32.4% despite the 9.1% decline in revenues in fiscal 2009.  Those reductions in G&A expenses more than offset severance costs of approximately $400,000 recognized, in the third quarter of fiscal 2009, in connection with the departure of the Company’s former chief executive officer.  Also contributing to the decrease in G&A expenses was a $420,000 decrease in stock-based compensation expense in fiscal 2009, as compared to fiscal 2008, due to (i) a reduction in the number of stock awards granted in fiscal 2009 as compared to fiscal 2008, and (ii) an increase in forfeitures of outstanding stock awards during the third quarter of 2009.

Fiscal 2008 vs. 2007.   The reduction in G&A expenses of $727,000 in fiscal 2008, compared to fiscal 2007, was primarily attributable to savings in legal, professional and outside services costs and a lower level of corporate information technology personnel costs in fiscal 2008, compared to 2007.  Those cost savings more than offset a $205,000 increase in stock-based compensation costs due primarily to an increase in restricted stock awards granted to our officers and directors in fiscal 2008.

Impairment Losses
   
Fiscal Year Ended June 30,
(Dollars in thousands)
 
   
2009
   
2008
   
2007
 
Impairment losses                                               
  $ 649     $ -     $ 16  
As a percentage of net revenues
    1.8 %     -       0.1 %

The impairment loss in fiscal 2009 was attributable to a determination that, due to technical and operational inefficiencies, the carrying value of capitalized software developed for our autograph business was impaired at June 30, 2009.

Amortization of Intangible Assets
   
Fiscal Year Ended June 30,
(Dollars in thousands)
 
   
2009
   
2008
   
2007
 
Amortization expense                                               
  $ 871     $ 490     $ 505  
As a percentage of net revenues
    2.4 %     1.2 %     1.3 %

The increase in the amortization expense of $381,000 in fiscal 2009, compared to fiscal 2008, was primarily attributable to the amortization of capitalized software costs, for which amortization commences as development projects are completed.  In addition, we also incur amortization costs in connection with the intangible assets acquired in business acquisitions that occurred during fiscal 2006 through the first quarter of fiscal 2007.  Capitalized software costs and acquired intangible 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.  Amortization expense, for fiscal 2009, includes approximately $165,000 resulting from the amortization of capitalized software costs invested in the development of software for our autograph business that we determined was impaired at June 30, 2009, and for which we recognized an impairment loss in fiscal 2009 (see “Results of Operations -- Impairment Losses ” above).

Stock-Based Compensation Expense

We recognized stock-based compensation expense, arising from the grant of restricted stock and stock option awards, of $759,000, $1,179,000 and $854,000 during fiscal 2009, 2008 and 2007, respectively.  Stock-based compensation expense is recorded as part of (i) costs of sales, in the case of stock awards granted to employees whose costs are classified as cost of revenues, (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:

 
41

 


   
Fiscal Year Ended June 30,
(Dollars in thousands)
 
   
2009
   
2008
   
2007
 
Cost of revenues                                               
  $ 294     $ 293     $ 158  
Selling and marketing expenses
    -       (7 )     8  
General and administrative expenses
    465       893       688  
    $ 759     $ 1,179     $ 854  

Generally, the vesting of stock option and restricted stock awards that we have granted to officers, employees and outside directors is conditioned on continued employment or service with the Company during a specified time period or periods (“vesting periods”).  Typically, the vesting period is four years for officer and employee awards and shorter periods for director awards, reflecting their service periods; although we have, on occasion, granted stock awards that become vested, in part or in whole, on the date of grant.  In accordance with SFAS 123R, stock-based compensation expense is determined over the respective vesting periods of the awards, calculated on a straight-line basis, net of an estimated forfeiture rate which, in the case of restricted stock awards was 7% in 2007 and 5% in both 2008 and 2009 and in the case of stock option grants was 5% in each of fiscal 2009 and 2008 and 9% in fiscal 2007.  See “Critical Accounting Policies and Estimates – Stock-Based Compensation ” above.

Stock-based compensation expense related to restricted stock grants of approximately $256,000, $352,000 and $164,000 was recognized in fiscal 2009, 2008 and 2007, respectively.  Compensation cost is determined based on the closing price per share of our common 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 forfeitures.

There were no new options granted in fiscal 2009, although all options outstanding were adjusted for the 10% stock dividend in October 2008, as required under the original terms of such option grants.  We calculate stock-based compensation by estimating the fair value of stock options as of their respective grant dates 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 and recognize such costs on a straight-line basis over the vesting period of the options.

A total of $176,000 of compensation expense related to unvested stock-based compensation awards remained unrecognized as of June 30, 2009 and will be recognized as compensation expense as follows:

Year Ending June 30,
 
Amount
 
2010
  $ 136,000  
2011
    30,000  
2012
    10,000  
Total
  $ 176,000  

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 forfeiture percentage.

Interest Income, Net

Interest income is generated on cash balances that we have invested, primarily in highly liquid money market accounts and funds, short-term bank certificates of deposit and commercial paper instruments and tax-free funds.  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.  The following table compares the interest income we earned in the fiscal years ended June 30, 2009, 2008 and 2007.

 
42

 


   
Fiscal Year Ended June 30,
(Dollars in thousands)
 
   
2009
   
2008
   
2007
 
Interest income, net
  $ 284     $ 1,138     $ 2,149  
Percent of net revenue
    0.8 %     2.9 %     5.6 %

Fiscal 2009 and 2008.   Interest income, net, was $284,000 in fiscal 2009, compared with $1,138,000 in fiscal 2008.  That decrease was primarily attributable to (i) a shift of our cash and cash equivalent balances into lower yielding government guaranteed money market funds; (ii) a decrease in our average cash balances in fiscal 2009, compared to fiscal 2008, due to our use of a portion of our available cash to fund quarterly dividends, share repurchases, capital expenditures, and the losses incurred by our discontinued operations; and (iii) a decrease in interest rates earned on our cash and cash equivalent balances in fiscal 2009, compared to fiscal 2008, due to reductions in prevailing market rates of interest as a result of actions taken by the Federal Reserve Board in response to the increased severity of the economic recession and credit crisis.

Fiscal 2008 vs. 2007. Interest income, net was $1,138,000 in 2008, compared with $2,149,000, in 2007.  The decrease in interest income was primarily attributable to (i) a shift of our cash and cash equivalent balances for part of the year into liquid tax-free money funds from taxable investments; (ii) a decrease in our average cash balances in 2008, compared to 2007, due to our use of  cash to fund quarterly dividends, share repurchases, capital expenditures, increases in advances under our dealer-financing program and operating losses of our discontinued operations; and (iii) a decrease in interest rates earned on our cash and cash equivalent balances during 2008, compared with 2007, due to reductions in prevailing market rates of interest as a result of actions taken by the Federal Reserve Board.

Provision for Income Taxes
   
Fiscal Year Ended June 30,
(Dollars in thousands)
 
   
2009
   
2008
   
2007
 
Provision for income taxes
  $ 1,183     $ 2,155     $ 2,336  

The income tax provision for fiscal 2009 reflects valuation allowances that we established against the Company’s deferred tax assets due to uncertainties with respect to the realization of the tax benefits comprising those assets, net of a tax benefit of $96,000, related to the reversal of certain tax exposures for uncertain state tax positions recognized when the Company adopted FIN 48, effective July 1, 2007, that have since been resolved.  In accordance with SFAS 109, valuation allowances established in fiscal 2009 against deferred tax assets that existed at the beginning of the year are attributable to continuing operations.  See “Critical Accounting Policies and Estimates --  Income Tax and Deferred Tax Assets ”.

The income tax provision recorded in fiscal 2008 reflects tax at the effective rate for fiscal 2008 and a valuation allowance for California Enterprise Zone Tax Credits, due to our determination that it had become more likely than not that we would be unable to recover, in full, the income tax benefits comprising our deferred tax assets in the fourth quarter of fiscal 2008.

For fiscal 2007, the effective tax benefit was approximately 45% and reflected the higher percentage of permanent differences between income for book and income for tax purposes due to the level of losses in 2007.

Discontinued Operations
   
Fiscal Year Ended June 30,
(Dollars in thousands)
 
   
2009
   
2008
   
2007
 
Loss from discontinued operations, net of gains on sales of discontinued businesses (net of income taxes)
  $ 18,126     $ 15,927     $ 3,320  

The loss from discontinued operations for fiscal 2009, primarily reflects (i) losses of $5,219,000 that we recognized on the discontinuance and exit from our jewelry authentication and grading businesses in the third and fourth quarters of fiscal 2009; (ii) impairment losses of $7,695,000 recognized at December 31, 2008 to the carrying values of

 
43

 

long lived assets and goodwill of those jewelry businesses; and (iii) losses of $5,212,000 incurred from the on-going operations of our discontinued businesses from July 1, 2009 through the date of their discontinuance, which was March 2, 2009.  No income tax benefits were recognized in connection with the recognition of those losses in fiscal 2009, due to uncertainly as to the realization of our deferred tax assets in future periods.  See “Critical Accounting Policies and Estimates-- Long-Lived Assets Other Than Goodwill—Goodwill and Income Taxes and Deferred Tax Assets   above for a discussion of the impairment losses to the carrying values of our jewelry businesses recognized at December 31, 2008.

The losses that we recognized in fiscal 2009, in connection with the discontinuance of our jewelry authentication and grading businesses, were comprised of (i) $4,000,000 of operating lease accruals representing the expected loss on the leases for the facilities that had been occupied by those businesses, (ii) approximately $900,000 of estimated losses on the disposal of the assets of our jewelry authentication and grading businesses, and (iii) approximately $400,000 of severance costs incurred in connection with the termination of employment of the employees of those businesses.  The amount of the operating lease accruals was determined based on our estimates of the time that it will take to sublease those facilities and the rents at which we could expect to sublease those facilities over the remaining duration of the leases, discounted to present value.  Those estimates, in turn, were based primarily on rental market surveys that were conducted for us by independent real estate consulting firms.  We are in the process of seeking subtenants for these facilities and we will re-evaluate these estimates and update this loss accrual as necessary to take account of the results of those subleasing efforts and any changes that might occur in market rental rates or in commercial office space available for rent in the market where these facilities are located.  See “Critical Accounting Policies and Estimates -- Accrual for Losses on Facility Leases ” above.

The losses from discontinued operations for fiscal 2008, consist of (i) losses of $7,867,000 from the operations of our discontinued businesses, including our jewelry authentication and grading businesses, incurred in the year ended June 30, 2008, and (ii) impairment losses of $11,233,000, recognized at June 30, 2008, to the carrying value of long-lived assets and goodwill of our jewelry businesses, partially offset by related income tax benefits recognized in fiscal 2008.

The losses from discontinued operations for fiscal 2007 are primarily comprised of the loss from the operations of our jewelry businesses incurred during that year, partially offset by related income tax benefits recognized in fiscal 2007.

Quarterly Results of Operations and Seasonality

The following tables present unaudited selected quarterly financial data for each of the eight quarters beginning September 30, 2007 and ending on June 30, 2009.  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 are not necessarily indicative of results that may be expected for any subsequent fiscal 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, because collectibles commerce generally decreases during the holiday season.

Our collectibles trade show business, which we acquired in July 2006, has added to the variability in our quarter-to-quarter operating results, as its revenues vary based on the timing of the collectibles trade shows it conducts.  As a general matter, the revenues of this business are significantly higher in the first, third and fourth quarters of our fiscal years, compared to the second quarter, because the Long Beach Collectibles Shows (the larger of the two trade shows that it conducts) take place during the first, third and fourth quarters, while the smaller Santa Clara Collectibles Shows take place in the second and fourth quarters of the year.


 
44

 


 
Quarterly Reports of Operations
 
Quarters Ended
(In thousands, except per share data)
 
   
Sept. 30,
2007
   
Dec. 31,
2007
   
Mar. 31,
2008
   
June 30,
2008
   
Sept. 30,
2008
   
Dec. 31,
2008
   
Mar. 31,
2009
   
June 30,
2009
 
Statement of Operations Data:
                                               
Net revenues
  $ 10,264     $ 9,258     $ 10,345     $ 9,638     $ 9,043     $ 7,802     $ 9,315     $ 9,754  
Cost of revenues
    4,332       5,785       4,928       4,734       4,126       4,027       4,111       4,121  
Gross profit
    5,932       3,473       5,417       4,904       4,917       3,775