10-K 1 mainfile.htm 10-K YEAR ENDED JUNE 30, 2008 mainfile.htm
 
 

 


 
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, 2008
   
 
OR
   
q
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
   
 
For the transition period from _______ to _____
   
Commission file number 0-27887
 
 
 
COLLECTORS UNIVERSE, INC.
 
(Exact name of Registrant as specified in its charter)
Delaware
 
33-0846191
(State or other jurisdiction of
 
(I.R.S. Employer Identification No.)
Incorporation or organization)
   
1921 E. Alton Avenue, Santa Ana, California
 
92705
(Address of principal executive offices)
 
(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 [X]  NO [    ]
 
Indicate, by check mark, if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.   See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act, (check one):
 
Large accelerated filer o
Accelerated filer ý
Non-accelerated filer o
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  [  ]   NO  x
 
As of December 31, 2007, the aggregate market value of the Common Stock held by non-affiliates was approximately $91,601,261 based on the per share closing price of $12.30 of Registrant’s Common Stock as of such date as reported by the Nasdaq Global Market.
 
As of September 26, 2008, a total of 8,361,344 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, 2008, for its Annual Meeting of Stockholders scheduled to be held on December 2, 2008.





 
 

 

COLLECTORS UNIVERSE, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2008
 
TABLE OF CONTENTS



PART I
   
Page
       
 
Forward-Looking Statements                                                                                                                            
1
 
Business                                                                                                              
1
 
Risk Factors                                                                                                              
30
 
Unresolved Staff Comments                                                                                                              
36
 
Properties                                                                                                              
36
 
Legal Proceedings                                                                                                              
37
 
Submission of Matters to a Vote of Security Holders                                                                                                              
38
   
Executive Officers of Registrant                                                                                                              
38
PART II
     
 
Market for Common Stock and Related Stockholder Matters                                                                                                              
39
 
Selected Consolidated Financial Data                                                                                                              
40
 
42
 
Quantitative and Qualitative Disclosures About Market Risk                                                                                                              
63
 
Financial Statements and Supplementary Data                                                                                                              
64
   
Report of Independent Registered Public Accounting Firm                                                                                                              
65
   
Consolidated Balance Sheets at June 30, 2008 and 2007                                                                                                              
66
   
67
   
68
   
69
   
71
 
101
 
Controls and Procedures                                                                                                              
101
 
Other Information                                                                                                              
104
PART III
   
 
Directors and Executive Officers                                                                                                              
104
 
Executive Compensation                                                                                                              
104
 
Security Ownership of Certain Beneficial Owners and Management                                                                                                              
104
 
Certain Relationships and Related Transactions                                                                                                              
104
 
Principal Accountant Fees And Services                                                                                                              
104
       
PART IV
Exhibits and Financial Statement Schedules                                                                                                              
105
   
SIGNATURES                                                                                                                                          
S-1
INDEX TO EXHIBITS                                                                                                                                          
E-1




 

i
 

 

 
Statements contained in this Annual Report that are not historical facts or that discuss our expectations, beliefs or views regarding our future operations or future financial performance, or financial or other trends in our business, constitute “forward-looking statements” as defined in the Private Securities Reform Act of 1995.  Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts.  Often, such statements include the words “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “project,” or words of similar meaning, or future or conditional verbs such as “will,” “would,” “should,” “could,” or “may”.  Forward looking statements are estimates or predictions about the future.  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 of 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.

PART I
ITEM 1.   BUSINESS
 
Overview
 
We are a leading provider of value-added authentication, grading and information services to dealers and collectors of high-value coins, sportscards, autographs, stamps and vintage U.S. currency notes (which we will sometimes generally refer to as “collectibles”) and to wholesale and retail dealers of diamonds and colored gemstones.
 
 
Collectibles.  The collectibles that we authenticate and grade have market values generally ranging from $100 to over $1 million, due principally to their rarity, age or association with famous individuals or historical events.
 
The authenticity and the state of preservation, or quality, of these collectibles are also important determinants of their value in the collectibles markets.  For that reason, sellers, purchasers and collectors submit their high-value collectibles to us for:
 
 
Certifications by our independent experts of their authenticity; that is, confirmation that the collectibles are real and are what they have been represented to be; and
 
 
Evaluations of their physical condition and appearance and the assignment of a grade by our independent experts on the basis of uniform quality standards.
 
Once we have authenticated and assigned a grade to a collectible, we encapsulate it in a tamper-evident, clear plastic holder, or issue a certificate of authenticity, that (i) identifies the specific collectible, (ii) sets forth the quality grade we have assigned to it and (iii) bears one of our brand names and logos: “PCGS” for coins, “PSA” for sportscards, “PSA/DNA” for autographs and memorabilia, “PSE” for stamps and “PCGS Currency” for U.S. vintage currency notes1. Additionally, we warrant our certification of authenticity and the grade that we assign to the coins, sportscards, currency and stamps bearing our brands. We do not warrant our authenticity determinations for autographs.
 
Diamonds and Colored Gemstones.  In November 2005, we began offering diamond authentication and grading services to wholesale and retail dealers of diamonds as a result of our acquisition of Gem Certification & Appraisal Lab (GCAL), an independent diamond certification and grading laboratory.  In August 2006, we began offering identification, authentication and grading services to wholesale and retail dealers of high value colored gemstones, including emeralds, rubies and sapphires, as a result of our acquisition of American Gemological Laboratories (AGL), an independent colored gemstone certification and grading laboratory.
 


 
1
Collectors Universe, PCGS, Professional Sports Authenticator and PSA/DNA, Set Registry, CU3000 First Strike, and each of the logos associated with those names, are registered service or trade marks of the Company.

 
1

 

 The market values of the diamonds and colored gemstones that we grade generally range from approximately $200 to over $1 million, depending, in the case of diamonds, primarily on their weight, color and clarity.  The market values of colored gemstones depend primarily on their color, tone, and clarity and the presence of and type of enhancements, which are made to almost all colored gemstones to improve their color or clarity or both.  The market value of a colored gemstone also can be affected by its country of origin.
 
Our customers, who usually consist of wholesale and retail dealers and auction companies, submit diamonds and colored gemstones to us for:
 
§ 
Confirmations, by our independent experts, that the diamonds or colored gemstones are, in fact, natural (as opposed to synthetically manufactured); and
 
§ 
Evaluations of their physical condition and appearance and the assignment of a grade by our independent experts on the basis of uniform quality standards that, in the case of diamonds, relate to their color and clarity and, in the case of colored gemstones relate to color, tone, clarity, enhancements and, in some cases, country of origin.
 
Our Diamond Grading and Certification Services.  Upon completion of the grading process for diamonds, a GCAL certificate is issued that sets forth the weight, cut, color and clarity grades assigned to the diamond by GCAL, along with other information that is measured as part of the grading process, such as the dimensions of the diamond.  GCAL also includes a direct light performance analysis of each diamond utilizing a proprietary process that measures, in a digital image, the number of pixels of light that pass through a diamond, ranking the light performance higher for more light and lower for less light.  A similar process measures the symmetry of the cut of the diamond, another feature that can have a direct impact on the brilliance and reflectivity of a diamond.  A graphic representation of the brilliance and symmetry is included on the certificate.  Additionally, using a patented technology for non-invasive diamond identification that we acquired in December 2005, we digitally capture and record the unique refractive light pattern of the diamond (which we refer to as a “Gemprint”), that we store in our computer database, cross-indexed to the certificate number issued with the diamond2.  This “Gemprint” process enables us to match GCAL graded diamonds, on a one-to-one basis, with their GCAL certificates, thereby providing an additional measure of protection against misrepresentations of diamond quality that can occur by, for example, switching a diamond grading certificate issued for a higher quality diamond to a lower quality diamond.  GCAL provides a limited warranty with respect to the color and clarity grades that GCAL assigns to the diamonds it certifies.
 
We believe that Gemprint’s process provided by GCAL is the only non-intrusive diamond identification service offered by any diamond certification company and that no diamond certification company, except GCAL, warrants the color and clarity grades it assigns to the diamonds they certify.
 
In fiscal 2008, we began offering some of our services separately that were previously only available as a part of the bundled services on a diamond grading certificate.  These separately offered services, include the issuance of (i) a direct light performance report, which provides information on the optical brilliance and optical symmetry of a diamond that can assist a retailer in demonstrating one of the most important points of differentiation between two or more diamonds; and (ii) a Diamond ID report that provides a “gemprint” of the diamond and registration of that gemprint in our global database to assist in positive identification of the diamond in the event it is lost or stolen or to confirm its authenticity in the event the owner later seeks to sell it.
 


 
2
GCAL, Gemprint and AGL and each of the logos associated with their respective names, are registered service marks of the Company.

 
2

 

Additionally, in fiscal 2008, we launched the Certified Diamond Exchange (CDE), an Internet based business-to-business exchange exclusively for GCAL certified diamonds.  The buyers and sellers on CDE register with us, which entitles them, without charge, to buy or sell GCAL certified diamonds on the exchange.  The buyers on CDE are generally retailers and jewelry manufacturers.  Wholesale sellers have presented for purchase millions of dollars of GCAL certified diamonds and will generally deliver the diamond via overnight delivery directly to the buyer’s store or facility.   There are over 30,000 retailers in the United States registered with the Jewelers Board of Trade and since inception in November 2007, CDE has registered over 2,000 buyers.  The sellers on CDE are, for the most part, diamond dealers and cutter/polishers who offer diamonds on the exchange that are GCAL certified diamonds.  CDE increases the availability and distribution of GCAL certified diamonds and provides an incentive for diamond sellers to obtain GCAL diamond certifications on diamonds in order to place those diamonds on the CDE for sale directly to thousands of retailers in the United States who have registered to purchase GCAL certified diamonds on the CDE.
 
Our Colored Gemstone Grading and Certification Services.  AGL offers different levels of service to its customers:
 
·      
Its “Prestige” Service, which is designed for grading and certification of colored gemstones whose weight and market value justify the costs of a higher level and more comprehensive suite of grading and certification services; and
 
·      
Its “Fast Track” Service, which is designed for lower weight and less valuable colored gemstones.
 
AGL’s Prestige Service provides the customer with a comprehensive quality analysis and report that sets forth the identification, weight, cut, color, tone and clarity grades assigned to the gemstone, along with the description of the quality enhancements that had been made to the gemstone and, in some cases, its country of origin.  A high resolution color image of the colored gemstone is included on the certificate for identification purposes.
 
AGL’s Fast Track Service allows the customer to select from among a variety of grading services that includes, for a minimum fee, information relating to the identification, weight and cut of the gemstone, which is set forth on a small plastic card, similar in size and materials to a credit card.  Fast Track customers also may order one or more supplemental services that will provide them with information regarding the color, tone, clarity and/or country of origin of the gemstone, for additional fees that will vary based on the extensiveness of the services ordered.
 
AGL warrants the identification information with respect to the colored gemstones it certifies, but does not warrant information relating to the enhancement, color, clarity or country of origin of the colored gemstone.
 
In fiscal 2008, we developed the Colored Gemstone Exchange (CGE), an Internet based business-to-business exchange exclusively for gemstones carrying AGL documents. The buyers and sellers on CGE register with us, which entitles them, without charge, to buy and sell AGL certified colored gemstones from the exchange.  The buyers on CGE are generally retailers and jewelry manufacturers.  Gemstone dealers list for purchase on the CGE, gemstones with AGL documentation as to their identification, weight, shape and enhancements.  Of key importance in this market is the inclusion of color images on the exchange for each of the gemstones, since the color of a colored gemstone is perhaps the most important feature.  Generally, in the current marketplace, there are no methods for a buyer to know the color of a gemstone without physical examination as imaging is not widely utilized. Because each gemstone has an AGL document with an image, CGE electronically shares the digital image from the AGL document database to display an attractive color image.  On CGE, buyers have the opportunity to purchase these gemstones directly from wholesale sellers who will generally deliver the gemstone via overnight delivery directly to the buyer’s store or facility.  The sellers of AGL certified gemstones on the CGE are primarily gemstone dealers and cutter/polishers.  We believe that CGE increases the availability and distribution of many of the smaller colored gemstones, valued from $200 to approximately $20,000, that carry the new AGL Fast Track documentation and that the increased liquidity offered by CGE creates an incentive for gemstone sellers to obtain AGL Fast Track documentation for these smaller and less valuable colored gemstones..
 
Benefits Provided by our Authentication and Grading Services.  We believe that our authentication and grading services increase the liquidity and marketability and, therefore, add to the value, of the collectibles, diamonds and colored gemstones that we authenticate and grade.  Our services provide sellers, purchasers and collectors with (i) the confidence of knowing that the collectibles, diamonds or colored gemstones they are buying or selling are authentic or natural, as the case may be; (ii) information, in the form of
 
 
3

 
objective and uniform measures of quality, that enable sellers, purchasers and collectors to assess the value of those collectibles, diamonds or colored gemstones; and (iii) information, based on analysis of the colored gemstone and technological comparisons to known origin specimens, relating to the country of origin of a colored gemstone.  Armed with this information, a prospective buyer who might otherwise be reluctant to purchase a high-priced collectible, diamond or colored gemstone, is more informed and more confident about, and more willing to make such a purchase, particularly “sight-unseen,” on Internet auction sites such as those operated by eBay and Blue Nile and even in higher value assets as may be offered by Sotheby’s.  We also believe that dealers who sell collectibles, diamonds or colored gemstones that have been authenticated and graded by us are more readily able to sell, and are more likely to obtain higher prices for, those items than if they had not been authenticated and graded by us, because our services give prospective buyers the confidence to purchases those collectible, diamonds or colored gemstones from those dealers.
 
We originated the standards and methodologies we use for authenticating and grading coins, sportscards, autographs and stamps.  Those standards and methodologies have become generally accepted in the collectible coin, sportscard and autograph markets.  At the time we launched our independent third party stamp grading service, the concept of grading the quality of stamps, in addition to authenticating them, was relatively novel.  Since that time, our stamp grading standards have become increasingly accepted, especially for higher value stamps.
 
The standards and methodologies we use in grading diamonds are generally accepted in the diamond market. Those standards and methodologies were developed by the Gemological Institute of America, a non-profit educational corporation.  However, we believe that the diamond grading services we offer differ from those that are available from competing diamond grading services primarily in terms of the rigorousness and consistency with which we apply those grading standards.  For that reason, among others, Blue Nile, which is the largest seller of diamonds on the Internet, has chosen GCAL to certify all of Blue Nile’s Signature Collection which, according to Blue Nile, includes the world's most brilliant round diamonds, as well as the world's first and only princess, emerald, and Asscher diamonds, cut to Blue Nile’s finest ideal standards.
 
AGL has developed certain proprietary standards for the colored gemstone market relating to color, tone and clarity of colored gemstones and descriptive terms used in the disclosure of colored gemstone enhancements.
 
We also have developed some of the leading brands in the collectibles, diamonds and colored gemstones markets in which we conduct our business:
 
§  
“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;
 
§  
“PSE” (Professional Stamp Experts), which is the brand name for our independent stamp authentication and grading service;
 
§  
“PCGS Currency” the brand name for our currency authentication and grading service;
 
§  
“GCAL” (Gem Certification & Assurance Lab), which is the brand name for our independent diamond authentication and grading service; and
 
§  
“AGL” (American Gemological Laboratories), which is the brand name of our independent third party colored gemstone grading business.
 
PCGS and PSA are among the leading independent authentication and grading services in the collectible coin and sportscard markets in the United States.  PSA/DNA and PSE also are among the leading independent authentication services in their respective markets.  Currency authentication and grading are new to the currency market and PCGS Currency is one of the leading independent authentication and grading services in the currency market.  GCAL is among the top quality independent authentication and grading services in the diamond market and we believe it is the only diamond certification service that offers a non-invasive and unchangeable diamond identification method that makes it possible to detect the switching or alteration of diamond grading certificates and the only service that offers a warranty with respect to the quality grades relating to the diamond’s color and clarity.  AGL is one of the world leaders in colored gemstone authentication, grading, enhancement disclosure and for the most valuable colored gemstones, identification of the country of origin.
 
 
 
4

 
We began offering our PCGS coin authentication and grading services in 1986 and, from inception through fiscal year ended June 30, 2008, we had authenticated and graded more than 15 million coins.  In 1991, we launched our PSA sportscard authentication and grading service and, through June 30, 2008, had authenticated and graded over 11 million sportscards.  In 1999, we launched our PSA/DNA vintage autograph authentication business and in June 2004 we extended that business by introducing vintage autograph grading services to dealers and collectors of autographed sports memorabilia. We started our PSE stamp authentication and grading service in 2000.  We launched PCGS Currency as an extension of the PCGS brand in March 2005. In the second quarter of fiscal 2006, we acquired GCAL and the Gemprint technology.  We acquired AGL in the first quarter of fiscal 2007.
 
The following table provides information regarding the respective numbers of coins, sportscards, autographs and stamps that we authenticated or graded from 2006 to 2008, the number of diamonds we authenticated and graded since the acquisition of GCAL, our diamond authentication and grading service, in the second quarter of fiscal 2006 and the number of colored gemstones we authenticated and graded since the acquisition of AGL, our colored gemstone authentication and grading service, in the first quarter of fiscal 2007.
 
   
Units Processed
 
   
2008
   
2007
   
2006
 
Coins
    1,474,900       47 %     1,558,700       50 %     1,786,300       55 %
Sportscards
    1,329,500       42 %     1,262,700       41 %     1,200,300       37 %
Autographs
    199,600       6 %     169,800       5 %     179,700       6 %
Stamps
    53,000       2 %     66,200       2 %     37,000       1 %
Currency
    59,200       2 %     36,200       1 %     28,800       1 %
Diamonds(1)
    30,000       1 %     25,000       1 %     6,700       -  
Colored Gemstones(2)
    4,700       -       2,000       -       -       -  
Total
    3,150,900       100 %     3,120,600       100 %     3,238,800       100 %

The following table sets forth the estimated values at which our customers insured the collectibles, diamonds and colored gemstones that they submitted to us for grading or authentication.

   
Declared Values (000)
 
   
2008
   
2007
   
2006
 
Coins
  $ 1,327,000       73 %   $ 1,435,000       82 %   $ 1,613,000       90 %
Sportscards
    90,000       5 %     88,000       5 %     75,000       4 %
Autographs
    26,000       2 %     24,000       1 %     15,000       1 %
Stamps
    25,000       1 %     12,000       -       21,000       1 %
Currency
    45,000       2 %     32,000       2 %     43,000       2 %
Diamonds(1)
    225,000       12 %     97,000       6 %     27,000       2 %
Colored Gemstones(2)
    93,000       5 %     62,000       4 %     -       -  
Total
  $ 1,831,000       100 %   $ 1,750,000       100 %   $ 1,794,000       100 %

1      We commenced the authentication and grading of diamonds in the second quarter of 2006 when we acquired GCAL and Gemprint.
2      We commenced the authentication and grading of colored gemstones in the first quarter of 2007, when we acquired AGL.

We generate revenues principally from our authentication and grading service fees.  For collectibles, those fees range from $4 to over $200 per item authenticated and graded, based primarily on the type of item authenticated or graded and the turn-around times selected by our customers, which range from 1 to approximately 60 days.  In fiscal 2008 our authentication and grading fees for all our businesses averaged $10.90. As a general rule, collectibles dealers and, to a lesser extent, individual collectors, request faster turn-around times and, therefore, generally pay higher fees for more valuable, older or “vintage” collectibles, than they do for modern collectibles.  Diamond authentication and grading fees, generally range from $30 to over $300 based on the weight of the diamond and are fixed with specific delivery times; although fees sometimes vary in the case of contracts that provide for volume submissions.  Authentication and grading fees for AGL range from $25 to $2,500 based on whether the customer requests our Prestige Service or our Fast Track Service, the weight of the colored gemstone and whether the customer requests that we certify the country of origin of the colored gemstone.
 

 
5

 
We also generate on-going revenues, to a lesser extent, from (i) sales of advertising on our websites; (ii) sales of our printed publications and price guides and advertising placed in such publications; (iii) sales of our rarity or “population” reports that contain data regarding the total number of coins and sportscards we have graded since our inception, categorized by item type and grade determination; (iv) monthly subscription fees associated with our Internet-based, dealer to dealer exchange “CCE” (Certified Coin Exchange) for certified coins; and (v) trade show management fees generated by our trade show management company, Expos Unlimited LLC (“Expos”), which promotes and manages two well known coin, stamp and collectibles shows in Long Beach and Santa Clara, California, respectively.  We believe that our printed publications, price guides and reports make collectors better informed consumers and make collecting more interesting and exciting for them while our dealer to dealer exchange provides a source of additional liquidity to coin dealers seeking to sell PCGS certified coins.

Industry Background
 
The primary determinants of the prices of, and the willingness of sellers, purchasers and collectors to purchase, high-value or high-priced collectibles, diamonds, colored gemstones or other high-value assets are their authenticity and quality. The authenticity of a collectible relates not only to the genuineness of the collectible, but also to the absence of any alterations or repairs that may have been made to hide damage or to restore the item. The authenticity of a diamond or colored gemstone relates to its formation in a natural method and mined from the earth as opposed to laboratory grown or synthetically produced, and in the case of colored gemstones, the country of origin.  The quality of a collectible relates to its state of preservation relative to its original state of manufacture or creation. The quality of a diamond is largely a function of its color and clarity.  The quality of a gemstone relates to color, tone, clarity, enhancements and in some cases, the country of origin.  With regard to value, confirmation of authenticity generally is required before a buyer is willing to proceed with a purchase of a high-priced collectible, diamond or colored gemstone.  Quality directly affects value and price, usually on an exponential basis, with higher quality collectibles, diamonds and colored gemstones, generally attracting dramatically higher prices than those of lower quality. Even a relatively modest difference in quality can translate into a significant difference in perceived value and, therefore, in price. For example, a 1952 Mickey Mantle baseball card that received a PSA grade from us of 9 on our PSA grading scale of 1-to-10 was sold at public auction in 2006 for $282,588. By comparison, a similar 1952 Mickey Mantle baseball card that received a PSA grade of 8 was sold at public auction also in 2006 for $72,057.

Although, in the case of diamonds and colored gemstones, the weight of the stone (as measured by mechanical devices) has a significant impact on value, quality ratings also have a material impact on value. A round brilliant cut two carat natural diamond with a GCAL grade D color (which is the most desirable blue-white color on the scale from D to the yellow tint of a P color) and a clarity grade of flawless or “FL” (which indicates that the diamond has no imperfections or inclusions) has an approximate wholesale market value ranging from $75,600 to $79,800. By comparison, a similar cut two carat diamond with a GCAL grade I color and a clarity grade of SI2 (which is in the midpoint range of clarity) has an approximate wholesale market value ranging from $13,200 to $13,940.  In the same manner, a rectangular cut two carat emerald with AGL color grade 3, a tone of  70 (a very attractive and intense green) and a clarity grade of “LI” (or lightly included) has an approximate market value ranging from $18,000 to $20,250. By comparison, a similar cut emerald with AGL color grade 6, a tone of 50 (an average color and intensity of green) and a clarity grade of “MI2” (moderately included) has an approximate market value ranging from $3,600 to $4,800. The country of origin, of a colored gemstone also can affect its market value.  For example, the same oval cut two carat Blue Sapphire with an AGL color grade of 3, a tone of 70 (rich and deep blue) and a clarity grade of “LI” has an approximate market value ranging from $2,800 to $3,400 if its country of origin is Burma, but would have an approximate market value ranging from $20,000 to $22,000 if its country of origin is Kashmir.

Until the advent of independent third party authentication and grading, most prospective buyers, including experienced collectibles, diamond and colored gemstone dealers and retailers, insisted on physically examining high-priced collectibles, diamonds and colored gemstones before consummating transactions.  However, unlike professionals in the trade, most purchasers and collectors lacked the experience and knowledge needed to determine, with confidence, the authenticity or the quality, and hence the value, of high-priced collectibles, diamonds and colored gemstones, even when they had the opportunity to examine them physically.  As a result, purchasers and collectors had to rely on representations made by sellers regarding authenticity and quality.  For these reasons, “buyer beware” characterized the high-value collectibles, diamond and colored gemstone markets, and “sight-unseen” markets for rare coins, diamonds, colored gemstones and other high-value collectibles were practically non-existent.
 
 
 
6

 
High-value collectibles have been traditionally marketed at retail by dealers through direct mail, catalogues, price lists and advertisements in trade publications, and sold and purchased by them at collectibles shows, auction houses and local dealer shops. Diamonds and colored gemstones have been marketed at retail through tens of thousands of retail jewelry stores or in departments of large general retail stores. These markets were highly inefficient because:
 
§  
they were fragmented and localized, which limited both the variety of available collectibles, diamonds and colored gemstones 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, diamonds and colored gemstones 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 and quality.
 
Coin Market.  In an effort to overcome some of these inefficiencies, approximately 30 years ago, professional coin dealers began using a numerical grading scale for grading coins. That scale ranged from 1 to 70, with higher numbers denoting a higher quality. Previously, professional dealers used descriptive terms, such as “Fair,” “Fine” and “Uncirculated,” to characterize the quality of the coins they sold, a practice that continued after the development of the numeric grading system. However, whether using a numeric or a descriptive system, grading standards varied significantly from dealer to dealer, depending on a dealer’s subjective criteria of quality. Moreover, dealers were hardly disinterested or independent since, as the sellers or buyers of the coins they were grading, they stood to benefit financially from the assignment of a particular grade.
 
Sportscard Market.  Misrepresentations of authenticity and quality also operated as a barrier to the liquidity and growth of the collectibles market for sportscards.  Even experienced and knowledgeable dealers insisted on physically examining purportedly rare and higher priced sportscards.  Most collectors lacked the knowledge needed to purchase collectible sportscards with confidence, even when they had physically examined them.  Sportscard dealers eventually developed a rudimentary adjectival system to provide measures of quality, using descriptive terms such as “Poor,” “Very Good,” “Mint” and “Gem Mint.” These measures of quality were assigned on the basis of such characteristics as the centering of the image on the card and the presence or absence of bent or damaged corners, scratches and color imperfections. However, as was the case with coins, grading standards varied significantly from dealer to dealer, depending on a dealer’s subjective criteria of quality. Additionally, since the dealers who bought and sold sportscards were the ones that assigned these grades, collectors remained vulnerable to fraudulent practices.
 
Autographed Memorabilia Market.  The market for autographed sports, entertainment and historical memorabilia has been plagued by a high incidence of forgeries and misrepresentations of authenticity. For example, Operation Bullpen, initiated by the FBI and other law enforcement agencies beginning in 1997, has uncovered a high volume of outright forgeries of signatures and widespread misrepresentations as to the genuineness of sports memorabilia. We believe that the high incidence of such fraudulent activities was due, in large part, to a dearth of independent third party memorabilia authentication services and an absence of systematic methodologies and specimen data needed for verification of authenticity.
 
Stamp Market.  Stamp dealers developed an adjectival system, similar to the one developed for sportscards, by which they valued and priced stamps based primarily on the centering of the stamp image on the stamp paper background, ignoring other faults in the stamp. As a result, experienced and knowledgeable dealers insisted on physically examining purportedly rare and higher priced stamps before purchasing them. Additionally, most collectors lacked the knowledge and experience needed to purchase higher priced stamps with confidence. Consequently, as was the case with coins and sportscards, collectors were forced to depend on representations of authenticity and quality from the very dealers from whom they purchased or to whom they sold stamps.  However, prior to our entry into the market, independent third-party stamp grading was non-existent.
 
 
7

Currency Market.  There has been some grading of currency in the past, but none of the grading businesses have been successful as the market was not developed, such that there was not substantial demand for grading services.  In addition, the grading businesses were not third-party independent grading businesses, as they were operated and owned by currency dealers, who also bought and sold the same materials that they graded; thereby, creating potential conflicts of interest.   PCGS Currency is an independent third-party grading service that does not have such conflicts of interest.  Our currency grading utilizes a numerical 70 – point system to determine the overall grade or condition of a note.
 
Diamond Market.  Approximately 70 years ago, the Gemological Institute of America (“GIA”), a non-profit educational corporation, developed a system for classifying and grading diamonds which consisted of the “4C’s” of carat, cut, color and clarity.  The system provided terminology for identifying (1) the weight of a diamond, denominated as “carats,” (2) the shape and proportion of the diamond with a cut analysis; (3) the relative color of the diamond using an alphabetic scale from a high quality color of “D” to the lowest quality color of “P”; and (4) the relative clarity of, or imperfections in the diamond, using descriptive terms on a scale from “Flawless” (“FL”) to “Very Slightly Included” (“VSI”) to “Slightly Included” (“SI”) to “Included” (I”).  In its gemologist educational programs, the GIA taught this grading system as a required part of the curriculum.   Notwithstanding the widespread use of common terminology, these measures of quality can be subjectively and inconsistently applied.
 
Colored Gemstone Market. Although the GIA has held classes on the identification, authentication and grading of colored gemstones for approximately 30 years, no significant standard or system of color, tone and clarity grading has been in widespread use in the marketplace.  In addition, the availability of sample gemstones for technical trace element analysis needed to determine country of origin was very limited, in part because of the limitation of the number of trusted samples from various regions of the world and in part due to the limitations of the technology to examine and classify the samples.   As a result, buyers were largely dependent on subjective assessments of quality and country of origin from the dealers from whom they purchased colored gemstones, and no sight-unseen market for colored gemstones existed.
 
These conditions created a need and the demand for independent authentication and grading services from which sellers, purchasers and collectors could obtain:
 
§  
determinations, from independent, third party experts, of the authenticity of the high-value collectibles, diamonds and colored gemstones that sellers, purchasers and collectors purchased, particularly “sight-unseen” or over the Internet;
 
§  
representations of quality based on uniform standards applied by independent, third party experts; and
 
§  
authoritative information, compiled by a credible third party, to help purchasers and collectors understand the factors that affect an item’s perceived value and price, including:
 
—  
its rarity;
 
—  
its quality or grade; and
 
—  
its historical and recent selling prices.

The Impact of eBay and other e-Commerce Websites on the Collectibles, Diamond and Colored Gemstone Markets.  The advent of the Internet and, in particular, eBay’s development of an Internet or “virtual” marketplace and other Internet-selling websites such as Blue Nile and Amazon, have overcome many of the inefficiencies that had characterized the traditional collectibles, diamond and colored gemstone markets.  eBay and other online marketplaces (i) offer enhanced interaction between and greater convenience for sellers and buyers of high-value collectibles, diamonds and colored gemstones; (ii) eliminates or reduces the involvement of dealers and other “middlemen;” (iii) 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, diamonds and colored gemstones that are listed for sale on the Internet.  Buyers have no ability to physically examine them, and no means to confirm the identity or the credibility of the dealers or sellers on the Internet.  As a result, we believe that the growth of Internet selling websites, such as eBay, Blue Nile and Amazon, has increased awareness of the importance of, and the demand for, independent third party authentication and grading services of the type we provide.  Our services enable purchasers and collectors to use the Internet to purchase collectibles, diamonds and

 
8

 

colored gemstones “sight-unseen,” with the confidence of knowing that they are authentic and are of the quality represented by sellers.  The importance and value of our services to purchasers and collectors, we believe, are demonstrated by:
 
§  
eBay’s inclusion, on its collectibles websites, of information that identifies, and encourages visitors to use, our independent third party authentication and grading services, as well as similar services offered by some of our competitors; and
 
§  
Blue Nile’s use of GCAL’s services to certify all of the diamonds comprising its Signature Collection, which are the highest quality diamonds that Blue Nile sells, even when those diamonds have already been certified by other well-known diamond certification services.

Our Services
 
PCGS Coin Authentication and Grading Services.  Recognizing the need for third party authentication and grading services, we launched Professional Coin Grading Service in 1986. PCGS employs expert coin graders, who are independent of coin buyers and sellers, to provide impartial authentication and grading services.  Currently, we employ 20 experts who have an average of 27 years of experience in the collectible coin market.  We also established uniform standards of quality measured against an actual “benchmark” set of coins kept at our offices.  We place each coin that we authenticate and grade in a tamper-evident, clear plastic holder that bears our logo, so that any prospective buyer will know that it is a PCGS authenticated and graded coin.  We also provide a warranty as to the accuracy of our coin authentication and grading.
 
By providing an independent assessment by coin experts of the authenticity and quality of coins, we believe that PCGS has increased the liquidity of the trading market for collectible coins.  Following the introduction of our independent, third party authentication and grading service, buyer confidence, even between dealers, increased to such a degree that coins authenticated and graded by PCGS were able to be traded “sight-unseen.”  As a result, PCGS facilitated the development, in 1990, of a dealer market, known as the “Certified Coin Exchange,” on which coin dealers traded rare coins “sight-unseen,” over a private satellite network, which now operates on the Internet.
 
In addition, we began to provide a range of authoritative content on coin collecting to inform and communicate with the collector community, including guides and reports that track the trading prices and the rarity of PCGS-graded coins.
 
More recently, our coin authentication and grading services have facilitated the development of a growing Internet or “virtual” marketplace for collectible coins.  A prospective buyer, who might otherwise be reluctant to purchase a high-priced coin listed on the Internet, is able to rely on a PCGS certification in deciding whether or not to bid and in determining the amount to offer for the coin.  As a result, to enhance the marketability of higher priced coins, many sellers submit their coins to PCGS for authentication and grading.  That enables the sellers to include, in their Internet sales listings, digital images of the coins in their tamper-evident, clear plastic holders, which identify the coins as having been authenticated and graded by PCGS as well as their PCGS-assigned grades.
 
PSA Sportscard Authentication and Grading Services.  Leveraging the credibility and using the methodologies that we had established with PCGS in the coin market, in 1991 we launched Professional Sports Authenticator (PSA), which instituted a similar authentication and grading system for sportscards.  Our independent sportscard experts certify the authenticity of and assign a grade to sportscards using a numeric system with a scale from 1-to-10 that we developed, together with an adjectival system to describe their condition.  At June 30, 2008, we employed 15 experts who have an average of 24 years of experience in the collectible sportscard market.  We believe that our authentication and grading services have removed barriers that were created by the historical seller-biased grading process and, thereby, have improved the overall marketability of and facilitated commerce in sportscards, including over the Internet and at telephonic sports memorabilia auctions.
 
PSA/DNA Autograph Authentication and Grading Services.  In 1999, we launched our vintage autograph authentication business, initially offering authentication services for “vintage” sports autographs and memorabilia that were autographed or signed prior to the time they were presented to us for authentication.  The vintage autograph authentication business is distinctly different from the “signed-in-the-presence” authentication of autographs where the “authenticator” is present and witnesses the actual signing.  Vintage autograph authentication can involve the rendering of an opinion of authenticity by an industry expert based on (i) an analysis of the signed object, such as the signed document or autographed item of memorabilia, to confirm its consistency with similar materials or items that existed during the signer’s lifetime; (ii) a comparison of the signature submitted for authentication with exemplars; and (iii) a handwriting analysis.  As of June 30, 2008, we employed 3 autograph experts with an average of 23 years of experience in the autograph memorabilia market, as well as 3 consultants on a contract basis.
 
 
9

 
In June 2004, we also began offering grading services for autographs, beginning with baseballs containing a single signature or autograph.  We use uniform grading standards that we have developed and a numeric scale of 1-to-10, with the highest number representing “Gem Mint” condition or top quality.  We assign grades to the collectibles based on the physical condition or state of preservation of the autograph.  Autograph grading is in its infancy, and we cannot predict whether it will gain market acceptance.
 
PSE Stamp Authentication and Grading Services.  In January 2000, we launched our Professional Stamp Experts (PSE) as an independent, third party stamp authentication and grading service.  We use both an adjectival system and a numeric scale from 1-to-100 to grade stamps.  We assign grades based on the centering of the stamp image on the stamp paper background and the absence or presence of other faults on the stamp.  There have been viable third party stamp authentication services in operation for several decades, and stamp dealers and collectors had been using a subjective grading system based primarily on the centering of the stamp image on the stamp paper background, ignoring other faults.  However, prior to our entry into the stamp market, independent third party stamp grading was non-existent.  As a result, we encountered some resistance to this concept in the stamp collectibles market, which is steeped in tradition and slow to change, as we did from coin dealers when we launched PCGS and from sportscard dealers when we launched PSA.  In October 2005, the Philatelic Foundation based in New York began using PSE’s numerical grading system to assign grades to stamps.  In the spring of 2006, Scott Publishing Company, the long-time publisher of the Scott Catalogs also adopted and incorporated PSE’s numerical grading system into their bi-annual valuing supplement.  These two events have established PSE’s numerical grading scale, and we believe has facilitated the continuing spread of third-party stamp authentication and grading, throughout the philatelic industry.  As of June 30, 2008, we employed 6 stamp graders, and use another expert on a part-time basis.  Those graders have an average of 33 years of experience in the collectible stamp market.
 
Vintage U.S. Paper Currency Authentication and Grading.  In the third quarter of fiscal 2005, we began marketing a U.S. paper currency authentication and grading service, which we decided to brand as “PCGS Currency” because many of the dealers of currency notes are familiar with and have used PCGS’ coin authentication and grading service.  As of June 30, 2008, we employed 3 currency experts with 16 years of experience and use the services of 2 other experts on a contract basis.
 
GCAL Diamond Authentication and Grading Services. In November 2005, we acquired Gem Certification & Assurance Lab (GCAL), which is as an independent, third party diamond authentication and grading service that has been in the business of diamond authentication and grading since 2001. We use the internationally recognized system for grading diamonds, commonly referred to as the “4C’s”.  In December 2005, we acquired the assets of Gemprint Corporation, which consisted primarily of a patented non-invasive diamond identification technology that enables us to create and record the digital image of the unique refractive light pattern or “fingerprint” (which we refer to as the “Gemprint”) of the diamonds that GCAL grades.  We store the digital image of the “Gemprint” in our database, cross-indexed to the diamond’s grading certificate that is issued by GCAL, which is assigned its own number for recordkeeping and identification purposes.  This “Gemprint” process enables us to match GCAL graded diamonds, on a one-to-one basis, with their GCAL certificates, thereby providing an additional measure of protection against misrepresentations of diamond quality that can occur by, for example, altering the grading certificate or switching a diamond grading certificate issued for a higher quality diamond to a lower quality diamond.
 
There are more than ten diamond grading services in operation.  Four of those existing grading services, including GIA, have been in operation for more than 20 years and are larger and better known than GCAL.  However, unlike GCAL, almost all of the key competitors are owned, managed or governed by diamond dealers that are in the business of selling diamonds, including those graded by such grading services.  As a result, we believe that those grading services potentially have inherent conflicts of interest when grading diamonds submitted by those dealers and, therefore, do not provide truly independent third party grading services.  Additionally, unlike GCAL, none of these existing services has any non-intrusive process to secure the identification of diamonds that they have certified in order to make it possible to detect misrepresentations of the quality which can occur by altering the information on or switching a grading certificate.  As a result, we believe that GCAL’s greater independence and its Gemprint diamond identification technology, along with the warranty of the quality determinations of color and clarity that CGAL issues provide it with a competitive advantage that we are promoting as a means of increasing GCAL’s share of the diamond grading market.  Currently, we employ 8 diamond graders who have an average of 21 years of diamond grading experience.
 
 
10

 
AGL Colored Gemstone Authentication and Grading Services.  In August 2006, we acquired American Gemological Laboratories (AGL), one of the leading independent third party authentication and grading services for colored gemstones, such as emeralds, rubies and sapphires.  Its services are used by, among others, Sotheby’s and Christie’s for their jewelry auctions and by jewelry retailers such as Cartier and Fred Leighton.  AGL has been in the business of authenticating and grading colored gemstones since 1977. We utilize the fundamental information obtained in GIA vocational classes, but (i) express the color and tone using a three digit system we developed called ColorScan; (ii) express the color and hue combinations using a 1 to 10 scale in half-point increments; (iii) describe tone on a scale of 0-100; and (iv) identify clarity grades on a scale using descriptors such as “FI” meaning “Free from Inclusions”, to “MI1” and “MI2” meaning “Moderately Included” to “E1”, “E2” and “E3” meaning “Excessively Included”.  Enhancement analysis and country of origin identification are accomplished by comparing the gemstones to our database reference set of over 5,000 colored gemstone samples, which we believe is one of the largest such reference collections in the world, personally accumulated by AGL’s president in travels around the world to various mining sites.  There are more than six competing colored gemstone authentication and grading services in operation, of which, only three have been in operation for a similar period of time as AGL.  Currently, we employ 4 grading experts with an average of 26 years of experience.
 
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 1960’s.  The CCE website features over 200,000 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, and users 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, Collectors Corner has over 44,000 coins offered for sale with offering prices aggregating in excess of $45 million.  In December 2007, as an extension of the Collectors Corner business-to-consumer website, we launched a segment for certified currency, which makes the search and sorting capabilities of Collectors Corner available to consumers of currency, as well as coins.  Sellers of currency on Collectors Corner pay a separate fixed monthly fee to list currency for sale.  Collectors Corner now has over 1,400 items of currency offered for sale with offering prices aggregating approximately $3 million.  In May 2008, as a further extension of Collectors Corner, we launched a segment for sportscards.  In a similar fashion to coins and currency, all consumers are able to search and sort for certified sportscards.  Sellers of sportscards pay a separate fixed monthly fee to list sportscards for sale.   Collectors Corner now has over 32,000 sportscards offered for sale with offering prices aggregating more than $3.5 million.  Collectors Corner is receiving, on average, over 50,000 visits per month with over 425,000 pageviews. The enhanced liquidity provided by CCE and Collectors Corner for certified coins, currency and sportscards, increases the volume and turnover of these items, which benefits PCGS, PCGS Currency and PSA, respectively, because, as a general rule, increases in sales and purchases of coins, currency and sportscards 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, currency and sportscards certified by PCGS, PCGS Currency and PSA, respectively, bought and sold between dealers and consumers.  We are in the process of further extending the concepts and systems developed for Collectors Corner into the stamp market where we offer authentication and grading certification services.
 
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, which we publish on a monthly basis primarily for distribution to approximately 7,600 PSA Collectors Club members and the Stamp Market Quarterly, which we publish for distribution to approximately 2,000 stamp dealers and collectors.  In addition, we publish Palmieri’s Market Monitor, an educational and informative diamond and gemstone-industry publication.  We sell advertising to dealers and vendors for placement in our publications.  We manage a Collectors Universe website and
 
 
11

 
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 sports 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 PCGS Currency, PSE in stamps and CCE and Collectors Corner in coins.
 
Our Mission
 
             Our mission is to provide the finest available authentication and grading services to sellers and buyers of high-value collectibles and other high-value assets in order to:
 
§  
increase the values and liquidity of the high value collectibles and other high value assets;
 
§  
enable and facilitate transactions in high value collectibles and other high value assets;
 
§  
generally enhance interest, activity and trading in high value collectibles and other high value assets; and
 
§  
achieve profitable growth, build long-term value for our stockholders and provide rewarding opportunities for our employees.
 
Our Growth Strategy
 
Our growth strategies include:
 
§  
Leveraging the strong brand awareness that we have achieved in our existing collectibles markets:
 
—  
to increase the demand for and use of our services not only by dealers, but also by collectors, only a relatively small percentage of which use independent authentication or grading services; and
 
—  
to introduce new value-added services to customers in our existing collectibles markets.
 
§  
Increasing GCAL’s  market share by (i) offering services, such as its Gemprint diamond identification service either combined with the authentication and grading service or separately as a stand-alone service, that are not available from its competitors, (ii) implementing marketing programs targeted at sellers and purchasers of diamonds which emphasize the benefits of the GCAL grading certificate, (iii) continuing to provide faster turnaround service and more competitive pricing, and (iv) using the selling incentive of the Certified Diamond Exchange (CDE) which offers GCAL certified diamonds exclusively.
 
§  
Increasing AGL’s share of the middle and high-end segment of the colored gemstone market by (i) offering enhanced grading services, such as a guarantee of identification, primarily to dealers and high-net worth consumers, (ii) marketing the benefits of AGL’s services, including offering a lower priced authentication and grading certificate, with accurate identification and disclosure of appropriate enhancements, which are needed by gemstone dealers to comply with Federal Trade Commission guidelines, and (iii) using the selling incentive of the Colored Gemstone Exchange which offers AGL documented gemstones exclusively.

§  
Identifying and entering other high-value collectibles or high-value asset markets where we believe we can succeed in building and meeting the demand among dealers, sellers and buyers for independent, third party authentication and grading services.

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

Increasing the Demand for our Services in Existing Collectibles Markets.  We have established leading brands in our existing collectibles markets, including PCGS, PSA, PSA/DNA, PSE and PCGS Currency.  We use those brands to promote Collectors Universe as the premier provider of authentication and grading services in the high-value collectibles markets, in order (i) to increase our market share among existing users of authentication and grading services and (ii) to increase the use of our services by the numerous collectors that do not currently use any independent third party authentication or grading services.
 
 
12

 
Although we have authenticated and graded over 15 million coins since the inception of PCGS and over 11 million sportscards since the inception of PSA, we estimate that less than 10% of the vintage United States coins and vintage sportscards have been authenticated and graded.  According to recent data available on eBay’s websites, the number of coins being sold at any one time on eBay generally ranges from approximately 105,000 to 150,000, of which only approximately 13% are authenticated and graded by a third party authentication and grading service, such as ours. Similarly, the number of sportscards being sold at any one time on eBay generally ranges from approximately 320,000 to 470,000, 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.  Also, new collectibles are introduced each year into the markets in which we operate, some of which are authenticated and graded in the year of their introduction.  Over time, these collectibles will increase the supply of vintage items that are sold by dealers and collectors and, which we expect will be submitted for independent third party authentication and grading.
 
To take advantage of these market opportunities, we have:
 
§  
enhanced our marketing programs to promote our brands and services directly to Internet and other auction-related businesses.  These programs emphasize the benefits of using our services, including increased marketability and the prospect of higher bids for collectibles;
 
§  
initiated joint marketing programs with collectibles dealers that are designed to make their customers aware of the availability and benefits of our authentication and grading services;
 
§  
established authorized PCGS and PSA dealer networks to increase the visibility of our brands and the use of our services by those dealers and their customers;
 
§  
developed and expanded our Set RegistrySM programs to increase demand for our collectible coin, sportscard and stamp authentication and grading services among collectors and to increase traffic on our websites;
 
§  
developed and linked buying demand from our Set Registry program to Collectors Corner in order to increase the referral of PSA sportscard buyers to Collectors Corner dealer-subscribers, thereby enhancing the value of the subscription and increasing the preference for PSA graded sportscards in the market;
 
§  
expanded the offerings and markets in which Collectors Corner provides a business-to-consumer website for the sale of third party products certified by us; and
 
§  
increased the promotion of our Collectors Clubs to attract and to provide incentives for collectors to use our services.
 
Expanding Services in our Existing Markets.  Using the brand recognition we have established in the markets we serve, we have expanded services in our existing markets.  These services include:
 
§  
Participation at Collectibles Trade Shows.  Each year we participate in approximately 40 collectibles trade shows that attract collectibles dealers and collectors who buy and sell collectibles at those shows.  At some shows, we offer same day, on-site authentication and grading services, which facilitate the trading and sales of collectibles at these shows and conventions.  At the same time, we obtain additional brand exposure and generate increased revenues, because dealers and collectors generally are willing to pay higher fees for same day, on-site services.  In July 2006, we acquired Expos Unlimited LLC (“Expos”), a tradeshow management company that operates two well-known coin, stamp and collectibles shows in Long Beach and Santa Clara, California.  This acquisition assures us of the continued availability of the primary show venue in Long Beach for our authentication and grading services.
 

 
13

 

§  
Sales of Website and Print Advertising.  We sell advertising in our publications and on our websites to collectibles dealers and auctioneers in the markets in which we offer our branded authentication and grading services. Due to the increasing number of visitors to our websites, we are able to offer those dealers and auctioneers the opportunity to market their products and services to an increased number of prospective customers.
 
§  
Autograph Grading Services.  We launched autograph grading services, beginning with single signed baseballs. Our autograph grading service meets existing and creates additional demand for differentiation in the quality, and thus in the value, of autographed memorabilia. Our grading is based primarily on sharpness, intensity, readability and clarity of autographs.
 
§  
Expansion of Website Information Services.  We have been expanding the information available on our websites, including the addition of: (i) historical coin auction prices; (ii) reproductions of historical reference books; and (iii) the contents of famous coin, sportscard and stamp collections.  These services are designed to attract new collectors, increase the number of visitors to our websites and increase advertising revenues. Currently, PCGS.com has, on average, over 500,000 visits, with over 2.7 million page views per month, and PSACARD.com has, on average, over 180,000 visits, with over 1.5 million page views per month.
 
§  
eBay Promotional Programs.  Leveraging our expertise and reputation as a leading independent third party authenticator and grader of high-value collectibles, we work with eBay to create programs designed to increase the marketability of collectibles on its auction websites and, at the same time, promote our authentication and grading services. For example, we introduced and provide a fee-based “Quick Opinion” autograph authentication service to visitors on eBay’s sports memorabilia auction website, whereby our autograph experts render an authenticity opinion based on an examination of the digital image of the autograph posted on eBay. We also have included  information about the benefits of our authentication and grading services on our websites, to which eBay has placed links on its collectibles websites in order to make that information readily accessible to its users.
 
§  
Set Registry Programs.  We have improved our Set Registry programs with an investment in software and technology that drives the program on the separate websites of our authentication and grading services.  The Set Registry provides a free Internet-based program to allow collectors in a specific market to record their collection online in a chosen sub-market, such as Morgan Dollars in coins or 1948 Bowman in sportscards and to compare their collection in completeness and quality to all other similar collections that are registered and receive a ranking of the participant’s registered set.  Each year, the Set Registry awards prizes for the highest ranking sets and maintains a “Hall of Fame” for the best sets ever assembled.  To maintain the integrity of the program and to provide a preference for our authentication and grading services, all of the items in each registered set must have been authenticated and graded by one of our authentication and grading services.  Set Registry is deployed by PCGS, PSA,  PSE, and PCGS Currency.  In fiscal year ended June 30, 2008, the number of registered sets on our Set Registries increased by 26%, 27%, 74% and 327%, in PCGS, PSA, PSE and PCGS currency, respectively.
 
Increasing GCAL’s Share of the Diamond Market.  We believe that we can increase GCAL’s share of the diamond grading market, notwithstanding competition from the larger and more established grading services, such as GIA, by promoting GCAL’s independence, its policy, practice and reputation for consistent and rigorous application of diamond grading standards, the warranty of color and clarity grades it issues, the security associated with the Gemprint of each GCAL certified diamond which, among other benefits, deters switching of diamonds and associated grading reports and the other services that GCAL is able to offer, such as our grading guarantee, that are not available from its competitors.  Additionally, we believe that only about 50% of the diamonds larger than 0.50 carat are offered with third party authentication and grading services and we have found that many diamond retailers do not promote the availability of diamond grading services and that the majority of consumers do not request such services when purchasing diamonds.  As a result, we believe that the opportunity exists for us to grow the demand for GCAL’s services and enable us to increase its market share.  According to the U.S. Geological Survey 2006 Minerals Yearbook, the United States imported 17 million carats of polished diamonds in 2006, of which 6.0 million carats were of 0.5 carats or larger.
 

 
14

 

To take advantage of these opportunities, since acquiring GCAL, we have:
 
§  
Enhanced and established GCAL as a brand providing high quality and consistent authentication and grading services.
 
§  
Provided increased security for purchasers of diamonds by including, with each diamond that is graded by GCAL, a “Gemprint” of the diamond, which is a digital image of its unique refractive light pattern, using our patented non-invasive diamond identification process.  GCAL stores the Gemprint in its computer database, cross-indexed to the diamond’s GCAL grading certificate.  As a result, if a dealer or consumer wants to sell the diamond at a future date, the seller can provide the prospective purchaser with evidence that the diamond being sold is, in fact, the diamond that was originally graded by and described in the grading certificate issued by GCAL, by (i) using the Gemprint process to produce another digital image of the diamond at the time of sale and (ii) comparing that digital image to one stored in GCAL’s database.  Consequently, the Gemprint process enables GCAL to provide an additional measure of protection against misrepresentations of diamond quality that can occur by, for example, switching a diamond grading certificate issued for a higher quality diamond to a lower quality diamond or by altering the grading certificate.
 
§  
Launched the Five Star Diamond Grading Certificate that includes five distinct services combined into one certificate at a 20% to 50% discount to the fees that we believe the customer would have to pay to purchase these services separately.  GCAL’s Five Star certificate also means that the customer need only keep a single grading certificate, rather than having to maintain multiple grading certificates issued by the different grading services.  The five bundled services include:
 
—  
Direct Light Performance Analysis, which is a service that directly measures the light return from a diamond and expresses that return in calculations, of Optical Brilliance and, Optical Symmetry, using descriptive terms from Excellent, Very Good, and Good to Fair.  These results are based on the measurement of the number of pixels in light return from incident light.  The results are shown on the certificate in two digital images of the diamond along with the two associated adjectival descriptions for Brilliance and Symmetry.  The easily understood graphics and rating assist a potential diamond buyer in comparing the visual qualities of one diamond to another.
 
—  
Gemprint Security Registration, which is a service that captures the unique light refraction pattern of a diamond in a digital format and records the unique “fingerprint” of the diamond, and registers that image in a database, which provides assurance that a GCAL certified diamond can be matched to the original certificate, thereby making it possible to detect misrepresentations of the quality of the diamond by mans of switching or altering its grading certificates.
 
—  
Laser Inscription, which is a service that inscribes information using a cold laser on the girdle of the diamond. Laser inscription is often used for quick identification, engraving of logos or particular phrases. Laser inscription is one of the most often requested extra services that is included in the GCAL bundled services.
 
Grading Guarantee, which is a limited warranty that provides assurance to the diamond purchaser that if the diamond is submitted for re-grading, within two years following the date of its original examination (which may occur as a result of a resale of the diamond), the color and clarity grades on the re-grading will be equal to the color and clarity grades assigned on the diamond’s original grading.  Due to the grading process employed by GCAL, the grading experts who re-grade a diamond are not able to determine the original grades assigned to the diamond and, therefore, the rating assigned on re-grading cannot be affected by the original grades given to the diamond. This guarantee is the first and only warranty issued in the industry and provides the buyer with increased confidence in the quality rating provided by GCAL. Fair and Consistent Clarity and Color Certification, which is the result of the consensus process employed by GCAL, where at least two qualified diamond experts must agree on the subjective grading of Clarity and Color, two of the four “C’s” of diamond grading. The other two “C’s” are Carat and Cut, both of which are measured by high technology machines.  Differences in one grade of Clarity or one grade of Color may result in value differences in the marketplace from 10% to 50%.
 
 
15

 
§  
Launched the GemFactsSM Digital Certification Data Delivery System, by which the information on a GCAL grading certificate is delivered, digitally, on a mini-CD along with the printed certificate at the time of retail sale or on the Internet in a certificate look-up feature on the GCAL website.  This digital delivery system allows for co-marketing of certain diamond retail programs, including co-branding with the retail seller and may include a digital marketing video for the retail seller.  Educational “pop-up” windows are available when any one of 19 key terms are touched with the cursor, making the GemFacts digital certificate interactive for the user and a helpful sales tool at the retail counter.
 
§  
Launched the Certified Diamond Exchange (CDE), an Internet based business-to-business exchange exclusively for GCAL certified diamonds (www.cdediamonds.com).  The buyers and sellers on CDE register for free. The buyers on CDE are generally retailers and jewelry manufacturers, Wholesale sellers  have listed for sale, on the CDE, millions of dollars of GCAL certified diamonds and, on completion of a sale, a seller generally will deliver the diamond via overnight delivery directly to the buyer’s store or facility.  There are over 30,000 retailers in the United States registered with the Jewelers Board of Trade and, since its inception in November 2007, CDE has registered over 2,000 buyers.  The sellers on CDE are diamond dealers and cutter/polishers who are currently not charged a fee for listing their diamonds for sale on the CDE; however, they may only offer GCAL certified diamonds for sale on the CDE.  The CDE increases the availability and distribution of CGAL certified diamonds and the increased liquidity provided by the CDE creates an incentive for diamond sellers to obtain GCAL diamond certifications so as to be able to offer their diamonds for sale on the CDE.
 
§  
Launched separate services for Direct Light Performance and Gemprint Security Registration that were previously only available as a part of the combined services on a GCAL diamond grading certificate.  The direct light performance report offers information on the optical brilliance and optical symmetry of a diamond that can assist a retailer in demonstrating one of the most important points of differentiation between two or more diamonds.  The Diamond ID report offers a Gemprint of the diamond and registration in our global database to assist in positive identification of a diamond in the event it is lost or stolen.  The separate service not only provides an opportunity for increased branding of GCAL on diamonds that trade in the marketplace but also reinforces the value proposition of the bundled services associated with the GCAL diamond grading certificate.
 
              
Obtained accreditation of GCAL operations from the International Organization for Standards (“ISO”) under standard 17025:2005, which required GCAL to meet the rigorous standards of the ISO relating to (a) management requirements primarily with respect to the operation and effectiveness of the quality management systems within GCAL's gemological laboratory, and (b) technical requirements relating to the competence of GCAL's staff, methodologies and test/calibration equipment.  GCAL is now one of only three diamond grading labs in the world and the only one in North America that is accredited under ISO 17025:2005, although International Gemological Institute in North America, and the Gemological Institute of America’s (“GIA”) Gem Instruments Division are accredited under the less rigorous ISO 9001 accreditation. We believe that, because the diamond grading business is global and the majority of the authorized distributors associated with the diamond mines are not domiciled in the United States, and larger jewelry retailers realize that there can be marketing benefits in using the services of an accredited gemological grading service, we believe that ISO accreditation can be an important factor in the decisions they make in selecting the authentication and grading service they will use.
 
Increasing AGL’s Share of the Colored Gemstone Market.  We believe we can increase AGL’s share of the colored gemstone authentication and grading market, because authentication and grading services are requested on less than 1% of all the colored gemstones purchased for $500 or more.  According to the U.S. Geological Survey 2006 Minerals Yearbook, imports into the United States of colored gemstones in 2006 included 3.9 million carats of emeralds, 3.6 million carats of rubies and 6.8 million carats of sapphires, along with 2.2 billion carats of other colored gemstones.  We estimate that, in the high-value market served by auctioneers, such as Sotheby’s and Christie’s, third party authentication and grading is requested by the auctioneers for 30% to 50% of the colored gemstones sold at those auctions.  We also estimate that AGL’s share of the certification services purchased by sellers or purchasers of colored gemstones at those auctions is approximately 30%.  In the lower to middle value segment of the market, colored gemstones are generally sold at retail in similar stores and venues as diamonds.  Although this selling environment is quite familiar with the concept of third party authentication and grading of diamonds, retailers and others in this segment of the market generally do not use any third-party authentication and grading services for lower to middle value gemstones.  Further, the Federal Trade Commission has
 
 
16

 
promulgated regulations, requiring retailers to disclose enhancements to colored gemstones where those enhancements (a) are not, or may not be, permanent; (b) create special care requirements; or (c) have a significant effect on the gemstone’s value.  Because most retailers do not have sufficient information or expertise to make the determinations required to satisfy these Federal disclosure requirements and retailers generally know that consumer confidence is increased with third-party authentication and grading, we believe we can increase our sales of our colored gemstone certification services by offering an independent, third party certificate of color, tone and clarity, with the required disclosures about enhancements, in this low to middle-value segment of the colored gemstone market, priced at a level that makes it economically feasible to have a larger number of such colored gemstones authenticated and graded by us.  In addition, we believe there is a cross-marketing opportunity between GCAL and AGL through the marketing of (i) AGL services to the retailers with which GCAL has existing relationships, including Blue Nile, and (ii)  GCAL services to the auctioneers and retailers with AGL has existing relationships, such as Sotheby’s, Christie’s and Cartier.
 
To take advantage of these opportunities, since acquiring AGL, we have:
 
§  
Increased capacity and broadened the use of the AGL Prestige services for high quality colored gemstones valued in excess of $20,000.
 
§  
Increased the promotion and marketing of AGL’s Fast Track services which are targeted to the market for colored gemstones valued at between $500 and $20,000 where there has previously been little demand for and, therefore, little competition in offering authentication and grading services.
 
§  
Sponsored educational forums in conjunction with the Federal Trade Commission and the Jewelers Vigilance Committee for the colored gemstone trade to explain and describe the federal guidelines for disclosure of gemstone enhancements.  These forums are available online on the website of AGL at www.aglgemlab.com and DVDs have been distributed to many of the manufacturers, dealers and retailers.
 
§  
Developed and in July 2008 launched, the Colored Gemstone Exchange (CGE) (www.cgegems.com), an Internet based business-to-business exchange exclusively for gemstones carrying AGL documents   The buyers and sellers on CGE register free.  The buyers on CGE are generally retailers and jewelry manufacturers.  Gemstone dealers list for sale only those gemstones for which they have obtained AGL documentation as to the identification, weight, shape and enhancements.  Of key importance in this market is the inclusion of color images on the exchange for each of those colored gemstones.  Buyers have the opportunity, via the CDE, to purchase these gemstones online directly from wholesale sellers, who will generally deliver the gemstone via overnight delivery directly to the buyer’s store or facility.  The sellers on CGE are gemstone dealers and cutter/polishers who are currently not charged a fee for registering or offering gemstones on the exchange, but may only offer and sell AGL-documented gemstones on the CGE.  We believe that the CGE will increase the availability and distribution of many of the smaller colored gemstones valued from $500 to approximately $20,000 that carry the new AGL Fast Track documentation and the increased liquidity that is provided by the CGE creates an incentive for gemstone sellers to obtain AGL Fast Track services on these smaller and less valuable colored gemstones so as to be able to list those gemstones for sale on the CGE.
 

 
17

 

Entering Other Collectibles and High-Value Asset Markets.  There are additional high-value collectibles and high-value assets with respect to which marketability and value depend primarily on their authenticity and state of preservation or quality.  We believe that the growth of some of these markets has been hampered by the absence or limited availability of independent authentication and grading services.  Although we are currently focused on growing our newer businesses in the diamond and colored gemstone markets, we continue to evaluate opportunities with the intention to expand our business into one or more of those markets. Other markets that we are considering for possible expansion include:
 
Antique silver
Musical instruments
Art
Political memorabilia
Art glass
Postcards
Comic books
Rare books
Entertainment memorabilia
Watches
Estate jewelry
Wine
 
We intend to consider the following criteria in selecting markets for future expansion:
 
§  
Market Size.  The size of the target market, measured both in terms of the volume and the value of the collectibles or high-value assets that trade in the market;
 
§  
Trading Prices.  The prices at which collectibles or other high-value assets trade in the target market, because we have found that the more valuable the collectible or asset, the greater is the demand for authentication and grading services;
 
§  
Competitive Environment.  The presence or absence of existing independent authentication and grading services in the target market, its capacity for new entrants and the satisfaction of dealers and collectors with the services offered by existing providers;
 
§  
Availability of Experts.  The availability of experts needed to succeed in entering a target market; and
 
§  
Means of Entry.  The benefits and costs of entry by means of an opportunistic acquisition, as opposed to starting a new authentication and grading service that would require the development of a new brand.
 
The largest of these currently targeted markets are estate and pre-owned jewelry, including watches, and entertainment memorabilia, such as Hollywood props, scripts and wardrobes.  According to data available from eBay, at any one time there are approximately 300,000 to 500,000 items of entertainment memorabilia and from 80,000 to 100,000 watches listed on eBay’s auction websites.  We are not aware of any significant third party authentication or grading services in any of these markets.
 
There is no assurance that we will succeed in expanding our business into any of these new markets or, even if we do succeed in doing so, that the authentication or grading services we will offer in those markets will gain market acceptance or become profitable.
 
Operations
 
We offer authentication and grading services for coins, sportscards, autographs and autographed memorabilia, stamps, vintage U.S. and currency notes, and for diamonds and colored gemstones.  Our trained and experienced authentication and grading experts determine the authenticity of and, using uniform quality standards, assign a quality grade to these collectibles and to diamonds and colored gemstones.
 
PCGS.  Since our inception in 1986, we have graded approximately 15 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, 2008, our fee per coin averaged approximately $13.83.  We authenticate and grade coins in accordance with standards that we developed and which have become generally accepted in the industry. We use both an adjectival and numeric system, with a scale of 1-to-70, to rate the quality of the coins, with the highest number representing “gem” or perfect quality. We have authenticated and graded, either before or after sale, two of the three highest priced U.S. coins ever sold at public auction, including an 1804 Draped Bust Silver Dollar, that was sold by the owner at an auction in 1999 for approximately $4.1 million, and a U.S. 1913 Liberty Head Nickel, that was recently sold for $4.15 million, the second highest price paid for any coin.
 
 
18

 
Our grading of coins involves an exacting and standardized process.  We receive coins from dealers and collectors and remove all packaging that identifies the submitter in any way.  We then enter information regarding the coins into our proprietary computerized inventory system, which tracks the coins at every stage of our authentication and grading process.  Generally, our process requires that two of our experts evaluate each coin independently, and no authenticity opinion is issued and no quality grade is assigned unless their opinions of authenticity and the grades independently assigned by each of them are the same.   In some cases, depending on the type of coin being authenticated and graded or on the results of the initial review process, a third expert is involved to make the final determinations of authenticity and grade.  The coin, the determination of authenticity and its grade are then verified by one of our senior experts, who has the authority to resubmit the coin for further review if deemed to be necessary. Only after this process is complete is the coin reunited with its invoice, thus keeping the authentication and grading process independent of the identity of the owner and the history of the coin. The coin is then sonically sealed in our specially-designed, tamper-evident, clear plastic holder, which also encases a label describing the coin, the quality grade that we have assigned to it, a unique certificate number and bar code, and the PCGS hologram and brand name.
 
PSA.  We launched our PSA sportscard authentication and grading service in 1991 and, through June 30, 2008, had authenticated and graded over 11 million sportscards.  Our sportscard grading system uses both an adjectival and a numeric system with a scale from 1-to-10, with the highest number representing “mint” condition or perfect quality.  We employ sportscard authentication and grading procedures that are similar to our coin authentication and grading procedures and at a minimum, two graders are assigned to every card.  On receipt of sportscards from dealers and collectors, we remove all packaging that identifies the submitter in any way and enter information regarding the sportscards into our proprietary computerized inventory system that enables us to track the sportscards throughout our authentication and grading process.  Only after the authentication and grading process is complete is the sportscard reunited with its invoice, thus keeping the authentication and grading process independent of the identity of the owner and the history of the sportscard.  The sportscard is then sonically sealed in our specially-designed, tamper-evident, clear plastic holder, which also encases a label that identifies the sportscard, the quality grade that we have assigned to it and a unique certificate number, and the PSA hologram and brand name.
 
We primarily authenticate and grade baseball sportscards and, to a lesser extent, football, basketball and hockey sportscards, as well as entertainment and other collectible cards.  We typically charge fees ranging between $4 and $50 per card, with an average fee of $5.76 per card in 2008.  As is the case with coin authentication and grading, sportscard authentication and grading fees are based on the particular turn-around time requested by the submitter, ranging from one day’s turn-around for the highest level of service to approximately 60 days for the lowest level of service.
 
The sportscards submitted to us for authentication and grading include primarily (i) older or vintage sportscards, particularly of memorable or historically famous players, such as Honus Wagner, Joe DiMaggio, Ted Williams and Mickey Mantle, and (ii) modern or newly produced sportscards of current or new athletes who have become popular with sports fans or have achieved new records or milestones, such as Nolan Ryan and Roger Clemens.  These sportscards have, or are perceived to have, sufficient collectible value and are sold more frequently than are sportscards of less notable athletes, leading dealers and collectors to submit them for grading to enhance their marketability.  Also, the production and sale of each new series of sportscards, which take place at the beginning and during the course of each new sports season, create new collectibles that provide a source of future additional authentication and grading submissions to us.  Among the sportscards that we have authenticated and graded is a 1909 Honus Wagner baseball card, which received a PSA grade of NM-MT8 and was sold by the owner, via auction, in 2007 for approximately $2.35 million and resold in September 2007 for $2.8 million.
 
PSA/DNA.  In 1999, we began offering authentication services for vintage sports autographs.  Because of the variability in the size of autographed memorabilia, the procedures we use necessarily differ from those used in authenticating and grading coins and sportscards.  Customers may ship the autographed memorabilia to us for authentication at our offices or, in the case of dealers or collectors that desire to have a large number of items authenticated, we will sometimes send an expert to the customer’s location for “on-site” examination and authentication.  Our experts reference what we believe is one of the largest databases of known genuine examples of signatures for comparison to a submitted specimen and draw
 
 
19

 
upon their training and experience in handwriting analysis. In most cases, we take a digital photograph of the autographs that we authenticate and store those photographs in a master database.  Before shipping the item back to the customer, a tamper-evident label is affixed to the collectible.  The label contains our PSA/DNA name and logo and a unique certificate number.  For additional security, in all cases when an item is fully authenticated, we tag the items with synthetic DNA-laced ink, which is odorless, colorless and tasteless and visible only when exposed to a narrow band wavelength of laser light using a hand-held, battery-powered lamp. Additional verification can be obtained by a chemical analysis of the ink to verify the unique DNA code used by PSA/DNA is, in fact, applied to the item.  As a result, if the label is removed from the item, it is still possible to verify that the item was authenticated by us.
 
Memorabilia that have been authenticated by our vintage autograph service include Mark McGwire’s 70th home run baseball, which was sold at auction in 1999 for more than $3 million, and the baseball bat, autographed by Babe Ruth, which he used to hit the first home run ever hit in Yankee Stadium in 1923.  That bat recently was sold by Sotheby’s for more than $1.2 million.
 
We also offer grading services for autographs.  We use uniform grading standards that we have developed to assign two grades to the collectible, one based on the physical condition or state of preservation of the autograph, and the other based on the physical condition of the collectible, using a numeric scale of 1-to-10, the highest number representing “Gem Mint” condition or perfect quality.
 
PSE.  We commenced our PSE stamp authentication and grading service in January 2000.  In rating the quality of stamps, we assign a numeric grade to each stamp that ranges from 1-to-100.  The grade assigned to a stamp is based on several characteristics, including the centering of the image on the stamp and the absence or presence of various faults, such as creases, perforation problems and other imperfections that, if present, will reduce the value of the stamp. For a stamp to receive a grade of 100, which means that it is in “gem” condition, the image on the stamp must be perfectly centered and the stamp must be faultless.  Stamps submitted to us for grading are independently examined and graded by at least two of our stamp experts.  After a stamp has been authenticated and graded, we generally issue a certificate of authentication that briefly describes the stamp and the grade assigned to it and has a digital image of the stamp attached.  The certificate bears the PSE name and logo and a unique certification number that we assign to the stamp for record keeping purposes.  We also offer our customers the option of having the stamp encapsulated in a tamper-evident, clear plastic holder with an encased label that, like the certificate, identifies the stamp and sets forth the grade assigned to it, its unique certification number and the PSE name and logo.
 
Stamps that have been authenticated and graded by us include an 1868 1¢ “Z” Grill U.S. postage stamp, which received a PSE grade of Extremely Fine (XF) 90 and was last sold at auction in 1989 for more than $900,000.  The owner submitted the stamp to us shortly after we initiated our stamp authentication and grading service in 2000.
 
The volume of stamp authentication and grading submissions through fiscal 2007, relative to the number of coin and sportscard submissions, has not been material.  Since stamp grading services are relatively new to the market, we cannot predict when or even whether our services will gain the level of market acceptance needed for stamp grading to become a material contributor to our operating results.
 
Vintage U.S. Paper Currency.  PCGS began marketing a vintage U.S. paper currency grading service, under the brand name “PCGS Currency” in the third quarter of fiscal 2005.  We have engaged a number of paper currency experts to grow this business and to authenticate and grade vintage paper currency.  We use an adjectival and numeric grading system, with a scale of 1-to-70, which is similar to the system that we use for grading coins, largely because most vintage currency dealers are already familiar with that system.  Currently, there are two relatively small vintage paper currency authentication and grading companies with which we compete, one of which is a subsidiary of, Numismatic Guaranty Corporation of America, our principal coin authentication and grading competitor, which started a separate vintage paper currency authentication and grading service in the first calendar quarter of 2005.  The rare currency market is smaller than our other collectibles markets and there is no assurance that our currency authentication and grading service will gain broad market acceptance or that demand for such services or our entry into that market will generate material revenues for us or enable this service to become profitable.
 
Diamonds. GCAL was founded in 2001 and was acquired by the Company in the second quarter of fiscal 2006.  We employ diamond grading experts and mineralogists to examine, authenticate and grade diamonds.  We use a combination of technology and the application of industry standards in this process.  To authenticate diamonds, we use a Raman Spectrometer to examine the chemical composition and Fourier Transform Infrared Spectrometer to assist in determining various treatments that may be applied to diamonds.  
 
20

 
In addition, we use DiamondSure and DiamondView to verify diamonds and Sarin instruments to weigh and measure the dimensions along with a Colorimeter to assist in color grading.  Experts review each diamond with respect to established color reference sets and various magnification devices to closely examine for imperfections and inclusions that would affect the clarity grade and application of clarity standards.  In addition to providing information relative to the “4C’s” of diamond grading, we also provide a direct measurement of light performance with technology acquired as part of the GCAL acquisition, and we provide a registration of the Gemprint of each diamond using the patented technology that produces, records, stores, sorts and matches digital refractive images from a pinpoint, single laser light source applied to the diamond.
 
      GCAL assigns a quality grade to the diamond by measuring its Cut, Carat, Color and Clarity (which are known as the “4C’s” of the diamond).  Cut and Carat are measured using measurement equipment, while the Color and Clarity are determined by our experts through the application of industry standards.  Grades are applied using a scale in Color from a top Color grade of “D” to a faint yellow lower Color grade of “M” or lower, and a Clarity grade of “Flawless” (“FL”) to “Very, Very Slightly Included 1” to “Very, Very Slightly Included 2” (“VS1” and “VS2”), to the much lower quality grade of “Included 3” (“I3”).
 
In fiscal 2008, GCAL was accredited by the International Organization for Standards under ISO 17025: 2005, the international standard for competence in a laboratory.  GCAL is currently the only diamond grading laboratory in North America with the ISO 17025: 2005 accreditation and is one of only three in the world.(although there are two other U.S. based gemological grading services that have been accredited under the less rigorous ISO 9001 Standard).  To be accredited under ISO 17025, a laboratory must satisfy rigorous standards relating to (a) the operation and effectiveness of the quality management systems within the laboratory, and (b) technical requirements relating to the competence of its staff, methodologies and testing and calibration equipment.
 
Colored Gemstones.  AGL was founded in 1977 and was acquired by the Company in the first quarter of fiscal 2007.  We employ colored gemstone experts to examine, authenticate, grade, identify enhancements and determine the country of origin.  We utilize, in addition to industry standards and various technologies, a combination of standards, systems and terminology that were developed by AGL in grading and certifying colored gemstones.  To identify, authenticate and examine enhancements of colored gemstones, we use one or more technologies including multi-channel spectroscopy, Fourier Transform Infrared Spectrometer, Raman Spectrometer, x-ray fluorescence, ultra-violet near visible infrared spectroscopy, specimen comparison and trace element comparison to authenticate colored gemstones from our extensive reference collection of over 5,000 samples.  Weight is measured by technologically sophisticated scales. Color and tone are reviewed by our experts to determine the application of the three digit code for color and tone from a system we developed called ColorScan.  Color and hue are described on a numeric scale from 1 to 10 in half point increments with tone set forth on a scale from 0-100.  Clarity is reviewed to determine the application of a scale using descriptors such as “FI” meaning “Free from Inclusions”, to “MI1” and “MI2” meaning “Moderately Included” to “E1”, “E2” and “E3” meaning “Excessively Included”.  A critical review of the stone for enhancements is completed relying on the reference collection and other testing resulting in the use of descriptions and disclosures that we developed.  If requested, an analysis of the country of origin is performed, comparing the subject stone and its trace elements and crystalline structure to those in the reference collection.
 
Publications and Content.  We publish authoritative price guides and rarity reports for coins, sportscards, sports autographs and memorabilia and stamps.  This information is available on our website and in our publications. These publications include:
 
§  
Price Guides.  We provide a wide variety of authoritative price guides for a number of collectible markets. For example, we track the prices at which the 3,000 most actively-traded U.S. coins are sold, dating back to 1970, and compile and publish this information in a generally recognized collectible coin index, known as the CU3000.
 
§  
Rarity Reports.  We compile and publish reports that list the total number of coins and sportscards we have graded since our inception, categorized by item type and grade determination. We can publish, for example, the exact number of Mint State (MS) 67-grade 1881-S Morgan silver dollars that we have graded. We believe that collectors use this information to make more informed decisions regarding the purchase of particular coins.
 

 
21

 
 

 
§  
Articles.  Collecting is a passion for many and has nuances and anecdotes that are well suited to a library of articles for each category of collectibles. We write informative articles and publish them on our websites. A sense of community is also important to collectors. We therefore encourage our customers to communicate and to write articles which we sometimes publish on our websites or include in our publications.
 
§  
Historical Content.  Collecting is often about history, and, in many instances, historical events associated with a collectible enhance its value. In our publications, we provide short histories about unusual and rare collectibles.  We believe that these historical accounts add to the attractiveness and excitement of purchasing such items.  During 2004, House of Collectibles, a division of Random House, published the second edition of the Official Guide to Coin Grading and Counterfeit Detection, which was authored by our collectible coin experts.  To enhance the historical content that we are able to provide dealers and collectors, in the first quarter of 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, to the most recent U.S. minted coins, such as the Fifty State Quarters™ and the One Ounce American Eagle Gold and Silver Bullion Coins currently being produced by the U.S. Mint.
 
§  
News.  We provide market news and information that are accessible to collectors and dealers on our websites. The news and information most often relate to recent events, such as sales of collectibles at record prices, the introduction of new collectibles and trends and developments in the collectibles markets we serve.
 
Marketing
 
We employ both “pull” and “push” strategies in marketing our services to dealers and collectors of high-value collectibles and diamonds.  For collectibles, our “pull” strategies are designed to promote our brands and increase the preference among collectors for our authentication and grading services and to encourage collectors to communicate that preference to their collectibles dealers, because most authentication and grading submissions are made by dealers.  In our experience, if a customer requests a particular grading service, the dealer ordinarily will comply with that request.  On the other hand, if the customer expresses no preference, the dealer will make its own choice of authentication and grading service or may even decide not to submit the collectible to an independent service for authentication and grading.
 
For diamonds and colored gemstones, our “pull” strategy is designed to promote our services and brands to the retail consumers who are interested in buying a diamond or colored gemstone, principally by communicating over the Internet to this target market through our websites, to which consumers are linked when making search engine inquiries for information on diamonds or colored gemstones, diamond and colored gemstone pricing, purchasing assistance and other searches.  We believe that our websites are distinctive because they offer third party education, information and price guides that are not associated with the sale of diamonds, diamond jewelry or colored gemstones and, therefore, are attractive to consumers who are seeking independent and unbiased information that will make them more educated and better consumers.  Since most diamond submissions come from diamond “sightholders” (authorized buyers of rough diamonds from the mining companies) and jewelry manufacturers, the objective of our “pull” strategy is to create demand from retail consumers for our brand at the retail counter.  For colored gemstones, the supply chain is more diversified than for diamonds, but the strategy to “pull” demand from the retailers and consumers is similar.  We believe that consumer demand will lead diamond and colored gemstone and jewelry retailers to order diamonds, colored gemstones and diamond and colored gemstones jewelry that have been graded by one of our services.  In addition, we promote our services to the many independent and chain store retailers through trade publication advertising and trade show appearances to demonstrate the benefits of selling diamonds and colored gemstones with our diamond and colored gemstone grading certificates in order to encourage retailers to ask for or even demand our brand of certification on diamonds and colored gemstones and diamond or colored gemstone jewelry they purchase from sightholders and wholesale distributors.
 
Therefore, our “pull” oriented marketing programs emphasize (i) the protections that collectors and retail customers will have if they purchase collectibles, diamonds and colored gemstones that we have authenticated and graded, and (ii) the improved marketability and higher prices that they and the associated retailers can realize if they use our independent third party authentication and grading services.
 
 
22

Our “Push” Strategy, on the other hand, is designed to market our services directly to collectibles dealers and to diamond sightholders, colored gemstone suppliers and diamond and colored gemstone jewelry manufacturers to encourage them to use and promote our services.
 
Our “Pull” Strategy.  We have developed and implemented a number of marketing programs and initiatives designed to create consumer preference for collectibles that have been authenticated and graded by us.  Those programs and initiatives include:
 
§  
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 trade shows around the United States that are attended by collectors, as well as dealers.  We also participate in and support programs conducted by non-profit associations whose members are primarily collectors, such as the American Numismatic Association and the American Stamp Dealers Association.
 
§  
Set Registry Programs.  We provide collectors with the opportunity to participate in free Internet “Set Registry” programs that we host on our collectibles websites.  These programs encourage collectors to assemble full sets of related collectibles that have been authenticated and graded by us.  Generally, each registered set is comprised of between 50 and 200 separate, but related, collectibles.  Examples include particular issues of coins, such as Twenty Dollar Gold Double Eagles or Morgan Silver Dollars; particular sets of sportscards, such as all Hall of Fame pitchers or a particular team, like the 1961 Yankees; or sets of collectible stamps, such as Columbian Commemoratives or Graf Zeppelin Airmail stamps.  Our Set Registry programs enable collectors:
 
—  
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
 
—  
to enter our annual Company-sponsored Set Registry competitions and awards programs in which collectors can win awards for having collected the most complete and highest graded sets of particular series or issues of coins, sportscards or stamps.
 
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 73,000 sets were registered on our Set Registries as of June 30, 2008, which represents a 28% increase over the number registered as of June 30, 2007.
 
§  
Collectors Clubs Subscription Program.  We also have established “Collectors Clubs” for coin, currency and sportscard collectors.  For an annual membership fee, ranging from $50 to $230, collectors receive a number of benefits, including (i) the right to have, without any further charge, a specified number of collectibles authenticated and graded by us, a privilege that non-member collectors do not have; and (ii) access to certain proprietary data that we make available on our websites or in print.  As of June 30, 2008, there were approximately 18,000 members in our Collectors Clubs.
 
 
23

 
 
§  
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 200,000 certified coins being offered at bid and ask at an aggregate value of approximately $600 million, an increase in excess of 100% of the number of items offered on average in the previous year.  The liquidity afforded the units traded on CCE increases the demand for PCGS certified coins.
 
§  
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, sportscards and items of currency that have been certified by us and are being offered for sale by dealers.  Currently, there are approximately 44,000 coins 32,000 sportscards and 1,400 items of currency 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.  In addition, we launched the functional ability for PSA Set Registry participants to automatically search Collectors Corner for specific sportscards that would increase the value of the participant’s set on our PSA Set Registry by either filling a void in the participant’s set or by upgrading the quality of a sportscard currently a part of the set.  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 sportscard set in the PSA Set Registry, create increased brand preference for PCGS, PSA and PSE authenticated and graded items.
 
§  
Diamond Trade Buyer Website.  We have launched the GCAL diamond website, which is directed to the trade to provide information on our services and processes.  The website includes details about our service levels and our unique warranty and Gemprint application, along with videos of our processes in the laboratory.  During the twelve month period ended June 30, 2008, we had (on average) approximately 1,200 unique visitors a week to this trade-oriented website.
 
 
Diamond Certificate Co-Branding.  GCAL has a program of co-branding the diamond sightholder or the retailer on the GCAL diamond grading certificate in order to provide point-of-sale support or after-sale support for their brands once the consumer has taken the diamond home.  Diamond sightholders are requested by many diamond mining interests to conduct marketing programs to “brand” a diamond from that mining interest at the retail counter.  Co-branding on the diamond grading certificate is one of the most cost effective ways by which a sightholder can brand the diamonds it purchases and resells.  Retailers are searching for various points of differentiation in a sales presentation and co-branded diamond grading certificates can create a point of differentiation between the retailer and those of its competitors who are not using GCAL’s services.  Currently, GCAL has several co-branding programs in process including programs with retailers Bailey Banks & Biddle, a unit of Finlay Corporation and Blue Nile, and product manufacturer Vision Cut for the Cushette brand diamond.
 
 
Certified Diamond Exchange Business-to-Business Website.  As previously discussed, we launched the Certified Diamond Exchange (CDE), an Internet based business-to-business exchange exclusively for GCAL certified diamonds.  The buyers and sellers on CDE may register with us, for free, which entitles them to access and use the CDE to purchase GCAL certified diamonds.  The buyers on CDE are generally retailers and jewelry manufacturers.  Wholesale diamond sellers, comprised primarily of diamond dealers and cutter/polishers, have listed millions of dollars of GCAL certified diamonds for sale on the CDE.  Upon completion of a sale, the seller will generally deliver the diamond via overnight delivery directly to the buyer’s store or facility.  There are over 30,000 retailers in the United States registered with the Jewelers Board of Trade and, since inception of the CDE in November 2007, over 2,000 jewelry retailers have registered to access and purchase GCAL certified diamonds on the CDE.  Currently, we do not charge any fees for sellers to be able to register to list or effectuate sales of diamonds on the CDE; however, we do require that all diamonds that are listed on the CDE must be GCAL certified.  We believe that the CDE increases the availability and distribution of GCAL certified diamonds and that, by providing increased liquidity, creates an incentive for diamond sellers to obtain GCAL certifications for their diamonds so as to be able to sell them on the CDE.
 
 
24

 
 
§  
Colored Gemstone Exchange Business-to-Business Website.  As previously discussed, we developed, and in July 2008, we launched the Colored Gemstone Exchange (CGE), an Internet based business-to-business exchange exclusively for gemstones carrying AGL documents   Membership on the CGE, which is free of charge, entitles members to purchase AGL documented gemstones on the CCE. The buyers on CGE are generally retailers and jewelry manufacturers.  Gemstone dealers list for sale on the CGE, gemstones with AGL documentation as to the identification, weight, shape and enhancements of the gemstones.  Of key importance in this market is the inclusion of color images on the exchange for each of the gemstones, which facilitates the online sale and purchase of the gemstones.  Upon completion of a sale of a gemstone on the CGE, the seller will generally deliver the gemstone via overnight delivery directly to the buyer’s store or facility.  The sellers on the CGE are primarily gemstone dealers and cutter/polishers.  Sellers are currently not charged a fee for registering or effectuating gemstone transactions on the CGE.  However, we require that all gemstones listed for sale on CGE be AGL-documented.  We believe that the CGE increases the availability and distribution of many smaller colored gemstones, valued from $200 to approximately $20,000, that carry the new AGL “Fast Track” documentation and that, by providing increased liquidity, the CGE creates an incentive for gemstone sellers to obtain AGL “Fast Track” certification” on their smaller and less valuable colored gemstones so as to be able to sell those gemstones on the CGE.
 
Our “Push” Strategy.  We also market our services directly to collectibles dealers and auctioneers to promote their use of our authentication and grading services.  Our marketing message is focused on the potential increase in marketability of the collectibles due to the increase in consumer confidence that is attributable to our authentication and grading of those collectibles.  These marketing programs include:
 
§  
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, sportscard, autograph and stamp markets.  At these shows and conventions, collectibles dealers gather on a trading floor or “bourse” to buy and sell collectibles.  We offer same day, on-site authentication and grading services, which facilitate the trading and sales of collectibles at these shows and conventions.  At the same time, we obtain additional brand exposure and generate increased revenues, because dealers and collectors generally are willing to pay higher fees for same day, on-site services.
 
—  
In July 2006, we acquired Expos Unlimited LLC (“Expos”), a tradeshow management company that operates two of the larger and better known coin, stamp and collectibles shows in Long Beach and Santa Clara, California, respectively.  This acquisition assures us of the continued availability of these two show venues for our onsite authentication and grading services, provides us a platform for inaugurating and conducting collectibles shows in our other markets and adds management personnel who are experienced in managing and conducting collectibles trade shows.
 
§  
Authorized Dealer Network.  We have implemented authorized dealer programs for coin and sportscard collectibles dealers and auction companies.  Authorized dealers are able to use our marketing materials which are designed to promote our services and those of our authorized dealers to collectors.  Those materials include “point of sale” and “point of purchase” displays and brochures and direct mail pieces for insertion in customer mailings.  In addition, authorized dealers may use our brand logotypes on their websites to attract buyers for coins and sportscards that have been authenticated and graded by us.  We also conduct joint marketing programs with our authorized dealers in which we provide financial support for dealer marketing programs, approved by us, that promote both the dealer’s products and services and our authentication and grading services.


 
25

 

§  
Jewelry Trade Publication Advertising, Trade Show Appearances and Educational Seminars. GCAL advertises in the major jewelry trade publications and maintains an active press relations campaign. GCAL also attends the major jewelry trade shows primarily in the summer (targeted at the fall and holiday selling season) and late fall and winter (targeted at the Valentine’s Day and Mother’s Day season). GCAL also has the opportunity to hold educational seminars at some of the trade shows and in-store training on grading issues and the use of the GCAL diamond grading certificate in retail transactions.  Because colored gemstones are sold at retail through virtually identical channels of distribution, AGL utilizes these same communication channels in trade publications, trade show appearances and educational seminars. This increased utilization of the existing communications links, allows for significant synergy between GCAL and AGL with respect to the time, energy, messaging and expenses in these venues.

§  
Cross-Marketing Between GCAL and AGL.  GCAL is establishing relationships with retailers to provide diamond authentication and grading services for the middle market.  By introducing the AGL brand to the retailers and drawing on the high value brand recognition of AGL and a more value-driven pricing program, we believe we can cross-market AGL services to the GCAL relationships.  At the same time, AGL has relationships with some of the high value sellers like Sotheby’s and Christie’s.  By introducing GCAL to these high value sellers and describing the benefits of GCAL certifications, including the grading warranties offered by GCAL and the security benefits of Gemprint, we believe we can cross-market GCAL to the AGL relationships.  As a result of those cross-marketing efforts, Christie’s, which is a long-time AGL customer, will soon begin including, in its diamond auction catalogues, descriptions or copies of GCAL grading certificates to promote the sale of GCAL certified-diamonds at its auctions.
 
eBay Promotional Programs.  Since 1999, we have worked with eBay on programs to increase the volume of collectibles traded on eBay and, at the same time, to provide greater exposure for our authentication and grading services. Current programs include:
 
§  
Informative and Educational Web Pages.  We have created web pages for eBay specifically designed to inform and educate eBay buyers and sellers about the benefits of our authentication and grading services. eBay includes, on its collectibles web pages, links to our web pages and encourages its collectibles customers to use our services. eBay has similar programs with other collectibles authentication and grading services.
 
§  
Quick Opinion Autograph Authentication Service.  We have developed, for eBay’s customers that visit its sports memorabilia auction website, a fee-based “Quick Opinion” autograph authentication service.  For a prescribed fee, currently $7.49 per autograph, an eBay visitor that is interested in selling or buying an autographed item of memorabilia on the eBay auction website can obtain, from one of our autograph experts, a “quick” opinion as to the authenticity of the autograph, generally provided within a day of submission.  The opinion is based on an examination of a digital image of the autograph posted on eBay and, due to the limitations inherent in this process, we do not warrant the accuracy of these opinions.  The fees generated by this service are shared between us and eBay.
 

 
26

 

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
 
PSE
PCGS
 
CU3000
 
Coin Universe
Professional Sports Authenticator
 
PSE
 
Collectors.com
PSA
 
History in Your Hands
 
Record Universe
PSA/DNA
 
First Strike
 
PCGS Currency
Currency Universe
 
Diamond Market Monitor
 
Set Registry
First Strike
 
Diamond Profile
 
Expos Unlimited
Gemprint Appraiser
 
Gemprint
 
Long Beach Coin, Stamp and Collectibles Expo
Palmieri’s Market Monitor
 
Professional Currency Grading
 
Santa Clara Coin, Stamp and Collectibles Expo
Quick Opinion
 
Source Veritas
   
Sports Market Report
 
AGL
   
 
We have not conducted an exhaustive search of possible prior users of the unregistered trademarks listed above and, therefore, it is possible that our use of some of these trademarks may conflict with others.
 
The Company owns several patents related to the Gemprint process and scanning device. The principal patent is number 5,828,405 issued by the United States Patent and Trademark Office (“USPTO”) in 1998. Generally, this patent provides for the capture of the unique optical response of a gemstone (or optical “fingerprint”) where a laser beam is focused on the gemstone and the optical response is recorded in a digital image. This is accomplished at a controlled site, currently in the form of a small rectangular box about the size of a breadbox, and connected to a desktop computer or other computing system for receiving and displaying a data signal from a two dimensional video camera. The two dimensional video camera id part of a light image capture arrangement comprising a laser diode in combination with optical means for producing a collimated light beam directed at a gemstone. The gemstone is oriented in a predetermined manner relative to the light beam and a screen surface is located to collect and display the unique light pattern from a gemstone. The video camera directed at the screen surface is sized to collect the image in a digital format and directs the data signal to the attached computing device. With a communication link to a database through a local area network or through the Internet, the digital image is stored in a standardized manner. In a similar manner, subsequent digital images can be obtained and then compared using an algorithm to those images on the database. Other related patents are 5,124,935 and 2,679,821 issued by USPTO and related patents filed in the United Kingdom, Canada and Israel.
 
Collectibles and Jewelry Experts
 
As of June 30, 2008, we employed 59 experts in our authentication and grading operations, who have from 2 to 51 years, and an overall average of 25 years, of experience.  Our experts include individuals that either (i) had previously been collectibles dealers or were recognized as experts in the markets we serve, or (ii) have been trained by us in our authentication and grading methodologies and procedures, or in the case of diamonds, have been trained in the vocational schools 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.
 

 
27

 

Service Warranties
 
We issue an authenticity or grading warranty with every coin and sportscard authenticated or graded by us. Under the terms of the warranty, if a coin or sportscard that was graded by us later receives a lower grade upon resubmission to us for grading, we are obligated either to purchase the coin or sportscard at the price paid by the then-owner of the coin or sportscard or, instead, if we so choose, to pay the difference in value of the item at its original grade as compared with its lower grade.  Similarly, if a coin or sportscard that has been authenticated by us is later determined not to have been authentic, we are obligated under our warranty to purchase the coin or sportscard at the price that the then-owner paid for that collectible.  We accrue for estimated warranty costs based on historical claims experience.  Through September 30, 2007, our warranty reserves had proved to be adequate.  However, certain warranty claims were received by us in the second quarter and early in the third quarter of fiscal 2008 that were significant in relation to our historical claims experience and, as a result, we recognized, in the second quarter of 2008, an additional expense of $822,000 for those claims.  We also decided to increase our warranty accrual rate, effective January 1, 2008, to reflect this higher warranty claims experience, and we 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 sportscard to our customer, we place the coin or sportscard in a tamper-evident, clear plastic holder that encapsulates a label identifying the collectible as having been authenticated and graded by us.  The warranty is voided in the event the plastic holder has been broken or damaged or shows signs of tampering.
 
We do not provide a warranty with respect to our opinions regarding the authenticity or quality of autographs.
 
We recently began offering a warranty with respect to the color and clarity grades assigned by GCAL to the diamonds it grades, which is the first such warranty offered by any diamond grading service.  Under the terms of the warranty, if a diamond certified by GCAL is submitted for subsequent grading by GCAL within two years of the date of the original certification (which often occurs if the diamond is being sold), and, on that resubmittal receives a color or clarity grade that is lower than its original color or clarity grade, we will be obligated either to purchase the diamond at the price paid by the then-owner of the diamond or, instead, if we so choose, to pay the difference in value of the diamond at its original grade as compared with its lower grade.
 
Customer Service and Support
 
We devote significant resources, including a 23 person staff, to providing personalized customer service and support in a timely manner handling approximately 380 customer service calls per day.  On our websites, customers are able to check the status of their collectibles submissions throughout the authentication and grading process and to confirm the authenticity of the over 18 million collectibles that we have graded. When customers need services or have any questions, they can telephone or e-mail our support staff, Monday through Friday between the hours of 7:00 A.M. and 5:00 P.M., Pacific Time. We also involve our collectibles and diamond experts in providing support services when necessary to address special issues.
 
Supplies
 
In order to obtain volume discounts, we have chosen to purchase most of the injection-molded plastic parts for our clear plastic holders principally from a single supplier.  There are numerous suppliers for these items, however, and we believe that, if necessary, we could obtain those items from any of those other suppliers without significant cost to us. However, if it were to become necessary for us to obtain another supplier, we might have to arrange for the fabrication of a die for the new supplier.  Fabrication of high precision dies can be a lengthy process.  Therefore, it is our practice to maintain at least a one month supply of these molded plastic parts in inventory.
 
Competition
 
Coin Authentication and Grading.  We have three primary competitors in the coin authentication and grading market: Numismatic Guaranty Corporation of America (“NGC”), Independent Coin Grading and ANACS.
 
Sportscard Authentication and Grading.  We have two primary competitors in sportscard authentication and grading: Beckett Sportscard Grading Corporation, and Sportscard Guaranty, LLC.
 
 
28

 
Autograph Authentication and Grading.  In the vintage autograph authentication market, we compete with James Spence Authentication (“JSA”) and a few smaller competitors.
 
Stamp Authentication and Grading.  In stamp authentication, our principal competitors are the Philatelic Foundation and the American Philatelic Society, both of which are non-profit organizations.  The Philatelic Foundation also grades stamps.
 
Currency Authentication and Grading.  We have a major competitor in currency:  Paper Money Guaranty, (a subsidiary of NGC).
 
Diamond Authentication and Grading.  In the diamond grading market, we compete with ten other grading services, several of which are larger, have been in business longer and are better known than GCAL.  Our principal competitors are the Gemological Institute of America, a non-profit educational organization (GIA); AGS Laboratories, an affiliate of the American Gem Society, a non-profit trade association; European Gemological Laboratories; International Gemological Institute; and Gemological Science International. 
 
Colored Gemstone Authentication and Grading. In the colored gemstone market, we compete with six or more such services, some of which have operating histories longer than AGL. Our principal competitors are Gubelin Gemological Laboratories, Schweizerische Stiftung für Edelstein-Forschung (SSEF, or the Swiss Gemological Institute), a non-profit organization, and Gemological Testing Center of the American Gem Trade Association, a non-profit trade association.
 
The principal competitive factors in our authentication and grading markets are (i) brand recognition and awareness, (ii) an established reputation for integrity, independence and consistency in the application of grading standards, and (iii) responsiveness of service.  Price is much less of a factor in the case of vintage collectibles, but is a more important consideration with respect to modern coins and sportscards because of their significantly lower values.  Price is a more important competitive factor in the diamond market, due to the larger number of competitors.  Because the current market in colored gemstones certification is primarily focused on high-value colored gemstones, price is not as important a consideration as the credibility and history of the particular grading service.  We believe that our PCGS, PSA, PSA/DNA, PSE and PCGS Currency brands compete favorably with respect to all of these factors and are among the leaders in each of their respective markets.  We believe that our GCAL brand is a premium brand in the diamond market, interpreting the grading standards in a rigorous and consistent manner, and one of the three or four top quality brands, despite the fact that it is the smallest, in terms of the volume of grading submissions, as compared to its principal competitors.  We believe that AGL is a premium brand and competes favorably with respect to all of these factors.
 
Barriers to entry into the authentication and grading market are relatively low, especially in the sportscard authentication and grading market.  However, brand name recognition and a reputation for integrity, independence and consistency in the application of grading standards can take several years to develop.  The limited supply of collectibles experts also operates as a barrier to entry or expansion in our collectibles markets.  By contrast, the supply of grading experts in the diamond and colored gemstone markets are much more plentiful.  In colored gemstones, the availability of a suitable and trusted reference collection is essential to providing accurate enhancement and country of origin analysis.

Information Technology
 
We have developed proprietary software systems 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, 2008, our systems tracked the authentication and grading process, generating records and data for over 3,000,000 collectibles submitted to us for authentication and grading, without significant disruption or loss of service.
 
 
29

 
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.
 
We have limited redundancy with our remote computer systems in both the New York, NY and Santa Barbara, CA offices.  However, we do not have real-time fully redundant computer systems at a location that is remote from Southern California, where our primary computer systems currently are located.  As a result, any damage to or failure of our computer systems due to a catastrophic event in Southern California, such as an earthquake, could cause an interruption in our services.
 
Government Regulation
 
With the exception of laws in some states that require memorabilia authenticators to certify to the accuracy of their authentication opinions, there are no material government regulations specifically relating to the authentication and grading businesses that we conduct, other than regulations that apply generally to businesses operating in the markets where we maintain operations or conduct business.  However, our dealer finance program will be subject to numerous laws and regulations in those states in which we may make loans to dealers.
 
Disposition of Collectibles Sales Businesses
 
During the period from 1999 through the latter part of fiscal 2004, we also were engaged in the business of marketing and selling collectible coins, sportscards, currency and sports entertainment and historical memorabilia, primarily at multi-venue auctions.  We also sold collectible coins by direct sales methods.
 
In December 2003, we implemented a plan to focus our financial and management resources, and collectibles expertise, on the operations and growth of our authentication and grading businesses, and to divest the collectibles auctions and direct sales businesses.
 
Employees
 
As of June 30, 2008, we had 251 full-time employees and 37 part-time employees, of which 199 were employed in our authentication and grading-related businesses, including our 59 experts and 23 customer service and support personnel. The other employees included 18 in information services, 5 in marketing, 3 in our CCE subscription business, 24 in our Expos business, of which 23 were part-time employees, and 39 in other business and administrative services.  We have never had a work stoppage, and no employees are represented under collective bargaining agreements. We consider relations with our employees to be good.
 
 
Our business is subject to a number of risks and uncertainties that could prevent us from achieving our business objectives and that could hurt our future financial performance and the price performance of our common stock.  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:
 
 
30

 
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 is an important factor in the willingness and ability of collectors and consumers to purchase, and the prices that they are willing to pay for, high-value collectibles, diamonds and colored gemstones.  Declines in purchases and sales, and in the value, of collectibles, diamonds or colored gemstones usually result in declines in the use of authentication and grading services, as such services are most often used by sellers and purchasers of collectibles in conjunction with and to facilitate sale and purchase transactions.  As a result, economic uncertainties, downturns and recessions can and do adversely affect our operating results by (i) reducing the frequency with which collectibles dealers and collectors submit their coins, sportscards and other collectibles for authentication and grading; (ii) reducing purchases of diamonds and colored gemstones by consumers, which would lead to a reduction in the number of diamonds and colored gemstones submitted to us for grading; (iii) causing collectibles dealers and collectors to request longer authentication and grading turn-around times with respect to the collectibles they submit to us for grading, which would reduce our revenues, gross profit margin and operating results, and (iv) reducing the ability of customers to pay outstanding accounts receivable.
 
Temporary popularity of some collectibles may result in short-term increases, followed by decreases, in the volume of submissions for our services, which could cause our revenues to fluctuate.
 
Temporary consumer popularity or “fads” among collectors may lead to short-term or temporary increases, followed by decreases, in the volume of collectibles that we authenticate and grade.  These trends may result in significant period-to-period fluctuations in our operating results and could result in declines in our net revenues and profitability, not only because of a resulting decline in the volume of authenticating and grading submissions, but also because such trends could lead to increased price competition, which could require us to reduce our authentication and grading fees in order to maintain market share.  For example, the number of coins submitted to us for grading declined during 2008 and 2007 relative to 2006, due in part to a decline in the popularity of certain coin grading programs.
 
Our revenues and income depend significantly on revenues generated by our coin authentication and grading services.  A decrease in the level of submissions for these services, which historically has been impacted by changes in economic conditions, could adversely affect our revenues and results of operations.
 
Coin authentication and grading, related services and product sales accounted for approximately 55%, 58% and 65% of our net revenues in fiscal 2008, 2007 and 2006, 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 grading submissions for a majority of our net revenues make us more vulnerable to adverse changes in 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 and operating results.
 

 
31

 

Our top 6 customers, account for approximately 10% of our total net revenues.
 
During the year ended June 30, 2008, six of our coin customers accounted, in the aggregate, for approximately 10% of our total net revenues.  As a result, the loss of any of those customers, or a lower level of grading submissions by any of those customers, could cause our net revenues to decline and, therefore, could harm our operating results. Our revenues from these customers are also impacted by the level of submissions and revenue earned from submissions at collectibles trade shows where we provide on-site grading and authentication services to show attendees who typically request same-day turn-around.  The level of submissions at trade shows can vary depending upon a number of factors, including the timing and number of the trade shows conducted in any particular period, or short-term decisions made by dealers during such trade shows.  In addition, the level of our revenues can be impacted by short-term changes in the price of gold that may occur generally or around the time of the show, which can affect the volume of coin transactions from these customers at the trade shows and which, in turn, can affect the volume of submissions to us for on-site grading and same-day turn-around at shows.
 
Our diamond, colored gemstone and currency authentication and grading businesses are in their start-up phases.  There can be no assurance that these businesses will prove to be successful.
 
We purchased our diamond and colored gemstone grading businesses in November 2005 and August 2006, respectively, and we started our currency authentication and grading business in March 2005.  These businesses have yet to make a material contribution to our net revenues.  To date, our diamond, colored gemstone and currency grading businesses have incurred significant operating losses and we do not have, as of yet, an assurance that these services will gain market acceptance or that these businesses will ever make a material contribution to our net revenues or achieve profitability.  As a result, in accordance with applicable accounting rules, in the fourth quarter of fiscal 2008, we determined that there had been an impairment to these jewelry businesses, and we recorded a non-cash impairment loss of approximately $11,232,000 with respect to the goodwill, intangible assets and certain tangible assets of our diamond and colored gemstone grading businesses.  See "MANAGEMENT'S DISCUSSION AND ANALYSIS ─ Critical Accounting Policies and Estimates ─ Long-Lived Assets Other than Goodwill and Goodwill in Part II of this Report.
 
Future acquisitions and the commencement of new businesses present risks, and we may be unable to achieve the financial and strategic goals of any acquisition or commencement of any new business.
 
One component of our growth strategy is to acquire existing or to start new businesses that serve other markets for other collectibles or high-value assets.  In fiscal 2006 we acquired four businesses, including a diamond grading business, and in fiscal 2007 we acquired two other businesses, a colored gemstone grading business and a trade show management company.  The purchase of these new businesses, present a number of risks and uncertainties, including:
 
§  
difficulties in integrating newly acquired or newly started businesses into existing operations, as a result of which we may incur increased operating costs that can adversely affect our operating results;
 
§  
the risk that our current and planned facilities, computer systems and personnel and controls will not be adequate to support our expanded operations;
 
§  
diversion of management time and capital resources from our existing businesses, which could adversely affect their performance and our operating results;
 
§  
dependence on key management personnel of acquired or newly started businesses and the risk that we will be unable to integrate or retain such personnel;
 
§  
the risk that new services we may introduce or begin offering, whether as a result of internal expansion or business acquisitions, will not gain acceptance;
 
§  
competition from established or larger competitors in new markets, such as in our diamond grading business, which could adversely affect the financial success and performance of any of the businesses we may have acquired or started; and
 
§  
the risk that the anticipated benefits of any acquisition or of the commencement of any new business may not be realized, in which event we will not be able to achieve an acceptable return on our investment.
 

 
32

 

There are risks associated with new service offerings, with which we have little experience.
 
We are continually exploring new services that we might introduce and offer to our existing authentication and grading customers as a means of increasing our net revenues and profitability.  Those new services, however, may prove to be unprofitable and negatively impact our operating results.
 
We are dependent on our key management personnel.
 
Our performance is greatly dependent on the performance of our senior management and certain other key employees.  As a result, the loss of the services of any of our executive officers or other key employees could harm our business.  Some of our executive officers and key employees are experts in the collectibles markets and have industry-wide reputations for authentication and grading of collectibles.  In particular, the loss of Michael R. Haynes, our Chief Executive Officer, or David G. Hall, our President, could have a negative effect on our reputation for expertise in the collectibles markets in which we operate and could lead to a reduction in authentication and grading submissions to us.
 
We are dependent on our collectibles experts.
 
In certain of our markets, there are a limited number of individuals who have the expertise to authenticate and grade collectibles, and competition for available collectibles experts is intense.  Accordingly, our business and our growth initiatives are heavily dependent on our ability (i) to retain our existing collectibles experts, who have developed relatively unique skills and enjoy a reputation for being experts within the collectibles markets, and (ii) to implement personnel recruiting, succession and training programs that will enable us to add collectibles experts, as necessary, to grow our business and offset employee turnover that can occur from time to time.  If we are not successful in retaining our existing collectibles experts or in hiring and training new collectibles experts, this could limit our ability to grow our business and adversely affect our operating results and financial condition.  Moreover, some of our experts could leave our Company to join a competitor or start a competing business.
 
We could suffer losses on authentication and grading warranties.
 
Certain of our grading service businesses offer customers service warranties.  The warranties offered by our collectibles grading businesses provide that:
 
   § 
if any collectible we have authenticated and sealed in our tamper-evident plastic cases is later determined not to have been genuine, we would have to purchase the collectible at the price paid for it by its then owner; and
 
§ 
if any collectible that was graded by us and sealed in our tamper-evident plastic cases later receives a lower grade upon resubmission to us for grading, we would be obligated either to purchase the collectible at the price paid by its then owner or to pay the difference in its value at its original grade as compared to its value at the lower grade.
 
GCAL, our diamond grading subsidiary, offers a grading warranty which provides that, if a diamond graded by us is submitted for re-grading within two years and, on re-grading is assigned a color or clarity grade that is more than one grade lower than the original color or clarity grade it received, GCAL will become obligated to purchase the diamond at the price paid by its then owner or, if GCAL so chooses, to pay the difference in its value at its original grade as compared to its value at the lower grade.
 
We have no insurance coverage for claims made under these warranties and, therefore, we maintain reserves to satisfy such warranty claims based on historical experience.  However, there is no assurance that these warranty reserves will prove to be adequate and, if they are not, our operating results could be harmed and, therefore, we will continue to 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, in the second quarter of 2008, an additional expense of $822,000 to provide for those claims.  In addition, effective January 1, 2008, we increased our warranty accrual rate to reflect this higher warranty claims experience.  Those actions contributed to an increase in our costs of sales and, therefore, to the operating loss we incurred for fiscal year 2008.
 

 
33

 

Increased competition could adversely affect our financial performance.
 
Although there are few major competitors in the collectibles authentication and grading markets in which we currently operate, competition in these markets is, nevertheless, intense.  In addition, in the diamond market there are a number of grading services that are substantially larger, have been in business substantially longer and are better known than GCAL.  Increased competition in our collectibles markets could adversely affect our pricing and profit margins and our ability to achieve further growth, and we cannot assure that we will continue to be successful in competing against existing or future competitors in our collectibles markets.  In our diamond business, as we implement its growth strategy, we are likely to encounter intense competition from larger and more established competitors that have significant market shares.  Also, our entry into new collectibles or high-value asset markets could lead other potential competitors to enter those markets as well.  Such competition could adversely affect our ability to generate profits and could cause us to continue to incur losses in those markets and damage our financial condition.
 
We depend on our ability to protect and enforce our intellectual property rights.
 
We believe that our patents, trademarks and other proprietary rights are important to our success and competitive position. We rely on a combination of patents, trademarks, copyright and trade secret laws to establish and protect our proprietary rights.  However, the actions we take to establish and protect our intellectual and other proprietary rights may prove to be inadequate to prevent imitation of our services or products or to prevent others from claiming violations of their intellectual and proprietary rights by us. In addition, others may develop similar trade secrets or other intellectual property independently or assert rights in our intellectual and other proprietary rights that could lead them to seek to block sales of our services based on allegations that use of some of our marks or other intellectual property constitutes a violation of their intellectual property rights.
 
Our unregistered trademarks could conflict with trademarks of others.
 
We have not conducted an exhaustive search of possible prior users of our unregistered trademarks, including Coin Universe, Collectors.com and PSE.  Therefore, it is possible that our use of some of these trademarks may conflict with others.  As a result, we could face litigation or lose the use of some of these trademarks, which could have an adverse effect on our name recognition and result in a decrease in revenues and an increase in expenses.
 
The imposition of government regulations could increase our costs of doing business.
 
With the exception of state laws applicable to autograph authentication, the collectible coin and other high-value collectibles markets are not currently subject to direct federal, state or local regulation.  However, from time to time government authorities discuss additional regulations which could impose restrictions on the collectibles industry, such as regulating collectibles as securities or requiring collectibles dealers to meet registration or reporting requirements, or regulating the conduct of auction businesses.  Adoption of laws or regulations of this nature could lead to a decline in sales and purchases of collectibles and, therefore, also to a decline in the volume of coins, sportscards and other collectibles that are submitted to us for authentication and grading.
 
Our reliance on a single source for principally all of our “tamper-evident,” clear plastic coin and sportscard holders exposes us to potential supply and quality problems.
 
We place all of the coins, sportscards and currency notes, and sometimes also the stamps that we authenticate and grade, in tamper-evident, clear plastic holders.  In order to take advantage of volume pricing discounts, we purchase substantially all of those holders, on a purchase order basis, from one principal supplier.  Our reliance on a single supplier for a substantial portion of those plastic holders exposes us to the potential for delay in our ability to deliver timely authentication and grading services in the event that supplier were to terminate its services to us or to encounter financial or production problems.  If, in such an event, we were unable to obtain replacement holders in a relatively short period of time, we could lose customer orders, or incur additional production costs.  In addition, if the replacement holders were not of comparable quality to our existing supplier, we could expose ourselves to the potential for additional warranty claims in the event that tampering with our holders was not evident.  These occurrences could cause a decline in our net revenues and have a material adverse effect on our results of operations.
 

 
34

 

Our computer and network systems may be vulnerable to unforeseen problems and security risks, and we are vulnerable to system failure due to a lack of redundant systems at another location.
 
Our operations are dependent on our ability to protect our computer systems that we use in our authentication and grading operations and to maintain our websites against damage from fire, power loss, telecommunications failure, earthquakes and similar catastrophic events.  In this regard, Southern California, where we are primarily located, is particularly vulnerable to earthquakes and fires that could result in damage to our computer systems.  In addition, our diamond and colored gemstone operations are located in a New York City high-rise building that could be vulnerable to terrorist attacks or to fire or other disasters.  We do not have redundant computer systems at any locations that are remote from Southern California or New York.  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 other reason, our revenues and business could be harmed.
 
We are exposed to potential risks and we will continue to incur costs as a result of the internal control testing and evaluation process mandated by Section 404 of the Sarbanes-Oxley Act of 2002.
 
Although we 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, we expect we will continue to incur costs, including accounting fees and other personnel costs in order to maintain compliance with that Section of the Sarbanes-Oxley Act.  Also, if our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to our practices, our reputation may be harmed or we may be subject to litigation.
 
If our quarterly results are below the expectations of securities market analysts and investors or we decide to suspend or discontinue the payment of dividends, the price of our common stock may decline.
 
Many factors, including those described in this “Risk Factors” section, can affect our business, financial condition and results of operations, which makes the prediction of our future financial results difficult.  These factors include:
 
§  
increases or decreases in number of collectibles or diamonds graded from period to period;
 
§  
changes in market conditions that can affect the demand for our authentication and grading services, such as a decline in the popularity of certain collectibles and volatility in the prices of gold and other precious metals;
 

 
35

 

§  
changes in economic conditions that affect the availability of disposable income among collectors and consumers; and
 
§  
the actions of our competitors.
 
If, as a result of these or other conditions or factors, our quarterly operating results fall below expectations or we decide to suspend or discontinue the payment of dividends, securities market analysts may downgrade our common stock and some of our stockholders may sell their shares, which could adversely affect the trading prices of our common stock.  Additionally, in the past, companies that have experienced declines in the trading price of their shares due to events of this nature have been the subject of securities class action litigation.  If we become involved in a securities class action litigation in the future, it could result in substantial costs and diversion of our management’s attention and resources, thus harming our business.
 
No assurance that we will continue to pay cash dividends.
 
In May 2006, our Board of Directors adopted a policy providing for the payment of cash dividends, initially at a rate of $0.08 per share per quarter, which was subsequently increased to $0.25 per share.  As we disclosed previously, the continued payment of cash dividends was subject to a number of factors, including changes in market and financial conditions, and, therefore, there could be no assurance that the amount of the Company's cash dividend would not be reduced or the payment of cash dividends would not be suspended or discontinued by the Board of Directors.  On September 26, 2008, the Board of Directors determined that, due to market and economic conditions, including the liquidity crisis in the United States, the prudent course of action would be, and the Board of Directors voted, to suspend the payment of cash dividends in order to preserve the Company's cash resources to support the continued implementation of the Company's strategic plan and the growth of its business.  At the same time, the Board of Directors approved a 10% stock dividend on the Company's outstanding shares, commencing in November, 2008.  See "MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS ─ Dividends" in Part II of this Report.
 
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 option plans may also discourage, delay or prevent a change in control of our Company or unsolicited acquisition proposals.
 
 
None
 
 
We lease approximately 59,000 square feet for our California-based headquarters under a nine-year lease that commenced in November 2000.  We currently sublease 2,184 square feet of this office space to a related party sub-tenant with an expiration date that coincides with the expiration of the Company's nine-year lease.  We lease approximately 7,300 square feet in New York City in connection with our diamond grading business of which 5,000 square feet is leased under an operating lease through December 31, 2015 and the balance being leased on a month-to-month basis.  For our colored gemstone grading business, we currently lease 6,675 square feet under an operating lease through December 2017 and 2,133 on a month-to-month basis until such time that our new 6,675 square feet space is available for occupancy.  In connection with our Expos shows management business, we lease approximately 1,000 square feet in Santa Barbara, CA under a lease agreement with a related party that commenced on July 1, 2006 and continues for a period of 3 years until June 30, 2009.
 
 
36

 
 
Bill Miller v. Collectors Universe, Inc.  As previously reported, the Company was a defendant in this legal action, which was brought in the Superior Court of California, County of Orange, by Bill Miller, a former employee of the Company and an expert in the authentication of autographs and memorabilia.  In his suit, Miller alleged that the Company had issued authentication certificates bearing his name without his consent, in violation of a California statute prohibiting unauthorized appropriation of a person’s name, signature or likeness.  The statute provides that a person whose name, signature or likeness has been misappropriated, in violation of the statute, is entitled to recover the greater of $750 or the actual damages suffered as a result of the unauthorized use, and any profits that were attributable to that unauthorized use that are not taken into account in computing the actual damages.  The Company denied Miller’s allegations and asserted that he was not entitled to any recovery under the statute in excess of his actual damages and that he had not suffered any actual damages as a result of the issuance of the certificates.
 
Also, as previously reported, at the conclusion of the trial, which took place in October 2005, (i) the jury found that the Company had used Miller’s name without his consent on 14,060 authentication certificates, but that Miller had sustained actual damages from that use totaling $14,060; and (ii) the parties entered into a stipulated judgment in the case, which, among other things, provided that Miller’s statutory damages arising from the actions of the Company were zero, and the Company was entitled to recover $37,812 from Miller on a cross complaint.  The court left unresolved and for future determination the issue of which party, if any, was the prevailing party in the lawsuit, which would determine which party, if any, is entitled to recover its attorney’s fees from the other party.
 
In March, 2005, Miller filed an appeal of the trial court’s ruling and the stipulated judgment in which he sought, among other things, a finding that as a matter of law he was entitled to statutory damages that should be determined by multiplying $750 times the 14,060 authentication certificates on which his name appeared without his consent, or approximately $10.5 million in total.
 
On February 1, 2008, the three-judge Appellate Court ruled unanimously in favor of the Company, holding that (i) the use of Miller’s name by the Company constituted, at most, a single violation of the statute in question and, therefore, Miller was not entitled to multiply $750.00 by the number of times his name was used as a measure of damages; and (ii) Miller had the right to file a new trial in an effort to recover damages for the use by the Company of his name; however, in that lawsuit he would have to prove that Collectors Universe violated the statute at issue or common law and, if he succeeded in proving such a violation, he would have to prove that he incurred actual damages as a result of that violation in order to recover any amounts against the Company.
 
In February 2008, Miller filed a petition with the California Supreme Court seeking a review and reversal of the Appellate Court’s decision.  On April 23, 2008, the California Supreme Court denied Miller’s petition for review.  Miller has accepted the judgment for $14,060 plus $750 statutory damages.
 
However, in August 2008, the Company and Miller reached a tentative settlement agreement which provides for a complete release by each party of all known and unknown claims it has or may have against the other relating to or arising out of the subject matter of the suit, including the pending claims for recovery of its legal fees and expenses.  The documentation to give effect to the settlement and mutual release has been prepared and is awaiting signature by the parties.  In the event that Miller does not to sign the documentation, then, each party would be free to pursue its claims for recovery of its legal fees and costs from the other party.
 
Other Legal Actions
The Company is named from time to time, as a defendant in lawsuits that arise in the ordinary course of business.  Management of the Company believes that none of those lawsuits currently pending against it is likely to have a material adverse effect on the Company.


 
37

 

 
None.
 
 
Name
 
Age
 
Positions
         
Michael R. Haynes                                
 
57
 
Chief Executive Officer
David G. Hall                                
 
61
 
President
Joseph J. Wallace                                
 
48
 
Chief Financial Officer
 
MICHAEL R. HAYNES has served as Chief Executive Officer and a Director of the Company since January 1, 2003.  He served as Chief Operating Officer, Chief Financial Officer and Director of Tangible Asset Galleries, Inc, a distributor of fine art, from 2000 to 2002.  He has been President, Chief Operating Officer and/or Chief Financial Officer of eight collectibles, precious metals, specialty retail, distribution, e-commerce and manufacturing businesses.  Overall, Mr. Haynes has more than 25 years of experience in managing the growth and development of growth companies, which includes over 19 years experience in managing both public and private companies engaged in the business of selling collectibles at auction, retail and wholesale.  He was also one of the co-founding board members of the Industry Council for Tangible Assets, a Washington, D.C. trade association for dealers and auctioneers of tangible and collectible assets, where he served for nine years.  Mr. Haynes holds a Master's degree in Business and a Bachelor of Science degree in mechanical engineering, both from Southern Methodist University.  He is a Certified Public Accountant and a Certified Financial Planner.
 
DAVID G. HALL has served as President of Collectors Universe, Inc. since September 2001.  From April 2000 to September 2001, Mr. Hall served as our Chairman of the Board and Chief Executive Officer.  Mr. Hall also 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, a member of the Institute of Certified Public Accountants, in Ireland, and a CPA in the State of California.


 
38

 

PART II

 
Our common stock is listed on the Nasdaq Global Market, trading under the symbol CLCT.  The following table sets forth the high and low closing prices of our common stock, as reported by NASDAQ, and the cash dividends that we paid to our stockholders, in each of the fiscal quarters in the fiscal years ended June 30, 2008 and 2007:
 
 
Fiscal 2008
 
Closing Share Prices
       
   
High
   
Low
   
Cash
Dividend
Per Share
 
First Quarter                                                
  $ 15.80     $ 12.99     $ 0.25  
Second Quarter                                                
    14.05       10.49       0.25  
Third Quarter                                                
    12.26       8.75       0.25  
Fourth Quarter                                                
    10.56       8.11       0.25  

 
Fiscal 2007
 
Closing Share Prices
       
   
High
   
Low
   
Cash
Dividend
Per Share
 
First Quarter                                                 
  $ 14.28     $ 12.28     $ 0.08  
Second Quarter                                                 
    14.39       12.34       0.08  
Third Quarter                                                 
    14.21       12.73       0.12  
Fourth Quarter                                                 
    15.29       13.46       0.12  
 
The Company had 77 holders of record and approximately 2,341 beneficial owners of its common stock on June 30, 2008.
 
Dividends.  On May 31, 2006, the Company adopted a dividend policy that called for the payment of quarterly cash dividends of $0.08 per common share, for an expected annual cash dividend of $0.32 per share.  The quarterly cash dividend was increased to $0.12 per share in the third quarter of fiscal 2007.  Then, effective in the first quarter of fiscal 2008, the quarterly cash dividend was increased to $0.25 per common share for an expected annual cash dividend to stockholders of $1.00 per common share.
 
As we disclosed previously, the continued payment of cash dividends was subject to a number of factors, including the Company’s financial performance and changes in market and financial conditions, and, therefore, there could be no assurance that the amount of the cash dividend would not be reduced or the payment of cash dividends would not be suspended or discontinued by the Board of Directors.  On September 26, 2008, the Board of Directors determined that, due to market and economic conditions, including the liquidity crisis in the United States, the prudent course of action would be, and the Board of Directors voted, to suspend the future payment of cash dividends in order to preserve the Company's cash resources to support the continued implementation of the Company's strategic plan and the growth of its business.  At the same time, the Board of Directors approved a 10% stock dividend on the Company's outstanding shares, and it declared that this dividend will be distributed on November 3, 2008 to all stockholders of record on October 20, 2008.
 
Share Repurchases
 
On December 6, 2005, the Company publicly announced that its Board of Directors had approved a stock buyback program that authorized the Company to make up to $10 million of stock repurchases in the open market or private transactions, in accordance with applicable SEC rules.  The Company is under no obligation to repurchase any shares under this program, and the timing, actual number and value of shares that may be repurchased under this program will depend on a number of factors, including the Company’s future financial performance, the Company’s available cash resources and competing uses for the cash that may arise in the future, prevailing market prices of the Company’s common stock and the number of shares that become available for sale at prices that the Company believes are attractive.  During the years ended June 30, 2008, 2007 and 2006, the Company repurchased and retired 232,152, 72,517 and 181,851 shares, respectively, for which it paid a total of approximately $2,198,000, $945,000 and $2,618,000, respectively.
 
 
 
39

 
At June 30, 2008, the total dollar value of shares that could be purchased in the future under this program was $4,239,000.
 
The following table sets forth information regarding our share repurchases in each of the months during the quarter ended June 30, 2008.
 
   
(a)
   
(b)
   
(c)
   
(d)
 
 
 
 
 
Monthly Periods
Through June 30, 2008
 
 
Total
Number
of Shares Purchased
   
Average Price Paid
per Share
   
Dollar Value
of Shares
Purchased
as Part of Publicly
Announced Program
   
Approximate
Dollar Value
of Shares that
May Yet Be
Purchased
under the Programs
 
                         
April 1 to April 30, 2008
    0       N/A       N/A     $ 5,116,308  
May 1 to May 31, 2008
    36,945     $ 9.68     $ 357,688     $ 4,758,620  
June 1 to June 30, 2008
    53,331     $ 9.74     $ 519,496     $ 4,239,124  
Total
    90,276     $ 9.72     $ 877,184          

 
The selected operating data for the fiscal years ended June 30, 2008, 2007 and 2006, and the selected balance sheet data at June 30, 2008 and 2007 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, 2005 and 2004 and the related balance sheet data at June 30, 2006, 2005 and 2004 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.
 
During the fiscal year ended June 30, 2006, we acquired four businesses, including Gem Certification & Appraisal Lab, a gemological certification and grading laboratory (“GCAL”) and substantially all of the assets of Gemprint Corporation (“Gemprint”), consisting primarily of a patented technology for non-invasive diamond identification which is used to digitally capture the unique refractive light pattern (or “Gemprint”) of each diamond that is processed with that technology.  During the fiscal year ended June 30, 2007, we acquired two additional businesses, including American Gemological Laboratories, an international colored gemstone certification and grading laboratory  (“AGL”).  The operating results of each of these acquired businesses have been included in our consolidated results of operations from the respective dates of their acquisition by us.  See Item 7 - MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — Our Business — Recent Acquisitions, below in this report.
 
In the third quarter of fiscal 2005, we completed a public offering in which we sold a total of 2,195,856 shares of our common stock at a public offering price of $17.50 per share.  The net proceeds to us from the sale of the shares in the offering, after payment of underwriting commissions and offering expenses, were approximately $35,657,000.
 
As previously disclosed, in December 2003 our Board of Directors approved, and during the balance of fiscal 2004 we implemented, a plan to dispose of our collectibles sales businesses.  As a result, the consolidated selected financial data set out below for the five years ended June 30, 2008 have been restated to classify the assets and related liabilities of those businesses as held for sale and the related operating results as discontinued operations.  In addition, in fiscal year 2006, discontinued operations also included the operations of CTP, which was a business we acquired as part of another acquisition and which we sold in November 2005.


 
40

 


   
Years Ended June 30,
 
   
2008
   
2007
   
2006
   
2005
   
2004
 
Consolidated Statement of Operations Data:
 
(In thousands, except per share data)
 
       
Net revenues(1)
  $ 41,984     $ 40,452     $ 36,914     $ 33,607     $ 26,420  
Cost of revenues
    23,773       19,297       14,890       12,239       10,322  
Gross profit(1) (2)
    18,211       21,155       22,024       21,368       16,098  
Selling, general and administrative expenses
    23,553       23,082       17,986       14,380       11,829  
Impairment losses(3)
    11,233       55       -       -       -  
Amortization of intangible assets
    1,193       950       269       21       -  
Operating income (loss)
    (17,768 )     (2,932 )     3,769       6,967       4,269  
Interest income, net
    1,117       2,144       2,346       906       135  
Other income (expense), net
    5       6       22       26       (25 )
Income (loss) before provision (benefit) for income taxes
    (16,646 )     (782 )     6,137       7,899       4,379  
Provision (benefit) for income taxes(4)
    (1,016 )     (39 )     2,733       3,141       1,581  
Income (loss) from continuing operations
    (15,630 )     (743 )     3,404       4,758       2,798  
Income (loss) from discontinued operations, net of gain
   on sales of discontinued businesses (net of income taxes)
    (2 )     228       296       60       (1,068 )
Net income (loss)
  $ (15,632 )   $ (515 )   $ 3,700     $ 4,818     $ 1,730  
                                         
Net income (loss) per basic share:
                                       
  Income (loss) from continuing operations
  $ (1.85 )   $ (0.09 )   $ 0.40     $ 0.68     $ 0.45  
  Income (loss) from discontinued operations, net of gain
     on sales of discontinued businesses (net of income taxes)
    -       0.03       0.04       0.01       (0.17 )
Net income (loss)
  $ (1.85 )   $ (0.06 )   $ 0.44     $ 0.69     $ 0.28  
Net income (loss) per diluted share:
                                       
  Income (loss) from continuing operations
  $ (1.85 )   $ (0.09 )   $ 0.39     $ 0.64     $ 0.44  
  Income (loss) from discontinued operations, net of gain
     on sales of discontinued businesses (net of income taxes)
    -       0.03       0.03       0.01       (0.17 )
Net income (loss)
  $ (1.85 )   $ (0.06 )   $ 0.42     $ 0.65     $ 0.27  
Weighted average shares outstanding:
                                       
Basic
    8,450       8,367       8,473       7,013       6,170  
Diluted
    8,450       8,367       8,782       7,452       6,463  
                                         
Cash dividends paid on common stock
  $ 8,517     $ 3,350     $ 674     $ -     $ -  
Cash dividends paid per share of common stock
  $ 1.00     $ 0.40     $ 0.08     $ -     $ -  
                                         
Balance Sheet Data:
 
At June 30,
 
   
2008
   
2007
   
2006
   
2005
   
2004
 
   
(In thousands)
 
Cash and cash equivalents
  $ 23,345     $ 42,386     $ 52,110     $ 65,439     $ 21,454  
Working capital - continuing operations
    26,006       42,208       54,812       68,576       22,308  
Working capital – discontinued operations
    (9 )     -       75       338       991  
Goodwill and Intangibles – continuing
    12,468       23,249       14,473       79       -  
Total assets – continuing operations
    52,018       78,101       78,138       75,123       32,690  
Total assets – discontinued operations
    -       -       83       411       1,384  
Stockholders' equity
    43,830       68,891       71,906       70,566       29,366  
 
 


1.
Revenues for FY2008 and 2007 include product revenues of $1,061,000 and $289,000, respectively.  In years 2004 through 2006, the level of product sales was less than $50,000 in each year.  Product revenues represent the sale, primarily of coins, that are purchased under our warranty policy and are not considered an integral part of our on-going revenue generating activities.  The gross profit on such product sales in fiscal year 2008 and 2007 was 7% and 34%, respectively.

2.
The level of gross profit can vary depending upon the mix of revenues and other factors.  See “Factors Affecting Our Gross Profit Margins” and “Results of Operation-Gross Profit” under Item 7, Management Discussion and Analysis of Financial Condition and Results of Operations.

3.
Aggregate impairment loss in 2008 of $11,233,000 consisting of $9,064,000, $1,860,000, $176,000 and $133,000 for goodwill, intangible assets other than goodwill, property and equipment, and other assets, respectively, related to our jewelry division.  See note 2 to Consolidated Financial Statements under Item 8, Financial Statements and Supplementary Data.

4.
The income tax benefit for fiscal year 2008 is net of a valuation allowance of $4,550,000.  See note 2 to Consolidated Financial Statements under Item 8, Financial Statements and Supplementary Data.


 
41

 

 
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the “Selected Consolidated Financial Data” and our Consolidated Financial Statements and related notes, included elsewhere in Part II of this Annual Report.   This discussion also should be read in conjunction with the information in Item IA of Part I of this Report, entitled “Risk Factors,” which contains information about certain risks and uncertainties that can affect our business and our financial performance in the future.
 
Introduction and Overview
 
Our Business
 
Collectors Universe, Inc. (“we,” “us” or the “Company”) provides grading and authentication services to dealers and collectors of high-value coins, sportscards, autographs, stamps, and vintage U.S. currency notes and to sellers and purchasers of diamonds and colored gemstones.  We believe that our authentication and grading services add value to these collectibles and to diamonds and colored gemstones by enhancing their marketability and, thereby, providing increased liquidity to the dealers, collectors and consumers that own, buy and sell them.
 
We generate revenues principally from the fees paid for our authentication and grading services.  To a much lesser extent, we generate revenues from:  the sale of advertising on our websites; the sale of printed publications and collectibles price guides and advertising in such publications; the sale of Collectors Club membership, subscriptions to  our CCE dealer-to-dealer Internet bid-ask market; for certified coins product revenues that we generate from sales primarily of coins that we purchase under our warranty policy, and revenues that we generate from the collectibles trade show conventions that we conduct.
 
Recent Business Acquisitions.  On July 14, 2005 we purchased, for an aggregate purchase price of $515,000, 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, the common stock of Certified Coin Exchange (“CCE”), which operates a subscription-based dealer-to-dealer Internet bid-ask market for third party certified coins.
 
On November 8, 2005 we acquired Gem Certification & Appraisal Lab (“GCAL”), a gemological certification and grading laboratory.  As part of that transaction, we also acquired Diamond Profile Laboratory, Inc. (“DPL”), a scientific diamond light performance analysis laboratory, and all publishing and other rights to “Palmieri’s Market Monitor,” an educational and informative industry publication.  We paid an aggregate acquisition price of $3,268,000 in cash for GCAL, DPL and the publishing and other rights to Palmieri’s Market Monitor.
 
On December 22, 2005 we acquired the business and substantially all of the assets of Gemprint Corporation (“Gemprint”), consisting primarily of a patented technology for non-invasive diamond identification which Gemprint uses to digitally capture the unique refractive light pattern (or “Gemprint”) of each diamond that is processed with that technology.  We paid an aggregate purchase price for Gemprint’s business and assets of $8,583,000 in cash, assumed certain pre-acquisition liabilities and lease commitments, and agreed to pay additional contingent purchase price of $1 for each diamond that we register using the Gemprint process in excess of 100,000 registrations per year during the five year period ending December 22, 2010.
 
Effective July 1, 2006 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.  Depending on the future revenue performance of Expos, we may become obligated to make contingent payments to the former owners of Expos up to an aggregate of $750,000 in July 2011.  Expos owns and operates the Long Beach Coin, Stamp & Collectibles Expo (“Long Beach”) and the Santa Clara Coin, Stamp & Collectibles Expo (“Santa Clara”), which comprise, in total, five trade shows that are held annually.
 

 
42

 

On August 18, 2006, we acquired American Gemological Laboratories (“AGL”), an international colored gemstone certification and grading laboratory.  AGL is one of the leading third party authentication and grading services for colored gemstones, including colored gemstones that are sold at auction through Sotheby’s and Christie’s and by jewelry retailers such as Cartier and Fred Leighton.  We paid an aggregate acquisition price of $3,947,000 in cash for AGL, and, depending on the future revenue performance of AGL, we may become obligated to make payments of up to an aggregate of an additional $3,500,000 over the next five years.
 
The operating results of these acquired businesses have been consolidated into our operating results from the respective dates of their acquisition
 
Discontinued Operations.  As previously disclosed, in fiscal 2004 our Board of Directors authorized the divestiture of our collectibles auctions and sales businesses.  As a result, we sold our collectibles sales businesses during that year, but retained the collectibles inventory and accounts receivable of those businesses, which have since been substantially liquidated.  The activities resulting from the divestiture of those businesses have been classified as discontinued operations and the discussion that follows focuses almost entirely on our authentication and grading businesses, which comprise substantially all of our continuing operations.
 
Factors That Can Affect our Financial Position and Operating Results
 
Factors that Can Affect our Revenues.  Our revenues are comprised of (i) fees generated by the authentication and grading of high-value collectibles, and other high value assets consisting of diamonds and colored gemstones, and (ii) to a lesser extent, revenues from sales of collectibles club memberships; advertising on our websites and in printed publications and collectibles price guides; subscription-based revenues primarily related to our CCE dealer-to-dealer Internet bid-ask market for collectible coins certified by us; fees earned from the management, operation and promotion of collectibles trade shows and conventions and revenues from sales of products, which consist primarily of coins that we purchase under our warranty policy.
 
Our authentication and grading revenues accounted for approximately 81%, 84% and 90% of our total net revenues in the fiscal years ended June 30, 2008, 2007 and 2006, respectively.  The amounts of such revenues are primarily affected by (i) the volume and mix, among coins and sportscards, on the one hand, and other collectibles and diamonds and colored gemstones, on the other hand, of authentication and grading submissions; (ii) in the case of coins and sportscards, the “turn-around” times requested by our customers, because we charge higher fees for faster service times, and (iii) the mix of authentication and grading submissions between vintage or “classic” coins and sportscards, on the one hand, and modern coins and sportscards, on the other hand, because dealers generally request faster turn-around times for vintage or classic coins and sportscards than they do for modern submissions, as vintage or classic collectibles are of significantly higher value and are more saleable by dealers than modern coins and sportscards.
 
Six 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, 2008.  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.  Our revenues from these customers are also impacted by the level of submissions and revenue earned from submissions at collectibles trade shows where we provide on-site grading and authentication services to show attendees who typically request same-day turn-around.  The level of submissions can vary depending upon a number of factors, including the timing of the shows or short-term decisions made by dealers during shows.  In addition, the level of our revenues can be impacted by short-term changes in the price of gold that may occur around the time of the show, which can affect the volume of coin transactions from these customers at the shows and which, in turn, can affect the volume of submissions to us for on-site grading and same-day turn-around.
 
Factors Affecting our Gross Profit Margins.  The gross profit margins on authentication and grading submissions also are primarily affected by (i) the volume and mix, among coins, sportscards and other collectibles and high value assets, of authentication and grading submissions, because we generally realize higher margins on coin submissions than on submissions of other collectibles and high-value assets; (ii) in the case of coins and sportscards, the “turn-around” times requested by our customers, because we charge higher fees for faster service times, (iii) the mix of authentication and grading submissions between vintage or “classic” coins and sportscards, on the one hand, and modern coins and sportscards, on the other hand, because dealers generally request faster turn-around times for vintage or classic coins and sportscards than they do for modern submissions, and (iv) the stage of development and the seasonality of our newly acquired businesses.  Furthermore, because a significant proportion of our direct costs are fixed in nature, our gross profit is also affected by the overall volume of collectibles authenticated and graded in any period.
 
 
43

 
Impact of Economic Conditions on Financial Performance.  We generate substantially all of our revenues from the collectibles and the diamond and colored gemstone markets.  Accordingly, our operating results are affected by the financial performance of those markets, which depends to a great extent on (i) discretionary consumer spending and, hence, on the availability of disposable income, (ii) on other economic conditions, including prevailing interest and inflation rates, which affect consumer confidence, and (iii) the performance and volatility of the gold and other precious metals markets and the stock markets.  These conditions primarily affect the volume of purchases and sales of collectibles which, in turn, affects the volume of authentication and grading submissions to us, because our services facilitate commerce in collectibles.  Accordingly, factors such as improving economic conditions which usually result in increases in disposable income and consumer confidence, and volatility in and declines in the prices of stocks and a weakening in the value of the U.S. Dollar, which often lead investors to increase their purchases of precious metals, such as gold bullion and other coins and collectibles, usually result in increases in submissions of collectibles for our services.  By contrast, the volume of collectibles sales and purchases and, therefore, the volume of authentication and grading submissions, usually decline during periods characterized by recessionary economic conditions and by declines in disposable income and consumer confidence or by increasing stock prices and relative stability in the stock markets.
 
The following tables provide information regarding the respective number of coins, sportscards, autographs, currency, diamonds and colored gemstones that we graded or authenticated in the fiscal years ended June 30, 2008, 2007, and 2006 and their estimated values, which are the amounts at which those coins, sportscards and stamps and other high value assets were insured by the dealers and collectors who submitted them to us for grading and authentication.

   
Units Processed
 
   
2008
   
2007
   
2006
 
Coins
    1,474,900       47 %     1,558,700       50 %     1,786,300       55 %
Sportscards
    1,329,500       42 %     1,262,700       41 %     1,200,300       37 %
Autographs
    199,600       6 %     169,800       5 %     179,700       6 %
Stamps
    53,000       2 %     66,200       2 %     37,000       1 %
Currency
    59,200       2 %     36,200       1 %     28,800       1 %
Diamonds(1)
    30,000       1 %     25,000       1 %     6,700       -  
Colored Gemstones(2)
    4,700       -       2,000       -       -       -  
Total
    3,150,900       100 %     3,120,600       100 %     3,238,800       100 %

   
Declared Values (000)
 
   
2008
   
2007
   
2006
 
Coins
  $ 1,327,000       73 %   $ 1,435,000       82 %   $ 1,613,000       90 %
Sportscards
    90,000       5 %     88,000       5 %     75,000       4 %
Autographs
    26,000       2 %     24,000       1 %     15,000       1 %
Stamps
    25,000       1 %     12,000       -       21,000       1 %
Currency
    45,000       2 %     32,000       2 %     43,000       2 %
Diamonds(1)
    225,000       12 %     97,000       6 %     27,000       2 %
Colored Gemstones(2)
    93,000       5 %     62,000       4 %     -       -  
Total
  $ 1,831,000       100 %   $ 1,750,000       100 %   $ 1,794,000       100 %

 
1.  
We commenced the authentication and grading of diamonds in the second quarter of 2006 when we acquired GCAL and Gemprint.
 
2.  
We commenced the authentication and grading of colored gemstones in the first quarter of 2007, when we acquired AGL.
 

 
44

 

Overview of Fiscal 2008 Operating Results
 
The following table set forth comparative financial data for the years ended June 30, 2008 and 2007.
 
   
Year Ended June 30, 2008
   
Year Ended June 30, 2007
   
2008 vs. 2007
 
   
Amount
   
Percent of Revenues
   
Amount
   
Percent of
Revenues
   
Percent
Change
 
 
   
(Dollars in thousands)
 
Net revenues
  $ 41,984       100.0 %   $ 40,452       100.0 %     3.8 %
Cost of revenues
    23,773       56.6 %     19,297       47.7 %     23.2 %
Gross profit
    18,211       43.4 %     21,155       52.3 %     (13.9 )%
Selling and marketing expenses
    8,073       19.2 %     7,497       18.5 %     7.7 %
General and administrative expenses
    15,480       36.9 %     15,585       38.5 %     (0.7 )%
Impairment losses
    11,233       26.8 %     55       0.2 %     (20,323.6 )%
Amortization of intangible assets
    1,193       2.8 %     950       2.3 %     25.6 %
Operating loss
    (17,768 )     (42.3 )%     (2,932 )     (7.2 )%     (506.0 )%
Interest income, net
    1,117       2.7 %     2,144       5.3 %     (47.9 )%
Other income
    5       -       6       -       (16.7 )%
Loss before benefit for income taxes
    (16,646 )     (39.6 )%     (782 )     (1.9 )%     (2,028.6 )%
Benefit for income taxes
    (1,016 )     (2.4 )%     (39 )     (0.1 )%     (2,505.1 )%
Loss from continuing operations
    (15,630 )     (37.2 )%     (743 )     (1.8 )%     (2,003.6 )%
Income (loss) from discontinued operations(1)
    (2 )     -       228       0.5 %     (100.9 )%
Net loss
  $ (15,632 )     (37.2 )%   $ (515 )     (1.3 )%     (2,935.3 )%
Net loss per diluted share:
                                       
Loss from continuing operations
  $ (1.85 )           $ (0.09 )             (1,955.6 )%
Income from discontinued operations(1)
    -               0.03               -  
Net loss
  $ (1.85 )           $ (0.06 )             (2,983.3 )%


 
(1)  
Net of gain on sales of discontinued businesses (net of income taxes).
 
As the above table indicates, we generated a 3.8% increase in net revenues in fiscal 2008, as compared to fiscal 2007 primarily as a result of increases in revenues from (i) our non-grading service businesses, including increased advertising revenues earned on our coin and sportscards publications and increased revenues from our  CFC financing activities  (“other-related businesses”), and (ii) sales of collectible coins purchased by us under our coin grading warranty policy.  However, despite that increase in net revenues, we incurred an operating loss of $17,768,000 in fiscal 2008, as compared to an operating loss of $2,932,000 in fiscal 2007, due primarily to:
 
§  
Increased operating losses of $13,140,000 incurred by our diamond and colored gemstones operations, including a $1,907,000 increase in losses from on-going operations of those businesses and an impairment loss of approximately $11,233,000 with respect to goodwill and other tangible and intangible assets.  Such impairment losses reflected a fair value determination of these two reporting units at June 30, 2008; and
 
§  
A $3,254,000 decrease in operating income generated by our coin grading business in fiscal 2008, as compared to fiscal 2007, which was due primarily to a decline in trade show revenues of approximately $1,500,000 in fiscal 2008, and higher costs of sales, which included warranty costs of $822,000 recognized in the second quarter of fiscal 2008 as a result of certain significant coin warranty claims.
 
Partially offsetting the operating losses attributable to the operations of our authentication and grading businesses was a net improvement in the operating results of our other related businesses and a lower level of unallocated corporate costs.  These, as well as other factors affecting our operating results in the fiscal 2008 are described in more detail below.
 

 
45

 

Critical Accounting Policies and Estimates
 
General.  In accordance with accounting principles generally accepted in the United States of America (“GAAP”), we record our assets at the lower of cost or fair value.  In determining the fair value of certain of our assets, principally accounts and notes receivable and inventories, we must make judgments, estimates and assumptions regarding circumstances or trends that could affect the value of those assets, such as economic conditions or trends that could impact our ability to fully collect our accounts receivable or realize the value of our inventories in future periods.  Those judgments, estimates, and assumptions are based on current information available to us at that time.  Many of those conditions, trends and circumstances, however, are outside of our control and, if changes were to occur in the events, trends or other circumstances on which our judgments or estimates were based, or other unanticipated events were to happen that might affect our operations, we may be required under GAAP to adjust our earlier estimates.  Changes in such estimates may require that we reduce the carrying value of the affected assets on our balance sheet (which are commonly referred to as “write-downs” of the assets involved).
 
It is our practice to establish reserves or allowances to record such downward adjustments or “write-downs” in the carrying value of assets such as accounts and notes receivable and inventory.  Such write-downs are recorded as charges to income or increases in expense in our statement of operations in the periods when those reserves or allowances are established or increased to take account of changed conditions or events.  As a result, our judgments, estimates and assumptions about future events and changes in the conditions, events or trends upon which those estimates and judgments were made, can and will affect not only the amounts at which we record such assets on our balance sheet, but also our results of operations.
 
The decisions as to the timing of adjustments or write-downs of this nature also require subjective evaluations or assessments about the effects and duration of events or changes in circumstances.  For example, it is difficult to predict whether events or conditions, such as increases in interest rates or economic slowdowns, will have short or longer term consequences for our business, and it is not uncommon for it to take some time after the occurrence of an event or the onset of changes in economic circumstances for the full effects of such events or changes to be recognized.  Therefore, management makes such estimates based upon the information available at that time and reevaluates and adjusts its reserves and allowances for potential write-downs on a quarterly basis.
 
During fiscal year 2006 and in the first quarter of fiscal year 2007, we acquired certain businesses and, in accordance with GAAP, we accounted for those acquisitions using the purchase method of accounting.  That accounting method required us to allocate 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 was determined, from any such impairment analysis, that the estimated fair value of any such assets had declined below their carrying value, we would be required to recognize an impairment charge that would have the effect of reducing our income in the period when that charge was recognized.
 
In making our estimates and assumptions, we follow GAAP in order to enable us to make fair and consistent estimates of the fair value of assets and to establish adequate reserves or allowances for possible write-downs in the carrying values of our assets.
 
Set forth below is a summary of the accounting policies and critical estimates that we believe are material to an understanding of our financial condition and results of operations.
 
Revenue Recognition Policies.  We generally record revenue at the time of shipment of the authenticated and graded collectible or high-value assets to the customer.  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 collectible items to us for authentication and grading.  We record those prepayments as deferred revenue until their graded collectibles are shipped back to them and our revenue generating activities are complete.  At that time, we record the revenues from the authentication and grading services we have performed for the customer and deduct this amount from deferred revenue.  For certain dealers to whom we extend open account privileges, we record revenue at the time of shipment of the authenticated and graded collectible to the dealer as there is no uncertainty surrounding the collection of receivables from these customers.
 
 
46

 
 
With respect to our Expos trade show business, we recognize revenue generated by the promotion, management and operation of collectibles conventions and trade shows in the periods in which the shows take place, which corresponds with the revenue generating activities being complete.
 
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 product sales when items are shipped and all the requirements of Staff Accounting Bulletin No. 104, Revenue Recognition, issued by the Securities and Exchange Commission (“SEC”), have been satisfied.  Product revenues sold consist primarily of collectible coins that we purchased pursuant to our coin authentication and grading warranty program and are not considered an integral part of the Company’s on-going revenue generating activities.
 
Accounts Receivable, Notes Receivable and the Allowance for Doubtful Accounts.  In the normal course of our authentication and grading business, we extend payment terms to many of the larger, more creditworthy dealers or distributors who submit collectibles or diamonds or colored gemstones to us for authentication and grading on a recurring basis.  In addition, primarily in connection with our coin dealer financing programs, we make advances or extend credit under notes receivable arrangements.  We regularly review our accounts and notes receivable, estimate the amount of, and establish an allowance for, uncollectible amounts in each quarterly period.  The amount of that allowance is based on several factors, including the age and extent of significant past due amounts, and in the case of notes receivable, the current value of the collateral we hold as security for the payment obligations under the notes receivable, and known conditions or trends that may affect the ability of account debtors or note obligors to pay their accounts or notes receivable balances.  Each quarter we review estimates of uncollectible amounts and such economic or other conditions or trends in order to enable us to determine whether or not to adjust the amount of the allowance.  For example, if the financial condition of certain dealers or economic conditions were to deteriorate, adversely affecting their ability to make payments on their accounts or notes, increases in the allowance may be required.  Since the allowance is created by recording a charge against income that is reflected in general and administrative expenses, an increase in the allowance will cause a decline in our operating results in the period when the increase is recorded.
 
Inventory Valuation Reserve.  Our collectibles inventories are valued at the lower of cost or fair value and have been reduced by an inventory valuation allowance to provide for potential declines in the value of those inventories.  The amount of the allowance is determined and is periodically adjusted on the basis of market knowledge, historical experience and estimates concerning future economic conditions or trends that may impact the sale value of the collectibles inventories.  Additionally, due to the relative uniqueness of some of the collectibles included in our collectibles inventory, valuation of such collectibles often involves judgments that are more subjective than those that are required when determining the market values of more standardized products due to volatility in the price of precious metal, the condition of the collectible and any specific features of the individual collectible.  We review the market values of the collectible on a quarterly basis.  Ultimately, we recognize a profit or loss on the actual sale of the collectible relative to its most recent inventory carrying value.  Our estimates of market values have proven to be reasonably accurate in the past.

 
47

 

If there were to be an economic downturn or there were to occur other events or circumstances that are likely to make it more difficult to sell, or that would lead us to reduce the sales prices of, those collectibles, it may become necessary to increase the reserve.  Increases in this reserve will cause a decline in operating results, because such increases are recorded by charges against income.
 
Grading Warranty Costs.  We offer a limited warranty covering the coins, sportscards, stamps and currency that we authenticate and grade.  Under the warranty, if any such collectible that was previously authenticated and graded by us is later submitted to us for re-grading and either (i) receives a lower grade upon resubmittal or (ii) is determined not to have been authentic, we will offer to purchase the collectible or, at our option, pay the difference in value of the item at its original grade as compared with its lower grade.  However this warranty is voided if the collectible, upon resubmittal to us, is not in the same tamper-resistant holder in which it was placed at the time we last graded the item.  If we purchase an item under a warranty claim we recognize, as a reduction in our warranty reserve, the difference in value of the item at its original grade and its re-graded estimated value.  We include the purchased item in our inventory at the re-graded estimated value of the item.  We offer a similar limited warranty of two years’ duration on the diamonds we grade.  We accrue for estimated warranty costs based on historical trends and related experience.  Through September 30, 2007, our warranty reserves had proved to be adequate.  However, certain warranty claims were received by us in the second quarter and early in third quarter of fiscal 2008 that were significant in relation to our historical claims experience and, as a result, we recognized, in the second quarter of 2008, an additional expense of $822,000 for those claims.  We also decided to increase our warranty accrual rate, effective January 1, 2008, to reflect this higher warranty claims experience, and we 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.
 
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.  Based on such reviews, we determined that impairment losses occurred in fiscal year 2008 in the amounts of approximately $176,000 for property and equipment, $1,860,000 for intangible assets other than goodwill, and $133,000 for other assets in relation to our jewelry businesses. During fiscal year 2007, we recorded impairment losses of $25,000 for equipment, and $16,000 for intangible assets in relation to our jewelry businesses and $14,000 in equipment unrelated to our jewelry businesses. Because the Company has incurred significant operating losses in its jewelry reporting units since the acquisitions of these businesses and has recognized impairment losses at June 30, 2008, management intends to closely monitor the performance and future prospects of these units for further impairment.   Due to the early stage of the jewelry businesses, significant risk and uncertainty exists around estimating the level and timing of future revenues of these businesses.  Such estimates of revenue will significantly impact the expected level of future cash flows from those businesses, which is used in determining whether the fair value of those businesses are less than the carrying amount of the assets of those businesses.  It is possible that the Company may need to record additional impairment losses as a result of testing these or other units for impairment during the annual impairment tests or on an interim basis if a triggering event occurs.

Goodwill. We test the carrying value of goodwill and other indefinite-lived intangible assets on a formal basis at least annually on their respective acquisition anniversary dates, or more frequently if indicators of impairment are determined to exist. We apply a discounted cash flow model or an income approach to determining a fair value that is used to estimate the fair value of the reporting unit on a total basis, which is then compared to the carrying value of the reporting unit.  If the fair value of the reporting unit exceeds the carrying value of the reporting unit, no impairment of goodwill exists as of the measurement date. If the fair value is less than the carrying value, then there is the possibility of goodwill impairment and further testing and remeasurement of goodwill is required. In accordance with GAAP, we consider the diamond and colored gemstone grading businesses as separate reporting units for the purpose of testing separately for the impairment of goodwill.  As a result of the occurrence of losses in prior fiscal periods in our jewelry reporting units and the uncertainty of the timing of future revenues and related cash flows, we concluded during the fourth quarter of 2008 that such indicators of impairment did exist in our diamond and colored gemstone grading reporting units at June 30, 2008, which resulted in impairment losses related to goodwill recorded on the Consolidated Statements of Operations for the fiscal year ended June 30, 2008 in the amounts of approximately $7,267,000 for the diamond grading reporting unit and approximately $1,797,000 for the colored gemstone reporting unit.  Because the Company has incurred significant operating losses in its jewelry reporting units since the acquisitions of these businesses and has recognized impairment losses at June 30, 2008, management intends to closely monitor the performance and future prospects of these units for further impairment.   Due to the early stage of the jewelry businesses, significant risk and uncertainty exists around estimating the level and timing of future revenues of these businesses.  Such estimates of revenue will significantly impact the expected level of future cash flows from those businesses, which is used in determining whether the fair value of those businesses are less than the carrying amount of the assets of those businesses.  It is possible that the Company may need to record additional impairment losses as a result of testing these or other units for impairment during the annual impairment tests or on an interim basis if a triggering event occurs.
 
 
48


Stock-Based Compensation.  We recognize share-based compensation expense based on the fair value recognition provision of SFAS No. 123(R), Share-Based Payment, using the Black-Scholes option valuation method.  Under that method, assumptions are made with respect to the expected lives of the options or other stock awards granted, the expected volatility of the Company’s stock, dividend yield percentage and the risk-free interest rate at the date of grant.  In addition, under SFAS No. 123(R), we recognize and report share-based compensation expense net of an estimated forfeiture rate that we expect will occur over the vesting period of the stock awards, which we estimate on the basis of historical forfeiture experience or other factors that could affect the likelihood of forfeiture.  Due to the smaller number of stock awards granted to fewer employees since the Company adopted SFAS No. 123R, and the cumulative nature of any adjustment arising from a change in the forfeiture rate, we monitor the forfeiture rate very closely, to ensure that all stock awards that vest are fully expensed at the time the vesting occurs.  Once we determine the compensation expense of a stock award, that expense is recognized in our  consolidated statements of operations over its vesting period using the straight-line attribution method.  During fiscal 2007 and 2008, we issued restricted shares to outside members of the Board of Directors and to our CEO and, accordingly, we recognize stock-based compensation over the vesting period of such restricted shares, based upon the closing stock prices of the shares on their respective dates of the grant, net of an estimated forfeiture rate.
 
Capitalized Software.  In fiscal years 2008, 2007 and 2006, we capitalized approximately $1,436,000, $1,483,000 and $421,000, respectively, of software development costs related to a number of in-house software development projects, in accordance with Statement of Position (“SOP”) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.  SOP 98-1 requires that certain costs incurred, either from internal or external sources, be capitalized as part of intangible assets and amortized on a straight-line basis over the useful life of the software, which be believe is conservatively estimated at three years.  Planning, training, support and maintenance costs incurred either prior to or following the implementation phase are recognized as expense in the period in which they are incurred.  During the fiscal years ended June 30, 2008, 2007 and 2006, we recorded approximately $591,000, $193,000 and $11,000, respectively, as amortization expense related to such capitalized software projects.  We evaluate the carrying values of capitalized software to determine if the carrying values are impaired, and, if necessary, an impairment charge is recorded in the period in which an impairment occurs.

Income Taxes and Deferred Tax Assets.  We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes and FASB Interpretation 48, Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109 (“FIN48”).  SFAS No. 109 requires the recording of deferred tax assets and liabilities for the future consequences of events that have been recognized in the Company’s financial statements or tax returns.  Measurement of the deferred items is based on enacted tax laws.  In the event the future consequences of differences between financial reporting bases and tax bases of the Company’s assets or liabilities result in a deferred tax asset, SFAS No. 109 requires that we evaluate the probability of realizing the future benefits comprising that asset and we review the nature, the expected timing of the realization of these assets and the expiration dates for net operating losses or credits, when determining the likelihood of realization.  The company has gross deferred tax assets of $5,967,000 at June 30, 2008.  The deferred tax assets include tax deductions that will arise in future years for the impairment losses recognized at June 30, 2008.  Also included in the deferred tax assets at June 30, 2008 are $2,275,000 of net operating losses which expire no later than 2027 and $908,000 of California Enterprise Zone Credits, which can be carried forward indefinitely.  Realization of such deferred tax assets is dependent on generating sufficient taxable income in future periods.  Utilization of the net operating losses requires the Company to generate sufficient taxable income before their expiration.  The California Enterprise Zone Credits will only be utilized if taxable income is generated in the Enterprise Zone.  Due to the length of time and the extent of the taxable income required to fully realize the deferred tax assets related to the impairment loss and the California Enterprise Zone Credits, the Company recorded a valuation allowance of $4,550,000 against such assets at June 30, 2008.  The remaining net deferred tax asset of $1,395,000 has been determined by management to be more likely than not realizable at June 30, 2008 based upon projections of future taxable income.
 
 
49

 
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 adjust 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 accumulated deficit, an increase to income taxes payable of $279,000 and a decrease in deferred tax liabilities of $109,000.  Interest and penalties totaled $101,000 as of July 1, 2007, the date of the adoption of FIN 48, and were accounted for as part of the total adjustment to accumulated deficit of $170,000.  During fiscal year 2008, which followed the adoption of FIN 48, we recorded approximately $13,000 in interest and penalties as components of income tax expense.
 
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,
 
   
2008
   
2007
   
2006
 
Net revenues
    100.0 %     100.0 %     100.0 %
Cost of revenues
    56.6 %     47.7 %     40.3 %
Gross profit
    43.4 %     52.3 %     59.7 %
Operating expenses:
                       
Selling and marketing expenses
    19.2 %     18.5 %     13.4 %
General & administrative expenses
    36.9 %     38.5 %     35.4 %
Impairment losses
    26.8 %     0.2 %     -  
Amortization of intangible assets
    2.8 %     2.3 %     0.7 %
Total operating expenses
    85.7 %     59.5 %     49.5 %
Operating income (loss)
    (42.3 )%     (7.2 )%     10.2 %
Interest income, net
    2.7 %     5.3 %     6.4 %
Income (loss) before provision for income taxes
    (39.6 )%     (1.9 )%     16.6 %
Provision (benefit) for income taxes
    (2.4 )%     (0.1 )%     7.4 %
Income (loss) from continuing operations
    (37.2 )%     (1.8 )%     9.2 %
Income from discontinued operations, net of gain on sales of
discontinued businesses (net of income taxes)
    -       0.5 %     0.8 %
Net income (loss)
    (37.2 )%     (1.3 )%     10.0 %
 
Net Revenues.  Net revenues consist primarily of fees that we generate from the authentication and grading of high-value collectibles, including coins, sportscards, autographs, stamps and currency, and high-value assets consisting of diamonds and colored gemstones.  To a lesser extent, we generate collectibles related service revenues (referred to as “other related revenues”) from sales of collectibles club memberships and advertising on our websites and in printed publications and collectibles price guides; subscription-based revenues primarily related to our CCE dealer-to-dealer Internet bid-ask market for coins authenticated and graded by us; and fees earned from promoting, managing and operating collectibles conventions.  Net revenues also include, to a significantly lesser extent, revenues from the sales of products, consisting primarily of coins that we purchase under our warranty policy.  Revenues from product sales are not considered an integral part of our on-going revenue generating activities.  In the year ended June 30, 2006, such sales accounted for less than $50,000 of our net revenues.  However, product sales generated revenues of $1,061,000, or 2.5%, and $289,000, or 0.7%, of our total net revenues in fiscal 2008 and 2007, respectively.
 

 
50

 

 
The following tables set forth our total net revenues for the fiscal years ended June 30, 2008, 2007 and 2006, broken out between grading and authentication services and other related products and services, respectively:
 
               
2008 vs. 2007
 
   
2008
   
2007
   
Increase (Decrease)
 
   
Amount
   
% of Net
Revenues
   
Amount
   
% of Net
Revenues
   
Amount
   
% of Net
Revenues
 
   
(Dollars in thousands)
 
Grading and authentication fees
  $ 33,897       80.7 %   $ 34,003       84.1 %   $ (106 )     (0.3 )%
Other related products and services
    8,087       19.3 %     6,449       15.9 %     1,638       25.4 %
Total net revenues
  $ 41,984       100.0