Collectors Universe Inc.
Annual Report 2002

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COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 ------------------------------------------------------------------------ (cid:13) (cid:13) UNITED STATES (cid:13) SECURITIES AND EXCHANGE COMMISSION (cid:13) Washington, D.C. 20549 (cid:13) (cid:13) ------------- (cid:13) (cid:13) FORM 10-K (cid:13) (cid:13) ------------- (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (Mark One) (cid:13) x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE (cid:13) SECURITIES EXCHANGE ACT OF 1934 (cid:13) For the fiscal year ended June 30, 2002 (cid:13) OR (cid:13) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE (cid:13) SECURITIES EXCHANGE ACT OF 1934 {NO FEE REQUIRED} (cid:13) For the transition period from to (cid:13) (cid:13) (cid:13) (cid:13) ------------- (cid:13) (cid:13) Commission file number 0-27887 (cid:13) (cid:13) ------------- (cid:13) (cid:13) COLLECTORS UNIVERSE, INC. (cid:13) (Exact name of Registrant as specified in its charter) (cid:13) (cid:13) ------------- (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) Delaware 33-0846191 (cid:13) (State or other jurisdiction of (I.R.S. Employer Identification No.) (cid:13) Incorporation or organization) (cid:13) 1921 E. Alton Avenue, Santa Ana, 92705 (cid:13) California (cid:13) (Address of principal executive (Zip Code (cid:13) offices) (cid:13) (cid:13) (cid:13) (cid:13) (949) 567-1375 (cid:13) (Registrant's telephone number, including area code) (cid:13) (cid:13) Securities registered pursuant to Section 12(b) of the Act: None (cid:13) (cid:13) Securities registered pursuant to Section 12(g) of the Act: Common Stock, (cid:13) par value $.001 per share (cid:13) (cid:13) Indicate, by check mark, whether the Registrant (1) has filed all reports (cid:13) required to be filed by Section 13 or 15(d) of the Securities Exchange Act (cid:13) of 1934 during the preceding 12 months (or for such shorter period that the (cid:13) Registrant was required to file such reports); and (2) has been subject to (cid:13) such filing requirements for the past 90 days. YES x NO (cid:13) (cid:13) This document is compiled by Thomson Financial 1 (cid:13) (cid:13) COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 Indicate, by check mark, if disclosure of delinquent filers pursuant to (cid:13) Item 405 of Regulation S-K is not contained herein, and will not be (cid:13) contained, to the best of Registrant's knowledge, in definitive proxy or (cid:13) information statements incorporated by reference in Part III of this Form (cid:13) 10-K or any amendment to this Form 10-K. (cid:13) (cid:13) As of September 23, 2002, the aggregate market value of the Common Stock (cid:13) held by non-affiliates was approximately $11,857,906. (cid:13) (cid:13) As of September 23, 2002, a total of 25,012,486 shares of Registrant's (cid:13) Common Stock were outstanding. (cid:13) (cid:13) DOCUMENTS INCORPORATED BY REFERENCE (cid:13) (cid:13) Items 10, 11, 12, and 13 of Part III of the Form 10-K are incorporated by (cid:13) reference from Registrant's Definitive Proxy Statement for its Annual (cid:13) Meeting which is expected to be filed with the Securities and Exchange (cid:13) Commission on or before October 28, 2002. (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) COLLECTORS UNIVERSE, INC. (cid:13) (cid:13) FORM 10-K (cid:13) (cid:13) FOR THE FISCAL YEAR ENDED JUNE 30, 2002 (cid:13) (cid:13) INDEX (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) Page (cid:13) PART I ---------------- (cid:13) Item 1. Business 1 (cid:13) Item 2. Properties 12 (cid:13) Item 3. Legal Proceedings 12 (cid:13) Submission of Matters to a Vote (cid:13) Item 4. of Security Holders 12 (cid:13) Executive Officers of (cid:13) Registrant 12 (cid:13) PART II (cid:13) Market for Common Stock and (cid:13) Item 5. Related Stockholder Matters 13 (cid:13) Selected Consolidated Financial (cid:13) Item 6. Data 14 (cid:13) Management's Discussion and (cid:13) Analysis of Financial Condition (cid:13) Item 7. and Results of Operations 15 (cid:13) Quantitative and Qualitative (cid:13) Item 7A. Disclosures About Market Risk 24 (cid:13) Financial Statements and (cid:13) Item 8. Supplementary Data 26 (cid:13) Changes in and Disagreements (cid:13) with Accountants on Accounting (cid:13) Item 9. and Financial Disclosure 46 (cid:13) PART III (cid:13) Directors and Executive (cid:13) Item 10. Officers 46 (cid:13) Item 11. Executive Compensation 46 (cid:13) Security Ownership of Certain (cid:13) Beneficial Owners and (cid:13) Item 12. Management 46 (cid:13) Certain Relationships and (cid:13) Item 13. Related Transactions 46 (cid:13) This document is compiled by Thomson Financial 2 COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 Item 14. Controls and Procedures 46 (cid:13) PART IV (cid:13) Exhibits, Financial Statement (cid:13) Schedules, and Reports on Form (cid:13) Item 15. 8-K 47 (cid:13) SIGNATURES S-1 (cid:13) CERTIFICATION OF CHIEF EXECUTIVE OFFICER UNDER SECTION (cid:13) 302 OF SARBANES-OXLEY ACT S-2 (cid:13) CERTIFICATION OF CHIEF FINANCIAL OFFICER UNDER SECTION (cid:13) 302 OF SARBANES-OXLEY ACT S-3 (cid:13) INDEX TO EXHIBITS E-1 (cid:13) (cid:13) (cid:13) ii (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) (cid:13) FORWARD-LOOKING STATEMENTS (cid:13) (cid:13) This Report, including "Management's Discussion and Analysis of Financial (cid:13) Condition and Results of Operations" contains "forward-looking statements" (cid:13) as defined in the Private Securities Litigation Reform Act of 1995. (cid:13) Forward-looking statements are estimates of, or statements about our (cid:13) expectations or beliefs regarding, our future financial performance and (cid:13) operating trends that are based on current information and that are subject (cid:13) to a number of risks and uncertainties that could cause our actual (cid:13) operating results in the future to differ significantly from those expected (cid:13) at the current time, including the risks and uncertainties described in (cid:13) Part I of this Report under the caption "Item I--Description of (cid:13) Business--Certain Factors That Could Affect Our Future Performance" and in (cid:13) "Management's Discussion and Analysis of Financial Condition and Results of (cid:13) Operations" above. (cid:13) (cid:13) Due to these and other possible uncertainties and risks, readers are (cid:13) cautioned not to place undue reliance on the forward-looking statements (cid:13) contained in this Report, which speak only as of the date of this Report, (cid:13) or to make predictions based solely on historical financial performance. We (cid:13) also disclaim any obligation to update forward-looking statements contained (cid:13) in this Report. (cid:13) (cid:13) iii (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) (cid:13) PART I (cid:13) (cid:13) Item 1. BUSINESS (cid:13) (cid:13) Collectors Universe--Overview (cid:13) (cid:13) Collectors Universe is a leading provider of value-added services to (cid:13) dealers and collectors of high-end collectible coins, sportscards, (cid:13) currency, stamps, sports and entertainment memorabilia, autographs and (cid:13) other collectibles. Our reputation and the breadth of our value-added (cid:13) services facilitate commerce in collectibles by providing collectors and (cid:13) dealers with the confidence to buy and sell high-end collectibles, sight (cid:13) unseen, at Internet and telephonic auctions that we, and others, conduct (cid:13) and by making the collecting experience more exciting and memorable. (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) . Service. We authenticate the genuineness of collectible coins, (cid:13) sportscards, autographs and stamps, and we grade the quality of (cid:13) collectible coins, sportscards and stamps in accordance with (cid:13) This document is compiled by Thomson Financial 3 (cid:13) COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 consistently applied uniform standards so that buyers can have the (cid:13) assurance that the collectibles they are purchasing are genuine and (cid:13) are of the quality represented by the sellers. (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) . Content. We compile and publish authoritative information about (cid:13) the rarity, quality and trading history of high-end collectibles (cid:13) that make collectors and dealers more informed purchasers and (cid:13) sellers and which adds to the excitement of the collecting (cid:13) experience. (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) . Commerce. We conduct premium multi-venue auctions at which (cid:13) dealers and collectors are able, in person, by mail, via the (cid:13) telephone and on the Internet, to buy and sell rare or valuable (cid:13) collectibles (which we sometimes refer to as "high-end (cid:13) collectibles"). We also operate an online collectibles marketplace, (cid:13) at www.collectors.com., where collectors and dealers can buy (cid:13) high-end collectibles and where they can access the information we (cid:13) publish before making their purchase and sale decisions. We also (cid:13) operate co-branded websites with e-Bay and Yahoo, that facilitate (cid:13) the purchase and sale of collectibles at their online auction sites (cid:13) by enabling buyers and sellers of collectibles visiting their (cid:13) auction sites to access our authentication and grading services and (cid:13) our collectibles content. (cid:13) (cid:13) (cid:13) (cid:13) We generate revenues from fees paid for authentication and grading services (cid:13) provided to our customers, typically ranging from $6 to $70 per item. We (cid:13) also generate revenues from commissions paid by both buyers and sellers (cid:13) when we sell collectibles that have been consigned to us for auctioning (cid:13) ("consigned collectibles"), the total of which generally ranges from 10% to (cid:13) 25% of the sales prices of the collectibles, and from the sales of (cid:13) collectibles that we purchase for resale at our auctions or through retail (cid:13) sales ("purchased collectibles" or "owned collectibles"). When we sell (cid:13) owned collectibles in one of our auctions, we receive a buyer's fee at the (cid:13) same rate as charged for consigned collectibles sold in our auctions. (cid:13) (cid:13) We have developed some of the leading brand names in our collectibles (cid:13) market: (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) . "PCGS" ("Professional Coin Grading Service"), which is the leading (cid:13) coin grading and authentication service in the United States; (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) . "PSA" ("Professional Sports Authenticators"), which is the leading (cid:13) This document is compiled by Thomson Financial 4 (cid:13) (cid:13) (cid:13) (cid:13) COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 sportscard grading and authentication service in the United States; (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) . "Bowers and Merena," which is a leading auctioneer of rare and (cid:13) collectible coins in the United States; and (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) . "Lyn Knight Currency Auctions," which is a leading auctioneer of (cid:13) rare and collectible currencies. (cid:13) (cid:13) (cid:13) (cid:13) The High-End Collectibles Market Opportunity (cid:13) (cid:13) We believe that, over time, the high-end collectibles market will continue (cid:13) to grow as a result of increased nostalgia for memorabilia, an increase in (cid:13) leisure and disposable income, the desirability of (cid:13) (cid:13) 1 (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) owning collectibles and investor confidence that collectibles will (cid:13) appreciate in value. We also believe that the convenience and efficiency of (cid:13) the Internet will stimulate further growth in the high-end collectibles (cid:13) market. It is also our view that this growth is dependent upon the (cid:13) availability of reliable authentication and grading services, authoritative (cid:13) information necessary to value collectibles and trading forums or venues (cid:13) that enable buyers and sellers of collectibles to maximize the value of (cid:13) their collectibles. As a provider of these services to the collectibles (cid:13) markets, we have the opportunity to benefit directly from such growth in (cid:13) terms of increased demand for our services. (cid:13) (cid:13) Industry Background (cid:13) (cid:13) Development of Collectibles Markets. (cid:13) (cid:13) Collectible Coin Grading and Authentication. The sight-unseen market for (cid:13) high-end coins was practically non-existent prior to the development of (cid:13) consistently applied uniform quality grading standards. Previously, buyers (cid:13) needed to actually see a coin before purchase to determine whether its (cid:13) quality justified the asking price. Even when buyers could view coins (cid:13) before purchase, they often lacked the knowledge to determine, with (cid:13) confidence, the authenticity or quality of a coin. As a result, a system (cid:13) for grading coins developed among dealers by which they used either (cid:13) descriptive terms, such as "uncirculated," "brilliant uncirculated" and (cid:13) "gem brilliant uncirculated," or a numerical scale ranging from 1 to 70, (cid:13) with higher numbers denoting a higher quality. However, whether using a (cid:13) descriptive or numeric system, grading varied significantly from dealer to (cid:13) dealer, depending on a dealer's subjective criteria. Moreover, dealers were (cid:13) hardly disinterested or independent, since as the buyers or sellers of the (cid:13) coins they were grading, they stood to benefit financially from the (cid:13) assignment of a particular grade. As a result, grading standards were often (cid:13) inconsistently applied, and many collectors were vulnerable to fraudulent (cid:13) practices. These conditions severely limited the growth of the rare coin (cid:13) market and created a barrier to the participation of new collectors who (cid:13) This document is compiled by Thomson Financial 5 (cid:13) (cid:13) (cid:13) COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 lacked the expertise necessary to buy and sell with confidence. (cid:13) (cid:13) In response to these conditions, in 1986 we launched Professional Coin (cid:13) Grading Service (PCGS), which instituted the practice of employing expert (cid:13) graders who were independent of the buyers and sellers of coins, thereby (cid:13) providing impartiality in the grading process. We established consistent (cid:13) standards of quality measured against an actual "benchmark" or "reference" (cid:13) set of coins kept at our office, and we provided a warranty as to the (cid:13) accuracy of our authentication and grading. We placed each graded coin in a (cid:13) tamper-evident holder, so that any prospective buyer would know that it was (cid:13) a PCGS authenticated and graded coin. (cid:13) (cid:13) As a result, dealers were able to trade PCGS graded coins sight-unseen and (cid:13) an electronic teletype network called the "Certified Coin Exchange" (cid:13) developed and was used by dealers to buy and sell rare coins electronically (cid:13) before the Internet became viable. In addition, we began to provide a range (cid:13) of authoritative content on coin collecting to inform and communicate with (cid:13) the collector community, including guides that tracked the price and rarity (cid:13) of PCGS graded coins. (cid:13) (cid:13) Sportscard Grading and Authentication. In the sportscard collectibles (cid:13) markets, misrepresentations of authenticity and quality were also a barrier (cid:13) to market growth. Using the skills and credibility we established with PCGS (cid:13) in the coin market, in 1991 we launched Professional Sports Authenticator (cid:13) (PSA), which instituted a similar authentication and grading system for (cid:13) sportscards. Our authentication and grading services have improved the (cid:13) marketability of sportscards by removing the barriers created by (cid:13) misrepresentations of authenticity or quality and also facilitating sales (cid:13) and trading of sportscards over the internet and at remotely held sports (cid:13) memorabilia auctions. The sportscards submitted to us for grading include (cid:13) primarily older or vintage sportscards, particularly of memorable or (cid:13) historically famous or notable players, such as Joe DiMaggio, Ted Williams, (cid:13) Mickey Mantle, Honus Wagner and modern or newly produced sportscards of (cid:13) current or new athletes who are or have become popular with sports fans or (cid:13) have achieved new records or milestones. These sportscards have or are (cid:13) perceived to have sufficient collectible value to justify grading and are (cid:13) sold more frequently than are sportscards of less notable athletes, leading (cid:13) dealers and collectors to submit them for grading to enhance their (cid:13) marketability. Additionally, the production and sale each new sports season (cid:13) of new series of sportscards creates new collectibles that have been a (cid:13) source of additional grading submissions to us. (cid:13) (cid:13) 2 (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) (cid:13) Stamp Grading. Based upon our success in establishing grading for coins (cid:13) and sportscards, in January 2000 we launched grading of U.S. stamps through (cid:13) Professional Stamp Experts (PSE). Stamp authentication and grading is in (cid:13) its infancy and, based on our experience in launching coin grading and (cid:13) sports card grading, we expect to meet resistance to this concept in the (cid:13) stamp collectibles market, which is heaped in tradition. We believe, (cid:13) however, that the grading of stamps can gain, albeit gradually, a degree of (cid:13) market acceptance as grading has for coins and sportscards. (cid:13) (cid:13) Authentication of Sports and Historical Memorabilia. Forgeries and (cid:13) misrepresentation of authenticity also have hindered development and growth (cid:13) of the market for autographed memorabilia. Operation Bullpen conducted by (cid:13) the FBI and other law enforcement agencies a few years ago uncovered (cid:13) widespread misrepresentations as to the genuineness of sports memorabilia. (cid:13) Beginning in 2001, we launched our James Spence Autographs division, (cid:13) offering authentication services for sports autographs and memorabilia. (cid:13) This division is headed by James Spence who has developed an expertise and (cid:13) is recognized as a leader in authenticating autographs, especially of (cid:13) sports heroes. We believe the demand for our vintage authentication (cid:13) services will grow as collectors increasingly rely on independent third (cid:13) This document is compiled by Thomson Financial 6 COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 parties for determining the genuineness of sports and entertainment (cid:13) collectibles. We offer another authentication service, PSA/DNA, that (cid:13) certifies autographed sports collectibles at the time of signing or when (cid:13) used during a sporting event. This service uses a proprietary (cid:13) authentication system that incorporates a holographic, tamper-evident label (cid:13) in conjunction with a special marking ink that is essentially (cid:13) non-recreatable. (cid:13) (cid:13) Collectible Commerce. (cid:13) (cid:13) We conduct premium auctions of high-end collectible coins, currency, (cid:13) sportscards and sports, entertainment and historical memorabilia. Our (cid:13) premium auctions utilize a "multi-venue" auction format that allows buyers (cid:13) and sellers to select the bidding format that is the most convenient and (cid:13) comfortable for them. These auction formats include various combinations of (cid:13) mail-in-bids, telephone, Internet and live bidding. Our premium auction (cid:13) companies include Bowers and Merena Galleries and Kingswood Coin Auctions (cid:13) for rare coins, Lyn Knight Currency Auctions for U.S. Currency, Superior (cid:13) Sportscard Auctions for vintage sportscards and sports memorabilia, and (cid:13) Odyssey for entertainment and historical memorabilia. Several of our (cid:13) auction companies are prominent within their respective collectibles (cid:13) market. (cid:13) (cid:13) In 1999, Bowers and Merena auctioned the 1804 Childs Silver Dollar for (cid:13) $4,100,000, the second highest price at which a U.S. Coin has been sold at (cid:13) auction. Lyn Knight Currency Auctions holds the record for the highest (cid:13) gross auction sales at any single auction of U.S. currency at $6,500,000. (cid:13) (cid:13) In conjunction with our auction commerce, we also sell high-end collectible (cid:13) coins and autographs through direct retail sales, catalogs and via the (cid:13) Internet on our website at www.collectors.com. These "e-Shops" continue to (cid:13) become a more important component of our direct retail sales activities in (cid:13) the future. (cid:13) (cid:13) We also participate in e-commerce through co-branded websites with e-Bay (cid:13) and Yahoo. These co-branded websites offer our authentication and grading (cid:13) services to their users and also direct them to our website for price (cid:13) guides on certain collectibles, rarity reports, verification of previously (cid:13) authenticated collectibles and other commerce opportunities. (cid:13) (cid:13) Content and Publications. (cid:13) (cid:13) We publish authoritative price guides, rarity reports and other collectible (cid:13) information. In July 2000, we acquired Odyssey Publications. Odyssey (cid:13) publishes the nationally distributed Autograph Collectors Magazine and is (cid:13) considered to be a leading authority within the entertainment and (cid:13) historical autograph market. We also publish the monthly Sports Market (cid:13) Report for primary distribution to our 6,000 PSA Collectors Club members. (cid:13) In April 2001, Odyssey commenced distribution of the Sports Market Report (cid:13) as a national magazine to numerous outlets, including Borders, Barnes & (cid:13) Noble, and to convenience stores, specialty outlets and grocery stores. We (cid:13) believe our price guides, rarity information and (cid:13) (cid:13) 3 (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) authentication information has commercial potential, and we are exploring (cid:13) various business opportunities to generate additional revenues from our (cid:13) databases and publications. (cid:13) (cid:13) Our Business Strategy (cid:13) (cid:13) Our objectives are to create an integrated provider of collectible services (cid:13) to the high-end collectibles markets and to increase our share of those (cid:13) markets. To achieve those objectives we intend to: (cid:13) (cid:13) This document is compiled by Thomson Financial 7 COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 Cross-Sell Our Services and Products to Our Established Customer (cid:13) Base. Our experience has shown that collectors of one kind of (cid:13) collectible frequently are interested in other types of collectibles. As a (cid:13) result, we develop and conduct programs designed to cross-sell our services (cid:13) and products to our customer base of dealers and collectors. (cid:13) (cid:13) Penetrate Other Collectibles Markets for Authentication and (cid:13) Grading. There are other high-end collectibles markets in which growth (cid:13) has been hampered due to the absence of independent authentication and (cid:13) grading services. As a result, one of our strategies is to use our (cid:13) reputation and expertise in coins and sportscards to penetrate new markets. (cid:13) During fiscal 2000, we launched the grading of rare and collectible stamps (cid:13) and the authentication of autographs and other sports memorabilia. We also (cid:13) believe that authentication and grading services can be extended to serve (cid:13) different tiers of presently served markets. (cid:13) (cid:13) Leverage Brand Names. We have established leading brands within select (cid:13) collectibles markets, including PCGS, PSA, Bowers and Merena, Lyn Knight (cid:13) Currency Auctions, Superior Sportscard Auctions, and PSA/DNA. We intend to (cid:13) use the reputations of these brands to promote Collectors Universe as the (cid:13) premier factor in the high-end collectibles industry. Our new stamp (cid:13) authentication and grading service, PSE, is leveraging the reputation of (cid:13) our other grading services to gain credibility within the stamp (cid:13) collectibles market. (cid:13) (cid:13) Acquire Complementary Businesses. The collectibles markets are (cid:13) fragmented, and therefore we seek opportunities to acquire complementary (cid:13) businesses to augment our growth and to penetrate new markets to (cid:13) consolidate niches within these markets. (cid:13) (cid:13) Form Strategic Alliances. We have entered into strategic alliances with (cid:13) eBay, Yahoo, Upper Deck, and others to promote the Company's services, and (cid:13) we will continue to seek out other strategic opportunities to expand our (cid:13) business and open new markets. (cid:13) (cid:13) Expand Internationally. We believe the market for authenticated and (cid:13) graded collectibles can be geographically expanded to the PacRim and (cid:13) European markets. During fiscal 2001, we signed an exclusive distribution (cid:13) agreement with a Japanese company to authenticate and grade sportscards (cid:13) published and distributed in Japan. However, the grading of collectibles is (cid:13) in its infancy in many international markets, and we do not know whether it (cid:13) will gain wide spread acceptance. We intend, however over the next several (cid:13) years, to pursue other international opportunities for coins, sportscards, (cid:13) stamps, autographs and memorabilia. (cid:13) (cid:13) Factors That Could Affect Our Future Financial Performance (cid:13) (cid:13) A Decline in the Popularity of High-End Collectibles Could Impact Our (cid:13) Business. The popularity of collectibles may vary over time due to (cid:13) perceived scarcity, subjective value, general consumer trends, changes in (cid:13) the prices of precious metals, interest rates and other general economic (cid:13) conditions. Since our operating results are affected by both the market (cid:13) value of collectibles and the volume of collectibles transactions, a (cid:13) decline in popularity of high-end collectibles would likely cause a (cid:13) decrease in our revenues and our profitability. (cid:13) (cid:13) Declines in General Economic Conditions Could Affect Our Operating (cid:13) Results. The availability of discretionary or disposable income is an (cid:13) important factor in the willingness and ability of individuals to purchase, (cid:13) and the prices that they are willing to pay for, high-end collectibles. (cid:13) Additionally, declines in purchases and sales of collectibles usually also (cid:13) result in declines in utilization of authentication and (cid:13) (cid:13) 4 (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) This document is compiled by Thomson Financial 8 COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 grading services, as such services are most often used by sellers and (cid:13) purchasers of collectibles in conjunction with and to facilitate sale and (cid:13) purchase transactions. As a result, economic uncertainties, downturns and (cid:13) recessions can and do affect our operating results by (i) reducing the (cid:13) commissions we are able to generate on sales of collectibles, (ii) reducing (cid:13) the frequency at which collectors submit their coins, sportscards and other (cid:13) collectibles for authentication and grading, (iii) causing declines in the (cid:13) value of collectibles that we hold in our inventory, (iv) reducing the (cid:13) ability and willingness of customers to pay outstanding accounts (cid:13) receivable. One countervailing factor is that during economic downturns, (cid:13) the value of gold and other precious metals tends to increase, which can (cid:13) lead to increases in the sales prices of collectible coins. (cid:13) (cid:13) Temporary Popularity of Some Collectibles Could Cause Our Revenues to (cid:13) Fluctuate. Temporary consumer popularity or "fads" among collectors may (cid:13) lead to short term or temporary increases in the volume of collectibles (cid:13) that we authenticate and grade and auction or sell. These trends may result (cid:13) in significant period to period fluctuations in our operating results. Any (cid:13) decline in the popularity of the collectibles we authenticate and grade and (cid:13) auction or sell, as a result of changes in consumer trends, could harm our (cid:13) business. In particular, the market for authentication and grading of (cid:13) sportscards is relatively new, and the volume of sportscards we receive has (cid:13) fluctuated significantly in the last two years. There is no guarantee that (cid:13) the level of trading in sportscards will not continue to decline from (cid:13) current levels. (cid:13) (cid:13) There Are Limited Supplies of Collectibles. Our business is (cid:13) substantially dependent upon obtaining collectible coins, sportscards, (cid:13) records and other high-end collectibles for authentication, grading and (cid:13) auction. We depend upon dealers and collectors submitting collectibles for (cid:13) authentication and grading, and there is no guarantee that the current (cid:13) rates of grading and authentication submissions will remain stable or (cid:13) increase. Although there are numerous dealers and collectors from whom we (cid:13) are able to obtain collectibles for our auctions, there are only a limited (cid:13) number of dealers with the capacity to submit high-end collectibles for (cid:13) auction on a regular basis. A change in our relationships with suppliers or (cid:13) dealers could negatively impact our ability to obtain or auction high-end (cid:13) collectibles in the quantities and at the times we desire. This could (cid:13) impair our ability to attract a sufficient number of people interested in (cid:13) high-end collectibles to our auctions, which would lead to reductions in (cid:13) our revenues and a decline in our operating results. See "Inventory and (cid:13) Working Capital" elsewhere in this Item 1. (cid:13) (cid:13) Variability of Our Operating Results. Our operating results are and can (cid:13) be significantly affected by the frequency and size of our high-end (cid:13) collectibles auctions. The timing, frequency and size of those auctions (cid:13) cannot be fixed, because scheduling of those auctions depends on when (cid:13) sufficient consignments of collectibles can be obtained to justify the (cid:13) holding of such auctions. In addition, as a result of revenue recognition (cid:13) policies that apply to auctions, under generally accepted accounting (cid:13) principles auction revenue generated in a particular accounting period may (cid:13) not be recognized until the subsequent accounting period. As a result, our (cid:13) auction revenue, and therefore our operating results, often vary from (cid:13) period to period. See "Item 7--Management's Discussion and Analysis of (cid:13) Financial Condition and Results of Operations" in Part II of this Report. (cid:13) (cid:13) We May Incur Losses on Our Collectibles Inventory. In addition to (cid:13) auctioning collectibles on consignment, we own some of the collectibles (cid:13) sold in our auctions and own almost all of the collectibles that we sell at (cid:13) retail. We purchase these collectibles from dealers and collectors and (cid:13) assume the inventory and price risks of these items until they are sold. If (cid:13) we are unable to resell these purchased collectibles when we want or need (cid:13) to, or at prices sufficient to generate a profit on their resale, or if the (cid:13) market value of our inventory of purchased collectibles declines, our (cid:13) revenues and operating results would decline. See "Inventory and Working (cid:13) Capital" elsewhere in this Item 1. (cid:13) This document is compiled by Thomson Financial 9 COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 (cid:13) Our Investment and Expansion in New Collectibles Markets May Not Generate (cid:13) Adequate Returns. We have expanded into new collectibles markets, (cid:13) offering authentication and grading services in the collectible stamp (cid:13) market and authentication services in the autograph sports memorabilia (cid:13) market for the first time. Those services may not find market acceptance by (cid:13) dealers and collectors in those markets as they have in the coin and (cid:13) sportscard markets. In addition, standards for authenticating and grading (cid:13) stamps and authenticating autographs are not well established, which (cid:13) increases the risks of errors in grading and (cid:13) (cid:13) 5 (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) authentication that could make it difficult to establish the creditability (cid:13) of such services on which the success of those businesses is dependent. As (cid:13) a result, we may not generate acceptable returns, and we could incur losses (cid:13) on our investments in these new businesses. (cid:13) (cid:13) Other Risks Associated With Expansion of Our Business. If appropriate (cid:13) opportunities present themselves, we also intend to acquire businesses, (cid:13) technologies, services or products that we believe will help us to expand (cid:13) our business. The process of integrating an acquired business, technology, (cid:13) service or product may result in operating difficulties and expenditures (cid:13) which we cannot anticipate and may absorb significant management attention (cid:13) that would otherwise be available for further development of our existing (cid:13) business. Moreover, the anticipated benefits of any acquisition may not be (cid:13) realized. Any future acquisitions of other businesses, technologies, (cid:13) services or products might require us to obtain additional equity or debt (cid:13) financing, which might not be available to us on favorable terms or at all, (cid:13) and might be dilutive. (cid:13) (cid:13) We Could Suffer Losses on Authentication and Grading Warranties. We (cid:13) offer a warranty covering the coins and sportscards that we authenticate (cid:13) and grade. Under the terms of our warranty, any coin or sportscard that was (cid:13) originally graded by us and which subsequently receives a lower grade upon (cid:13) resubmittal to us for grading, obligates us either to purchase the coin or (cid:13) sportscard or pay the difference in value of the item at its original grade (cid:13) as compared with its lower grade. We have no insurance coverage for claims (cid:13) made under these warranties and, therefore, we maintain reserves to satisfy (cid:13) such warranty claims based on historical experience, which in the past have (cid:13) proven to be adequate. If warranty claims were to exceed these reserves, we (cid:13) would incur additional charges that would adversely affect our operating (cid:13) results. (cid:13) (cid:13) Increased Competition Could Affect Our Financial Performance. Our (cid:13) auction and retail businesses are highly competitive. We compete directly (cid:13) with other auction companies that specialize in and have an industry (cid:13) reputation for hosting premium collectibles auctions, including Sotheby's, (cid:13) Inc., Christie's, Inc. Mastronet and Heritage Capital Corporation. These (cid:13) competitors each have the ability to attract collectible consignments and (cid:13) buyers to their auctions as a result of their reputation and the quality of (cid:13) the collectibles they are able to obtain through their industry connections (cid:13) and financial resources. In addition, other reputable auction companies (cid:13) that do not presently engage in auctions for coins or sportscards, or other (cid:13) collectibles that are the focus of our business, may decide to enter our (cid:13) markets to compete with us. Some companies have greater name recognition (cid:13) and have greater financial and marketing resources than we do. Our retail (cid:13) sales business is highly competitive with hundreds of competitors, some of (cid:13) whom are larger and enjoy greater name recognition than our company. (cid:13) Additionally, although there are few major competitors in the collectibles (cid:13) authentication and grading markets, competition also is intense in these (cid:13) markets. Increases in competition could adversely affect our pricing and (cid:13) profit margins and our ability to achieve further growth. See "Competition" (cid:13) elsewhere in this Part I. (cid:13) (cid:13) This document is compiled by Thomson Financial 10 COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 The Imposition of Government Regulations Could Increase the Costs of Doing (cid:13) Business. The collectible coin and other high-end collectibles markets (cid:13) are not currently subject to direct federal, state or local regulation, (cid:13) although auctions in general and the sale of particular types of artwork (cid:13) and autographed sports memorabilia are regulated in some states. However, (cid:13) from time to time government authorities discuss additional regulations (cid:13) which could impose restrictions on the collectibles industry, such as (cid:13) regulating collectibles as securities or requiring collectibles dealers to (cid:13) meet registration or reporting requirements, and impose restrictions on the (cid:13) conduct of auction businesses. Adoption of laws or regulations of this (cid:13) nature could increase the complexity and costs of conducting auctions, (cid:13) which might decrease our ability to attract sellers and buyers. (cid:13) (cid:13) Factors that Could Affect our Share Price Performance (cid:13) (cid:13) Possible Delisting of our Shares by NASDAQ. During the quarter ended (cid:13) June 30, 2002, the bid price of our shares declined below $1.00 per share (cid:13) for a period of 30 consecutive trading days, where it has since remained. (cid:13) We have been notified by NASDAQ that our shares may be delisted from (cid:13) trading on the NASDAQ National Stock Market if the bid price does not (cid:13) increase to at least $1.00 per share for 10 consecutive trading days within (cid:13) the succeeding 90 days and we are unable to demonstrate to NASDAQ that our (cid:13) share price will so increase as a result of actions being taken by the (cid:13) Company. Although we believe that anticipated (cid:13) (cid:13) 6 (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) improvements in operating results in the current fiscal year will result in (cid:13) the required improvement in the trading price of our shares, there is no (cid:13) assurance that NASDAQ will not proceed with the delisting. A delisting of (cid:13) our shares from NASDAQ would make it more difficult for our stockholders to (cid:13) sell their shares in the open market and for the Company to attract new (cid:13) investors and to achieve improvements in the price performance of our (cid:13) stock. Accordingly, if necessary to maintain our NASDAQ listing, subject to (cid:13) the approval of our stockholders we are prepared to implement a reverse (cid:13) stock split of our outstanding shares to increase our share price above (cid:13) $1.00. See Item 5 in Part II of this Report. (cid:13) (cid:13) Services and Customers (cid:13) (cid:13) Authentication and Grading of Collectibles. We offer authentication and (cid:13) grading services for coins and sportscards and have recently inaugurated (cid:13) the grading of stamps. Using proprietary grading software developed by us, (cid:13) our teams of trained and experienced authenticators and graders determine (cid:13) the authenticity of an item submitted and then assign a numeric grade to (cid:13) the item based upon its quality. After the item is graded, it is usually (cid:13) encapsulated in a tamper-evident plastic holder. Customers for our (cid:13) authentication and grading services include individual collectors, dealers (cid:13) and, to a limited extent, wholesalers and manufacturers. (cid:13) (cid:13) We also offer authentication services for vintage sports autographs and (cid:13) signed sports memorabilia. After an item of memorabilia is determined to be (cid:13) authentic, it is entered into our database, with a digital picture for (cid:13) future reference, and issued a certificate of authenticity. Customers for (cid:13) our authentication services are primarily individual collectors and (cid:13) dealers. We also offer authentication services for "signed-in-the-presence" (cid:13) autographs and sports memorabilia, in which we use our proprietary PSA/DNA (cid:13) authentication system to affix a holographic label and/or special ink to (cid:13) the item that marks the item as genuine. (cid:13) (cid:13) PCGS Coin Grading Operations. Since our inception in 1986, we have (cid:13) graded more than 7,000,000 coins with a declared insured value of more than (cid:13) $9.0 billion. We authenticate and grade approximately 600,000 coins per (cid:13) year and, depending on the customer's requested turnaround time, we (cid:13) typically charge between $8 and $100 per coin for this service. We have (cid:13) This document is compiled by Thomson Financial 11 COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 graded, either before or after sale, three of the five highest priced U.S. (cid:13) coins ever sold at public auction, including an 1804 silver dollar that was (cid:13) purchased for approximately $4,100,000. We also have been named as the (cid:13) official grading service of the Professional Numismatists Guild, the most (cid:13) prominent non-profit national coin dealer trade organization. (cid:13) (cid:13) Our grading of coins involves a very exacting and standardized process. We (cid:13) receive coins from dealers and collectors and enter them into our (cid:13) proprietary computerized inventory system which tracks the coins at every (cid:13) stage of the grading process. The coins are graded by experts with years of (cid:13) coin grading experience who follow our benchmarked grading standards. Coins (cid:13) enter the grading process without any markings that could identify the (cid:13) owner of the coin ensuring that our graders are completely objective. (cid:13) Graders also examine the coins independently from one another. Based upon (cid:13) the type of coin and the results of the grading process, our proprietary (cid:13) software determines whether additional graders will examine the coin to (cid:13) assign a final grade. The coin is then sonically sealed in our (cid:13) specially-designed holder, which also encases the grade, the description of (cid:13) the coin and the PCGS hologram and brand name. The coin, grade and (cid:13) description are then verified by one or more experts who have the authority (cid:13) to resubmit the coin for further review, if necessary. Only after the (cid:13) grading phase is complete is the coin reunited with its invoice, thus (cid:13) keeping the grading process independent of the identity of the owner and (cid:13) the history of the coin. (cid:13) (cid:13) PSA Sportscard Grading Operations. Our PSA Division first started (cid:13) grading sportscards in 1991 and has graded over 4 million sportscards with (cid:13) a declared value of more than $0.6 billion. We employ authentication and (cid:13) grading procedures and provide warranties of accuracy that are similar to (cid:13) the procedures employed and warranties given in authentication and grading (cid:13) of coins. In addition to baseball cards, we authenticate and grade (cid:13) football, hockey and basketball sportscards and other collectible cards. We (cid:13) typically charge between $6 and $20 per card for our authentication and (cid:13) grading service, depending on the customer's requested turnaround time. We (cid:13) also have periodically entered into arrangements with sportcard (cid:13) manufacturers to grade, in bulk, modern sportscards that they produce. (cid:13) (cid:13) 7 (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) (cid:13) We experienced a rapid increase in grading submissions between fiscal 1999 (cid:13) and fiscal 2000. However, during the 4th quarter of fiscal 2000, sportscard (cid:13) submissions started to decline from a quarterly rate of approximately (cid:13) 520,000 cards to approximately 310,000 cards per quarter, a level at which (cid:13) it has remained throughout fiscal 2001 and 2002. We believe that this (cid:13) decrease in submission rates is due, in part, to an increase in the number (cid:13) of modern sportscards in circulation, which has led to a reduction in (cid:13) resale prices of those sportscards that has reduced the economic incentive (cid:13) to have them graded. However, we have been able to partially offset that (cid:13) decline in submissions through our Sport Card Set Registry Programs. Those (cid:13) programs, introduced by PSA in fiscal 2001, have encouraged collectors to (cid:13) collect or amass sets or combinations of related vintage and also modern (cid:13) sportscards, comprised not only of the cards of more famous and popular (cid:13) players, but also of less notable players who may have been or are (cid:13) associated with particular teams or sports events. To enhance the (cid:13) collectibility and marketability of such related sets or combinations of (cid:13) sportscards, on an increasing basis, dealers and collectors have been (cid:13) submitting the cards making up those sets for grading, including those of (cid:13) the less notable players which might not otherwise have been submitted for (cid:13) grading. (cid:13) (cid:13) Other Authentication and Grading Services. We commenced stamp (cid:13) authentication and grading and sports autograph authentication during (cid:13) fiscal 2000. The volume of submissions through fiscal 2002 has not been (cid:13) material, and since these services are new to the markets, we cannot (cid:13) This document is compiled by Thomson Financial 12 COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 predict when or even whether they will gain market acceptance. (cid:13) (cid:13) High-End Collectibles Auctions and Sales. We conduct premium auctions (cid:13) for high-end collectibles, including coins, currency, sportscards and (cid:13) sports memorabilia, rare records, entertainment and historical memorabilia. (cid:13) All of our premium auctions offer multi-venue bidding that includes varying (cid:13) combinations of Internet, telephone, mail and in-person formats. While the (cid:13) number of premium auctions varies each year, we typically conduct (cid:13) approximately 20 premium auctions each fiscal year. (cid:13) (cid:13) Customers for our premium auctions are generally individual collectors and (cid:13) dealers. At those auctions we sell collectibles that are consigned to us by (cid:13) dealers and collectors ("consigned collectibles") and, to a lesser extent, (cid:13) collectibles that we purchase for resale at our auctions ("purchased (cid:13) collectibles" or "owned collectibles"). We also make direct and catalog (cid:13) sales primarily of purchased collectibles. (cid:13) (cid:13) We generate revenue from our auctions in the form of commissions from both (cid:13) buyers and sellers of consigned collectibles and from sales of purchased (cid:13) collectibles that we sell and buyer's commissions on the sale of purchased (cid:13) or owned collectibles. Commissions from the sale of consigned collectibles (cid:13) vary but are generally between 10% to 25% of the sales price of the (cid:13) collectible. We charge buyers a commission on the sale of owned (cid:13) collectibles that varies but is generally between 10% and 15% of the sales (cid:13) price. Revenues from the sale of owned collectibles were $19,983,000 and (cid:13) $23,152,000 in fiscal 2002 and fiscal 2001, respectively. Commissions (cid:13) revenues from the sale of consigned and owned collectibles were $4,875,000 (cid:13) and $6,241,000 in fiscal 2002 and fiscal 2001, respectively. See "Item (cid:13) 7--Management's Discussion and Analysis of Financial Condition and Results (cid:13) of Operations" in Part II of this Report. (cid:13) (cid:13) Premium Auctions. Premium auctions feature special or unique (cid:13) collectibles that are sold in a multi-venue auction formats. In some of our (cid:13) premium auctions, we utilize "callback bidding" where bidders can choose to (cid:13) be called back by a phone operator immediately after the close of the first (cid:13) auction phase to be given the opportunity to participate in the final (cid:13) bidding phase. (cid:13) (cid:13) We require consignors in our premium auctions to ship their collectibles to (cid:13) us prior to auction. We photograph and prepare descriptions for all items (cid:13) consigned to us for auction and compile and publish a catalog of all items (cid:13) to be auctioned in advance of each of our premium auctions. Collectors can, (cid:13) thus, view all of the collectibles to be auctioned, along with complete (cid:13) descriptions, either by visiting our website and viewing online, or by (cid:13) ordering a catalog in hardcopy format. At the conclusion of the auction, we (cid:13) handle shipping and payment transactions. (cid:13) (cid:13) Direct and Catalog Sales. We also make sales of high-end collectibles at (cid:13) fixed prices at our website, at industry shows, by e-mail, newsletters, (cid:13) catalogs and by other direct sales programs to customers (cid:13) (cid:13) 8 (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) that prefer purchasing collectibles at fixed prices rather than acquiring (cid:13) them at auctions. We have a regular database of customers to whom we make (cid:13) direct and catalog sales, which include individual collectors. (cid:13) (cid:13) Publications and Content. We publish authoritative price guides and (cid:13) rarity reports for certain collectibles, including coins, currency and (cid:13) sportscards. This information is available on our website and in our (cid:13) publications that are distributed throughout the year. These publications (cid:13) include: (cid:13) (cid:13) Price Guides. We provide a wide variety of authoritative price guides (cid:13) for a number of collectible markets. For example, we track the value of the (cid:13) This document is compiled by Thomson Financial 13 COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 3,000 most actively-traded U.S. coins with information dating back to 1970. (cid:13) We compile and publish this information in a widely recognized collectible (cid:13) coin index, the CU3000. (cid:13) (cid:13) Rarity Reports. Three primary characteristics drive the market value of (cid:13) many collectibles: relative rarity, grade and significance to collectors. (cid:13) We compile and publish reports that list the total number of sportscards (cid:13) and coins we have graded since our inception in 1986, categorized by item (cid:13) type and grade determination. We can publish, for example, the exact number (cid:13) of MS67-grade 1881-S Morgan silver dollars we have graded. Collectors can (cid:13) utilize this information to make informed decisions regarding the purchase (cid:13) of particular coins. (cid:13) (cid:13) Articles. Collecting is a passion for many and has nuances and anecdotes (cid:13) that are well suited to a library of articles for each category of (cid:13) collectible. We write informative articles and publish them on our website. (cid:13) A sense of community is also important to collectors. We, therefore, (cid:13) encourage our users to communicate and to write articles that can be made (cid:13) available to all collectors. (cid:13) (cid:13) Historical Content. Collecting is often about history, and, in many (cid:13) instances, the collectible's history is what makes it valuable. In our (cid:13) catalogs, and in other publications, we provide short histories about (cid:13) unusual and rare collectibles that add to the attractiveness and excitement (cid:13) of purchasing such items. (cid:13) (cid:13) News. We provide the information that collectors and dealers need to (cid:13) track recent events, trends and developments in the collectibles markets we (cid:13) serve. For example, new collectibles are constantly being created, some (cid:13) collectibles increase in popularity and other collectibles sell at record (cid:13) prices. (cid:13) (cid:13) Customer Support (cid:13) (cid:13) We devote significant resources to providing personalized, customer service (cid:13) and support in a timely manner. Customers can check the status of their (cid:13) grading submissions at our Internet website. In addition, customers or (cid:13) prospective buyers can confirm the authenticity of the over 11 million (cid:13) collectibles we have graded. Customers also can choose to telephone or (cid:13) e-mail our general support staff. We also make available specialists and (cid:13) experts who are able to address virtually any issues our customers may (cid:13) encounter when using our services. (cid:13) (cid:13) Inventory and Working Capital (cid:13) (cid:13) Our inventory consists primarily of collectibles held for sale in our (cid:13) auctions and through direct sales. In our premium auctions, the majority of (cid:13) the collectibles sold are consigned to us, but we do sell collectibles (cid:13) owned by us, particularly sportscards and entertainment memorabilia. (cid:13) Collectibles sold through direct sales or catalog are usually owned by us. (cid:13) The supply of high-end collectibles is limited, and the timing of their (cid:13) availability in sufficient quantity to support our premium auctions and (cid:13) direct sales is uncertain. We, therefore, purchase inventory to insure (cid:13) availability and to take advantage of the opportunities to acquire high-end (cid:13) collectibles at favorable prices. In some circumstances, we may purchase a (cid:13) large "collection" of inventory with the intent of selling it in multiple (cid:13) future auctions. Therefore, our inventories are exposed to potentially (cid:13) limited turnover and valuation risks associated with fluctuations in their (cid:13) market prices. The Company periodically reviews its inventories and takes (cid:13) reserves against potential valuation loss. (cid:13) (cid:13) 9 (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) (cid:13) Historically, fees for authentication and grading were generally prepaid or (cid:13) This document is compiled by Thomson Financial 14 COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 paid at the time the item was submitted. Prepayments for services are (cid:13) recorded as deferred revenue until the service is completed and the item is (cid:13) returned. In prior fiscal years, prepaid submittals have provided us with a (cid:13) consistent source of cash and improved our working capital position. At (cid:13) June 30, 2002, deferred grading revenue, that is, the value of prepaid, but (cid:13) unprocessed grading submissions, was $545,000 as compared to $288,000 at (cid:13) June 30, 2001. We advance, to certain consignors in our premium auctions, (cid:13) funds in anticipation of selling their collectibles at auction. We (cid:13) generally charge market rates of interest for such advances and hold their (cid:13) consignment as collateral. This practice is common in the market for (cid:13) higher-end collectibles and is used to attract consignments to our (cid:13) auctions. At June 30, 2002, we had advanced $3,359,000 to consignors. (cid:13) (cid:13) The timing of premium auctions can have a significant impact upon our (cid:13) working capital. We generally pay consignors 45-days after the close of any (cid:13) auction but collect, all, or essentially all, the receivables from an (cid:13) auction 60 days following the completion of the auction. This auction cycle (cid:13) can cause significant fluctuations in the Company's cash balances and (cid:13) working capital position. See "Management's Discussion and Analysis of (cid:13) Financial Condition and Results of Operations" in Part II of this Report. (cid:13) (cid:13) Manufacturing and Suppliers (cid:13) (cid:13) We purchase injection-molded parts, holograms and printed labels for our (cid:13) grading services. There are numerous suppliers for these items, and any one (cid:13) could be substituted without significant delay or cost to the Company. (cid:13) However, while there are numerous sources for injection molded parts, these (cid:13) parts require a die to fabricate the part. The manufacture of high (cid:13) precision dies can be a lengthy process and requires considerable expertise (cid:13) in their fabrication. We do not have "back-up" dies for many of our high (cid:13) volume injection molded parts, and we rely on one supplier for these (cid:13) requirements. In the event that this supplier experiences a protracted (cid:13) production stoppage, we would not be able to service all of our customers. (cid:13) (cid:13) Operations and Technology (cid:13) (cid:13) We utilize proprietary software for our authentication, grading, order (cid:13) tracking, order processing and certain database functions. During fiscal (cid:13) 2002, we completed interfacing our proprietary grading software with a new (cid:13) company-wide enterprise software system. Total cost of this new software, (cid:13) and related hardware, was approximately $1,250,000, of which, approximately (cid:13) $600,000 and $50,000 was expensed during fiscal 2002 and 2001, (cid:13) respectively, representing primarily pre-development and (cid:13) post-implementation training and support costs. Approximately $600,000 has (cid:13) been capitalized and is being amortized over a 3 to 5 year life. (cid:13) (cid:13) Competition (cid:13) (cid:13) There are three main competitors in coin grading, Numismatic Guaranty (cid:13) Corporation of America, Independent Coin Grading and ANACS, a subsidiary of (cid:13) Amos Press, Inc. and a few minor competitors. In sportscard grading, there (cid:13) are also two main competitors, Beckett and Sportscard Grading Corporation, (cid:13) but numerous smaller competitors. The sportscard grading market attracts (cid:13) new competitors every year and, every year, several competitors disappear (cid:13) from the market. In July 2001, a new competitor entered the sportscard (cid:13) grading market, SCD Authentic, a division of Krause Publications. We (cid:13) believe that PCGS and PSA have the largest market share in each of their (cid:13) respective markets, but barriers to entry into the authentication and (cid:13) grading market are relatively low, especially into the sportscard grading (cid:13) market. However, the development of a brand name that buyers and sellers (cid:13) will rely on for making "sight-unseen" purchases can take several years to (cid:13) develop, and collectors tend to favor grading services that have an (cid:13) established reputation and whose grading standards tend to support the (cid:13) highest price in the market. (cid:13) (cid:13) Our traditional auction business is also highly competitive. We compete (cid:13) This document is compiled by Thomson Financial 15 COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 directly with other companies that specialize in collectibles and have an (cid:13) industry reputation for hosting premium collectibles auctions. Our (cid:13) competitors in traditional auction markets include Heritage Numismatic (cid:13) Auctions, Currency Auctions of America, recently purchased by Heritage, (cid:13) Mastro Fine Sports Auctions, Greg Manning Auctions and numerous smaller (cid:13) auction companies that compete in our markets for coins, sportscards and (cid:13) sports memorabilia, currency, rare records, autographs, and other types of (cid:13) collectibles. In addition, other (cid:13) (cid:13) 10 (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) reputable and much larger auction companies such as Sotheby's, Christie's (cid:13) and Butterfield & Butterfield, which do not specialize in, but do conduct (cid:13) auctions for collectibles that our Company specializes in, are potential (cid:13) competitors. In addition, other significant auction companies that do not (cid:13) presently engage in auctions for coins or sportscards or other collectibles (cid:13) that are the focus of our business may decide to enter our markets to (cid:13) compete with us. These companies have greater name recognition than us and (cid:13) have access to more financial and marketing resources than we do. We (cid:13) believe that the principal competitive factors in the traditional auction (cid:13) business are the reputation of the Company hosting the auction, the hosting (cid:13) party's ability to attract buyers to the auction and the quality of (cid:13) collectibles available for sale at the auction. (cid:13) (cid:13) In addition to these traditional auction companies, several companies have (cid:13) developed sales, auctions and trading over the Internet. While these (cid:13) Internet e-commerce companies generally host auctions or sell collectibles (cid:13) that have lower average selling prices than our collectibles sold at (cid:13) auction, several of them are much larger and have greater financial (cid:13) resources than our Company. These companies include eBay and, to a lessor (cid:13) extent, Yahoo and Amazon. In addition, several large companies sell (cid:13) specialty consumer products, including collectibles through interactive (cid:13) electronic media, including broadcast, cable and satellite television and, (cid:13) increasingly, the Internet. These companies include QVC, Home Shopping (cid:13) Network and Shop At Home. They generally have substantial financial (cid:13) resources and, while their current collectible offerings tend to be less (cid:13) focused and at lower prices than our collectible offerings, there can be no (cid:13) guarantee that they will not become significant competitors in the future. (cid:13) (cid:13) Direct sales of collectibles is highly competitive. There are thousands of (cid:13) retail establishments that sell collectibles directly to collectors, and (cid:13) there are numerous catalog companies and e-tailers that offer collectibles (cid:13) for sale through the Internet. The Company is not dominant in any of these (cid:13) markets, and barriers to entry are relatively low in e-commerce using (cid:13) commercially available software. (cid:13) (cid:13) Intellectual Property (cid:13) (cid:13) Our intellectual property primarily consists of trademarks, copyrights, and (cid:13) proprietary software and trade secrets. As part of our confidentiality (cid:13) procedures, we generally enter into agreements with our employees and (cid:13) consultants and limit access to, and distribution of, our software, (cid:13) documentation and other proprietary information. (cid:13) (cid:13) The following table sets forth a list of our trademarks, both unregistered (cid:13) and registered, that are currently being used in the conduct of our (cid:13) business: (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) Unregistered Marks Registered Marks (cid:13) -------------------------------------------------- ------------------------ (cid:13) Coin Universe Bowers and Merena Galleries Collectors Universe (cid:13) Collectors.com Kingswood Coin Auctions PCGS (cid:13) This document is compiled by Thomson Financial 16 COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 Lyn Knight Currency (cid:13) Auctions Sports Collectors Universe PSA (cid:13) Superior Sportscard (cid:13) Auctions Currency Universe PSA/DNA (cid:13) Bowers and Merena (cid:13) Auctions Record Universe Good Rockin' Tonight (cid:13) (cid:13) (cid:13) (cid:13) We have not conducted an exhaustive search of possible prior users of the (cid:13) unregistered trademarks listed above and, therefore, it is possible that (cid:13) our use of some of these trademarks may conflict with others. (cid:13) (cid:13) Government Regulation (cid:13) (cid:13) Numerous states, including the State of California in which our (cid:13) headquarters is located, have regulations regarding the manner in which (cid:13) "auctions" may be conducted and the liability of "auctioneers" in (cid:13) conducting such auctions. We must comply with each state's requirements (cid:13) when conducting in-person auctions and are required to collect sales tax (cid:13) depending on the collectible sold and manner in which title changes. The (cid:13) Company conducts multi-venue auctions in which the customer may bid, (cid:13) in-person, over the telephone or on the Internet through our website. At (cid:13) this time, it has not been determined if a state or (cid:13) (cid:13) 11 (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) governmental body could claim authority over a multi-venue auction for (cid:13) purposes of complying with "auctioneering" laws or the collection of sales (cid:13) tax. (cid:13) (cid:13) Employees (cid:13) (cid:13) As of June 30, 2002, we had 187 full-time employees and 33 part-time (cid:13) employees. Included in this total were 105 in grading and authentication, (cid:13) 52 in collectible sales and auction, 6 in website development, 4 in sales (cid:13) and marketing and 53 in other business and administrative services. We have (cid:13) never had a work stoppage, and no employees are represented under (cid:13) collective bargaining agreements. We consider our relations with our (cid:13) employees to be good. (cid:13) (cid:13) Item 2. PROPERTIES (cid:13) (cid:13) We lease approximately 59,000 square feet for our California-based (cid:13) headquarters under a nine-year lease that commenced in November 2000. This (cid:13) new facility exceeds our space requirements, and we are seeking to sublet a (cid:13) portion of the facility. (cid:13) (cid:13) We also lease a 6,500 square foot office in Wolfeboro, New Hampshire; a (cid:13) 3,700 square foot office in Lenexa, Kansas; a 3,200 square foot office in (cid:13) Traverse City, Michigan; a 1,500 square foot office in Orwigsburg, (cid:13) Pennsylvania and a 2,900 square foot office in Corona, California. (cid:13) (cid:13) Item 3. LEGAL PROCEEDINGS (cid:13) (cid:13) At June 30, 2002, we were not party to any legal proceedings that we (cid:13) believe is material. (cid:13) (cid:13) Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (cid:13) (cid:13) None. (cid:13) (cid:13) EXECUTIVE OFFICERS OF REGISTRANT (cid:13) (cid:13) This document is compiled by Thomson Financial 17 (cid:13) COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 (cid:13) (cid:13) (cid:13) Name Age Positions (cid:13) ---- --- ------ (cid:13) Roger W. Johnson 67 Chief Executive Officer (cid:13) David G. Hall 55 President (cid:13) Michael J. Lewis 58 Chief Financial Officer (cid:13) (cid:13) (cid:13) (cid:13) ROGER W. JOHNSON has served as a Director of Collectors Universe since (cid:13) November 1999 and was elected as its Chairman and Chief Executive Officer (cid:13) in September, 2001. From 1996 to September 2001, Mr. Johnson was a private (cid:13) investor. He was appointed by President Clinton and served as the (cid:13) Administrator of the General Services Administration of the United States (cid:13) from 1993 to 1996. Mr. Johnson also has been Chief Executive Officer of the (cid:13) Young Presidents' Organization, International since 1998. He is a member of (cid:13) the boards of directors of The Needham Funds, Inc., Sypris Solutions, Inc., (cid:13) Insulectro, Carole Little and the Women's Consumer Network, Washington, (cid:13) D.C. Mr. Johnson was Chairman and Chief Executive Officer of Western (cid:13) Digital Corporation from 1982 to 1993. Mr. Johnson holds an M.B.A. in (cid:13) industrial management from the University of Massachusetts. (cid:13) (cid:13) In August 2002, Mr. Johnson announced his decision to step down as Chairman (cid:13) and Chief Executive Officer of the Company, after having achieved goals he (cid:13) had set for himself when he assumed those positions with the Company. In (cid:13) announcing that decision, Mr. Johnson stated it was time to hand over his (cid:13) responsibilities to a new chief executive officer who could commit to a (cid:13) much longer period of leadership with the Company than he would be able to (cid:13) do. The Company's Board of Directors has opened an active search for a (cid:13) successor to Mr. Johnson, who has agreed to remain as Chief Executive (cid:13) Officer for an interim period to assist with the transition to the new (cid:13) Chief Executive Officer. At the same time, the Board of Directors elected (cid:13) James H. O'Neal, as Chairman of the Board, to lead that search. Mr. O'Neal, (cid:13) who is a private investor and has served as a director of the Company since (cid:13) June, 2001, was the President and Chief Executive Officer of Frito-Lay (cid:13) International from 1997 until his retirement in 2000, and prior to 1997 (cid:13) held a number of executive positions with PepsiCo, the parent company of (cid:13) Frito-Lay. (cid:13) (cid:13) DAVID G. HALL has served as President of Collectors Universe, Inc. since (cid:13) September 2001. From April 2000 to September 2001, Mr. Hall served as our (cid:13) Chairman of the Board and Chief Executive Officer. Mr. Hall also served as (cid:13) Chairman of the Board and a Director since founding Collectors Universe in (cid:13) February 1986. From 1986 to January 1999, he also served as President and (cid:13) Chief Executive Officer. Mr. Hall was honored in 1999 by COINage Magazine (cid:13) as Numismatist of the Century, along with 14 others. In 1990, Mr. Hall was (cid:13) named an Orange County Entrepreneur of the Year by INC. magazine. In (cid:13) addition, he has written A Mercenary's Guide to the Rare Coin Market, a (cid:13) book dedicated to coin collecting. Mr. Hall is also a member of the (cid:13) Professional Numismatists Guild. (cid:13) (cid:13) MICHAEL J. LEWIS has served as Chief Financial Officer of Collectors (cid:13) Universe, Inc. since October 2001. From January 2000 to October 2001, Mr. (cid:13) Lewis was a private investor. In 1998, Mr. Lewis was Chief Financial (cid:13) Officer of the Young Presidents' Organization. During 1999, Mr. Lewis was (cid:13) an associate with Eureka Financial Markets. From 1994 to 1997, Mr. Lewis (cid:13) served as (cid:13) Chief Executive Officer of National Case Management. Prior to that time, (cid:13) Mr. Lewis served as a Financial Consultant or as Chief Financial Officer, (cid:13) including Chief Financial Officer of Western Digital Corporation and Emulex (cid:13) Corporation. (cid:13) (cid:13) 12 (cid:13) This document is compiled by Thomson Financial 18 (cid:13) COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 (cid:13) ------------------------------------------------------------------------ (cid:13) PART II (cid:13) (cid:13) Item 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS (cid:13) (cid:13) The Company's common stock has been listed on the Nasdaq National Market, (cid:13) trading under the symbol CLCT, since November 4, 1999, when we commenced (cid:13) our initial public offering of common stock. The following table sets forth (cid:13) high and low closing prices for our common stock, as reported by the Nasdaq (cid:13) National Market for each of the fiscal quarters in the fiscal years ended (cid:13) on June 30, 2002 and 2001: (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) Fiscal 2002 High Low (cid:13) -------- ---- --- (cid:13) First Quarter 2.23 .71 (cid:13) Second Quarter 1.60 .72 (cid:13) Third Quarter 1.72 1.11 (cid:13) Fourth Quarter 1.50 .76 (cid:13) (cid:13) Fiscal 2001 High Low (cid:13) -------- ---- --- (cid:13) First Quarter 4.67 2.50 (cid:13) Second Quarter 2.56 1.53 (cid:13) Third Quarter 2.19 1.44 (cid:13) Fourth Quarter 2.20 1.45 (cid:13) (cid:13) (cid:13) (cid:13) The Company had 162 holders of record of its common stock and approximately (cid:13) 2,119 beneficial owners on June 30, 2002. (cid:13) (cid:13) Possible Delisting of Shares and Possible Reverse Stock Split. During (cid:13) the quarter ended June 30, 2002, the trading prices of our shares declined (cid:13) to less than $1.00 per share for 30 consecutive trading days. As a result, (cid:13) we have been informed by NASDAQ that our shares may be delisted from (cid:13) trading on the NASDAQ Stock Market, unless we can demonstrate to NASDAQ's (cid:13) satisfaction that the decline in our share price is temporary and the price (cid:13) will increase above $1.00 in the near term. A delisting of our shares from (cid:13) the NASDAQ Stock market would result in a decline in the marketability and (cid:13) the liquidity of our shares, making it more difficult for our stockholders (cid:13) to purchase and sell shares when they want or need to do so and for us to (cid:13) achieve improvements in our share price performance. (cid:13) (cid:13) As a result, if NASDAQ determines to proceed with the delisting of our (cid:13) shares, the only alternative available for achieving the increase in our (cid:13) share price required to maintain our NASDAQ listing may be a reverse stock (cid:13) split of our outstanding shares, in all probability ranging somewhere (cid:13) between a one share-for-three share to a one share-for-five share reverse (cid:13) split. Accordingly, we intend to ask our stockholders, at our Annual (cid:13) Stockholders Meeting scheduled for December 4, 2002, to grant the Board of (cid:13) Directors the authority to effectuate a reverse split of our outstanding (cid:13) shares within that range. If the reverse stock split is approved, the Board (cid:13) of Directors is likely to implement it only if it becomes necessary to (cid:13) ensure the continued listing of our shares on the NASDAQ Stock Market. (cid:13) Accordingly, even if the reverse stock split is approved by the (cid:13) stockholders, the Board of Directors may elect to delay, or even abandon it (cid:13) entirely if we are able to otherwise maintain the listing of our shares on (cid:13) NASDAQ. (cid:13) (cid:13) Dividends and Share Repurchases (cid:13) (cid:13) This document is compiled by Thomson Financial 19 (cid:13) COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 We do not intend to declare or pay cash dividends in the foreseeable (cid:13) future, as it is our current policy to retain all earnings to support (cid:13) future growth and expansion. (cid:13) (cid:13) Pursuant to an open market and private stock repurchase program approved by (cid:13) the Board of Directors, from September 25, 2000, through December 28, 2000, (cid:13) the Company purchased 500,000 of its shares at an average price of $2.04 (cid:13) per share. Although we do not currently have plans to do so, depending (cid:13) (cid:13) 13 (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) on market conditions and the alternatives for which the Company's cash may (cid:13) be used, the Board of Directors may consider adopting additional stock (cid:13) repurchase programs in the future. (cid:13) (cid:13) Item 6. SELECTED CONSOLIDATED FINANCIAL DATA (cid:13) (cid:13) The consolidated statements of operations data and balance sheets data for (cid:13) each of the fiscal years shown, include the operations of Collectors (cid:13) Universe, Inc. and its predecessor, Professional Coin Grading Service, Inc. (cid:13) The selected operating data for the fiscal years ended June 30, 2002, 2001 (cid:13) and 2000, and the selected balance sheet data at June 30, 2002 and 2001, (cid:13) are derived from the Company's audited consolidated financial statements (cid:13) included elsewhere in this Report. The selected financial data for the (cid:13) fiscal years ended June 30, 1999 and 1998 and at June 30, 2000, 1999 and (cid:13) 1998 are derived from audited consolidated financial statements that are (cid:13) not included in this Report. The following data should be read in (cid:13) conjunction with our consolidated financial statements and the related (cid:13) notes thereto and "Management's Discussion and Analysis of Financial (cid:13) Condition and Results of Operations" included herein. (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) Years Ended June 30, (4) (cid:13) -------------------------------------------------- (cid:13) Consolidated (cid:13) Statements of (cid:13) Operations Data 2002 2001 2000 1999 1998 (cid:13) (1) ------- -------- ------- ------- -------- (cid:13) (in thousands, except per share data) (cid:13) Net revenues $44,781 $ 52,384 $42,374 $22,563 $ 10,989 (cid:13) Cost of revenues 26,517 30,604 20,185 8,654 2,915 (cid:13) -------- --------- -------- -------- --------- (cid:13) Gross profit 18,264 21,780 22,189 13,909 8,074 (cid:13) Selling, general (cid:13) and administrative (cid:13) expenses 20,911 19,954 18,614 14,368 7,135 (cid:13) Amortization of (cid:13) goodwill 1,649 1,798 1,070 337 33 (cid:13) Impairment of (cid:13) goodwill 51 906 -- -- -- (cid:13) -------- --------- -------- -------- --------- (cid:13) Operating income (cid:13) (loss) (4,347) (878) 2,505 (796) 906 (cid:13) Interest income, (cid:13) net 379 855 748 30 26 (cid:13) Other income (cid:13) (expense), net 23 (33) (161) (28) (46) (cid:13) -------- --------- -------- -------- --------- (cid:13) Income (loss) (cid:13) before income (cid:13) taxes (3,945) (56) 3,092 (794) 886 (cid:13) Provision (cid:13) (benefit) for (cid:13) This document is compiled by Thomson Financial 20 COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 income taxes (2) (1,435) 593 1,550 (624) 13 (cid:13) -------- --------- -------- -------- --------- (cid:13) Net income (loss) (cid:13) (3) $(2,510) $ (649) $ 1,542 $ (170) $ 873 (cid:13) -------- --------- -------- -------- --------- (cid:13) Net income (loss) (cid:13) per share: (cid:13) Basic $ (0.10) $ (0.03) $ 0.07 $ (0.01) $ 0.05 (cid:13) -------- --------- -------- -------- --------- (cid:13) Diluted $ (0.10) $ (0.03) $ 0.06 $ (0.01) $ 0.05 (cid:13) -------- --------- -------- -------- --------- (cid:13) Weighted average (cid:13) shares (cid:13) outstanding: (cid:13) Basic 25,389 25,114 23,330 17,644 16,064 (cid:13) -------- --------- -------- -------- --------- (cid:13) Diluted 25,389 25,114 24,575 17,644 16,064 (cid:13) -------- --------- -------- -------- --------- (cid:13) Balance Sheet (cid:13) Data: (cid:13) Cash and cash (cid:13) equivalents $ 4,947 $ 5,874 $14,580 $ 1,852 $ 612 (cid:13) Working capital 18,496 20,485 20,399 2,316 975 (cid:13) Total assets 45,509 46,868 56,232 15,540 3,104 (cid:13) Stockholders' (cid:13) equity 37,128 39,550 41,115 10,098 1,562 (cid:13) (cid:13) (cid:13) ------ (cid:13) (cid:13) (cid:13) (cid:13) 1. Consolidated statements of operations data are not comparable for all (cid:13) periods shown. On April 11, 2002, we acquired the operating assets of (cid:13) Collectible Properties, Inc. On July 18, 2000, we acquired the (cid:13) publishing business of Odyssey Publications. On March 10, 2000, we (cid:13) acquired the operating assets of Bowers and Merena. On February 5, (cid:13) 1999, we acquired the auction businesses of Lyn F. Knight Rare Coins, (cid:13) Inc. and Kingswood Coin auctions LLC and acquired an additional 40% (cid:13) membership interest in Superior Sportscard Auctions LLC. On January 25, (cid:13) 1999, we acquired an additional 40% membership interest in Internet (cid:13) Universe LLC. The operating results for the periods shown include the (cid:13) operating results of each of those acquired companies only for the (cid:13) periods subsequent to their acquisition. (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) 2. In fiscal 2000, we provided for federal and state income taxes at rates (cid:13) applicable for a C corporation. For the first seven months of fiscal (cid:13) 1999, we provided for state income taxes at 1.5% and made no provision (cid:13) for federal income taxes because we were an S corporation. For the last (cid:13) five months of fiscal 1999, we provided for income taxes at applicable (cid:13) C corporation rates. For fiscal year 1998, we provided income taxes at (cid:13) 1.5%, the rate applicable for California S corporations, and made no (cid:13) provision for federal income taxes because we were an S corporation. (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) This document is compiled by Thomson Financial 21 (cid:13) (cid:13) (cid:13) COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 (cid:13) 3. Net income (loss) is not comparable for all periods presented because (cid:13) we converted from a substantially non-taxable S corporation to a fully (cid:13) taxable C corporation on February 5, 1999. (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) 4. The Company's fiscal year ends on the Saturday closest to June 30th. (cid:13) Accordingly, the last three fiscal years ended on June 29, 2002, June (cid:13) 30, 2001 and July 1, 2000. For clarity of presentation, all fiscal (cid:13) years are reported as ending on June 30th. (cid:13) (cid:13) (cid:13) 14 (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) (cid:13) Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND (cid:13) RESULTS OF OPERATIONS (cid:13) (cid:13) The following discussion and analysis should be read in conjunction with (cid:13) the "Selected Consolidated Financial Data" and the Company's consolidated (cid:13) financial statements and related notes included elsewhere herein. (cid:13) (cid:13) Critical Accounting Policies and Estimates (cid:13) (cid:13) General. The Company's consolidated financial statements have been (cid:13) prepared in accordance with accounting principles generally accepted in the (cid:13) United States of America ("GAAP"). In determining the carrying value of (cid:13) some of our assets and liabilities, principally accounts receivable, (cid:13) inventories, warranty obligations, deferred income taxes, and goodwill, we (cid:13) must make judgments, estimates and assumptions regarding future events and (cid:13) circumstances that could affect the value of those assets and liabilities, (cid:13) such as future economic conditions that will affect our ability to collect (cid:13) our accounts receivable or sell our inventories in future periods. Those (cid:13) judgments, estimates and assumptions are based on current information (cid:13) available to us at the time they are made. Many of those events and (cid:13) circumstances, however, are outside of our control and if changes in those (cid:13) events or circumstances occur thereafter, GAAP may require us to adjust our (cid:13) earlier estimates that are affected by those changes. Any downward (cid:13) adjustments are commonly referred to as "write-downs" of the assets (cid:13) involved. (cid:13) (cid:13) Additionally, decisions of when adjustments of this nature should be made (cid:13) also require subjective judgments involving an assessment or prediction (cid:13) abut the effects and duration of events or changes in circumstances. For (cid:13) example, it is not easy to predict whether events, such as occurred on (cid:13) September 11, 2001 or increases in interest rates or economic slowdowns, (cid:13) will have short or longer term consequences for a particular business and (cid:13) it is not uncommon for it to take some time, after the occurrence of an (cid:13) event or the onset of changes in economic circumstances, for the full (cid:13) effects of such events or changes to be recognized. (cid:13) (cid:13) It is our practice in certain cases to establish reserves or allowances to (cid:13) record any downward adjustments or "write-downs" in the carrying value of (cid:13) assets such as these. Examples include reserves or allowances established (cid:13) for uncollectible accounts receivable (sometimes referred to as "bad debt (cid:13) reserves") and reserves for slow moving inventory. Write-downs are charged (cid:13) against these reserves or allowances and those reserves are replenished (cid:13) following such write downs, or increased to take account of changed (cid:13) conditions or events, by charges to income or increases in expense in our (cid:13) This document is compiled by Thomson Financial 22 (cid:13) (cid:13) COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 statement of operations in the periods when those reserves or allowances (cid:13) are replenished or increased. With respect to other assets, such as (cid:13) goodwill, we write down their carrying value directly in the event of an (cid:13) impairment as a charge to income. As a result, our judgments, estimates and (cid:13) assumptions about future events can and will affect not only the amounts at (cid:13) which we record these assets on our balance sheet, but also our results of (cid:13) operations. (cid:13) (cid:13) Under GAAP, we also must make estimates or judgments regarding the periods (cid:13) during which, and also regarding the amounts at which, sales are recorded. (cid:13) Those estimates and judgments will depend on such factors as the (cid:13) circumstances under which customers may be entitled to return the products (cid:13) or reject or adjust the payment for the services provided to them. (cid:13) Additionally, in the case we grant our customers contractual rights to (cid:13) return products sold to them, we establish a reserve or allowance for (cid:13) product returns by means of a reduction in the amount at which the sales (cid:13) are recorded, based primarily on the nature, extensiveness and duration of (cid:13) those rights and our historical product return experience. (cid:13) (cid:13) In making our estimates and assumptions we follow GAAP and accounting (cid:13) practices applicable to our business that we believe will enable us to make (cid:13) fair and consistent estimates of the realizable or recoverable amounts of (cid:13) those assets and establish adequate reserves or allowances. Set forth below (cid:13) is a summary of the accounting policies that we believe are material to an (cid:13) understanding of our financial condition and results of operations that are (cid:13) discussed below. (cid:13) (cid:13) Revenue Recognition and the Allowance for Returns. We record, as (cid:13) deferred revenue, all prepaid grading submissions until the items are (cid:13) graded and returned to the submitter. Upon shipment back to the customer, (cid:13) we record the revenue from grading and deduct this amount from deferred (cid:13) revenue. For dealers who have open account status, we record revenue at the (cid:13) time of shipment. (cid:13) (cid:13) We record revenue from the sale of collectibles at our auctions at the time (cid:13) the collectible is either shipped based on agreement with the customer or (cid:13) delivered in-person to the successful bidder. Shipment or delivery (cid:13) generally takes place after payment is received from the successful bidder, (cid:13) which can be as long as 60 days after completion of the auction. As a (cid:13) result, revenues from sales made at auctions conducted in the second half (cid:13) of a fiscal quarter usually will not be recorded until the subsequent (cid:13) quarter. However, for certain repeat bidders we ship or deliver in-person (cid:13) the collectibles at the close of an auction and allow them to pay up to 60 (cid:13) days following the auction. Those sales are also recorded at the time of (cid:13) delivery or shipment. We also offer extended payment terms to certain (cid:13) collectors or dealers. For collectibles that we own and sell at auction, we (cid:13) record the successful bidder amount, or "hammer," as the sale of the (cid:13) merchandise and record the buyer's fee as commission earned. We also record (cid:13) the cost of the merchandise sold as cost of revenues. For collectibles that (cid:13) are consigned to us for auction, we record, as commissions earned, the (cid:13) amounts of the buyer's and seller's fees. Depending upon the type of (cid:13) collectibles auction, we charge successful bidders a 10% to 15% commission (cid:13) and generally charge consignors a 5% to 15% selling commission. On some (cid:13) large or important consignments, we may negotiate a reduced consignor (cid:13) commission or even pay a fee to the consignor. (cid:13) We sometimes provide our customers with limited rights to return items (cid:13) sold. (cid:13) (cid:13) 15 (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) We establish an allowance for estimated returns, which reduces the amounts (cid:13) of our reported revenues, based on historical returns experience. (cid:13) (cid:13) Accounts Receivable and the Allowance for Doubtful Accounts. In the (cid:13) normal course of business, we extend payment terms to larger, more (cid:13) This document is compiled by Thomson Financial 23 COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 creditworthy collectibles dealers. We regularly review their accounts and (cid:13) estimate the amount of and establish an allowance for uncollectible amounts (cid:13) in each reporting period. The amount of that allowance is based on several (cid:13) factors, including the age of unpaid amounts, a review of significant past (cid:13) due accounts, and economic conditions that may affect the ability of (cid:13) dealers to keep their accounts current. Estimates of uncollectible amounts (cid:13) are reviewed each period and, based on that review, and are revised to (cid:13) reflect changed circumstances or conditions and those changes are recorded (cid:13) in the period they become known. For example, if the financial condition of (cid:13) certain dealers or economic conditions were to deteriorate, adversely (cid:13) affecting the ability of those dealers to make payments on their accounts, (cid:13) increases in the allowance may be required. Since the allowance is created (cid:13) by recording a charge against income that is reflected in selling, general (cid:13) and administrative expenses, an increase in the allowance will cause a (cid:13) decline in our operating results in the period when the increase is (cid:13) recorded. (cid:13) (cid:13) Inventory Valuation Reserve. Inventories are valued at the lower of cost (cid:13) or market and are reduced by an inventory valuation allowance to provide (cid:13) for declines in the value of our inventory, which consists of collectible (cid:13) coins, sportscards and other collectibles. The amount of the allowance is (cid:13) determined on the basis of historical experience, estimates concerning (cid:13) future economic conditions and estimates of future sales. If there is an (cid:13) economic downturn or a decline in sales, causing inventories of some (cid:13) collectibles to accumulate, it may become necessary to increase the (cid:13) allowance. Increases in this allowance will cause a decline in operating (cid:13) results as such increases are effectuated by charges against income. (cid:13) (cid:13) Long-Lived Assets and Goodwill. Long-lived assets such as property and (cid:13) equipment, and goodwill and intangible assets are reviewed for impairment (cid:13) when events or circumstances indicate that the carrying value may not be (cid:13) recoverable. Prior to and during the fiscal year ending June 30, 2002, (cid:13) estimated undiscounted future cash flows were used to determine if an asset (cid:13) was impaired and, if such a determination were made, the carrying value of (cid:13) the asset would be reduced to fair value. Any resulting impairment would be (cid:13) recorded as a charge against income in the period in which the impairment (cid:13) was recorded. However, beginning with our 2003 fiscal year, we will be (cid:13) required to assess our goodwill for impairment based on the new standard (cid:13) established by Statement of Financial Accounting Standards (SFAS) No. 142, (cid:13) Goodwill and Other Intangible Assets, which will require that assessment to (cid:13) be made on the basis of the fair values of the assets of our reporting (cid:13) units, as defined in SFAS No. 142, rather than on the basis of undiscounted (cid:13) cash flows. We are in the process of performing the two-step transitional (cid:13) goodwill impairment testing required under this new standard. Although we (cid:13) will not be able to determine the full effect of SFAS No. 142 on our (cid:13) results of operations until we are able to complete that impairment (cid:13) analysis, it now appears that the new standard will require us, in the (cid:13) first half of fiscal 2003, to record a substantial write down in our (cid:13) goodwill, which totaled nearly $15 million at June 30, 2002. The amount of (cid:13) that goodwill write down or "impairment" will result in a non-cash charge (cid:13) that will be recorded on our income statement as a "cumulative effect of a (cid:13) change in accounting principle" for the quarter in which the amount of the (cid:13) write-off is determined. However, we do not expect that it will have an (cid:13) adverse effect our business operations or cash flows. For additional (cid:13) information regarding SFAS No. 142, see "Recent Accounting Pronouncements" (cid:13) below in this Section of the Report and Note 2 to our Consolidated (cid:13) Financial Statements, under the subcaption "Recent Accounting (cid:13) Pronouncements" also included in this Report. (cid:13) (cid:13) Warranty Reserve (cid:13) (cid:13) The Company offers a warranty covering the coins and sportscards it (cid:13) authenticates and grades. Under the terms of the warranty, any coin or (cid:13) sportscard originally graded by us, which subsequently receives a lower (cid:13) grade upon resubmittal to us, obligates us to either purchase the coin or (cid:13) sportscard or pay the difference in value of the item at its original grade (cid:13) This document is compiled by Thomson Financial 24 COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 as compared with its lower grade. Similarly, any coin or sportscard (cid:13) originally graded by us, which subsequently is determined to be not (cid:13) authentic, obligates us to purchase the coin or sportscard. We accrue for (cid:13) estimated warranty costs based on historical trends and related experience. (cid:13) (cid:13) Overview (cid:13) (cid:13) Our Business. (cid:13) (cid:13) Collectors Universe provides grading and authentication services for (cid:13) sportscards, rare coins, vintage stamps and authentication services for (cid:13) autographs and sports memorabilia. We also sell rare coins and rare (cid:13) currencies, sportscards, sports and entertainment memorabilia and other (cid:13) collectibles through auctions and direct sales channels. Most of our (cid:13) collectibles auctions are conducted utilizing a "multi-venue" format that (cid:13) may include in-person, Internet, mail-in, and telephone bidding options. (cid:13) This multi- (cid:13) (cid:13) 16 (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) venue format allows bidders to enter auction bids at any time and from any (cid:13) place in the manner that is most convenient for them. We also sell rare (cid:13) coins, sportscards, sports memorabilia and autographs through shows, (cid:13) catalogs, Internet and direct sales. During fiscal year 2000, we conducted (cid:13) weekly Internet auctions of consigned and owned collectibles, but these (cid:13) auctions were discontinued at the end of fiscal 2000. (cid:13) (cid:13) Revenue Recognition Policies. We record, as deferred revenue, all (cid:13) prepaid grading submissions until the items are graded and returned to the (cid:13) submitter. Upon shipment back to the customer, we record the revenue from (cid:13) grading and deduct this amount from deferred revenue. For dealers who have (cid:13) open account status, we record revenue at the time of shipment. (cid:13) (cid:13) We record revenue from the sale of collectibles at our auctions at the time (cid:13) the collectible is either shipped based on agreement with the customer or (cid:13) delivered in-person to the successful bidder. Shipment or delivery (cid:13) generally takes place after payment is received from the successful bidder, (cid:13) which can be as long as 60 days after completion of the auction. As a (cid:13) result, revenues from sales made at auctions conducted in the second half (cid:13) of a fiscal quarter usually will not be recorded until the subsequent (cid:13) quarter. However, for certain repeat bidders we ship or deliver in-person (cid:13) the collectibles at the close of an auction and allow them to pay up to 60 (cid:13) days following the auction. Those sales are also recorded at the time of (cid:13) delivery or shipment. We also offer extended payment terms to certain (cid:13) collectors or dealers. For collectibles that we own and sell at auction, we (cid:13) record the successful bidder amount, or "hammer," as the sale of the (cid:13) merchandise and record the buyer's fee as commission earned. We also record (cid:13) the cost of the merchandise sold as cost of revenues. For collectibles that (cid:13) are consigned to us for auction, we record, as commissions earned, the (cid:13) amounts of the buyer's and seller's fees. Depending upon the type of (cid:13) collectibles auction, we charge successful bidders a 10% to 15% commission (cid:13) and generally charge consignors a 5% to 15% selling commission. On some (cid:13) large or important consignments, we may negotiate a reduced consignor (cid:13) commission or even pay a fee to the consignor. (cid:13) (cid:13) Gross Profit Margins. The gross margin on sales of consigned (cid:13) collectibles is significantly higher than the gross margin on sales of (cid:13) owned collectibles because we realize commissions on sales of consigned (cid:13) collectibles without having to incur any significant associated costs. By (cid:13) contrast, upon the sale of owned collectibles, we record the costs of (cid:13) acquiring those collectibles, which are usually a significant percentage of (cid:13) the selling price. As a result, the sale of owned collectibles reduces our (cid:13) overall auction margins to a level that is significantly below that (cid:13) realized for authentication and grading services. Additionally, to a lesser (cid:13) extent, the gross profit margins on grading submissions can be affected by (cid:13) This document is compiled by Thomson Financial 25 COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 the mix of submissions between vintage or "classic" coins and sportscards, (cid:13) on the one hand, and modern coins and sportscards, on the other hand. (cid:13) Generally, our prices for grading services vary depending on the (cid:13) "turn-around" time requested by submitting dealers and collectors, who are (cid:13) willing to pay more for faster turn-around of the coins and sportscards (cid:13) they submit for grading. As a general rule, dealers and collectors request (cid:13) faster turn-around for vintage or classic coins and sportscards than they (cid:13) do for modern submissions. Consequently, our gross margin depends, not only (cid:13) upon the mix of grading revenues and auction revenues, but also upon the (cid:13) mix of consigned and owned collectibles sold at our auctions and the mix of (cid:13) vintage and modern collectibles submitted for grading and authentication. (cid:13) (cid:13) Our auctions are held periodically throughout the fiscal year. The number, (cid:13) scheduling and size of the auctions we conduct vary from quarter to (cid:13) quarter, depending largely on the volume, value and timing of the (cid:13) collectibles consignments that we receive for our auctions. For this (cid:13) reason, our auction revenue can vary, sometimes significantly, from quarter (cid:13) to quarter. Additionally, under our revenue recognition policies, we do not (cid:13) recognize auction revenues until the items sold at an auction are either (cid:13) shipped based on agreement with the customer or delivered in-person to the (cid:13) winning bidders. Since those items generally are not shipped to the winning (cid:13) bidders until payment is received from them, which can take up to 60 days (cid:13) after completion of an auction, revenue generated from auctions conducted (cid:13) near the end of a fiscal period often cannot be reported until the (cid:13) succeeding fiscal period, which contributes to the period-to-period (cid:13) variability in our auction revenues. These circumstances also make it (cid:13) difficult to forecast, on a quarterly basis, revenue that will be (cid:13) attributable to our auction business. (cid:13) (cid:13) Our cash flow is also affected by the number and timing of the auctions we (cid:13) conduct. Generally, we pay consignors of collectibles to our auctions the (cid:13) cash price at which their collectibles were sold, less (cid:13) (cid:13) 17 (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) the seller's commissions earned by us, approximately 45 days after (cid:13) completion of the auction. However, most of the payments for those (cid:13) collectibles from the winning bidders are not received until 60 days after (cid:13) an auction is completed. As a result, we experience significant cash (cid:13) outflows within the first 45 days, and cash inflows beginning 60 days, (cid:13) following completion of a large auction. Therefore, the amount of cash that (cid:13) we have at the end of any fiscal period can vary widely, depending on the (cid:13) number and timing of the auctions conducted during that fiscal period. (cid:13) (cid:13) The Company generates substantially all of its revenues from the (cid:13) collectibles market segment, which primarily relies on discretionary (cid:13) consumer spending. During the last quarter of fiscal year 2001, which ended (cid:13) on June 30, 2001, and during fiscal 2002, the Company experienced lower (cid:13) revenues from grading submissions, sales of owned collectibles and fees (cid:13) earned on the sale of consigned collectibles. We believe these lower (cid:13) revenues reflect, at least in part, the impact of recent unfavorable (cid:13) economic conditions on consumer spending. If these unfavorable economic (cid:13) conditions persist, it is likely that they will adversely affect the (cid:13) Company's operating results and financial condition in future periods, as (cid:13) well. (cid:13) (cid:13) 18 (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) (cid:13) Results of Operations (cid:13) (cid:13) The following table sets forth, for the periods indicated, certain (cid:13) financial data expressed as a percentage of net revenues: (cid:13) (cid:13) This document is compiled by Thomson Financial 26 COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 (cid:13) (cid:13) (cid:13) Fiscal Years Ended June 30, (cid:13) ------------------------------- (cid:13) 2002 2001 2000 (cid:13) ------ ------ ------ (cid:13) Net revenues 100.0% 100.0% 100.0% (cid:13) Cost of revenues 59.2% 58.4% 47.6% (cid:13) ------- ------- ------- (cid:13) Gross profit 40.8% 41.6% 52.4% (cid:13) Operating expenses: (cid:13) Selling, general & (cid:13) administrative 46.7% 38.1% 43.9% (cid:13) Impairment of (cid:13) goodwill 0.1% 1.8% (cid:13) Amortization of (cid:13) goodwill 3.7% 3.4% 2.6% (cid:13) ------- ------- ------- (cid:13) Total operating (cid:13) expenses 50.5% 43.3% 46.5% (cid:13) Operating income (cid:13) (loss) (9.7%) (1.7%) 5.9% (cid:13) Interest income, (cid:13) net 0.8% 1.6% 1.8% (cid:13) Other, net 0.1% -- (0.4%) (cid:13) ------- ------- ------- (cid:13) Income (loss) (cid:13) before income taxes (8.8%) (0.1)% 7.3% (cid:13) Provision (benefit) (cid:13) for income taxes (3.2%) 1.1% 3.7% (cid:13) ------- ------- ------- (cid:13) Net income (loss) (5.6%) (1.2%) 3.6% (cid:13) ------- ------- ------- (cid:13) (cid:13) (cid:13) (cid:13) Net Revenues. Net revenues decreased 15% to $44,781,000 in fiscal 2002 (cid:13) from $52,384,000 in the prior year. Collectible sales revenues decreased (cid:13) 16% to $26,454,000 in fiscal 2002 from $31,422,000 in the prior fiscal (cid:13) year, while grading and authentication revenues declined by 13% to (cid:13) $18,327,000 in the current fiscal year from $20,962,000 in fiscal 2001. (cid:13) Collectible sales revenue represented 59% and 60% of total revenues, while (cid:13) grading and authentication revenue represented 41% and 40% of total (cid:13) revenues, for fiscal 2002 and 2001, respectively. The 13% decrease in (cid:13) grading and authentication revenues in fiscal 2002 occurred primarily (cid:13) because of a 30% decrease in sportscard submissions. On the other hand, (cid:13) coin grading submissions increased 47% in fiscal 2002 from fiscal 2001. (cid:13) However, that increase in coin grading submissions only partially offset (cid:13) the decline in revenues from sportscard grading submissions because the (cid:13) average price for coin grading declined from the prior year. The reduction (cid:13) in sportscard submissions in fiscal 2002 was caused by several factors, (cid:13) including (i) reduced submissions by sportscard manufacturers for "bulk" (cid:13) grading; and (ii) a reduction in resale prices of modern sportscards, which (cid:13) reduced the economic incentive to have these cards graded and sold. In (cid:13) addition, sportscard grading revenue was negatively impacted by a decline (cid:13) in "vintage" sportscard submissions, which tend to use a higher priced (cid:13) grading service rate because of the value of these sportscards. The decline (cid:13) in the average price for coin grading in fiscal 2002 was primarily due to a (cid:13) higher proportion of modern coin submittals versus vintage submittals. (cid:13) Grading fees for modern coins are generally lower than grading fees for (cid:13) vintage coins, and this causes the average selling price to decline. For (cid:13) fiscal 2002, the average grading fee for coins declined approximately 15%. (cid:13) (cid:13) The 16% decrease in collectibles sales revenues in fiscal 2002 was due to (cid:13) This document is compiled by Thomson Financial 27 (cid:13) COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 several diverse factors, including (i) a continued decline, which began in (cid:13) fiscal 2001, in the demand for sportscards that we sell at auctions and in (cid:13) our direct sales channels, and (ii) a reduction in consignments by dealers (cid:13) and collectors to our premium Bowers and Merena Coin Auctions and to our (cid:13) Lyn Knight Currency Auctions which we believe was primarily due to concerns (cid:13) about the prices that could be realized for their coins and currency due to (cid:13) the economic recession. (cid:13) (cid:13) Net revenues increased 24% to $52,384,000 in fiscal 2001 from $42,374,000 (cid:13) in the prior year. Collectible sales revenues increased 74% to $31,422,000 (cid:13) in fiscal 2001 from $18,011,000 in the prior fiscal year; while grading and (cid:13) authentication revenues declined by 14% to $20,962,000 in fiscal 2001 from (cid:13) $24,363,000 in fiscal 2000. Collectible sales revenue represented 60% and (cid:13) 43% of total revenues, while grading and authentication revenue represented (cid:13) 40% and 57% of total revenues, for fiscal 2001 and 2000, (cid:13) (cid:13) 19 (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) respectively. The 14% decrease in grading and authentication revenues in (cid:13) fiscal 2001 occurred primarily because of lower sportscard submissions and, (cid:13) to a lesser extent, lower average grading fees for coin grading (cid:13) submissions. The reduction in sportscard submissions in fiscal 2001 was (cid:13) caused by several factors, including (i) reduced submissions by sportscard (cid:13) manufacturers for "bulk" grading; (ii) the absence in fiscal 2001 of (cid:13) submissions for grading of Pokemon cards, which were very popular in fiscal (cid:13) 2000; and (iii) a decline in resale prices of modern sportscards, which (cid:13) reduced the economic incentive to have these cards graded and sold. In (cid:13) addition, sportscard grading revenue was negatively impacted by a decline (cid:13) in "vintage" sportscard submissions, which tend to use a higher priced (cid:13) grading service rate because of the value of these sportscards. However, (cid:13) because of the much lower submission rates for bulk grading, which are the (cid:13) lowest cost grading service offered by the Company, the average grading fee (cid:13) for sportscard submissions actually increased approximately 5% in fiscal (cid:13) 2001 over the prior fiscal year. The average price for coin grading (cid:13) declined by approximately 6% in fiscal 2001 from the prior year primarily (cid:13) because of a higher proportion of modern submittals versus vintage (cid:13) submittals, as overall submission rates were stable. (cid:13) (cid:13) The 74% increase in collectibles sales revenues in fiscal 2001 was due to a (cid:13) variety of factors, including (i) the fact that operating results in fiscal (cid:13) 2001 included a full year of the operations of Bowers and Merena, which we (cid:13) acquired in March 2000, as compared to only about three months in fiscal (cid:13) 2000, which added approximately $10,000,000 of incremental net revenues in (cid:13) fiscal 2001; (ii) our acquisitions of James Spence Autographs and Odyssey (cid:13) Publications which added approximately $2,600,000 to our net revenues in (cid:13) fiscal 2001; and (iii) increases in retail and auction sales of owned (cid:13) collectibles in fiscal 2001. (cid:13) (cid:13) Gross Profit. Gross profit is calculated by subtracting the cost of (cid:13) revenues from net revenues. Cost of revenues consist primarily of labor to (cid:13) grade and authenticate coins and sportscards, production costs, printing, (cid:13) credit cards fees, warranty expense and the cost of owned collectibles sold (cid:13) in our auctions. Gross profit margin is gross profit stated as a percent of (cid:13) net revenues. Our gross profit margin (gross profits as a percentage of (cid:13) revenues) declined to 40.8% in fiscal 2002 from 41.6% in the prior fiscal (cid:13) year. That decline was due primarily to (i) the decline in net sales which (cid:13) affected gross profit margins because a significant portion of our costs of (cid:13) sales are fixed and, therefore, cannot be reduced directly in proportion to (cid:13) decreases in our revenues; and (ii) lower gross profit margins on grading (cid:13) activities because we received a higher proportion of modern sportscards (cid:13) for grading. As previously discussed, collectors and dealers submitting (cid:13) modern sportscards generally elect lower cost grading services than with (cid:13) respect to vintage sportscards (cid:13) (cid:13) Our gross profit margin declined to 41.6% in fiscal 2001 from 52.4% in the (cid:13) This document is compiled by Thomson Financial 28 COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 prior fiscal year. That decline was due primarily to (i) a change in the (cid:13) mix of revenues to a higher proportion of collectible sales revenue and a (cid:13) lower percentage of grading revenue on which we generally realize higher (cid:13) margins than on sales of collectibles; (ii) provisions made to establish (cid:13) bad debt and inventory valuation reserves and customer allowances in (cid:13) response to weakening economic conditions; and (iii) increases in direct (cid:13) labor costs associated with grading operations which were partially offset (cid:13) by lower production and warranty expenses. (cid:13) (cid:13) Selling, General and Administrative. Selling, general and (cid:13) administrative expenses (SG&A) primarily include wages and payroll-related (cid:13) expenses, advertising and promotional expenses, travel-related expenses, (cid:13) facility and security expenses, outside service charges and other general (cid:13) administrative expenses. Overall, SG&A increased 5.0% in fiscal 2002 to (cid:13) $20,911,000 from $19,954,000 the prior fiscal year. That increase was due (cid:13) primarily to (i) costs of implementing the Company's new enterprise (cid:13) computer management system, including integration of that system with the (cid:13) Company's existing grading software, and (ii) costs associated with changes (cid:13) in management and severance costs resulting from staff reductions that (cid:13) occurred in fiscal 2002. As a percentage of total net revenue, SG&A (cid:13) expenses increased to 47% in fiscal 2002 year from 38% in fiscal 2001, (cid:13) primarily because revenues decreased 15%, while SG&A was increasing. (cid:13) (cid:13) Overall, SG&A increased 7% in fiscal 2001 to $19,954,000 from $18,614,000 (cid:13) the prior fiscal year, due primarily to the inclusion in fiscal 2001 of the (cid:13) operating expenses of the acquired businesses and, to a lesser extent, (cid:13) increases in facility rent, salaries and marketing expenses, which were (cid:13) significantly offset by a $2,800,000 reduction in expenses that resulted (cid:13) from the discontinuation of our weekly Internet operations. However, as a (cid:13) percent of total revenue, SG&A expenses decreased to 38% in the current (cid:13) fiscal (cid:13) (cid:13) 20 (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) year from 44% in fiscal 2000, primarily because revenues increased at a (cid:13) much greater rate, 24%, than did SG&A expenses. (cid:13) (cid:13) Goodwill Impairment. Periodically, we evaluate the recoverability of (cid:13) goodwill and based upon our analysis at June 30, 2002, we determined that (cid:13) the goodwill associated with Professional Stamp Experts ("PSE") was (cid:13) partially impaired. This impairment resulted from a reduction in the (cid:13) projected revenues of PSE over the next several years. Accordingly, we (cid:13) incurred a goodwill impairment charge of $51,000 in fiscal 2002 to reduce (cid:13) the carrying value of the PSE goodwill to $89,000. (cid:13) (cid:13) During fiscal 2001, we determined that the goodwill associated with our (cid:13) acquisition in 1999 of Internet Universe, LLC, which conducted our Internet (cid:13) operations, had become impaired. This determination resulted primarily from (cid:13) a change in our projected revenue for Internet advertising on our website (cid:13) www.collectors.com, due to industry-wide reductions in the viability of (cid:13) banner advertising and the rates that could be charged for this type of (cid:13) Internet advertising. Accordingly, we incurred a charge of $906,000 in (cid:13) fiscal 2001 to reduce the carrying value of the Internet Universe, LLC (cid:13) goodwill to zero. This impairment charge was reflected in our collectible (cid:13) sales segment for the fiscal year ended June 30, 2001. (cid:13) (cid:13) Amortization of Goodwill and Intangibles. Amortization of goodwill and (cid:13) intangibles consists of goodwill charges relating to acquisitions by the (cid:13) Company and amortization charges for non-competition agreements that we (cid:13) obtained from the sellers in those acquisitions. We amortize goodwill over (cid:13) periods of 5 to 15 years and non-competition agreements over the respective (cid:13) terms of those agreements, which range from 3 to five years. Amortization (cid:13) expense for fiscal 2002 was $1,649,000 as compared to $1,798,000 for fiscal (cid:13) 2001. This decrease was due to the $906,000 goodwill write off in fiscal (cid:13) 2001 (discussed above), which reduced the amount of goodwill being (cid:13) This document is compiled by Thomson Financial 29 COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 amortized in fiscal 2002. (cid:13) (cid:13) Amortization expense for fiscal 2001 was $1,798,000 as compared to (cid:13) $1,070,000 for fiscal 2000. This increase resulted from the acquisition of (cid:13) Bowers and Merena and, to a lesser extent, the acquisition of Odyssey (cid:13) Publications. Those increases were partially offset by a $148,000 reduction (cid:13) in amortization expense attributable to the goodwill write-off in fiscal (cid:13) 2001, which occurred during the first half of that year. (cid:13) (cid:13) Interest Income. Interest income is generated on cash balances that we (cid:13) invest primarily in a highly liquid money market account, short-term CDs (cid:13) and commercial paper instruments. Interest income was $379,000 in fiscal (cid:13) 2002, compared with $855,000 in fiscal 2001 and $748,000 in fiscal 2000. (cid:13) The decrease in interest income results primarily from reduced average (cid:13) invested cash balances during 2002 as compared to 2001, which declined (cid:13) primarily as a result of operating losses incurred during 2002. (cid:13) (cid:13) Income Taxes. A tax benefit of $1,435,000 was recorded for fiscal year (cid:13) 2002, reflecting the loss incurred for the year. For fiscal 2001, the (cid:13) provision for income taxes was $593,000, despite a loss from operations (cid:13) before income taxes. This provision for income taxes resulted from the (cid:13) non-deductibility, for income tax purposes, of certain goodwill (cid:13) amortization expenses and other permanent tax differences. For fiscal 2000, (cid:13) income taxes were provided at 50.1%, which also reflects the statutory rate (cid:13) of 40.8% for California C corporations and the non-deductibility, for tax (cid:13) purposes, of certain goodwill amortization charges and other permanent tax (cid:13) differences. (cid:13) (cid:13) For fiscal 2001, we recorded a provision for income taxes of $593,000, (cid:13) despite a loss from operations before income taxes, due to the (cid:13) non-deductibility, for income tax purposes, of certain goodwill (cid:13) amortization expenses and other permanent tax differences. For fiscal 2000, (cid:13) income taxes were provided at 50.1%, which also reflects the statutory rate (cid:13) of 40.8% for California C corporations and the non-deductibility, for tax (cid:13) purposes, of certain goodwill amortization charges and other permanent tax (cid:13) differences. (cid:13) (cid:13) 21 (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) (cid:13) Quarterly Results of Operations and Seasonality (cid:13) (cid:13) The following table presents unaudited quarterly financial information for (cid:13) each of the eight quarters beginning September 30, 2000 and ending on June (cid:13) 30, 2002. The information has been derived from our unaudited quarterly (cid:13) financial statements, which have been prepared by us on a basis consistent (cid:13) with our audited financial statements appearing elsewhere in this Form (cid:13) 10-K. The information includes all necessary adjustments, consisting only (cid:13) of normal recurring adjustments, that management considers necessary for a (cid:13) fair presentation of the unaudited quarterly results when read in (cid:13) conjunction with the consolidated financial statements and the notes (cid:13) thereto appearing elsewhere in this Form 10-K. These operating results are (cid:13) not necessarily indicative of results that may be expected for any (cid:13) subsequent periods. We expect our operating results to fluctuate in the (cid:13) future due to a number of factors which are outside of our control. See (cid:13) "Overview" above in this Section of this Report for a discussion of those (cid:13) factors. (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) Fiscal Quarters Ended (cid:13) ------------------------------------------------------------------------ (cid:13) Sept. Dec. Mar. June Sept. Dec. Mar. June (cid:13) 30, 31, 31, 30, 30, 31, 31, 30, (cid:13) This document is compiled by Thomson Financial 30 COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 2000 2000 2001 2001 2001 2001 2002 2002 (cid:13) ------- ------- ------- ------- ------- ------- ------- ------- (cid:13) Net revenues $12,588 $12,112 $16,614 $11,070 $ 9,329 $10,615 $12,856 $11,981 (cid:13) Cost of (cid:13) revenues 6,913 7,094 9,432 7,165 5,917 6,254 8,036 6,310 (cid:13) ------- -------- ------- -------- -------- -------- -------- -------- (cid:13) Gross profit 5,675 5,018 7,182 3,905 3,412 4,361 4,820 5,671 (cid:13) SG&A 4,999 4,161 5,145 5,649 5,218 5,138 5,282 5,273 (cid:13) Amortization (cid:13) of goodwill 487 486 412 413 411 412 412 414 (cid:13) Impairment (cid:13) of goodwill -- 906 -- -- -- -- -- 51 (cid:13) ------- -------- ------- -------- -------- -------- -------- -------- (cid:13) Total (cid:13) operating (cid:13) expenses 5,486 5,553 5,557 6,062 5,629 5,550 5,694 5,738 (cid:13) Operating (cid:13) income (cid:13) (loss) 189 (535) 1,625 (2,157) (2,217) (1,189) (874) (67) (cid:13) Interest (cid:13) income, net 313 212 200 130 88 38 107 146 (cid:13) Other income (cid:13) (expense) -- (1) 1 (33) 8 7 4 4 (cid:13) ------- -------- ------- -------- -------- -------- -------- -------- (cid:13) Income (cid:13) (loss) (cid:13) before (cid:13) income taxes 502 (324) 1,826 (2,060) (2,121) (1,144) (763) 83 (cid:13) Provision (cid:13) (benefit) (cid:13) for income (cid:13) taxes 234 (129) 1,039 (551) (1,035) (43) (292) (65) (cid:13) ------- -------- ------- -------- -------- -------- -------- -------- (cid:13) Net income (cid:13) (Loss) $ 268 $ (195) $ 787 $(1,509) $(1,086) $(1,101) $ (471) $ 148 (cid:13) ------- -------- ------- -------- -------- -------- -------- -------- (cid:13) (cid:13) (cid:13) (cid:13) Liquidity and Capital Resources (cid:13) (cid:13) At June 30, 2002, we had cash and cash equivalents of $4,947,000 compared (cid:13) to cash and cash equivalents of $5,874,000 at June 30, 2001. The decrease (cid:13) in cash and cash equivalents since the end of the prior fiscal year (cid:13) primarily resulted from the operating loss in fiscal 2002, partially offset (cid:13) by reductions in accounts receivables and inventories. (cid:13) (cid:13) Because of the variability of the timing, the size and collectible content (cid:13) of our auctions is an inherent feature of our business, we expect that our (cid:13) cash and cash equivalent balances, and outstanding consignor payables, will (cid:13) be subject to significant fluctuations in subsequent reporting periods. (cid:13) (cid:13) Cash provided by operating activities was $933,000 for fiscal 2002, (cid:13) compared to cash used in operating activities of $5,511,000 in fiscal 2001. (cid:13) In fiscal 2002, cash was provided by (i) a $734,000 reduction in accounts (cid:13) receivable caused by enhanced credit management, (ii) a $1,480,000 (cid:13) reduction in inventories caused by management's emphasis on increasing (cid:13) inventory turns, and (iii) $2,574,000 of non-cash amortization expense (cid:13) charged for the fiscal year. Partially offsetting these cash sources was a (cid:13) net loss for the year of $2,510,000 and an increase in consignment advances (cid:13) against a large auction held in the last few days of June 2002. (cid:13) (cid:13) The amount of cash used in operating activities in fiscal 2001, which (cid:13) included $6,979,000 used to pay consignor payables, was largely (cid:13) attributable to the timing of our collectible auctions. We conducted (cid:13) This document is compiled by Thomson Financial 31 (cid:13) COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 several large auctions at the end of fiscal 2000, which generated a (cid:13) significant amount of payables due to the consignors whose collectibles (cid:13) were sold at those auctions. Since amounts due collectibles consignors (cid:13) (cid:13) 22 (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) generally are paid 45 days after completion of an auction, those payables (cid:13) were paid in the first quarter of fiscal 2001 although the auction activity (cid:13) that generated those payables occurred in fiscal 2000. By contrast, the (cid:13) open auctions at June 30, 2001 were not nearly as large as those at June (cid:13) 30, 2000, and accordingly the consignor payable liability significantly (cid:13) decreased in fiscal 2002 as compared to fiscal 2001. (cid:13) (cid:13) Net cash used in investing activities was $1,927,000 in fiscal 2002, (cid:13) compared to net cash used of $2,228,000 in fiscal 2001. We used $713,000 (cid:13) for capital expenditures in fiscal 2002, primarily for computer software (cid:13) and hardware. We also used net cash of $1,034,000 in the acquisition of (cid:13) Collectible Properties, Inc. in April 2002. During fiscal 2001, we advanced (cid:13) an officer of the Company $181,000. In the prior fiscal year, we used (cid:13) $1,050,000 for capital expenditures, primarily related to leasehold (cid:13) improvements for the new corporate offices and net cash of $814,000 in the (cid:13) acquisition of Odyssey Publications. (cid:13) (cid:13) During fiscal 2002, there was a cash inflow of $67,000 from financing (cid:13) activities. This cash inflow was primarily from the exercise of stock (cid:13) options. In the prior fiscal year, net cash of $967,000 was used in (cid:13) financing activities for the purchase of 500,000 shares of our common stock (cid:13) in an open market and private stock repurchase program approved by the (cid:13) Board of Directors. (cid:13) (cid:13) We believe that our existing cash balances and internally-generated funds, (cid:13) in addition to a $1.5 million bank line of credit obtained in November (cid:13) 2001, will be sufficient to finance our operations and financing (cid:13) requirements, and we do not expect any material changes in the sources of (cid:13) cash to fund our operations during the next twelve months. We anticipate (cid:13) that during fiscal 2003, we will be making capital expenditures of less (cid:13) than $100,000. (cid:13) (cid:13) Borrowings under the $1.5 million line of credit are subject to certain (cid:13) borrowing base limitations, bear interest at the prime rate (4.75% at June (cid:13) 30, 2002) plus 1%, and are due on demand. At September 27, 2002, there were (cid:13) no outstanding borrowings under the line of credit. (cid:13) (cid:13) Our capital requirements during the next twelve months could change as a (cid:13) result of any of a number of factors, including the level of sales that we (cid:13) are able to generate during fiscal 2003, which will depend both on the size (cid:13) of and the value of the collectibles we are able to sell at our auctions, (cid:13) and on grading submission rates and our growth rates. In addition, as part (cid:13) of our business strategy, we will continue to seek out opportunities to (cid:13) expand our business, both through internal growth and by acquisition, which (cid:13) could require significant cash expenditures. Depending upon these and other (cid:13) factors, we may require additional financing in the future through equity (cid:13) or debt offerings, which may or may not be available or may be dilutive to (cid:13) our shareholders. Our ability to obtain additional capital will depend upon (cid:13) our operating results, financial condition, future business prospects and (cid:13) conditions then prevailing in the relevant capital markets. (cid:13) (cid:13) Recent Accounting Pronouncements (cid:13) (cid:13) In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS (cid:13) No. 133, Accounting for Derivative Instruments and Hedging Activities. The (cid:13) Company adopted SFAS No. 133 effective for the first quarter of its fiscal (cid:13) year beginning July 1, 2000. SFAS No. 133 requires that the Company record (cid:13) all derivatives on the balance sheet at fair value. The Company does not (cid:13) have any derivative instruments nor does the Company engage in hedging (cid:13) This document is compiled by Thomson Financial 32 COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 activities. Therefore, the adoption of SFAS No. 133 had no impact on the (cid:13) Company's financial statements. (cid:13) (cid:13) In June 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS (cid:13) No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires the (cid:13) use of the purchase method of accounting and prohibits the use of the (cid:13) pooling-of-interests method of accounting for business combinations (cid:13) initiated after June 30, 2001. SFAS No. 141 also requires that the Company (cid:13) recognize acquired intangible assets, apart from goodwill, if the acquired (cid:13) intangible assets meet certain criteria. SFAS No. 141 applies to all (cid:13) business combinations initiated after June 30, 2001 and for purchase (cid:13) business combinations completed on or after July 1, 2001. The Company (cid:13) accounted for the acquisition of (cid:13) (cid:13) 23 (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) Collectible Properties, Inc. which was consummated subsequent to June 30, (cid:13) 2001, in accordance with SFAS No. 141. (cid:13) (cid:13) SFAS No. 142 requires, among other things, that companies no longer (cid:13) amortize goodwill, but instead test goodwill for impairment at least (cid:13) annually. In addition, SFAS No. 142 requires that the Company identify (cid:13) reporting units for the purposes of assessing potential future impairments (cid:13) of goodwill, reassess the useful lives of other existing recognized (cid:13) intangible assets, and cease amortization of intangible assets with an (cid:13) indefinite useful life. An intangible asset with an indefinite useful life (cid:13) should be tested for impairment in accordance with the guidance in SFAS No. (cid:13) 142. SFAS No. 142 is required to be applied in fiscal years beginning after (cid:13) December 15, 2001 to all goodwill and other intangible assets recognized at (cid:13) that date, regardless of when those assets were initially recognized. SFAS (cid:13) No. 142 was adopted by the Company effective as of July 1, 2002 and will (cid:13) require the Company to complete a transitional goodwill impairment test by (cid:13) no later than December 31, 2002. The Company is also required to reassess (cid:13) the useful lives of other intangible assets within the first interim (cid:13) quarter after adoption of SFAS No. 142. (cid:13) (cid:13) In accordance with the transition provisions of SFAS No. 142, the Company (cid:13) did not amortize goodwill arising from the acquisition of Collectible (cid:13) Properties in fiscal 2002. The Company's previous business combinations (cid:13) were accounted for using the purchase method. Due to our adoption of SFAS (cid:13) No. 142, we will no longer amortize our other goodwill balances arising (cid:13) from acquisitions consummated prior to July 1, 2001. (Such amortization (cid:13) expenses amounted to $1,649,000 in 2002.) The Company is in the process of (cid:13) performing the two-step transitional goodwill impairment testing required (cid:13) under the new standard. Based on the analysis for the first step testing (cid:13) performed to date, the Company anticipates an impairment of a substantial (cid:13) amount of its goodwill under the new standard in fiscal year 2003. The (cid:13) impairment will result in a non-cash charge that will be recorded on our (cid:13) income statement as a "cumulative effect of a change in accounting (cid:13) principle" for the fiscal quarter when the amount of that impairment is (cid:13) determined. (cid:13) (cid:13) In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment (cid:13) or Disposal of Long-Lived Assets, which supercedes previous guidance on (cid:13) financial accounting and reporting for the impairment of disposal of (cid:13) long-lived assets and for segments of a business to be disposed of. SFAS (cid:13) No. 144 is effective for fiscal years beginning after December 15, 2001. (cid:13) The Company does not expect the adoption of SFAS No. 144 to have a (cid:13) significant impact on the Company's financial position or results of (cid:13) operations. (cid:13) (cid:13) In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated (cid:13) with Exit or Disposal Activities. SFAS No. 146 addresses significant issues (cid:13) regarding the recognition, measurement, and reporting of costs associated (cid:13) with exit and disposal activities, including restructuring activities. SFAS (cid:13) This document is compiled by Thomson Financial 33 COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 No. 146 also addresses recognition of certain costs related to terminating (cid:13) a contract that is not a capital lease, costs to consolidate facilities or (cid:13) relocate employees, and termination benefits provided to employees that are (cid:13) involuntarily terminated under the terms of a one-time benefit arrangement (cid:13) that is not an ongoing benefit arrangement or an individual (cid:13) deferred-compensation contract. SFAS No. 146 is effective for exit or (cid:13) disposal activities that are initiated after December 31, 2002. Management (cid:13) believes that the adoption of SFAS No. 146 will not have a material impact (cid:13) on the Company's consolidated financial statements. (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (cid:13) (cid:13) (cid:13) (cid:13) Market risk represents the risk of loss that may impact the financial (cid:13) position, results of operations or cash flows of the Company due to adverse (cid:13) changes in financial market prices, including interest rate risk, foreign (cid:13) currency exchange rate risk, commodity price risk and other relevant market (cid:13) rate or price risks. (cid:13) (cid:13) The Company is exposed to a degree of market risk through changes in (cid:13) short-term interest rates. At June 30, 2002, we had approximately (cid:13) $4,947,000 in cash and cash equivalents. These funds are primarily invested (cid:13) in a highly liquid money market fund, and interest earned is re-invested in (cid:13) the same fund. The Company is exposed to the risk of declining short-term (cid:13) interest rates, but we do not consider this risk to be material. (cid:13) (cid:13) 24 (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) (cid:13) We have no activities that would expose it to foreign currency exchange (cid:13) rate risks or commodity price risks. (cid:13) (cid:13) FORWARD-LOOKING STATEMENTS (cid:13) (cid:13) This Report, including "Management's Discussion and Analysis of Financial (cid:13) Condition and Results of Operations" contains "forward-looking statements" (cid:13) as defined in the Private Securities Litigation Reform Act of 1995. (cid:13) Forward-looking statements are estimates of, or statements about our (cid:13) expectations or beliefs regarding, our future financial performance that (cid:13) are based on current information and that are subject to a number of risks (cid:13) and uncertainties that could cause our actual operating results in the (cid:13) future to differ significantly from those expected at the current time, (cid:13) including the risks and uncertainties described in Part I of this Report (cid:13) under the caption "Item I--Description of Business--Certain Factors That (cid:13) Could Affect Our Future Financial Performance" and in "Management's (cid:13) Discussion and Analysis of Financial Condition and Results of Operations" (cid:13) above. (cid:13) (cid:13) Due to these and other possible uncertainties and risks, readers are (cid:13) cautioned not to place undue reliance on the forward-looking statements (cid:13) contained in this Report, which speak only as of the date of this Report, (cid:13) or to make predictions based solely on historical financial performance. We (cid:13) also disclaim any obligation to update forward-looking statements contained (cid:13) in this Report (cid:13) (cid:13) 25 (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) (cid:13) Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (cid:13) This document is compiled by Thomson Financial 34 (cid:13) COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 (cid:13) Index to Consolidated Financial Statements (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) Page (cid:13) ----------------------------- (cid:13) Independent Auditors' Report 27 (cid:13) Consolidated Balance Sheets at June 30, 2002 (cid:13) and 2001 28 (cid:13) Consolidated Statements of Operations for (cid:13) the Years Ended June 30, 2002, 2001 and 2000 29 (cid:13) Consolidated Statements of Stockholders' (cid:13) Equity for the Years Ended June 30, 2002, (cid:13) 2001 and 2000 30 (cid:13) Consolidated Statements of Cash Flows for (cid:13) the Years Ended June 30, 2002, 2001 and 2000 31 (cid:13) Notes to Consolidated Financial Statements (cid:13) for the Years Ended June 30, 2002, 2001 and (cid:13) 2000 33 (cid:13) (cid:13) (cid:13) 26 (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) INDEPENDENT AUDITORS' REPORT (cid:13) (cid:13) To the Stockholders and Board of Directors of (cid:13) Collectors Universe, Inc. (cid:13) (cid:13) We have audited the accompanying consolidated balance sheets of Collectors (cid:13) Universe, Inc. and subsidiaries (the Company) as of June 30, 2002 and 2001, (cid:13) and the related consolidated statements of operations, stockholders' (cid:13) equity, and cash flows for each of the three years in the period ended June (cid:13) 30, 2002. Our audits also included the financial statement schedule listed (cid:13) in the index at Item 15(A) (2). These financial statements and the (cid:13) financial statement schedule are the responsibility of the Company's (cid:13) management. Our responsibility is to express an opinion on these financial (cid:13) statements and the financial statement schedule based on our audits. (cid:13) (cid:13) We conducted our audits in accordance with auditing standards generally (cid:13) accepted in the United States of America. Those standards require that we (cid:13) plan and perform the audit to obtain reasonable assurance about whether the (cid:13) financial statements are free of material misstatement. An audit includes (cid:13) examining, on a test basis, evidence supporting the amounts and disclosures (cid:13) in the financial statements. An audit also includes assessing the (cid:13) accounting principles used and significant estimates made by management, as (cid:13) well as evaluating the overall financial statement presentation. We believe (cid:13) that our audits provide a reasonable basis for our opinion. (cid:13) (cid:13) In our opinion, such consolidated financial statements present fairly, in (cid:13) all material respects, the financial position of Collectors Universe, Inc. (cid:13) and subsidiaries as of June 30, 2002 and 2001, and the results of their (cid:13) operations and their cash flows for each of the three years in the period (cid:13) ended June 30, 2002, in conformity with accounting principles generally (cid:13) accepted in the United States of America. Also, in our opinion, such (cid:13) financial statement schedule, when considered in relation to the basic (cid:13) consolidated financial statements taken as a whole, presents fairly in all (cid:13) material respects the information set forth therein. (cid:13) (cid:13) (cid:13) DELOITTE & TOUCHE LLP (cid:13) (cid:13) Costa Mesa, California (cid:13) This document is compiled by Thomson Financial 35 (cid:13) COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 August 26, 2002, except for paragraph 5 of Note 12, (cid:13) as to which the date is September 10, 2002 (cid:13) (cid:13) (cid:13) 27 (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES (cid:13) (cid:13) CONSOLIDATED BALANCE SHEETS (cid:13) (in thousands, except per share data) (cid:13) (cid:13) Assets (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) June 30, (cid:13) ------------------------------- (cid:13) 2002 2001 (cid:13) --------------- ------------ (cid:13) ASSETS (cid:13) Current assets: (cid:13) Cash and cash equivalents $ 4,947 $ 5,874 (cid:13) Accounts receivable, net 7,291 8,162 (cid:13) Auction consignment advances 3,359 1,897 (cid:13) Inventories, net 8,166 9,088 (cid:13) Prepaid expenses and other 513 823 (cid:13) Notes receivable 481 -- (cid:13) Note receivable from related (cid:13) party 381 200 (cid:13) Refundable income taxes 1,191 892 (cid:13) Deferred income taxes 648 645 (cid:13) ---------------- ------------- (cid:13) Total current assets 26,597 27,581 (cid:13) Property and equipment, net 1,736 1,898 (cid:13) Notes receivable, net of current (cid:13) portion 476 -- (cid:13) Goodwill, net 14,961 16,146 (cid:13) Deferred income taxes 1,074 803 (cid:13) Other assets 285 440 (cid:13) ---------------- ------------- (cid:13) $ 45,509 $ 46,868 (cid:13) ---------------- ------------- (cid:13) LIABILITIES AND STOCKHOLDERS' (cid:13) EQUITY (cid:13) Current liabilities: (cid:13) Accounts payable $ 878 $ 452 (cid:13) Consignor payable 4,598 4,265 (cid:13) Accrued liabilities 736 917 (cid:13) Compensation and benefits 967 650 (cid:13) Deferred revenue 921 812 (cid:13) ---------------- ------------- (cid:13) Total current liabilities 8,100 7,096 (cid:13) Deferred rent 281 222 (cid:13) Commitments and contingencies (cid:13) (Note 13) (cid:13) Stockholders' equity: (cid:13) Preferred stock, $.001 par value; (cid:13) 3,000 shares authorized; no (cid:13) shares issued or outstanding -- -- (cid:13) Common stock, $.001 par value; (cid:13) 30,000 shares authorized; (issued (cid:13) and outstanding shares: 25,526 in (cid:13) 2002 and 25,470 in 2001) 26 26 (cid:13) Additional paid-in capital 41,248 41,160 (cid:13) This document is compiled by Thomson Financial 36 COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 Accumulated deficit (3,125) (615) (cid:13) Treasury stock, at cost (500 (cid:13) shares) (1,021) (1,021) (cid:13) ---------------- ------------- (cid:13) Total stockholders' equity 37,128 39,550 (cid:13) ---------------- ------------- (cid:13) $ 45,509 $ 46,868 (cid:13) ---------------- ------------- (cid:13) (cid:13) (cid:13) (cid:13) The accompanying notes are an integral part of these consolidated financial (cid:13) statements. (cid:13) (cid:13) 28 (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES (cid:13) (cid:13) CONSOLIDATED STATEMENTS OF OPERATIONS (cid:13) (in thousands, except per share data) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) Years Ended June 30, (cid:13) --------------------------------------- (cid:13) 2002 2001 2000 (cid:13) ----------- ---------- --------- (cid:13) Net revenues (cid:13) Grading and authentication (cid:13) fees $ 18,327 $ 20,962 $ 24,363 (cid:13) Sales of collectibles and (cid:13) other 21,579 25,181 12,974 (cid:13) Commissions earned 4,875 6,241 5,037 (cid:13) ------------ ----------- ---------- (cid:13) Total net revenues 44,781 52,384 42,374 (cid:13) (cid:13) Cost of revenues (cid:13) Grading and authentication (cid:13) operating expenses 7,036 7,820 6,855 (cid:13) Cost of auctions and (cid:13) collectibles sold 19,481 22,784 13,330 (cid:13) ------------ ----------- ---------- (cid:13) Total costs of revenues 26,517 30,604 20,185 (cid:13) (cid:13) Gross profit 18,264 21,780 22,189 (cid:13) (cid:13) Selling, general and (cid:13) administrative expenses 20,911 19,954 18,614 (cid:13) Amortization of goodwill 1,649 1,798 1,070 (cid:13) Impairment of goodwill 51 906 -- (cid:13) ------------ ----------- ---------- (cid:13) Total operating expenses 22,611 22,658 19,684 (cid:13) (cid:13) Operating income (loss) (4,347) (878) 2,505 (cid:13) (cid:13) Interest income, net 379 855 748 (cid:13) Other income (expense), net 23 (33) (161) (cid:13) ------------ ----------- ---------- (cid:13) Income (loss) before income (cid:13) taxes (3,945) (56) 3,092 (cid:13) (cid:13) Provision (benefit) for (cid:13) income taxes (1,435) 593 1,550 (cid:13) This document is compiled by Thomson Financial 37 (cid:13) COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 ------------ ----------- ---------- (cid:13) Net income (loss) ($ 2,510) $ (649) $ 1,542 (cid:13) ------------ ----------- ---------- (cid:13) (cid:13) Net income (loss) per (cid:13) share: (cid:13) Basic ($ 0.10) $ (0.03) $ 0.07 (cid:13) ------------ ----------- ---------- (cid:13) Diluted ($ 0.10) $ (0.03) $ 0.06 (cid:13) ------------ ----------- ---------- (cid:13) (cid:13) Weighted average shares (cid:13) outstanding: (cid:13) Basic 25,389 25,114 23,330 (cid:13) ------------ ----------- ---------- (cid:13) Diluted 25,389 25,114 24,575 (cid:13) ------------ ----------- ---------- (cid:13) (cid:13) (cid:13) (cid:13) The accompanying notes are an integral part of these consolidated financial (cid:13) statements. (cid:13) (cid:13) 29 (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES (cid:13) (cid:13) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (cid:13) (in thousands) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) Retained (cid:13) Common Stock Additional Earnings Treasury Stock (cid:13) -------------- ---------------- (cid:13) Paid-in (Accumulated (cid:13) Shares Amount Capital Deficit) Shares Amount Total (cid:13) ------ ------ ---------- ------------- ------ ------- ------- (cid:13) Balance at (cid:13) July 1, 1999 20,282 $ 20 $ 11,586 $ (1,508) -- $ -- $10,098 (cid:13) (cid:13) Issuance of (cid:13) common stock (cid:13) in public (cid:13) offering 4,000 4 21,351 -- -- -- 21,355 (cid:13) Issuance of (cid:13) shares in (cid:13) acquisition 1,000 1 7,624 -- -- -- 7,625 (cid:13) Exercise of (cid:13) stock (cid:13) options 147 -- 323 -- -- -- 323 (cid:13) Tax benefit (cid:13) of stock (cid:13) option (cid:13) exercise -- -- 111 -- -- -- 111 (cid:13) Compensation (cid:13) expense (cid:13) related to (cid:13) stock (cid:13) options (cid:13) granted -- -- 61 -- -- -- 61 (cid:13) Net income -- -- -- 1,542 -- -- 1,542 (cid:13) ------ ------ ---------- -------------- ------- -------- -------- (cid:13) This document is compiled by Thomson Financial 38 (cid:13) COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 Balance at (cid:13) June 30, (cid:13) 2000 25,429 25 41,056 34 -- -- 41,115 (cid:13) (cid:13) Repurchase (cid:13) of common (cid:13) stock -- -- -- -- (500) (1,021) (1,021) (cid:13) Employee (cid:13) stock (cid:13) purchase (cid:13) plan 41 1 53 -- -- -- 54 (cid:13) Compensation (cid:13) expense (cid:13) related to (cid:13) stock (cid:13) options (cid:13) granted -- -- 51 -- -- -- 51 (cid:13) Net loss -- -- -- (649) -- -- (649) (cid:13) ------ ------ ---------- -------------- ------- -------- -------- (cid:13) Balance at (cid:13) June 30, (cid:13) 2001 25,470 26 41,160 (615) (500) (1,021) 39,550 (cid:13) (cid:13) Employee (cid:13) stock (cid:13) purchase (cid:13) plan 41 -- 55 -- -- -- 55 (cid:13) Exercise of (cid:13) stock (cid:13) options 15 -- 12 -- -- -- 12 (cid:13) Compensation (cid:13) expense (cid:13) related to (cid:13) stock (cid:13) options (cid:13) granted -- -- 21 -- -- -- 21 (cid:13) Net loss -- -- -- (2,510) -- -- (2,510) (cid:13) ------ ------ ---------- -------------- ------- -------- -------- (cid:13) 25,526 $ 26 $ 41,248 $ (3,125) (500) $(1,021) $37,128 (cid:13) (cid:13) (cid:13) (cid:13) The accompanying notes are in integral part of these consolidated financial (cid:13) statements. (cid:13) (cid:13) 30 (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) COLLECTORS UNIVERSE, INC. (cid:13) (cid:13) CONSOLIDATED STATEMENTS OF CASH FLOWS (cid:13) (in thousands) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) Years ended June 30, (cid:13) ---------------------------------------- (cid:13) 2002 2001 2000 (cid:13) ---------- ---------- ----------- (cid:13) CASH FLOWS FROM OPERATING (cid:13) ACTIVITIES: (cid:13) Net income (loss) $ (2,510) $ (649) $ 1,542 (cid:13) Adjustments to reconcile (cid:13) net income (loss) to net -- -- -- (cid:13) This document is compiled by Thomson Financial 39 (cid:13) COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 Cash provided from (cid:13) operating activities: (cid:13) Depreciation and (cid:13) amortization 2,523 2,552 1,689 (cid:13) Impairment of goodwill 51 906 -- (cid:13) Stock-based compensation (cid:13) expense 21 51 61 (cid:13) Provision for bad debts 137 502 182 (cid:13) Provision for inventory (cid:13) write-down 31 234 17 (cid:13) Write-off and forgiveness (cid:13) of note receivable from (cid:13) related party -- -- 26 (cid:13) Write-down of property and (cid:13) equipment -- 34 -- (cid:13) Deferred income taxes (274) (437) (156) (cid:13) Changes in operating assets (cid:13) and liabilities (net of (cid:13) effects of acquisitions): (cid:13) Accounts receivable 734 1,493 (7,981) (cid:13) Auction consignment (cid:13) advances (1,462) (204) (453) (cid:13) Inventories 1,480 (1,907) (1,154) (cid:13) Prepaid expenses and other 310 366 (597) (cid:13) Notes receivable (957) -- -- (cid:13) Refundable income taxes (299) (504) (388) (cid:13) Other assets 85 (81) (260) (cid:13) Accounts payable 426 (40) (526) (cid:13) Consignor payable 333 (6,979) 9,825 (cid:13) Accrued liabilities (181) (207) 227 (cid:13) Accrued compensation and (cid:13) benefits 317 110 16 (cid:13) Deferred revenue 109 (973) 108 (cid:13) Income tax payable -- -- (16) (cid:13) Deferred rent 59 222 -- (cid:13) ----------- ----------- ------------ (cid:13) Net cash provided by (used (cid:13) in) operating activities 933 (5,511) 2,162 (cid:13) (cid:13) CASH FLOWS FROM INVESTING (cid:13) ACTIVITIES: (cid:13) Proceeds from sale of (cid:13) property and equipment 1 -- -- (cid:13) Capital expenditures (713) (1,050) (915) (cid:13) Net cash paid for acquired (cid:13) businesses (1,034) (814) (10,308) (cid:13) Advances on notes (cid:13) receivable from related (cid:13) parties, net (181) (364) -- (cid:13) ----------- ----------- ------------ (cid:13) Net cash used in investing (cid:13) activities (1,927) (2,228) (11,223) (cid:13) (cid:13) (cid:13) (cid:13) The accompanying notes are an integral part of these consolidated financial (cid:13) statements. (cid:13) (cid:13) 31 (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) COLLECTORS UNIVERSE, INC. (cid:13) (cid:13) CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (cid:13) (in thousands) (cid:13) This document is compiled by Thomson Financial 40 (cid:13) COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 (cid:13) (cid:13) (cid:13) (cid:13) Years ended June 30, (cid:13) ---------------------------------------- (cid:13) 2002 2001 2000 (cid:13) ---------- ---------- ----------- (cid:13) CASH FLOWS FROM FINANCING (cid:13) ACTIVITIES: (cid:13) Purchase of common stock -- (1,021) -- (cid:13) Proceeds from sale of (cid:13) common stock -- -- 21,355 (cid:13) Proceeds from employee (cid:13) stock purchase plan 55 54 -- (cid:13) Stock option exercise and (cid:13) related tax benefit 12 -- 434 (cid:13) ----------- ----------- ------------ (cid:13) Net cash provided by (used (cid:13) in) financing activities 67 (967) 21,789 (cid:13) (cid:13) Net increase (decrease) in (cid:13) cash and cash equivalents (927) (8,706) 12,728 (cid:13) Cash and cash equivalents (cid:13) at beginning of year 5,874 14,580 1,852 (cid:13) ----------- ----------- ------------ (cid:13) Cash and cash equivalents (cid:13) at end of year $ 4,947 $ 5,874 $ 14,580 (cid:13) ----------- ----------- ------------ (cid:13) (cid:13) SUPPLEMENTAL DISCLOSURES OF (cid:13) CASH FLOW INFORMATION: (cid:13) Income taxes paid $ 9 $ 1,713 $ 2,018 (cid:13) Interest paid 36 -- -- (cid:13) (cid:13) SUPPLEMENTAL SCHEDULE OF (cid:13) NONCASH TRANSACTIONS: (cid:13) During the years ended June (cid:13) 30, 2002, 2001 and 2000, (cid:13) the Company acquired (cid:13) certain businesses, as (cid:13) follows (Note 3): (cid:13) Common stock issued in (cid:13) acquisitions $ -- $ -- $ (7,625) (cid:13) Fair value of assets (cid:13) acquired 589 25 4,583 (cid:13) Goodwill 445 857 13,391 (cid:13) Cash paid in acquisitions, (cid:13) net of cash acquired (1,034) (814) (10,308) (cid:13) ----------- ----------- ------------ (cid:13) Liabilities assumed $ -- $ 68 $ 41 (cid:13) ----------- ----------- ------------ (cid:13) (cid:13) (cid:13) (cid:13) The accompanying notes are an integral part of these consolidated financial (cid:13) statements. (cid:13) (cid:13) 32 (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) (cid:13) COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES (cid:13) (cid:13) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cid:13) This document is compiled by Thomson Financial 41 (cid:13) COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 (cid:13) 1. Company Organization and Nature Of Business (cid:13) (cid:13) Organization (cid:13) (cid:13) Collectors Universe, Inc. (We or the Company) is a Delaware corporation (cid:13) that was organized on February 5, 1999 for the purpose of enabling (cid:13) Professional Coin Grading Service, Inc. (PCGS or the Predecessor) to (cid:13) acquire other businesses that, like PCGS, would provide services to the (cid:13) collectibles markets. On February 5, 1999, Collectors Universe issued (cid:13) 17,311 shares of common stock in exchange for all of the outstanding shares (cid:13) of PCGS. As a result of that exchange, the former stockholders of PCGS (cid:13) become stockholders of Collectors Universe, with each of them receiving a (cid:13) number of our shares based on his or her percentage ownership of the shares (cid:13) of PCGS. Prior to this exchange, Collectors Universe had no operating (cid:13) assets or liabilities and had not yet conducted any operations. The assets (cid:13) and liabilities acquired were recorded at the predecessor basis as the (cid:13) transaction represented a transfer of assets and liabilities between (cid:13) entities under common control. (cid:13) (cid:13) Concurrently, with the exchange transaction with PCGS, Collectors Universe (cid:13) acquired the assets of the auction businesses of Lyn F. Knight Rare Coins, (cid:13) Inc. (Lyn Knight) and Kingswood Coin Auctions, LLC (Kingswood) and the (cid:13) minority ownership interests in Superior Sportscard Auctions, LLC (cid:13) (Superior) and Internet Universe, LLC (IU), both of which were (cid:13) majority-owned subsidiaries of PCGS at the time these acquisitions were (cid:13) consummated. (cid:13) (cid:13) Nature of the Business (cid:13) (cid:13) We are a collectibles company engaged in the grading, auctioning, selling (cid:13) and content information for high-end collectibles. We provide (cid:13) authentication and grading services for sportscards, rare coins, stamps and (cid:13) authentication-only services for sports memorabilia and autographs. We (cid:13) conduct in-person, telephone and Internet auctions of rare coins and (cid:13) currency, sportscards and sports memorabilia, rare records and (cid:13) entertainment memorabilia. We sell rare coins, sportscards, sports and (cid:13) entertainment memorabilia, historical documents and records on a direct (cid:13) basis and through catalogs and the Internet. We also publish magazines that (cid:13) provide market prices and information for certain collectibles. (cid:13) (cid:13) Basis of Presentation (cid:13) (cid:13) The accompanying consolidated financial statements have been prepared in (cid:13) accordance with accounting principles generally accepted in the United (cid:13) States of America. (cid:13) (cid:13) 2. Summary of Significant Accounting Policies (cid:13) (cid:13) Principles of Consolidation (cid:13) (cid:13) The accompanying consolidated financial statements include the accounts of (cid:13) Collectors Universe, Inc. and its subsidiaries. During the years ended June (cid:13) 30, 2002, 2001, and 2000, the Company acquired certain assets of other (cid:13) businesses and consolidated their accounts from the dates of acquisition (cid:13) (Note 3). All intercompany accounts have been eliminated in consolidation. (cid:13) (cid:13) Fiscal Year (cid:13) (cid:13) The Company's fiscal year ends on the Saturday closest to June 30th. (cid:13) Accordingly, the last three fiscal years ended on June 29, 2002, June 30, (cid:13) 2001 and July 1, 2000. For clarity of presentation, all fiscal years are (cid:13) reported as ending on June 30th. (cid:13) (cid:13) Use of Estimates (cid:13) (cid:13) This document is compiled by Thomson Financial 42 COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 The preparation of financial statements in conformity with generally (cid:13) accepted accounting principles requires management to make estimates and (cid:13) assumptions that affect the reported amounts of assets and liabilities and (cid:13) disclosure of contingent assets and liabilities at the dates of the (cid:13) financial statements and the reported amounts of (cid:13) (cid:13) 33 (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) (cid:13) COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES (cid:13) (cid:13) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (cid:13) (cid:13) revenues and expenses during the reporting periods. Actual results may (cid:13) differ from those estimates, and such differences may be material to the (cid:13) consolidated financial statements. (cid:13) (cid:13) Cash and Cash Equivalents (cid:13) (cid:13) We consider all highly liquid investments with original maturities of three (cid:13) months or less at the date of purchase to be cash equivalents. (cid:13) (cid:13) Concentrations (cid:13) (cid:13) Financial instruments that potentially subject the Company to significant (cid:13) concentrations of credit risk consist primarily of cash and cash (cid:13) equivalents and accounts receivable. The Company invests its excess cash in (cid:13) a large uninsured institutional money market fund. A substantial portion of (cid:13) accounts receivable is due from collectibles dealers. The Company performs (cid:13) an analysis of the expected collectibility of accounts receivable and makes (cid:13) an allowance for doubtful accounts, when necessary. The allowance for (cid:13) doubtful accounts was $293,000 and $570,000 at June 30, 2002 and 2001, (cid:13) respectively. (cid:13) (cid:13) The Company purchases injection-molded parts, holograms and printed labels (cid:13) for its grading services. There are numerous suppliers for these items, and (cid:13) any one could be substituted without significant delay or cost to the (cid:13) Company. However, while there are numerous sources for injection molded (cid:13) parts, these parts require a die to fabricate the part. The manufacture of (cid:13) high precision dies can be a lengthy process and requires considerable (cid:13) expertise in their fabrication. The Company does not have "back-up" dies (cid:13) for many of its high volume injection molded parts, and the Company relies (cid:13) on one supplier for these requirements. In the event that this supplier (cid:13) experiences a protracted production stoppage, the Company would not be able (cid:13) to service all of its customers. (cid:13) (cid:13) Fair Value of Financial Instruments (cid:13) (cid:13) The carrying value of cash equivalents, accounts receivable, notes (cid:13) receivable, accounts payable and accrued liabilities approximate their fair (cid:13) values. (cid:13) (cid:13) Inventories (cid:13) (cid:13) We account for inventories under the specific identification method, except (cid:13) for certain sports celebrity autograph inventory that is accounted for at (cid:13) average cost. Inventories are valued at the lower of cost or market on an (cid:13) inventory category basis. Inventories are periodically reviewed to identify (cid:13) slow moving items, and the allowance for inventory loss is recognized, as (cid:13) necessary. The allowance for inventory loss was $339,000 and $312,000 at (cid:13) June 30, 2002 and 2001, respectively. It is possible that our estimates of (cid:13) market value could change in the near term due to market conditions in the (cid:13) various collectibles markets served by the Company. (cid:13) (cid:13) During the fourth quarter ended June 30, 2002, the Company capitalized (cid:13) This document is compiled by Thomson Financial 43 COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 $116,000 of supplies inventory used in its grading and authentication (cid:13) operations. (cid:13) (cid:13) Property and Equipment (cid:13) (cid:13) Property and equipment are stated at cost. Depreciation and amortization (cid:13) are provided using the straight-line method over the estimated useful lives (cid:13) ranging from three to seven years. Leasehold improvements are amortized (cid:13) over the shorter of the estimated useful lives of the improvements or the (cid:13) term of the related lease. Repair and maintenance costs are expensed as (cid:13) incurred. (cid:13) (cid:13) Goodwill (cid:13) (cid:13) Goodwill represents the excess of the purchase price over the fair value of (cid:13) net assets acquired and is amortized using the straight-line method over (cid:13) periods ranging from five to fifteen years. We periodically evaluate the (cid:13) recoverability of goodwill by determining whether the amortization of the (cid:13) balance over its remaining useful life can be recovered through projected (cid:13) undiscounted future operating cash flows. During fiscal 2001, we determined (cid:13) that the goodwill associated with Internet Universe, LLC, which conducted (cid:13) our Internet operations, had become impaired. This determination resulted (cid:13) primarily from a change in our projected revenue for Internet advertising (cid:13) on our website www.collectors.com, due to industry-wide reductions in the (cid:13) viability of banner advertising and the rates that could be charged for (cid:13) this type of Internet advertising. Accordingly, we recorded a charge of (cid:13) $906,000 in fiscal 2001 to reduce the carrying value of the Internet (cid:13) Universe, LLC goodwill to zero. During fiscal 2002, we determined that the (cid:13) goodwill associated with Professional Stamp Experts (PSE) was partially (cid:13) impaired. This determination resulted from a reduction in future projected (cid:13) revenues of PSE. Accordingly, we recorded a charge of $51,000 in fiscal (cid:13) 2002 to reduce the carrying value of the PSE goodwill to $89,000. Based on (cid:13) our most recent analysis, we believe that no additional impairment exists (cid:13) at June 30, 2002. Accumulated amortization of goodwill was $4,188,000 and (cid:13) $2,609,000 at June 30, 2002 and 2001, respectively. (cid:13) (cid:13) 34 (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) (cid:13) COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES (cid:13) (cid:13) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (cid:13) (cid:13) (cid:13) Impairment of Long-Lived Assets (cid:13) (cid:13) We account for the impairment and disposition of long-lived assets in (cid:13) accordance with Statement of Financial Accounting Standards (SFAS) No. 121, (cid:13) Accounting for the Impairment of Long-Lived Assets and for Long-Lived (cid:13) Assets to Be Disposed Of . In accordance with SFAS No. 121, long-lived (cid:13) assets to be held for use are reviewed for events or changes in (cid:13) circumstances which indicate that their carrying value may not be (cid:13) recoverable through projected undiscounted future operating cash flows. The (cid:13) Company periodically reviews the carrying value of long-lived assets to (cid:13) determine whether an impairment to such value has occurred. At June 30, (cid:13) 2002, there was no impairment of long-lived assets. (cid:13) (cid:13) Revenue Recognition (cid:13) (cid:13) Net revenues include fees generated from the grading and authentication of (cid:13) sportscards, coins, autographs and stamps; the sales prices of owned (cid:13) collectibles sold in our auctions and directly to collectors; commissions (cid:13) earned on sales of consigned collectibles at our auctions; and revenue from (cid:13) the publication of collectibles magazines. Net revenues are determined net (cid:13) of discounts and allowances, product returns, and commissions paid to (cid:13) This document is compiled by Thomson Financial 44 COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 consignors on sales of their collectibles. (cid:13) (cid:13) We record revenue from the sale of collectibles at our auctions at the time (cid:13) the collectible is delivered in person, or otherwise shipped based on (cid:13) agreement with the successful bidder. Shipment or delivery generally takes (cid:13) place after payment is received from the successful bidder, which can be as (cid:13) long as 60 days after completion of the auction. However, for certain (cid:13) repeat bidders, we deliver in-person or ship the collectibles at the close (cid:13) of an auction and allow them to pay up to 60 days following the auction. (cid:13) Such sales are also recorded at the time of delivery or shipment. We also (cid:13) offer extended payment terms to certain collectors or dealers. For (cid:13) collectibles that we own and sell at auction, we record the successful (cid:13) bidder amount, or "hammer," as the sale of the merchandise and record the (cid:13) buyer's fee as commission earned. We also record the cost of the (cid:13) merchandise sold as cost of revenues. For collectibles that are consigned (cid:13) to us for auction, we record, as commissions earned, the amounts of the (cid:13) buyer's and seller's fees. Depending upon the type of collectibles auction, (cid:13) we charge successful bidders a 10% to 15% commission and generally charge (cid:13) consignors a 5% to 15% selling commission. On some large or important (cid:13) consignments, we may negotiate a reduced consignor commission or even pay a (cid:13) fee to the consignor. (cid:13) (cid:13) Grading revenues are recognized when the graded item is returned to the (cid:13) customer. Grading fees have generally been prepaid, although we have (cid:13) offered open account privileges to numerous larger dealers. Advance (cid:13) payments received for grading services are deferred until the service is (cid:13) performed and the item is shipped. For dealers who have open account (cid:13) status, we record revenue at the time of shipment. (cid:13) (cid:13) Warranty Costs (cid:13) (cid:13) The Company offers a warranty covering the coins and sportscards it (cid:13) authenticates and grades. Under the terms of the warranty, any coin or (cid:13) sportscard originally graded by us, which subsequently receives a lower (cid:13) grade upon resubmittal to us, obligates us to either purchase the coin or (cid:13) sportscard or pay the difference in value of the item at its original grade (cid:13) as compared with its lower grade. Similarly, any coin or sportscard (cid:13) originally graded by us, which subsequently is determined to be not (cid:13) authentic, obligates us to purchase the coin or sportscard. We accrue for (cid:13) estimated warranty costs based on historical trends and related experience. (cid:13) (cid:13) Advertising Costs (cid:13) (cid:13) Advertising costs are expensed as incurred and amounted to approximately (cid:13) $661,000, $849,000 and $895,000 for the three years ended June 30, 2002, (cid:13) 2001 and 2000, respectively. (cid:13) (cid:13) Income Taxes (cid:13) (cid:13) We account for income taxes in accordance with SFAS No. 109, Accounting for (cid:13) Income Taxes. Deferred taxes on income result from temporary differences (cid:13) between the reporting of income and expense for financial statements and (cid:13) tax reporting purposes. A valuation allowance related to a deferred tax (cid:13) asset is recorded when it is more likely than not that some portion or all (cid:13) of the deferred tax asset will not be realized. (cid:13) (cid:13) (cid:13) 35 (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) (cid:13) COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES (cid:13) (cid:13) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (cid:13) (cid:13) (cid:13) This document is compiled by Thomson Financial 45 COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 Stock-Based Compensation (cid:13) (cid:13) We account for stock-based awards to employees using the intrinsic value (cid:13) method in accordance with Accounting Principles Board (APB) Opinion No. 25, (cid:13) Accounting for Stock Issued to Employees, and adopted the disclosure (cid:13) provisions of SFAS No. 123, Accounting for Stock-Based Compensation. (cid:13) (cid:13) We account for equity instruments issued to non-employees in accordance (cid:13) with the provisions of SFAS No. 123 and Emerging Issues Task Force (EITF) (cid:13) Issue No. 96-18, Accounting for Equity Instruments that are Issued to Other (cid:13) Than Employees for Acquiring, or in Conjunction with Selling Goods or (cid:13) Services. All transactions in which goods or services are the consideration (cid:13) received for the issuance of equity instruments are accounted for based on (cid:13) the fair value of the consideration received or the fair value of the (cid:13) equity instrument issued, whichever is more reliably measurable. The (cid:13) measurement date used to determine the fair value of the equity instrument (cid:13) issued is the earlier of the date on which the third-party performance is (cid:13) complete or the date on which it is probable that performance will occur. (cid:13) (cid:13) Net Income (Loss) Per Share (cid:13) (cid:13) We compute net income (loss) per share in accordance with SFAS No. 128, (cid:13) Earnings Per Share. SFAS No. 128 requires the presentation of basic and (cid:13) diluted earnings per share. Basic earnings (loss) per share is computed by (cid:13) dividing net income (loss) attributable to common stockholders by the (cid:13) weighted average number of common shares outstanding during the periods (cid:13) presented. Diluted net income per share is computed by dividing net income (cid:13) attributable to common stockholders by the weighted average number of (cid:13) common and common equivalent shares outstanding during the periods (cid:13) presented assuming the exercise of all outstanding stock options and other (cid:13) dilutive securities. For the years ended June 30, 2002 and June 30, 2001, (cid:13) the effect of potentially dilutive stock options of 719,000 and 557,000 (cid:13) shares, respectively, is not included, as the effect is anti-dilutive. (cid:13) (cid:13) The following table sets forth the computation of basic and diluted net (cid:13) income (loss) per common share: (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (in thousands) (cid:13) --------------------------------------------- (cid:13) June 30, (cid:13) --------------------------------------------- (cid:13) 2002 2001 2000 (cid:13) ---------- --------- ---------------- (cid:13) Numerator: (cid:13) Net income (loss) used for (cid:13) basic and diluted net income (cid:13) (loss) per share $ (2,510) $ (649) $ 1,542 (cid:13) ----------- ---------- --------------- (cid:13) Denominator: (cid:13) Average common shares used (cid:13) for basic net income (loss) (cid:13) per share 25,389 25,114 23,330 (cid:13) Effects of dilutive stock (cid:13) options -- -- 1,245 (cid:13) ----------- ---------- --------------- (cid:13) Denominator for diluted net (cid:13) income (loss) per share 25,389 25,114 24,575 (cid:13) ----------- ---------- --------------- (cid:13) (cid:13) (cid:13) (cid:13) Comprehensive Income (cid:13) This document is compiled by Thomson Financial 46 (cid:13) COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 (cid:13) The Company does not have any items of other comprehensive income requiring (cid:13) separate disclosure. (cid:13) (cid:13) Computer Software Development Costs (cid:13) (cid:13) In accordance with Statement of Position No. 98-1, Accounting for the Costs (cid:13) of Computer Software Developed or Obtained for Internal Use, the Company (cid:13) has capitalized certain costs to obtain or develop software to be used for (cid:13) internal purposes. For fiscal years 2002 and 2001, the Company capitalized (cid:13) $93,000 and $232,000 respectively, of software development costs and (cid:13) amortized $198,000 and $142,000 respectively, of these costs based upon a (cid:13) two-year amortization period. (cid:13) (cid:13) 36 (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) (cid:13) COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES (cid:13) (cid:13) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (cid:13) (cid:13) (cid:13) Recent Accounting Pronouncements (cid:13) (cid:13) In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS (cid:13) No. 133, Accounting for Derivative Instruments and Hedging Activities. The (cid:13) Company adopted SFAS No. 133 effective for the first quarter of its fiscal (cid:13) year beginning July 1, 2000. SFAS No. 133 requires that the Company record (cid:13) all derivatives on the balance sheet at fair value. The Company does not (cid:13) have any derivative instruments nor does the Company engage in hedging (cid:13) activities. Therefore, the adoption of SFAS No. 133 had no impact on the (cid:13) Company's consolidated financial statements. (cid:13) (cid:13) In June 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS (cid:13) No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires the (cid:13) use of the purchase method of accounting and prohibits the use of the (cid:13) pooling-of-interests method of accounting for business combinations (cid:13) initiated after June 30, 2001. SFAS No. 141 also requires that the Company (cid:13) recognize acquired intangible assets, apart from goodwill, if the acquired (cid:13) intangible assets meet certain criteria. SFAS No. 141 applies to all (cid:13) business combinations initiated after June 30, 2001 and for purchase (cid:13) business combinations completed on or after July 1, 2001. The Company (cid:13) accounted for the acquisition of Collectible Properties, Inc. (CPI) (note (cid:13) 3), which was consummated subsequent to June 30, 2001, in accordance with (cid:13) SFAS No. 141. (cid:13) (cid:13) SFAS No. 142 requires, among other things, that companies no longer (cid:13) amortize goodwill, but instead test goodwill for impairment at least (cid:13) annually. In addition, SFAS No. 142 requires that the Company identify (cid:13) reporting units for the purposes of assessing potential future impairments (cid:13) of goodwill, reassess the useful lives of other existing recognized (cid:13) intangible assets, and cease amortization of intangible assets with an (cid:13) indefinite useful life. An intangible asset with an indefinite useful life (cid:13) should be tested for impairment in accordance with the guidance in SFAS No. (cid:13) 142. SFAS No. 142 is required to be applied in fiscal years beginning after (cid:13) December 15, 2001 to all goodwill and other intangible assets recognized at (cid:13) that date, regardless of when those assets were initially recognized. SFAS (cid:13) No. 142 was adopted by the Company effective as of July 1, 2002 and will (cid:13) require the Company to complete a transitional goodwill impairment test by (cid:13) no later than December 31, 2002. The Company is also required to reassess (cid:13) the useful lives of other intangible assets within the first interim (cid:13) quarter after adoption of SFAS No. 142. (cid:13) (cid:13) In accordance with the transition provisions of SFAS No. 142, the Company (cid:13) did not amortize goodwill arising from the acquisition of CPI in fiscal (cid:13) This document is compiled by Thomson Financial 47 COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 2002. The Company's previous business combinations were accounted for using (cid:13) the purchase method. Due to the Company's adoption of SFAS No. 142, it will (cid:13) no longer amortize its other goodwill balances arising from acquisitions (cid:13) consummated prior to July 1, 2001 (such amortization expenses amounted to (cid:13) $1,649,000 in 2002). The Company is in the process of performing the (cid:13) two-step transitional goodwill impairment testing required under the new (cid:13) standard. Based on the analysis for the first step testing performed to (cid:13) date, the Company anticipates an impairment of a substantial amount of its (cid:13) goodwill under the new standard in fiscal year 2003. (cid:13) (cid:13) In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment (cid:13) or Disposal of Long-Lived Assets, which supercedes previous guidance on (cid:13) financial accounting and reporting for the impairment of disposal of (cid:13) long-lived assets and for segments of a business to be disposed of. SFAS (cid:13) No. 144 is effective for fiscal years beginning after December 15, 2001. (cid:13) The Company does not expect the adoption of SFAS No. 144 to have a (cid:13) significant impact on the Company's financial position or results of (cid:13) operations. (cid:13) (cid:13) In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated (cid:13) with Exit or Disposal Activities. SFAS No. 146 addresses significant issues (cid:13) regarding the recognition, measurement, and reporting of costs associated (cid:13) with exit and disposal activities, including restructuring activities. SFAS (cid:13) No. 146 also addresses recognition of certain costs related to terminating (cid:13) a contract that is not a capital lease, costs to consolidate facilities or (cid:13) relocate employees, and termination benefits provided to employees that are (cid:13) involuntarily terminated under the terms of a one-time benefit arrangement (cid:13) that is not an ongoing benefit arrangement or an individual (cid:13) deferred-compensation contract. SFAS No. 146 is effective for exit or (cid:13) disposal activities that are initiated after December 31, 2002. Management (cid:13) believes that the adoption of SFAS No. 146 will not have a material impact (cid:13) on the Company's consolidated financial statements. (cid:13) (cid:13) 37 (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) (cid:13) COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES (cid:13) (cid:13) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (cid:13) (cid:13) (cid:13) Reclassifications (cid:13) (cid:13) Certain reclassifications have been made to the fiscal 2001 and 2000 (cid:13) financial statements to conform to the fiscal 2002 presentation. (cid:13) (cid:13) 3. Acquisitions (cid:13) (cid:13) Prior to June 30, 2001 (cid:13) (cid:13) On October 11, 1999, we acquired Professional Stamp Experts (PSE), a stamp (cid:13) authentication service. Total consideration was $305,000 in cash. The (cid:13) acquisition was accounted for under the purchase method of accounting. As (cid:13) there were no tangible or identified intangible assets acquired, the entire (cid:13) purchase amount was allocated to goodwill to be amortized over 5 years. The (cid:13) results of operations of PSE have been included in our consolidated (cid:13) financial statements from the date of acquisition. During the fourth (cid:13) quarter of fiscal year 2002, we determined that the goodwill associated (cid:13) with this acquisition had become partially impaired, and accordingly the (cid:13) Company recognized an impairment loss of $51,000 to reduce the carrying (cid:13) value of the PSE goodwill to $89,000. (cid:13) (cid:13) On March 10, 2000, we acquired substantially all of the operating assets of (cid:13) Auctions by Bowers and Merena, Inc., Bowers and Merena Galleries, Inc., and (cid:13) Bowers and Merena Research, Inc., (collectively, Bowers and Merena), a (cid:13) This document is compiled by Thomson Financial 48 COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 business primarily engaged in the auction and retail sales of rare coins. (cid:13) Total consideration was $10,003,000 in cash and 1,000,000 shares of (cid:13) Collectors Universe, Inc.'s common stock valued at $7,625,000. The (cid:13) acquisition was accounted for under the purchase method of accounting and, (cid:13) accordingly, the Company has recorded the assets acquired and the (cid:13) liabilities assumed based on their estimated fair value at the date of (cid:13) acquisition. The total purchase price was allocated to tangible net assets (cid:13) acquired of $4,542,000 and goodwill of $13,086,000 to be amortized over 15 (cid:13) years. The results of operations of Bowers and Merena have been included in (cid:13) our consolidated financial statements from the date of acquisition. (cid:13) (cid:13) On July 14, 2000, we acquired substantially all of the operating assets of (cid:13) Odyssey Publications, Inc., a business primarily engaged in the retail (cid:13) sales of entertainment and historical memorabilia. Total consideration was (cid:13) $814,000 in cash and the assumption of $68,000 in liabilities. The (cid:13) acquisition was accounted for under the purchase method of accounting, and (cid:13) accordingly the Company has recorded the assets acquired and the (cid:13) liabilities assumed based on their estimated fair value at the date of (cid:13) acquisition. The purchase price was allocated to assets acquired of $25,000 (cid:13) and goodwill of $857,000 to be amortized over 5 years. The results of (cid:13) operations of Odyssey Publications, Inc. have been included in our (cid:13) consolidated financial statements from the date of acquisition. (cid:13) (cid:13) Subsequent To June 30, 2001 (cid:13) (cid:13) On April 12, 2002, the Company acquired certain assets of Collectible (cid:13) Properties, Inc. (CPI), the currency sales auction business of Lyn F. (cid:13) Knight, former owner of Lyn F. Knight Rare Coins, Inc. and an employee of (cid:13) the Company, for $1,034,000 in cash. As a result of the acquisition, the (cid:13) Company gained a competitive position in the rare currency retail sales (cid:13) market. In addition, the acquisition complements the Company's existing Lyn (cid:13) Knight Rare Currency division, which is one of the leading rare currency (cid:13) auction companies in the country. The acquisition was accounted for under (cid:13) the purchase method of accounting and, accordingly, the Company has (cid:13) recorded the assets acquired based on their estimated fair values at the (cid:13) date of acquisition. The total purchase price of $1,034,000 was allocated (cid:13) to tangible assets acquired of $549,000, identifiable intangible assets of (cid:13) $40,000, and goodwill of $445,000. The goodwill of $445,000 was assigned to (cid:13) the Collectible Sales segment. The full amount is expected to be deductible (cid:13) for tax purposes. The results of operations of CPI have been included in (cid:13) the consolidated financial statements from the date of acquisition. (cid:13) (cid:13) The following condensed balance sheet summarizes the estimated fair values (cid:13) of the assets acquired at the date of acquisition. (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) Inventories $ 549,000 (cid:13) Intangible assets 40,000 (cid:13) Goodwill 445,000 (cid:13) ---------- (cid:13) Total assets acquired $1,034,000 (cid:13) ---------- (cid:13) (cid:13) (cid:13) (cid:13) Had the acquisitions occurred at the beginning of the fiscal year in which (cid:13) each acquisition was completed, or the beginning of the immediately (cid:13) preceding year, combined pro forma net sales, net income, and net income (cid:13) (loss) per common share would not have been materially different from that (cid:13) currently being reported. (cid:13) (cid:13) 38 (cid:13) (cid:13) This document is compiled by Thomson Financial 49 (cid:13) COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 ------------------------------------------------------------------------ (cid:13) (cid:13) COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES (cid:13) (cid:13) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) 4. Inventories (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) Inventories consist of the (cid:13) following at June 30: (in thousands) (cid:13) 2002 2001 (cid:13) ------------- ---------- (cid:13) Coins and currency $ 6,478 $ 5,791 (cid:13) Sportscards and memorabilia 1,613 3,210 (cid:13) Records 95 371 (cid:13) Other collectibles 319 28 (cid:13) -------------- ----------- (cid:13) 8,505 9,400 (cid:13) Less inventory reserve (339) (312) (cid:13) -------------- ----------- (cid:13) $ 8,166 $ 9,088 (cid:13) -------------- ----------- (cid:13) (cid:13) (cid:13) Inventory reserve represents valuation allowance on certain items held in (cid:13) inventory. (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) 5. Property and Equipment (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) Property and equipment consists (cid:13) of the following at June 30: (in thousands) (cid:13) 2002 2001 (cid:13) -------------- ---------- (cid:13) Coins and sportscard grading (cid:13) reference sets, fair value of (cid:13) $15 and $13 at June 30, 2002 (cid:13) and 2001, respectively $ 15 $ 13 (cid:13) Computer hardware and equipment 1,930 1,608 (cid:13) Computer software 1,072 690 (cid:13) Equipment 1,236 1,198 (cid:13) Furniture and office equipment 866 796 (cid:13) Leasehold improvements 455 379 (cid:13) Construction in progress -- 189 (cid:13) --------------- ----------- (cid:13) 5,574 4,873 (cid:13) This document is compiled by Thomson Financial 50 (cid:13) (cid:13) (cid:13) COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 Less accumulated depreciation (cid:13) and amortization (3,838) (2,975) (cid:13) --------------- ----------- (cid:13) Property and equipment, net $ 1,736 $ 1,898 (cid:13) --------------- ----------- (cid:13) (cid:13) (cid:13) (cid:13) Depreciation and amortization expense of property and equipment for fiscal (cid:13) 2002, 2001 and 2000 was $874,000, $754,000 and $619,000, respectively. (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) 6. Accrued Liabilities (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) Accrued liabilities consist of (cid:13) the following at June 30: (in thousands) (cid:13) 2002 2001 (cid:13) -------------- ------------------ (cid:13) Warranty costs $ 302 $ 280 (cid:13) Professional fees 143 104 (cid:13) Other 291 533 (cid:13) -------------- ----------------- (cid:13) $ 736 $ 917 (cid:13) -------------- ----------------- (cid:13) (cid:13) (cid:13) Activity and reserve balances related to the fiscal 2002, 2001, and 2000 (cid:13) warranty reserve through June 30, 2002 are as follows (in thousands): (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) Warranty reserve, July 1, 1999 $ 232 (cid:13) Charged to cost of revenues 165 (cid:13) Cash payments (116) (cid:13) ------- (cid:13) Warranty reserve, June 30, 2000 281 (cid:13) Charged to cost of revenues 159 (cid:13) Cash payments (160) (cid:13) ------- (cid:13) Warranty reserve, June 30, 2001 280 (cid:13) Charged to cost of revenues 249 (cid:13) Cash payments (227) (cid:13) ------- (cid:13) Warranty reserve, June 30, 2002 $ 302 (cid:13) ------- (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) 7. Line of Credit (cid:13) (cid:13) (cid:13) (cid:13) This document is compiled by Thomson Financial 51 (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 In November 2001, the Company entered into an unsecured line of credit (cid:13) agreement with a bank, which provides for borrowings of up to $1,500,000, (cid:13) subject to certain borrowing base limitations. Borrowings under the line of (cid:13) credit bear interest at the prime rate (4.75% at June 30, 2002) plus 1%, (cid:13) and are due on demand. This agreement can be terminated by either the bank (cid:13) or the company at any time. At June 30, 2002, there were no outstanding (cid:13) borrowings under the line of credit. (cid:13) (cid:13) 39 (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) (cid:13) COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES (cid:13) (cid:13) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) 8. Income Taxes (cid:13) (cid:13) (cid:13) (cid:13) The provision (benefit) for income taxes for the years ended June 30 (cid:13) consists of the following: (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (in thousands) (cid:13) ----------------------------------- (cid:13) 2002 2001 2000 (cid:13) ----------- -------- -------- (cid:13) Current: (cid:13) Federal $ (1,085) $ 798 $ 1,359 (cid:13) State (76) 232 347 (cid:13) ------------ --------- --------- (cid:13) (1,161) 1,030 1,706 (cid:13) Deferred: (cid:13) Federal 4 (334) (143) (cid:13) State (278) (103) (13) (cid:13) ------------ --------- --------- (cid:13) (274) (437) (156) (cid:13) ------------ --------- --------- (cid:13) Total provision (cid:13) (benefit) for income (cid:13) taxes $ (1,435) $ 593 $ 1,550 (cid:13) ------------ --------- --------- (cid:13) (cid:13) (cid:13) (cid:13) The reconciliation of the provision (benefit) for income taxes computed at (cid:13) federal statutory rates to the provision (benefit) for income taxes for the (cid:13) years ended June 30, is as follows: (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (in thousands) (cid:13) ------------------------------------- (cid:13) 2002 2001 2000 (cid:13) ---------- ------ ------------- (cid:13) Tax (benefit) at federal (cid:13) This document is compiled by Thomson Financial 52 (cid:13) (cid:13) COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 statutory rates $ (1,381) $ (19) $ 1,082 (cid:13) State income taxes (cid:13) (benefit), net (231) 84 217 (cid:13) Goodwill 127 436 168 (cid:13) Other, net 50 92 83 (cid:13) ----------- ------- -------------- (cid:13) $ (1,435) $ 593 $ 1,550 (cid:13) ----------- ------- -------------- (cid:13) (cid:13) (cid:13) (cid:13) Deferred income taxes reflect the net tax effect of temporary differences (cid:13) between the carrying amounts of assets and liabilities for financial (cid:13) reporting purposes and the amounts used for income tax purposes. (cid:13) Significant components of deferred taxes as of June 30, 2002 and 2001, are (cid:13) as follows: (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) 2002 2001 (cid:13) ------------ --------- (cid:13) Deferred tax assets: (cid:13) Supplier compensation costs $ 546 $ 546 (cid:13) Reserves 711 613 (cid:13) Goodwill 420 292 (cid:13) Property and equipment 79 18 (cid:13) Net operating loss carryover 172 -- (cid:13) Other 87 19 (cid:13) ------------- ---------- (cid:13) Total deferred tax assets 2,015 1,488 (cid:13) Deferred tax liabilities: (cid:13) State taxes (224) (28) (cid:13) Other (69) (12) (cid:13) ------------- ---------- (cid:13) Total deferred tax (cid:13) liabilities (294) (40) (cid:13) ------------- ---------- (cid:13) Net deferred tax assets 1,722 1,448 (cid:13) Less: Current portion (648) (645) (cid:13) ------------- ---------- (cid:13) $ 1,074 $ 803 (cid:13) ------------- ---------- (cid:13) (cid:13) (cid:13) (cid:13) At June 30, 2002, the Company had no federal tax net operating loss (cid:13) carryforward as it will carryback all tax losses to 2000 and 1999. The (cid:13) expected refunds are included in the Company's refundable income taxes at (cid:13) June 30, 2002. At June 30, 2002, the Company had a state net operating loss (cid:13) carryforward of $1,947,000. The Company's state net operating loss (cid:13) carryforward begins to expire in the year ended June 30, 2014. (cid:13) (cid:13) 40 (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) (cid:13) COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES (cid:13) (cid:13) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (cid:13) (cid:13) (cid:13) 9. Employee Benefit Plans (cid:13) (cid:13) This document is compiled by Thomson Financial 53 (cid:13) (cid:13) COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 We established an employee benefit plan, effective July 1992, that features (cid:13) a 401(k) salary reduction provision covering all employees who meet (cid:13) eligibility requirements. Eligible employees may elect to defer up to 15% (cid:13) of compensation or the statutorily prescribed annual limit. The Company, at (cid:13) its discretion, may make contributions to the plan. To date, we have not (cid:13) made contributions to the plan, and administrative costs have been nominal. (cid:13) (cid:13) On July 5, 2000, the Company implemented the previously approved Employee (cid:13) Stock Purchase Plan (the "Plan") covering all employees who meet certain (cid:13) eligibility requirements. The Plan allows employees to elect, at the (cid:13) beginning of each six-month period, to contribute up to 15% of compensation (cid:13) that will be applied to the purchase of Company stock at the end of the (cid:13) six-month period. The purchase price is 85% of the stock price on the first (cid:13) day of the six-month period or the last day of the six-month period, (cid:13) whichever is lower. (cid:13) (cid:13) During fiscal 2002 and 2001, we issued 41,000 shares of common stock under (cid:13) the Plan at an average purchase price of $1.35 per share in fiscal 2002 and (cid:13) $1.30 per share in fiscal 2001. (cid:13) (cid:13) 10. Stockholders' Equity (cid:13) (cid:13) In November 1999, we sold 4,000,000 shares of common stock in our initial (cid:13) public stock offering. Net proceeds from the initial public stock offering (cid:13) were approximately $21,400,000 after deducting offering expenses of (cid:13) approximately $2,600,000. In March 2000, we issued 1,000,000 shares as (cid:13) partial consideration in connection with a business acquisition (Note 3). (cid:13) (cid:13) During the quarter ended June 30, 2002, the trading prices of our shares (cid:13) declined to less than $1.00 per share. As a result, the Company was (cid:13) informed by NASDAQ on July 19, 2002, that its shares may be delisted from (cid:13) trading on the NASDAQ Stock Market. (cid:13) (cid:13) Treasury Stock (cid:13) (cid:13) During fiscal 2001, we repurchased 500,000 shares of common stock at an (cid:13) aggregate cost of $1,021,000. (cid:13) (cid:13) Consulting Agreement (cid:13) (cid:13) In July 1997, we granted options to an individual to purchase 532,000 (cid:13) shares of our common stock at an exercise price of $0.33 per share as (cid:13) consideration for a five-year consulting agreement commencing on July 1, (cid:13) 1997. The options vested 20% per year commencing December 31, 1997 through (cid:13) December 31, 2001 and are exercisable on or before December 31, 2005. No (cid:13) amount was recognized for the value of the options, as the amount was (cid:13) insignificant. (cid:13) (cid:13) Warrant Agreement (cid:13) (cid:13) In May 1999, we granted a warrant to purchase 50,000 shares of our common (cid:13) stock at an exercise price of $5.00 per share in connection with an (cid:13) exclusive license agreement. No amount was recognized for the value of the (cid:13) warrant, as the amount was insignificant. (cid:13) (cid:13) Non-Qualified Stock Option (cid:13) (cid:13) In March 2000, we granted a non-qualified stock option that was not under (cid:13) the 1999 Stock Incentive Plan for 500,000 shares of common stock at an (cid:13) exercise price of $7.63 in connection with an employment agreement. (cid:13) (cid:13) Supplier Compensation Cost (cid:13) (cid:13) During fiscal 1999 the Company granted 594,000 stock options to collectible (cid:13) experts providing content for our websites, at an exercise price of $5.00 a (cid:13) share. These options vested immediately and are exercisable over a ten-year (cid:13) This document is compiled by Thomson Financial 54 COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 term. The fair value of these options was expensed in fiscal 1999, and all (cid:13) of these options are outstanding at June 30, 2002. (cid:13) (cid:13) 11. Stock Option Plans (cid:13) (cid:13) In January 1999, we adopted the PCGS 1999 Stock Incentive Plan (the PCGS (cid:13) Plan). The PCGS Plan covers an aggregate of 1,077,000 shares of our common (cid:13) stock. In February 1999, we adopted the 1999 Stock Incentive Plan (the 1999 (cid:13) Plan), which provides for grants of incentive stock options, nonstatutory (cid:13) stock options, and restricted stock grants to directors, officers, (cid:13) employees and consultants of Collectors Universe who provide valuable (cid:13) services (cid:13) (cid:13) 41 (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) (cid:13) COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES (cid:13) (cid:13) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (cid:13) (cid:13) to Collectors Universe, entitling them to purchase up to 1,749,000 shares (cid:13) of our common stock. On December 5, 2000, the stockholders, at the (cid:13) Company's Annual Meeting, approved an amendment to the 1999 Plan to (cid:13) increase the authorized number of Common Stock that is issuable under this (cid:13) Plan from 1,749,000 to 2,999,000 shares. Each of these Plans provide that (cid:13) the option price per share may not be less than 100% of the fair market (cid:13) value of a share of common stock on the grant date, as determined by the (cid:13) Board of Directors for incentive stock options, and 85% of fair market (cid:13) value for nonstatutory stock options. For incentive stock options, the (cid:13) exercise price may not be less than 110% of the fair market value of a (cid:13) share of common stock on the grant date for any individual possessing 10% (cid:13) or more of the voting power of all classes of stock of Collectors Universe. (cid:13) The timing of exercise for individual option grants is at the discretion of (cid:13) the Board of Directors, and the options expire no later than ten years (cid:13) after the grant date (five years in the case of incentive stock options (cid:13) granted to individuals possessing 10% or more of the voting power of all (cid:13) classes of stock of Collectors Universe). In the event of a change in (cid:13) control of Collectors Universe, an option or award under these Plans will (cid:13) become fully exercisable if the option or award is not assumed by the (cid:13) surviving corporation or the surviving corporation does not substitute (cid:13) comparable awards for the awards granted under these Plans. (cid:13) (cid:13) The following is a summary of stock option activity for fiscal 2000, 2001 (cid:13) and 2002 under the PCGS Plan and the 1999 Plan: (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (in thousands, except per share data) (cid:13) ------------------------------------------------------------------------ (cid:13) Weighted (cid:13) Number Average Exercise (cid:13) Of Shares Price Per Share Price Per Share (cid:13) -------------------------------------------------------------------------------- (cid:13) Options (cid:13) outstanding (cid:13) at June 30, (cid:13) 1999 2,156 $2.11 - $5.23 $3.53 (cid:13) Granted 698 $3.62 - $7.75 $6.46 (cid:13) Cancelled 262 $5.00 - $7.63 $5.14 (cid:13) Exercised 147 $2.11 - $6.00 $2.19 (cid:13) --------- --------------- ----------------- (cid:13) Options (cid:13) outstanding (cid:13) at June 30, (cid:13) This document is compiled by Thomson Financial 55 COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 2000 2,445 $2.11 - $7.75 $4.30 (cid:13) Granted 908 $2.00 - $4.50 $2.68 (cid:13) Cancelled 338 $2.00 - $7.75 $4.36 (cid:13) Exercised -- -- -- -- (cid:13) --------- -------------- ----------------- (cid:13) Options (cid:13) outstanding (cid:13) at June 30, (cid:13) 2001 3,015 $2.11 - $7.63 $3.81 (cid:13) Granted 1,452 $0.77 - $2.00 $0.97 (cid:13) Cancelled 1,692 $0.77 - $7.63 $3.15 (cid:13) Exercised 15 $0.77 $0.77 (cid:13) --------- -------------- ----------------- (cid:13) Options (cid:13) outstanding (cid:13) at June 30, (cid:13) 2002 2,760 $0.77 - $7.63 $2.74 (cid:13) -------------------------------------------------------------------------------- (cid:13) (cid:13) (cid:13) (cid:13) The following table summarizes information about stock options outstanding (cid:13) at June 30, 2002: (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (in thousands, except per share data) (cid:13) ---------------------------------------------------------------------------- (cid:13) Options Outstanding Options Exercisable (cid:13) -------------------------------------------------------------------------- (cid:13) Weighted (cid:13) Average (cid:13) Remaining Weighted Weighted (cid:13) Range of Number of Contractual Average Number of Average (cid:13) Exercise Shares Life Exercise Shares Exercise (cid:13) Price Outstanding (years) Price Exercisable Price (cid:13) -------------------------------------------------------------------------- (cid:13) $0.77 - $1.52 1,240 9.4 $0.98 460 $0.80 (cid:13) $2.00 451 8.6 $2.00 386 $2.00 (cid:13) $2.11 - $2.61 100 7.5 $2.56 100 $2.56 (cid:13) $3.00 - $3.69 106 8.0 $3.05 52 $3.04 (cid:13) $4.50 158 8.0 $4.50 34 $4.50 (cid:13) $5.00 - $5.37 379 6.8 $5.02 298 $5.00 (cid:13) $6.00 148 7.3 $6.00 112 $6.00 (cid:13) $7.12 - $7.63 178 7.7 $7.63 91 $7.63 (cid:13) ----------- ----------- (cid:13) 2,760 8.5 $2.74 1,533 $2.98 (cid:13) -------------------------------------------------------------------------- (cid:13) (cid:13) (cid:13) 42 (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) (cid:13) COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES (cid:13) (cid:13) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (cid:13) (cid:13) (cid:13) The number of stock options exercisable and their weighted-average exercise (cid:13) prices at June 30, 2002 and 2001 were 1,533,000 at $2.98 and 1,945,000 at (cid:13) $3.42, respectively. (cid:13) (cid:13) This document is compiled by Thomson Financial 56 (cid:13) (cid:13) COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 SFAS No. 123 encourages, but does not require, companies to record (cid:13) compensation cost for employee stock option grants, using the fair value (cid:13) method. As permitted by SFAS No. 123, we have chosen to account for (cid:13) employee option grants using APB Opinion No. 25 and apply the (cid:13) disclosure-only provisions of SFAS No. 123. Accordingly, no compensation (cid:13) expense has been recognized for employee stock option grants, as such (cid:13) grants have been made with exercise prices at fair market value. Had (cid:13) compensation expense for the employee stock option grants been determined (cid:13) using the provisions of SFAS No. 123, our net income (loss) for fiscal (cid:13) 2002, 2001 and 2000 would have been changed to the amounts indicated below: (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) ------------------------------------------------------------ (cid:13) (In thousands, except per share (cid:13) amounts) 2002 2001 2000 (cid:13) ------------------------------------------------------------ (cid:13) Net income (loss): (cid:13) As-reported (2,510) $ (649) $1,542 (cid:13) Pro forma (3,013) $(2,465) $ 238 (cid:13) Basic net income (loss) per (cid:13) share: (cid:13) As-reported $ (0.10) $ (0.03) $ 0.07 (cid:13) Pro forma $ (0.12) $ (0.10) $ 0.01 (cid:13) Diluted net income (loss) per (cid:13) share: (cid:13) As-reported $ (0.10) $ (0.03) $ 0.06 (cid:13) Pro forma $ (0.12) $ (0.10) $ 0.01 (cid:13) ------------------------------------------------------------ (cid:13) (cid:13) (cid:13) (cid:13) Because stock options vest over several years and additional option grants (cid:13) are expected, the above pro forma effects of applying SFAS No. 123 are not (cid:13) likely to be representative of the effects on net income (loss) for future (cid:13) periods. (cid:13) (cid:13) The fair value of issued stock options is estimated on the date of grant (cid:13) using the Black-Scholes option pricing model, incorporating the following (cid:13) assumptions for stock options granted in fiscal 2002, 2001 and 2000, (cid:13) respectively: expected volatility (the amount by which the stock price is (cid:13) expected to fluctuate) of 81%, 333% and 237%; expected dividend yield of (cid:13) 0%, 0% and 0%; risk-free interest rate of 3.3%, 5.0% and 6.3% and expected (cid:13) life of 1.5 years for fiscal 2002 and 5 years for fiscal 2001 and 2000, (cid:13) respectively. The weighted average fair value of stock options granted (cid:13) during fiscal 2002, 2001 and 2000 was $0.40, $2.68 and $6.90 per option (cid:13) share, respectively. (cid:13) (cid:13) 12. Related-Party Transactions (cid:13) (cid:13) During the ordinary course of business, we provide grading services to (cid:13) certain entities that are owned, controlled or affiliated with our (cid:13) stockholders. Grading revenues received from these related entities (cid:13) amounted to $42,000, $9,000 and $144,000 during the years ended June 30, (cid:13) 2002, 2001 and 2000, respectively. In addition, we purchased inventories (cid:13) from, and sold inventories to, certain of these related entities. Purchases (cid:13) of inventories from these related entities amounted to $173,000, $20,000 (cid:13) and $247,000 during the years ended June 30, 2002, 2001 and 2000, (cid:13) respectively. (cid:13) (cid:13) J.D.R.C., Inc., an entity owned by one of our stockholders, provides (cid:13) research-consulting services to us related to our coin grading and (cid:13) authentication services. Amounts paid to J.D.R.C., Inc. related to these (cid:13) consulting services were $37,000, $24,000 and $102,000 during the years (cid:13) This document is compiled by Thomson Financial 57 (cid:13) COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 ended June 30, 2002, 2001 and 2000, respectively. (cid:13) (cid:13) In October 1998, we loaned $180,000 to a former officer of the Company. The (cid:13) loan bore interest at 9% per annum. Total outstanding principal and (cid:13) interest was paid in December 2001. (cid:13) (cid:13) During fiscal 2002, key employees purchased $111,000 of rare coins and (cid:13) sportscards from the Company. Accounts receivable balances at June 30, 2002 (cid:13) from these employees totalled $8,000 and represented invoices less than 30 (cid:13) days old. In fiscal 2001, certain employees bought rare coins and ingots (cid:13) from the Company at cost. Total purchases were $363,000. Certain employees, (cid:13) who made purchases from the Company during fiscal 2001 and 2000, had (cid:13) outstanding accounts receivable balances at June 30, 2001 aggregating (cid:13) $413,000. Subsequent to June 30, 2001, these balances were paid in full. (cid:13) During the ordinary course of business, certain key employees consigned (cid:13) (cid:13) 43 (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) (cid:13) COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES (cid:13) (cid:13) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (cid:13) (cid:13) collectibles to our auctions and received the auction proceeds upon sale, (cid:13) less commissions. Consignor payments to these employees aggregated $470,000 (cid:13) and $252,000 in fiscal 2002 and 2001, respectively. One employee received (cid:13) multiple consignor advances during fiscal 2001 that aggregated $245,000. (cid:13) This amount was outstanding at June 30, 2001 but was subsequently paid in (cid:13) full following the settlement of an auction. Consignor advances to this (cid:13) employee did not bear interest. In addition, certain key employees sold (cid:13) collectibles to our Company during the year ended June 30, 2001, (cid:13) aggregating $742,000. (cid:13) (cid:13) In October 2000, we loaned $300,000 to our then chief executive officer, (cid:13) Mr. David G. Hall, and additional borrowings subsequently increased the (cid:13) loan to $500,000. In June 2001, Mr. Hall repaid $300,000 and reduced the (cid:13) outstanding loan balance to $200,000 at June 30, 2001. The Company (cid:13) increased the loan to Mr. Hall during fiscal 2002 to $381,000. The loan, (cid:13) which was for a stated term, accrued interest at 10% per annum and was (cid:13) collateralized by 1,000,000 shares of our common stock owned by him. All (cid:13) accrued interest under this loan was paid at June 30, 2001. Accrued and (cid:13) unpaid interest at June 30, 2002 was $31,000. On September 10, 2002, Mr. (cid:13) Hall transferred to the Company 520,830 shares of the Company's common (cid:13) stock owned by him, with a fair value of $385,000 or at $0.74 per share, in (cid:13) full satisfaction of the then outstanding principal and interest under the (cid:13) loan. (cid:13) (cid:13) A member of the Board of Directors is also a partner in a professional (cid:13) services firm providing service to the Company. For the years ended June (cid:13) 30, 2002 and 2001, the member was paid $26,000 and $15,000, respectively, (cid:13) as Board fees and the professional services firm was paid $110,000 and (cid:13) $134,000, respectively for services rendered. (cid:13) (cid:13) 13. Commitments and Contingencies (cid:13) (cid:13) Leases (cid:13) (cid:13) The Company has various operating lease commitments for facilities and (cid:13) equipment that expire through November 2009. Total rent expense, net of (cid:13) sublease income, for the years ended June 30, 2002, 2001 and 2000 was (cid:13) approximately $1,860,000, $1,674,000 and $871,000, respectively. At June (cid:13) 30, 2001, future minimum lease payments under these agreements are as (cid:13) follows: (cid:13) (cid:13) (cid:13) This document is compiled by Thomson Financial 58 COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 (cid:13) (cid:13) 2003 $ 1,345 (cid:13) 2004 1,285 (cid:13) 2005 1,175 (cid:13) 2006 1,125 (cid:13) 2007 1,151 (cid:13) Thereafter 2,817 (cid:13) ------------------ (cid:13) 8,898 (cid:13) ------------------ (cid:13) (cid:13) (cid:13) (cid:13) Employment Agreements (cid:13) (cid:13) The Company has entered into employment agreements with certain executive (cid:13) officers and other key employees. The employment agreements provide for (cid:13) minimum salary levels, incentive compensation and severance benefits, among (cid:13) other items. (cid:13) (cid:13) Consulting Agreement (cid:13) (cid:13) The Company has entered into a consulting agreement with a former executive (cid:13) officer. The agreement provides for payments of $15,000 per month over a (cid:13) 20-month period, effective April 2000. In fiscal 2002, 2001 and 2000, (cid:13) $75,000, $180,000 and $45,000 respectively, was recorded as an operating (cid:13) expense under this consulting agreement. (cid:13) (cid:13) 14. Segment, Geographic and Major Customer Information (cid:13) (cid:13) Operating segments are defined as components of an enterprise about which (cid:13) separate financial information is available that is evaluated regularly by (cid:13) the Company's chief operating decision maker, or decision making group, in (cid:13) deciding how to allocate resources and in assessing performance. The (cid:13) Company's chief decision maker is its Chief Executive Officer. The (cid:13) operating segments of the Company are organized based on the services it (cid:13) offers. Similar operating segments have been aggregated to reportable (cid:13) operating segments based on having similar products or services, types of (cid:13) customers, and other criteria under SFAS No. 131, Disclosures about (cid:13) Segments of an Enterprise and Related Information. (cid:13) (cid:13) We operate principally in two service segments: the authentication and (cid:13) grading of collectibles and sales of collectibles through auctions and (cid:13) direct sales. Effective for the fiscal year ended June 30, 2001, the (cid:13) Company changed the description of its "Auction" business segment to (cid:13) "Collectible Sales" to reflect the increase in retail collectible sales (cid:13) within this segment that occurred in fiscal 2001. Accordingly, the (cid:13) description of the business segments for the fiscal year ended June 30, (cid:13) 2000 has been changed to conform to the presentation for the fiscal years (cid:13) ended June 30, 2002 and 2001. (cid:13) (cid:13) 44 (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) (cid:13) COLLECTORS UNIVERSE, INC. AND SUBSIDIARIES (cid:13) (cid:13) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (cid:13) (cid:13) (cid:13) We allocate operating expenses to each business segment based upon activity (cid:13) levels. In the fiscal year ended June 30, 2000, we allocated operating (cid:13) expenses to our business segments based upon head count. Accordingly, we (cid:13) have restated the operating income and unallocated operating expenses (cid:13) This document is compiled by Thomson Financial 59 (cid:13) COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 included in the business segment data for the fiscal year ended June 30, (cid:13) 2000 to conform to the presentation for the fiscal years ended June 30, (cid:13) 2002 and 2001. We do not allocate specific assets to these service (cid:13) segments. All of our sales and identifiable assets are located in the (cid:13) United States. No individual customer accounted for 10% or more of revenue (cid:13) for the years ended June 30, 2002, 2001 and 2000. (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) Year Ended June 30, 2002 (in thousands) (cid:13) ---------------------------------------------- (cid:13) Collectible Grading and (cid:13) Sales Authentication Total (cid:13) Net revenues from (cid:13) external customers $ 26,454 $ 18,327 $ 44,781 (cid:13) --------------- ----------------- --------- (cid:13) Operating income (cid:13) (loss) before (cid:13) unallocated operating (cid:13) expenses (2,949) 3,476 527 (cid:13) Unallocated operating (cid:13) expenses -- -- (4,874) (cid:13) --------- (cid:13) Operating loss, (cid:13) consolidated -- -- (4,347) (cid:13) --------- (cid:13) Goodwill amortization (cid:13) and impairment $ 1,559 $ 141 $ 1,700 (cid:13) (cid:13) Year Ended June 30, 2001 (in thousands) (cid:13) ---------------------------------------------- (cid:13) Collectible Grading and (cid:13) Sales Authentication Total (cid:13) Net revenues from (cid:13) external customers $ 31,422 $ 20,962 $ 52,384 (cid:13) --------------- ----------------- --------- (cid:13) Operating income (cid:13) (loss) before (cid:13) unallocated operating (cid:13) expenses $ (3,019) $ 4,796 $ 1,777 (cid:13) Unallocated operating (cid:13) expenses -- -- (2,655) (cid:13) --------- (cid:13) Operating income, (cid:13) consolidated -- -- (878) (cid:13) --------- (cid:13) Goodwill amortization $ 2,644 $ 60 $ 2,704 (cid:13) (cid:13) Year Ended June 30, 2000 (in thousands) (cid:13) ---------------------------------------------- (cid:13) Collectible Grading and (cid:13) Sales Authentication Total (cid:13) Net revenues from (cid:13) external customers $ 18,011 $ 24,363 $ 42,374 (cid:13) --------------- ----------------- --------- (cid:13) Operating (loss) (cid:13) income before (cid:13) unallocated operating (cid:13) expenses ($ 3,891) $ 8,862 $ 4,971 (cid:13) Unallocated operating (cid:13) expenses -- -- (2,466) (cid:13) --------- (cid:13) Operating loss, (cid:13) consolidated -- -- $ 2,505 (cid:13) --------- (cid:13) This document is compiled by Thomson Financial 60 COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 Goodwill amortization $ 1,030 $ 40 $ 1,070 (cid:13) (cid:13) (cid:13) 45 (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND (cid:13) FINANCIAL DISCLOSURE (cid:13) (cid:13) (cid:13) (cid:13) Not Applicable (cid:13) (cid:13) PART III (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) Item 10. DIRECTORS AND EXECUTIVE OFFICERS (cid:13) (cid:13) (cid:13) (cid:13) Except for information concerning the Company's executive officers, which (cid:13) is included in Part I of this Report, the information required by Item 10 (cid:13) is incorporated by reference from the Company's definitive proxy statement (cid:13) for its annual stockholders' meeting expected to be filed with the (cid:13) Commission on or before October 28, 2002. (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) Item 11. EXECUTIVE COMPENSATION (cid:13) (cid:13) (cid:13) (cid:13) The information required by Item 11 is incorporated herein by reference (cid:13) from the Company's definitive proxy statement for its annual stockholders' (cid:13) meeting expected to be filed with the Commission on or before October 28, (cid:13) 2002. (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (cid:13) (cid:13) (cid:13) (cid:13) The information required by Item 12 is incorporated herein by reference (cid:13) from the Company's definitive proxy statement for its annual stockholders' (cid:13) meeting expected to be filed with the Commission on or before October 28, (cid:13) 2002. (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (cid:13) (cid:13) This document is compiled by Thomson Financial 61 (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 (cid:13) (cid:13) The information required by Item 13 is incorporated herein by reference (cid:13) from the Company's definitive proxy statement for its annual stockholders' (cid:13) meeting expected to be filed with the Commission on or before October 28, (cid:13) 2002. (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) Item 14. CONTROLS AND PROCEDURES (cid:13) (cid:13) (cid:13) (cid:13) Not applicable. (cid:13) (cid:13) 46 (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) (cid:13) PART IV (cid:13) (cid:13) Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM (cid:13) 8-K. (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) A. The following financial statements are included in Item 8 of Form (cid:13) 10-K: (cid:13) (cid:13) 1. Financial Statements (cid:13) Independent Auditors' Report (cid:13) Consolidated Balance Sheets as of June 30, 2002 and 2001 (cid:13) (cid:13) Consolidated Statements of Operations for the years ended June 30, (cid:13) 2002, 2001 and 2000 (cid:13) (cid:13) Consolidated Statements of Stockholders' Equity for the years ended (cid:13) June 30, 2002, 2001 and 2000 (cid:13) (cid:13) Consolidated Statements of Cash Flows for the years ended June 30, (cid:13) 2002, 2001 and 2000 (cid:13) Notes to the Consolidated Financial Statements (cid:13) (cid:13) 2. Financial Statement Schedule (cid:13) Schedule II Valuation and Qualifying Accounts (cid:13) The other schedules are omitted because the required information is (cid:13) either inapplicable or has been disclosed in the consolidated (cid:13) financial statements and notes thereto. (cid:13) (cid:13) 3. Exhibits (cid:13) (cid:13) See Index to Exhibits immediately following the Signature Page of (cid:13) this Report (cid:13) (cid:13) B. Reports on Form 8-K (cid:13) (cid:13) No current reports on Form 8-K were filed during the quarter ended (cid:13) June 30, 2002. (cid:13) (cid:13) (cid:13) 47 (cid:13) This document is compiled by Thomson Financial 62 (cid:13) (cid:13) (cid:13) COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 (cid:13) ------------------------------------------------------------------------ (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) ---------------------------------------------------------------------------- (cid:13) Schedule II (cid:13) Valuation and Qualifying Accounts (cid:13) For the Years Ended June 30, 2000, 2001 and 2002 (cid:13) ----------------------------------------------------------- (cid:13) Charged Balance (cid:13) Balance at Charged to to Cost at (cid:13) Beginning Operating of End of (cid:13) Description of Period Expenses Revenues Deductions Period (cid:13) --------- ----------- ---------- ---------- ---------- --------- (cid:13) Allowance for (cid:13) doubtful (cid:13) accounts $ 37,500 $ 182,372 $ -- $ (114,650) $105,222 (cid:13) Inventory (cid:13) reserve 160,500 -- 16,889 (71,705) 105,684 (cid:13) ----------- ---------- ---------- ----------- --------- (cid:13) Total at June (cid:13) 30, 2000 $ 198,000 $ 182,372 $ 16,889 $ (186,355) $210,906 (cid:13) ----------- ---------- ---------- ----------- --------- (cid:13) (cid:13) Allowance for (cid:13) doubtful (cid:13) accounts $ 105,222 $ 502,301 $ -- $ (37,812) $569,711 (cid:13) Inventory (cid:13) reserve 105,684 -- 233,874 (27,099) 312,459 (cid:13) ----------- ---------- ---------- ----------- --------- (cid:13) Total at June (cid:13) 30, 2001 $ 210,906 $ 502,301 $ 233,874 $ (64,911) $882,170 (cid:13) ----------- ---------- ---------- ----------- --------- (cid:13) (cid:13) Allowance for (cid:13) doubtful (cid:13) accounts $ 569,711 $ 137,053 $ -- $ (413,764) $293,000 (cid:13) Inventory (cid:13) reserve 312,459 -- 31,253 (4,712) 339,000 (cid:13) ----------- ---------- ---------- ----------- --------- (cid:13) Total at June (cid:13) 30, 2002 $ 882,170 $ 137,053 $ 31,253 $ (418,476) $632,000 (cid:13) ----------- ---------- ---------- ----------- --------- (cid:13) (cid:13) (cid:13) 48 (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) SIGNATURES (cid:13) (cid:13) Pursuant to the requirements of Section 13 or 15(d) of the Securities Act (cid:13) of 1934, the registrant has duly caused this report to be signed on its (cid:13) behalf by the undersigned thereunto duly authorized. (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) COLLECTORS UNIVERSE, INC. (cid:13) (cid:13) Date: September 27, 2002 By: /s/ MICHAEL J. (cid:13) LEWIS (cid:13) --------------------------- (cid:13) Chief Financial Officer (cid:13) This document is compiled by Thomson Financial 63 (cid:13) COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 (cid:13) (cid:13) (cid:13) POWER OF ATTORNEY (cid:13) (cid:13) KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature (cid:13) appears below constitutes and appoints Roger W. Johnson and Michael J. (cid:13) Lewis, jointly and severally, his or her respective attorneys-in-fact, each (cid:13) with the power of substitution, for each other in any and all capacities, (cid:13) to sign any amendments to this Report on Form 10-K, and to file the same, (cid:13) with exhibits thereto and other documents in connection therewith, with the (cid:13) Securities and Exchange Commission, hereby ratifying and confirming all (cid:13) that each of said attorneys-in-fact, or his or her respective substitute or (cid:13) substitutes, may do or cause to be done by virtue hereof. (cid:13) (cid:13) Pursuant to the requirements of the Securities Exchange Act of 1934, this (cid:13) report has been signed by the following persons on behalf of the Registrant (cid:13) and in the capacities and on the dates indicated. (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) --------------------------------------------------------------------------- (cid:13) Signature Title Date (cid:13) --------------------------------------------------------------------------- (cid:13) (cid:13) /s/ JAMES H. Chairman/Director September 27, 2002 (cid:13) O'NEAL (cid:13) -------------------------- (cid:13) James H. O'Neal (cid:13) (cid:13) /s/ ROGER W. Chief Executive Officer September 27, 2002 (cid:13) JOHNSON (cid:13) -------------------------- (cid:13) Roger W. Johnson (cid:13) (cid:13) /s/ DAVID G. President and Director September 27, 2002 (cid:13) HALL (cid:13) -------------------------- (cid:13) David G. Hall (cid:13) (cid:13) /s/ MICHAEL J. Chief Financial Officer September 27, 2002 (cid:13) LEWIS (Principal Financial and (cid:13) -------------------------- Principal Accounting (cid:13) Michael J. Lewis Officer) (cid:13) (cid:13) /s/ Q. DAVID Director September 27, 2002 (cid:13) BOWERS (cid:13) -------------------------- (cid:13) Q. David Bowers (cid:13) (cid:13) /s/ BEN A. Director/Secretary September 27, 2002 (cid:13) FRYDMAN (cid:13) -------------------------- (cid:13) Ben A. Frydman (cid:13) (cid:13) /s/ VAN D. Director September 27, 2002 (cid:13) SIMMONS (cid:13) -------------------------- (cid:13) Van D. Simmons (cid:13) (cid:13) /s/ A. CLINTON Director September 27, 2002 (cid:13) ALLEN (cid:13) -------------------------- (cid:13) A. Clinton Allen (cid:13) This document is compiled by Thomson Financial 64 (cid:13) COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 (cid:13) --------------------------------------------------------------------------- (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) S-1 (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER (cid:13) UNDER (cid:13) SECTION 302 OF THE SARBANES-OXLEY ACT (cid:13) (cid:13) I, Roger W. Johnson, Chief Executive Officer of Collectors Universe, Inc., (cid:13) certify that: (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) 1. I have reviewed this annual report on Form 10-K of Collectors (cid:13) Universe, Inc.; (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) 2. Based on my knowledge, this annual report does not contain any (cid:13) untrue statement of a material fact or omit to state a material fact (cid:13) necessary to make the statements made, in light of the circumstances (cid:13) under which such statements were made, not misleading with respect (cid:13) to the period covered by this annual report; (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) 3. Based on my knowledge, the financial statements, and other financial (cid:13) information included in this annual report, fairly present in all (cid:13) material respects the financial condition, results of operations and (cid:13) cash flows of the registrant as of, and for, the periods presented (cid:13) in this annual report. (cid:13) (cid:13) (cid:13) (cid:13) Date: September 27, 2002 (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) /s/ ROGER W. (cid:13) JOHNSON (cid:13) ------------------------------ (cid:13) Roger W. Johnson (cid:13) Chief Executive Officer (cid:13) (cid:13) (cid:13) S-2 (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) This document is compiled by Thomson Financial 65 (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 CERTIFICATIONS OF CHIEF FINANCIAL OFFICER (cid:13) UNDER (cid:13) SECTION 302 OF THE SARBANES-OXLEY ACT (cid:13) (cid:13) I, Michael J. Lewis, Chief Financial Officer of Collectors Universe, Inc., (cid:13) certify that: (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) 1. I have reviewed this annual report on Form 10-K of Collectors (cid:13) Universe, Inc.; (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) 2. Based on my knowledge, this annual report does not contain any (cid:13) untrue statement of a material fact or omit to state a material fact (cid:13) necessary to make the statements made, in light of the circumstances (cid:13) under which such statements were made, not misleading with respect (cid:13) to the period covered by this annual report; (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) 3. Based on my knowledge, the financial statements, and other financial (cid:13) information included in this annual report, fairly present in all (cid:13) material respects the financial condition, results of operations and (cid:13) cash flows of the registrant as of, and for, the periods presented (cid:13) in this annual report. (cid:13) (cid:13) (cid:13) (cid:13) Date: September 27, 2002 (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) /s/ MICHAEL J. (cid:13) LEWIS (cid:13) ------------------------------ (cid:13) Michael J. Lewis (cid:13) Chief Financial Officer (cid:13) (cid:13) (cid:13) S-3 (cid:13) (cid:13) ------------------------------------------------------------------------ (cid:13) (cid:13) INDEX TO EXHIBITS (cid:13) (cid:13) (cid:13) (cid:13) Exhibit (cid:13) No. Description (cid:13) ------- --------- (cid:13) 1.1 Form of Underwriting Agreement.* (cid:13) 3.2 Form of Amended and Restated Certificate of Incorporation of (cid:13) This document is compiled by Thomson Financial 66 (cid:13) (cid:13) (cid:13) (cid:13) COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 Collectors Universe, as currently in effect.* (cid:13) 3.3 Amended and Restated Bylaws of Collectors Universe, as adopted (cid:13) September 1, 1999.* (cid:13) 4.1 Registration Rights Agreement.* (cid:13) 4.2 Form of Registration Rights Agreement for Stockholders pursuant (cid:13) to private placement.* (cid:13) 5.1 Opinion of Stradling Yocca Carlson & Rauth, a Professional (cid:13) Corporation.* (cid:13) 10.1 Collectors Universe 1999 Stock Incentive Plan.* (cid:13) 10.2 Form of Stock Option Agreement for the Collectors Universe 1999 (cid:13) Plan.* (cid:13) 10.4 PCGS 1999 Stock Incentive Plan.* (cid:13) 10.5 Form of Stock Option Agreement for the PCGS 1999 Plan.* (cid:13) 10.6 Employee Stock Purchase Plan.* (cid:13) 10.7 Form of indemnification Agreement.* (cid:13) 10.8 Asset Acquisition Agreement dated January 25,1999 between (cid:13) Professional Coin Grading Service, Inc., Info Exchange, Inc. and (cid:13) Brent Gutekunst.* (cid:13) 10.9 Collectors Universe/eBay Mutual Services Term Sheet dated (cid:13) February 10,1999, between the Company and eBay, Inc.* (cid:13) 10.10 Net Lease between Orix Searls Santa Ana Venture and Collectors (cid:13) Universe, dated June, 1999.* (cid:13) 10.11 Agreement for the Sale of Goods and Services dated March 31,1999, (cid:13) between the Company and DNA Technologies, * (cid:13) 10.12 Contribution and Acquisition Agreement dated February 3,1999, (cid:13) between the Company and Hugh Sconyers.* (cid:13) 10.13 Contribution and Acquisition Agreement dated February 3,1999, (cid:13) between the Company and BJ Searls.* (cid:13) 10.14 Contribution and Acquisition Agreement dated February 3,1999, (cid:13) between the Company and Greg Bussineau.* (cid:13) 10.15 Contribution and Acquisition Agreement dated February 3,1999, (cid:13) between the Company and Lyn F. Knight Rare Coins* (cid:13) 10.16 Contribution and Acquisition Agreement dated February 3,1999, (cid:13) between the Company, Kingswood Coin Auction, LLC and the Members (cid:13) of Kingswood.* (cid:13) 10.17 Contribution and Acquisition Agreement dated February 3,1999, (cid:13) between the Company and Professional Coin Grading Service, Inc.* (cid:13) 10.18 Employment Agreement dated March 1999, between Superior (cid:13) Sportscard Auctions, LLC and Greg Bussineau.* (cid:13) 10.19 Employment Agreement dated March 5,1999, between Lyn F. Knight, (cid:13) Lyn Knight Currency Auctions, Inc. and Collectors Universe.* (cid:13) 10.24 Asset Purchase Agreements between Collectors Universe, Inc. and (cid:13) Auctions by Bowers and Merena, Inc., Bowers and Merena Galleries, (cid:13) Inc. and Bowers and Merena Research, Inc. (Incorporated by (cid:13) reference to Exhibit 10-1 to Registrant's Current Report on Form (cid:13) 8-K, dated March 21, 2000).* (cid:13) 21.1 Subsidiaries of the Company. (cid:13) 23.1 Consent of Independent Auditors. (cid:13) 99.1 CEO Certifications under Section 906 of the Sarbanes-Oxley Act (cid:13) 99.2 CFO Certifications under Section 906 of the Sarbanes-Oxley Act (cid:13) (cid:13) (cid:13) ------ (cid:13) (cid:13) (cid:13) (cid:13) * Incorporated by reference to the same numbered exhibit to the Company's (cid:13) Registration Statement (No. 333-86449) on Form S-1 filed with the (cid:13) Commission on September 2, 1999. (cid:13) (cid:13) (cid:13) E-1 (cid:13) This document is compiled by Thomson Financial 67 (cid:13) (cid:13) COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 EXHIBIT 21.1 (cid:13) (cid:13) SUBSIDIARIES (cid:13) OF THE (cid:13) COMPANY (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) State of Collectors Universe (cid:13) Name Incorporation/Organization Ownership Percentage (cid:13) ------------------ -------------------------- ------------------------ (cid:13) Lyn Knight (cid:13) Currency Auction, (cid:13) Inc. Delaware 100% (cid:13) (cid:13) This document is compiled by Thomson Financial 68 (cid:13) COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 EXHIBIT 23.1 (cid:13) (cid:13) INDEPENDENT AUDITORS' CONSENT (cid:13) (cid:13) To the Stockholders and Board of Directors of (cid:13) Collectors Universe, Inc. (cid:13) (cid:13) We consent to the incorporation by reference in Registration Statements No. (cid:13) 333-85962, No. 333-34554, No. 333-34556 and No. 333-34558 of Collectors (cid:13) Universe, Inc. on Form S-8 of our report dated August 26, 2002, except for (cid:13) paragraph 5 of Note 12, as to which the date is September 10, 2002, (cid:13) appearing in this Annual Report on Form 10-K of Collectors Universe, Inc. (cid:13) for the year ended June 30, 2002. (cid:13) (cid:13) (cid:13) (cid:13) DELOITTE & TOUCHE LLP (cid:13) (cid:13) Costa Mesa, California (cid:13) September 27, 2002 (cid:13) This document is compiled by Thomson Financial 69 COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 (cid:13) Exhibit 99.1 (cid:13) (cid:13) CERTIFICATION OF PERIODIC REPORT (cid:13) (cid:13) I, Roger W. Johnson, Chief Executive Officer of Collectors Universe, Inc. (cid:13) (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act (cid:13) of 2002, 18 U.S.C. Sections 1350, that: (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (1) the Annual Report on Form 10-K of the Company for the fiscal year (cid:13) ended June 30, 2002 (the "Annual Report") fully complies with the (cid:13) requirements of Section 13(a) or 15(d) of the Securities Exchange (cid:13) Act of 1934 (15 U.S.C. 78m or 78o(d)); and (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (2) the information contained in the Annual Report fairly presents, in (cid:13) all material respects, the financial condition and results of (cid:13) operations for the Company. (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) September 27, 2002 (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) /s/ ROGER W. (cid:13) JOHNSON (cid:13) ------------------------------ (cid:13) Roger W. Johnson (cid:13) Chief Executive Officer (cid:13) (cid:13) This document is compiled by Thomson Financial 70 (cid:13) (cid:13) (cid:13) COLLECTORS UNIVERSE INC - 10-K Filing Date: 06/30/02 Exhibit 99.2 (cid:13) (cid:13) CERTIFICATION OF PERIODIC REPORT (cid:13) (cid:13) I, Michael J. Lewis, Chief Financial Officer of Collectors Universe, Inc. (cid:13) (the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act (cid:13) of 2002, 18 U.S.C. Sections 1350, that: (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (1) the Annual Report on Form 10-K of the Company for the fiscal year (cid:13) ended June 30, 2002 (the "Annual Report") fully complies with the (cid:13) requirements of Section 13(a) or 15(d) of the Securities Exchange (cid:13) Act of 1934 (15 U.S.C. 78m or 78o(d)); and (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (2) the information contained in the Annual Report fairly presents, in (cid:13) all material respects, the financial condition and results of (cid:13) operations for the Company. (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) September 27, 2002 (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) (cid:13) /s/ MICHAEL J. (cid:13) LEWIS (cid:13) ------------------------------ (cid:13) Michael J. Lewis (cid:13) Chief Financial Officer (cid:13) (cid:13) This document is compiled by Thomson Financial 71 (cid:13) (cid:13) (cid:13)

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