Description
Filed with the SEC from June 14 to June 20:
Collectors Universe (CLCT)
Private investor Richard Duncan reported that he holds 992,404 shares (12.2%) of the goods authenticator, after he sold 20,150 from May 25 through June 8 at $14.01 to $14.39 per share.
BUSINESS OVERVIEW
Overview
We provide authentication and grading services to dealers and collectors of high-value coins, trading cards, event tickets, autographs, memorabilia and stamps (“collectibles”). We believe that our authentication and grading services add value to these collectibles by enhancing their marketability and thereby providing increased liquidity to the dealers, collectors and consumers that own and buy and sell them.
Once we have authenticated and assigned a grade to a collectible, we encapsulate it in a tamper-evident, clear plastic holder, or issue a certificate of authenticity, that (i) identifies the specific collectible; (ii) sets forth the quality grade we have assigned to it; and (iii) bears one of our brand names and logos: “PCGS” for coins, “PSA” for trading cards and event tickets, “PSA/DNA” for autographs and memorabilia and “PSE” for stamps. Additionally, we warrant our certification of authenticity and the grade that we assign to the coins, trading cards and stamps bearing our brands. We do not warrant our authenticity determinations for autographs or memorabilia. For ease of reference in this Annual Report, we will sometimes refer to coins, trading cards and other collectibles that we have authenticated or graded as having been “certified.”
We principally generate revenues from the fees paid for our authentication and grading services. To a much lesser extent, we generate revenues from other related services, which consist of revenues from: (i) the sale of advertising on our websites; (ii) the sale of printed publications and collectibles price guides and advertising in such publications; (iii) the sale of membership subscriptions in our Collectors Club and CoinFacts, which is designed to attract interest in high-value collectibles among new collectors; (iv) the sale of subscriptions to our Certified Coin Exchange (CCE) dealer-to-dealer Internet bid-ask market for certified coins; and (v) collectibles trade show conventions that we conduct. We also generate revenues from sales of our collectibles inventory, which is comprised primarily of collectible coins that we have purchased under our coin grading warranty program; however, these activities are not the focus, and we do not consider them to be an integral part of our ongoing revenue-generating activities.
Industry Background
The primary determinants of the prices of, and the willingness of sellers, purchasers and collectors to purchase high-value or high-priced collectibles or other high-value assets, are their authenticity, quality and rarity. The authenticity of a collectible relates not only to the genuineness of the collectible, but also to the absence of any alterations or repairs that may have been made to hide, damage or to restore the item. The quality of a collectible relates to its state of preservation relative to its original state of manufacture or creation. The rarity of a collectible relates to its uniqueness and depends primarily on the number of identical collectibles of equivalent or better quality that become available for purchase from time to time. With regard to value, confirmation of authenticity generally is required before a buyer is willing to proceed with a purchase of a high-priced collectible.
Quality and rarity directly affect value and price, usually on an exponential basis, with higher quality and rare collectibles generally attracting dramatically higher prices than those of lower quality and lesser rarity. Even a relatively modest difference in quality can translate into a significant difference in perceived value and, therefore, in price. For example, a 1952 Mickey Mantle baseball card that received a PSA grade from us of 9, on our PSA grading scale of 1-to-10, was sold at public auction in 2006 for $282,588. By comparison, a similar 1952 Mickey Mantle baseball card that received a PSA grade of 8 was sold at public auction, also in 2006, for $72,057.
Until the advent of independent third-party authentication and grading, most prospective buyers, including experienced collectibles dealers and retailers, insisted on physically examining high-priced collectibles before consummating transactions. However, unlike professionals in the trade, most purchasers and collectors lacked the experience and knowledge needed to determine, with confidence, the authenticity, quality or rarity, and hence the value, of high-priced collectibles, even when they had the opportunity to examine them physically. Therefore, they had to rely on representations made by sellers regarding authenticity, quality and rarity. For these reasons, “buyer beware” characterized the high-value collectibles markets, and “sight-unseen” markets for rare coins and other high-value collectibles were practically non-existent.
Coin Market . In an effort to overcome some of these inefficiencies, approximately 30 years ago, professional coin dealers began using a numerical quality grading scale for coins. That scale ranged from 1 to 70, with higher numbers denoting a higher quality. Previously, professional dealers used descriptive terms, such as “Fair,” “Fine” and “Uncirculated,” to characterize the quality of the coins they sold, a practice that continued after the development of the numeric grading system. However, whether using a numeric or a descriptive system, grading standards varied significantly from dealer to dealer, depending on a dealer’s subjective criteria of quality. Moreover, dealers were hardly disinterested or independent since, as the sellers or buyers of the coins they were grading, they stood to benefit financially from the assignment of a particular grade.
Trading Cards Market . Misrepresentations of authenticity, quality and rarity also operated as a barrier to the liquidity and growth of the collectibles market for trading cards. Even experienced and knowledgeable dealers insisted on physically examining purportedly rare and higher-priced trading cards. Most collectors lacked the knowledge needed to purchase collectible trading cards with confidence, even when they had physically examined them. Trading card dealers eventually developed a rudimentary adjectival system to provide measures of quality, using descriptive terms such as “Poor,” “Very Good,” “Mint” and “Gem Mint.” These measures of quality were assigned on the basis of such characteristics as the centering of the image on the card and the presence or absence of bent or damaged corners, scratches and color imperfections. However, as was the case with coins, grading standards varied significantly from dealer to dealer, depending on a dealer’s subjective criteria of quality. Additionally, since the dealers who bought and sold trading cards were the ones that assigned these grades, collectors remained vulnerable to misrepresentations as to the authenticity, quality and rarity of trading cards being sold or purchased by dealers.
Autographed Memorabilia Market . The market for autographed sports, entertainment and historical memorabilia has been plagued by a high incidence of forgeries and misrepresentations of authenticity. For example, Operation Bullpen, initiated by the FBI and other law enforcement agencies beginning in 1997, has uncovered a high volume of outright forgeries of signatures and widespread misrepresentations as to the genuineness of sports memorabilia. We believe that the high incidence of such fraudulent activities was due, in large part, to a dearth of independent third-party memorabilia authentication services and an absence of systematic methodologies and specimen data needed for verification of authenticity.
Stamp Market . Stamp dealers developed an adjectival system, similar to the one developed for trading cards, by which they valued and priced stamps based primarily on the centering of the stamp image on the stamp paper background, ignoring other faults in the stamp. As a result, experienced and knowledgeable dealers insisted on physically examining purportedly rare and higher-priced stamps before purchasing them. Additionally, most collectors lacked the knowledge and experience needed to purchase higher-priced stamps with confidence. Consequently, as was the case with coins and trading cards, collectors were forced to depend on representations of authenticity, quality and rarity from the very dealers from whom they purchased or to whom they sold stamps. However, prior to our entry into the market, independent third-party stamp grading was non-existent.
The Impact of eBay and Other e-Commerce Websites on the Collectible Markets . The advent of the Internet and, in particular, eBay’s development of an Internet or “virtual” marketplace and other Internet-selling websites, such as eBay and Amazon, have overcome many of the inefficiencies that had characterized the traditional collectibles markets. eBay and other online marketplaces (i) offer enhanced interaction between and greater convenience for sellers and buyers of high-value collectibles; (ii) eliminate or reduce the involvement of dealers and other “middlemen;” (iii) reduce transaction costs; (iv) allow trading at all hours; and (v) continually provide updated information. However, Internet commerce still raises, and has even heightened, concerns about the authenticity and quality of the collectibles that are listed for sale on the Internet. Buyers have no ability to physically examine the collectibles and no means to confirm the identity or the credibility of the dealers or sellers on the Internet. As a result, we believe that the growth of Internet-selling websites, such as eBay and Amazon, has increased awareness of the importance of, and the demand for, independent third-party authentication and grading services of the type we provide. Our services enable purchasers and collectors to use the Internet to purchase high-value collectibles, without physical examination (“sight-unseen”), with the confidence of knowing that they are authentic and are of the quality represented by sellers. The importance and value of our services to purchasers and collectors, we believe, are demonstrated by eBay’s inclusion, on its collectibles websites, of information that identifies, and encourages visitors to use, our independent third-party authentication and grading services, as well as similar services offered by some of our competitors.
Our Services
PCGS Coin Authentication and Grading Services . Recognizing the need for third-party authentication and grading services, we launched Professional Coin Grading Service in 1986. PCGS employs expert coin graders, who are independent of coin buyers and sellers, to provide impartial authentication and grading services. As of June 30, 2011, we employed 21 experts who have an average of 30 years of experience in the collectible coin market. We also established uniform standards of quality measured against an actual “benchmark” set of coins kept at our offices. We place each coin that we authenticate and grade in a tamper-evident, clear plastic holder which bears our logo, so that any prospective buyer will know that it is a PCGS authenticated and graded coin. We also provide a warranty as to the accuracy of our coin authentication and grading.
By providing an independent assessment by coin experts of the authenticity and quality of coins, we believe that PCGS has increased the liquidity of the trading market for collectible coins. Following the introduction of our independent, third-party authentication and grading service, buyer confidence, even between dealers, increased to such a degree that coins authenticated and graded by PCGS were able to be traded “sight-unseen.” As a result, PCGS facilitated the development, in 1990, of a dealer market, known as the “Certified Coin Exchange,” on which coin dealers traded rare coins “sight-unseen,” over a private satellite network, which now operates on the Internet and which we now own.
We have graded high-value U.S. coins, including an 1804 Draped Bust Silver Dollar that was purchased for approximately $4.1 million, and the 1794 Flowing Hair Silver Dollar, which set a new record for the highest sale price paid for an individual rare coin at $7.8 million.
More recently, our coin authentication and grading services have facilitated the development of a growing Internet or “virtual” marketplace for collectible coins. A prospective buyer, who might otherwise be reluctant to purchase a high-priced coin listed sight-unseen on the Internet, is able to rely on a PCGS certification, as well as authoritative information about the coin that is accessible on our website, in deciding whether or not to bid and in determining the amount to offer for the coin. As a result, to enhance the marketability of higher-priced coins, many sellers submit their coins to PCGS for authentication and grading. That enables the sellers to include, in their Internet sales listings, digital images of the coins in their tamper-evident, clear plastic holders, which identify the coins as having been authenticated and graded by PCGS, as well as their PCGS-assigned grades.
In addition, we began to provide a range of authoritative content on coin collecting to inform and communicate with the collector community, including guides and reports that track the trading prices and the rarity of PCGS-graded coins.
PSA Trading Card and Authentication and Grading Services . Leveraging the credibility and using the methodologies that we had established with PCGS in the coin market, in 1991 we launched Professional Sports Authenticator (PSA), which instituted a similar authentication and grading system for trading cards. Our independent trading card experts certify the authenticity of and assign quality grades to trading cards using a numeric system with a scale from 1-to-10 that we developed, together with an adjectival system to describe their condition. At June 30, 2011, we employed 14 experts who have an average of 26 years of experience in the collectible trading card market. We believe that our authentication and grading services have removed barriers that were created by the historical seller-biased grading process and, thereby, have improved the overall marketability of and facilitated commerce in trading cards, including over the Internet and at telephonic sports memorabilia auctions.
The trading cards submitted to us for authentication and grading include primarily (i) older or vintage trading cards, particularly of memorable or historically famous players, such as Honus Wagner, Joe DiMaggio, Ted Williams and Mickey Mantle, and (ii) modern or newly produced trading cards of current or new athletes who have become popular with sports fans or have achieved new records or milestones, such as Ken Griffey, Jr. and Derek Jeter. These trading cards have, or are perceived to have, sufficient collectible value and are sold more frequently than are trading cards of less notable athletes, leading dealers and collectors to submit them for grading to enhance their marketability. Also, the production and sale of each new series of trading cards, which take place at the beginning and during the course of each new sports season, create new collectibles that provide a source of future additional authentication and grading submissions to us. Among the trading cards that we have authenticated and graded is a 1909 Honus Wagner baseball card, which received a PSA grade of NM-MT8 and was sold by the owner, via auction in 2007, for approximately $2.35 million and then resold in September 2007 for $2.8 million.
PSA/DNA Autograph Authentication and Grading Services . In 1999, we launched our vintage autograph authentication business, initially offering authentication services for “vintage” sports autographs and memorabilia that were autographed or signed prior to the time they were presented to us for authentication. The vintage autograph authentication business is distinctly different from the “signed-in-the-presence” authentication of autographs where the “authenticator” is present and witnesses the actual signing. Our vintage autograph authentication service involves the rendering of an opinion of authenticity by an industry expert based on (i) an analysis of the signed object, such as the signed document or autographed item of memorabilia, to confirm its consistency with similar materials or items that existed during the signer’s lifetime; (ii) a comparison of the signature submitted for authentication with exemplars of such signatures; and (iii) a handwriting analysis. As of June 30, 2011, we employed 5 autograph experts with an average of 25 years of experience in the autograph memorabilia market, as well as outside consultants that we use on a contract basis.
In June 2004, we also began offering grading services for autographs, beginning with baseballs containing a single signature or autograph. We use uniform grading standards that we have developed and a numeric scale of 1-to-10, with the highest number representing top quality or “Gem Mint” condition. We assign grades to the collectibles based on the physical condition or state of preservation of the autograph.
Memorabilia that have been authenticated by our vintage autograph service include Mark McGwire’s 70th home run baseball, which was sold at auction in 1999 for more than $3 million, and the baseball bat, autographed by Babe Ruth, which he used to hit the first home run ever hit in Yankee Stadium in 1923. That bat was sold by Sotheby’s for more than $1.2 million.
PSE Stamp Authentication and Grading Services . In January 2000, we launched Professional Stamp Experts (PSE) as our independent, third-party stamp authentication and grading service. We use both an adjectival system and a numeric scale from 1-to-100 to grade stamps. We assign grades based on the centering of the stamp image on the stamp paper background and the absence or presence of other faults on the stamp. There have been viable third-party stamp authentication services in operation for several decades, and stamp dealers and collectors had been using a subjective grading system based primarily on the centering of the stamp image on the stamp paper background, ignoring other faults. However, prior to our entry into the stamp market, independent third-party stamp grading was non-existent. As a result, we encountered some resistance to this concept in the stamp collectibles market, which is steeped in tradition and slow to change, as we did from coin dealers when we launched PCGS and from trading card dealers when we launched PSA. In October 2005 the Philatelic Foundation, based in New York, began using the numerical grades assigned by PSE to stamps. In the spring of 2006, Scott Publishing Company, the long-time publisher of the Scott Catalogs also began identifying the PSE numerical grades assigned to stamps that are included in its bi-annual valuing supplement to its catalogs. These two events have established PSE’s numerical grading scale, and we believe has facilitated the acceptance of third-party stamp authentication and grading. As of June 30, 2011, we employed 2 stamp graders, and use another expert on a part-time basis. Those graders have an average of 36 years of experience in the collectible stamp market.
Stamps that have been authenticated and graded by us include an 1868 1¢ “Z” Grill U.S. postage stamp, which received a PSE grade of (XF) 90, indicating its quality was “Extremely Fine,” and which was last sold at auction in 1989 for more than $900,000. The owner submitted the stamp to us shortly after we initiated our stamp authentication and grading service in 2000.
CCE Certified Coin Exchange and Collectors Corne r. In September 2005, we acquired the Certified Coin Exchange (CCE), a subscription-based, business-to-business Internet bid-ask market for coins that have been certified by us or by other independent coin authentication and grading services. CCE has been a marketplace in U.S. certified rare coin trading between major coin dealers in the United States since 1990, with similar operations for uncertified coins dating back to the 1960s. The CCE website now features over 100,000 bid and ask prices for certified coins at www.certifiedcoinexchange.com . The CCE provides liquidity in the geographically dispersed and highly fragmented market for rare coins. In March 2007, we introduced the Collectors Corner, a business-to-consumer website that enables sellers on CCE to offer many certified coins simultaneously at wholesale prices on CCE and at retail prices on Collectors Corner ( www.collectorscorner.com ) . Registration on Collectors Corner is free for consumers, who can search for and sort coins listed on Collectors Corner. Coin sellers must register and pay a fixed monthly fee to CCE for access to and to effectuate sale transactions on both CCE and Collectors Corner. Currently, there are over 95,000 collectibles, consisting primarily of coins, trading cards, currency and stamps that we have certified, which are offered for sale on Collectors Corner, with offering prices aggregating approximately $110 million. The enhanced liquidity provided by CCE and Collectors Corner for certified coins, trading cards, and certified stamps, has increased the volume and turnover of these items, which benefits us because, as a general rule, increases in sales and purchases of coins, trading cards and stamps increase the demand for our authentication and grading services. If we succeed in growing CCE and Collectors Corner, we believe that the CCE/Collectors Corner websites can become the preeminent online markets for PCGS certified coins sold by dealers to other dealers, and for coins, trading cards and stamps certified by PCGS, PSA and PSE, respectively, bought and sold between dealers and consumers.
CEO BACKGROUND
Mr. A. Clinton Allen has been Chairman and Chief Executive Officer of A.C. Allen & Company, a consulting firm, since 1987. He has been a director of the Company since 2001 and Chairman of the Board of Directors since December of 2002. Mr. Allen serves as a director and member of the Executive Committee of LKQ Corporation, a supplier of recycled OEM automotive parts. He is also a director of Avantair, Inc., a provider of fractional aircraft shares for business and personal use, and Brooks Automation, which provides integrated tool and factory automation solutions for the global semiconductor and related industries. Mr. Allen served as a director of Steinway Musical Instruments Company, a publicly traded manufacturer of pianos and other musical instruments, from 1999 and served as its Lead Director from 2003 until his retirement from that board of directors in May 2011. Mr. Allen provided the original financing for Blockbuster Entertainment Corporation, was one of its founding directors and served on its board until that company was acquired by Viacom/Paramount in September 1994. Mr. Allen holds a Masters Professional Director Certification from the American College of Corporate Directors, a director education and credentialing organization. The Company believes that Mr. Allen's financial and business expertise, combined with his experience as an executive and director of other companies, both public and private, as well as his years of experience providing strategic advisory services, qualifies him to serve as the non-executive Chairman of our Board of Directors and as a member of the Board.
Deborah A. Farrington is a founder and President of StarVest Management, Inc. and is, and since 1999 has been, a general partner of StarVest Partners, L.P., a venture capital fund which invests primarily in emerging software and business services companies. From 1993 to 1997, Ms. Farrington was President and Chief Executive Officer of Victory Ventures, LLC, a New York-based private equity investment firm. Also during that period, she was a founding investor and Chairman of the Board of Staffing Resources, Inc., a diversified staffing company which grew from $17 million to $300 million in annual revenues while she served on its board. Prior to 1993, Ms. Farrington held management positions with Asian Oceanic Group in Hong Kong and New York, Merrill Lynch & Co. Inc. and the Chase Manhattan Bank. Ms. Farrington serves on the board of directors of NetSuite, Inc., a New York Stock Exchange-listed company where she is Lead Director and Chairman of the Compensation Committee, and on the boards of directors of Host Analytics, Inc., PivotLink, Inc. and Xignite, Inc., all of which are private companies. She also serves on the board of directors of Opportunity International, a nonprofit organization that provides financial products and strategies to over two million people working their way out of poverty in the developing world. Ms. Farrington holds a Professional Director Certification from the American College of Corporate Directors, a director education and credentialing organization. She is a graduate of Smith College and received an MBA from the Harvard Business School. We believe that Ms. Farrington brings valuable experience and insight to our Board of Directors, having helped to finance and serve as a director of numerous emerging growth companies. She also is knowledgeable with respect to and plays a key role in the formulation and evaluation of the Company’s executive compensation programs and has served as Chairperson of our Compensation Committee since joining our Board of Directors.
David G. Hall has served as President of Collectors Universe since October 2001 and as a Director since its founding in February 1999. From April 2000 to September 2001, Mr. Hall served as the Chief Executive Officer of the Company and as Chairman of the Board from February 1999 to October 2001. Mr. Hall was a director of Professional Coin Grading Service, Inc., and was its Chief Executive Officer from 1986 to February 1999, when it was acquired by the Company. Mr. Hall was honored in 1999 by COINage Magazine as Numismatist of the Century, along with 14 other individuals. In 1990, Mr. Hall was named Orange County Entrepreneur of the Year by INC. Magazine . In addition, Mr. Hall has written A Mercenary’s Guide to the Rare Coin Market , a book dedicated to coin collecting. Mr. Hall invented and introduced the concept of and developed the business of independent third party grading of high value collectible coins and sports cards. He is also known in the numismatics community as one of the leading experts in identifying and grading high value collectible coins and he is in demand as a speaker at coin conventions and trade shows. We believe that, as the Company’s President and a member of our Board of Directors, he lends great credibility to the Company among collectibles dealers and collectors and he brings to the Board valuable insight about the collectibles markets generally and the collectibles coin market in particular.
Michael J. McConnell is, and since March 2009, has served as, the Company’s Chief Executive Officer and is and since July 2007 has been a director of the Company. He is a private investor and a Non-Executive Director of PaperlinX Limited, Redflex Holdings Limited and MRV Communications, Inc. From 1998 to September 30, 2008, Mr. McConnell was a Managing Director and a member of the Executive Committee of Shamrock Capital Advisors, Inc., a manager of private equity, real estate and direct investment funds, including the Shamrock Activist Value Funds. Prior to joining Shamrock in 1994, Mr. McConnell held various management positions at PepsiCo, Merrill Lynch and Kidder Peabody. Mr. McConnell formerly served on the boards of directors of Ansell Limited, Nuplex Industries, Force Corporation, iPass, Inc., Port-link International, Cosmoline Limited and Neo Technology Ventures. Mr. McConnell also serves on the Board of Governors of Opportunity International, a nonprofit organization that provides financial products and strategies to over two million people working their way out of poverty in the developing world. Mr. McConnell received his B.A. in Economics from Harvard University and his MBA (with distinction—Shermet Scholar) from the Darden School of the University of Virginia. We believe that, as a result of his past experience, including managing an investment fund focusing on “small-to-medium cap” public companies and serving as a director of a number of such companies, Mr. McConnell adds valuable managerial experience on the Board and a keen understanding of investor expectations, both of which are important to the Board’s strategic planning and risk management responsibilities.
A. J. “Bert” Moyer has been a business consultant and private investor since April 2002. From March 1998 until February 2000, he served as Executive Vice President and Chief Financial Officer of QAD, Inc., a leading provider of enterprise resource planning software applications for global manufacturing companies. Between September 2000 and February 2002, Mr. Moyer was engaged as a consultant to QAD, Inc., assisting in the Sales Operations of the Americas Region. He served as president of the commercial division of the Profit Recovery Group International, Inc. from March until July 2000. Prior to joining QAD, Inc. in 1998, Mr. Moyer was Chief Financial Officer of Allergan, a publicly traded specialty pharmaceutical company based in Irvine, California and prior to that he served as Chief Financial Officer of Western Digital, a publicly traded manufacturer of hard drives. Mr. Moyer currently serves on the boards of directors of CalAmp Corp., Virco Manufacturing Corporation, and MaxLinear, Inc., all of which are public companies. In addition, Mr. Moyer served on the boards of directors of two additional public companies, LaserCard Corporation and Occam Networks, Inc., until January 2011 and February 2011, respectively. Mr. Moyer holds a Professional Director Certification from the American College of Corporate Directors, a director education and credentialing organization. Mr. Moyer received his Bachelor of Science degree in Business Administration from Duquesne University and graduated from the Advanced Management Program at the University of Texas. Mr. Moyer brings a combination of managerial and financial experience and know-how to the Board, having served in both operational and financial management positions with a number of publicly traded companies. More particularly, due to his experience as a chief financial officer of publicly traded companies, he is familiar with the accounting and financial reporting requirements applicable to and the financial issues faced by public companies, making him an effective member of Audit Committee, of which he is the Chairman.
Van D. Simmons has been the President of DHRCC, Inc., a direct seller of rare coins since October 2000, a position he also held from 1981 to February 1997. From July to October 2000, he served as Vice President of Sales of the Company’s Bowers and Merena Division. He served as Chairman of the Board of David Hall’s North American Trading, LLC, a retailer of rare coins, from February 1997 to July 2000. Mr. Simmons was a founding director of the Company in February 1999 and was also a founder and served as a director of its predecessor company, Professional Coin Grading Service, Inc., from 1986 to February 1999. Mr. Simmons holds a Professional Director Certification from the American College of Corporate Directors, a director education and credentialing organization. Mr. Simmons possesses a keen understanding of the collectible coin market, which has proven to be valuable to the Board in understanding that market and in evaluating and approving the Company’s strategic initiatives in that market.
Bruce A. Stevens is an Industry Partner with Cordova, Smart & Williams, LLC, a private equity firm that focuses its investments on lower middle market companies that are engaged in businesses with which the partners of the firm have had operating experience. Currently, Mr. Stevens is the CEO of Berkshire Blanket, a CSW portfolio company. Berkshire is the category leader of blankets and throws in the United States. From 1985 until his retirement in January 2008, Mr. Stevens was the President and Chief Executive Officer of Steinway & Sons, a wholly owned subsidiary of Steinway Musical Instruments, Inc., which is the maker of fine pianos with manufacturing operations in the United States and Germany and operational facilities in China, Japan and the UK. He also served as a member of the board of directors of Steinway Musical Instruments, Inc. from 1996 until his retirement in January 2008. Before joining Steinway & Sons, Mr. Stevens was employed by Polaroid Corporation for nearly 18 years where he held various positions in both its domestic and international divisions. Mr. Stevens served on the Board of Trustees at the Manhattan School of Music in New York City until July 2011. He also has served on the boards of directors of numerous industry and music education organizations, such as the Piano Manufacturers Association International, American Music Conference, Winchester Community Music School and Winchester Foundation for Educational Excellence. Mr. Stevens earned a Bachelor’s Degree in Economics from the University of Pennsylvania, and has earned a Master Professional Director Certificate from The American College of Corporate Directors, a director education and credentialing organization. Having been the President and CEO of a consumer products company the sales of which, like those of the Company, depend in large part on the availability and willingness of consumers to spend discretionary income, Mr. Stevens brings to the Board considerable knowledge and experience in identifying and evaluating economic and market challenges faced by the Company, which has been of particular benefit to the Board when reviewing and evaluating marketing and strategic initiatives proposed by management.
MANAGEMENT DISCUSSION FROM LATEST 10K
Introduction and Overview
Our Business
Collectors Universe, Inc. (“we”, “us” “management” “our” or the “Company”) provides authentication and grading services to dealers and collectors of high-value coins, trading cards, event tickets, autographs, sports and historical memorabilia and stamps. We believe that our authentication and grading services add value to these collectibles by providing dealers and collectors with a high level of assurance as to the authenticity and quality of the collectibles they seek to buy or sell; thereby enhancing their marketability and providing increased liquidity to the dealers, collectors and consumers that own, buy and sell such collectibles.
We principally generate revenues from the fees paid for our authentication and grading services. To a much lesser extent, we generate revenues from other related services which consist of: (i) the sale of advertising on our websites; (ii) the sale of printed publications and collectibles price guides and advertising in our publications and on our website; (iii) the sale of membership subscriptions in our Collectors Club, which is designed primarily to attract interest in high-value collectibles among new collectors; (iv) the sale of subscriptions to our CCE dealer-to-dealer Internet bid-ask market for certified coins and to our CoinFacts website, which offers a comprehensive one-stop source for historical U.S. numismatic information and value-added content; and (v) the management and operation of collectibles trade shows and conventions. We also generate revenues from sales of our collectibles inventory, which is primarily comprised of collectible coins that we have purchased under our coin grading warranty program; however, such product sales are neither the focus nor an integral part of our on-going revenue generating activities.
Factors That Can Affect Operating Results and our Financial Position
Factors That Can Affect our Revenue . Our authentication and grading fees accounted for approximately 80% of our total net revenues in each of the three years ended June 30, 2011. The amounts of those fees are primarily driven by the volume and mix of coin and collectibles sales and purchase transactions by collectibles dealers and collectors, because our collectibles authentication and grading services generally facilitate sales and purchases of coins and other high value collectibles by providing dealers and collectors with a high level of assurance as to the authenticity and quality of the collectibles they seek to sell or buy. Consequently, dealers and collectors most often submit coins and other collectibles to us for authentication and grading at those times when they are in the market to sell or buy coins and other high-value collectibles that we authenticate and grade.
In addition, our coin authentication and grading revenues are impacted by the level of modern coin submissions, which can be volatile, primarily depending on the timing and size of modern coin marketing programs by the United States Mint and by customers or dealers who specialize in sales of such coins.
The amounts of our authentication and grading revenues are affected by (i) the volume and mix of authentication and grading submissions among coins and trading cards, on the one hand, and other collectibles on the other hand; (ii) in the case of coins and trading cards, the “turnaround” times requested by our customers, because we charge higher fees for faster service times; and (iii) the mix of authentication and grading submissions between vintage or “classic” coins and trading cards, on the one hand, and modern coins and trading cards, on the other hand, because dealers generally request faster turnaround times for vintage or classic coins and trading cards than they do for modern submissions, as vintage or classic collectibles are of significantly higher value and are more saleable by dealers than modern coins and trading cards; and (iv) as discussed above, the timing of marketing programs for modern coins.
Our revenues are also affected by the volume of coin authentication and grading submissions we receive at collectibles trade shows where we provide on-site authentication and grading services to show attendees, who typically request higher-priced same-day turnaround for the coins they submit to us for authentication and grading at those shows. The volume of trade show submissions varies from period to period depending upon a number of factors, including the number and the timing of the shows in each period and the volume of collectible coins that are bought and sold at those shows by dealers and collectors. In addition, the number of such submissions and, therefore, the revenues and gross profit margin we generate from the authentication and grading of coins at trade shows can be impacted by short-term changes in the prices of gold that sometimes occur around the time of the shows, because gold prices can affect the willingness of dealers and collectors to sell and purchase coins at the shows.
Factors Affecting our Gross Profit Margins . The gross profit margins we earn on collectibles authentication and grading submissions are impacted by much the same factors that impact our revenues, as the average service fee and the resulting gross profit margin earned is affected by (i) the volume and mix of those submissions among coins, trading cards and other collectibles, because we generally realize higher margins on coin submissions than on submissions of other collectibles; (ii) in the case of coins and trading cards, the “turnaround” times requested by our customers, because we charge higher fees for faster service times; and (iii) the mix of authentication and grading submissions between vintage or “classic” coins and trading cards, on the one hand, and modern coins and trading cards, on the other hand, because dealers generally request faster turnaround times for vintage or classic coins and trading cards than they do for modern submissions. Furthermore, because a significant proportion of our costs of sales are fixed in nature in the short-term, our gross profit margin is also affected by the overall volume of collectibles that we authenticate and grade in any period.
Impact of Economic Conditions on our Financial Performance . As discussed above, our operating results are affected by the volume of collectibles transactions by collectibles dealers and collectors which, in turn, is primarily affected by (i) the disposable income available to collectors and their confidence about future economic conditions, because high-value collectibles are generally viewed as luxury goods and are purchased with disposable income; (ii) the cash flows generated by collectibles dealers and their confidence about future economic conditions, which affect their willingness and the ability of such dealers to purchase collectibles for resale; (iii) the availability and cost of borrowings because collectibles dealers often rely on borrowings to fund their purchases of collectibles, (iv) prevailing and anticipated rates of inflation and the strength or weakness of the U.S. dollar, because the threat of increased inflation or concerns about the weakening of the U.S. dollar often lead investors and consumers to purchase gold and silver coins as a hedge against inflation or reductions in the purchasing power of the U.S. currency; and (v) the performance and volatility of the gold and other precious metals markets, which can affect the level of purchases and sales of collectible coins, because investors and consumers will often increase their purchases of hard assets, including gold coins if they believe that the market prices of hard assets will increase. As a result, the volume of collectibles transactions and, therefore, the demand for our authentication and grading services, generally increase during periods characterized by economic growth, the availability of lower cost borrowings, or increases in inflation or in gold prices or a weakening of the U.S. dollar. By contrast, collectibles transactions and, therefore, the demand for our services generally decline during periods characterized by economic downturns or recessions, declines in consumer and business confidence, an absence of inflationary pressure, or declines in the market prices of gold. However, these conditions can sometimes counteract each other as it is not uncommon, for example, for investors to shift funds from gold to other investments during periods of economic growth and growing consumer and business confidence.
Despite the continued uncertainties with respect to the strength and the sustainability of the economic recovery, our revenues (excluding product revenues) in the current fiscal year increased by approximately 10%, compared to the same period of the prior year, and included a 14% increase in revenue from the authentication and grading of collectible coins, which is our largest grading and authentication market. We believe those increases reflect the continued high prices of gold and concerns about inflation and the continued weakness of the U.S. dollar among collectors and investors, as well as customer-specific marketing initiatives that drive the grading of modern coins. Our revenues are discussed in more detail below under the caption Results of Operations: “ Net Revenues”.
Factors That Can Affect our Financial Position . A substantial number of our authentication and grading customers prepay our authentication and grading fees when they submit their collectibles to us for authentication and grading. As a result, historically, we have been able to rely on internally generated cash and have never incurred borrowings to fund our continuing operations. We currently expect that internally generated cash flows and current cash and cash equivalent balances will be sufficient to fund our continuing operations at least through the end of fiscal 2012.
In addition to the day-to-day operating performance of our business, our overall financial position can also be affected by the Company’s capital raising or stock buyback activities, the dividend policy adopted by the Board of Directors from time to time, and the Company’s decisions to invest in and to fund the acquisition of businesses. In July 2009, the Company used approximately $8.9 million of available cash to purchase 1,749,828 shares of our common stock in a “Dutch Auction” tender offer, and in fiscal 2010, the Board of Directors reinstated the payment of dividends such that we paid approximately $9.9 million and $5.9 million in cash dividends to stockholders in fiscal 2011 and 2010, respectively. In addition, our financial position is impacted by the Company’s tax position as the Company may only be required to pay minimum taxes, when it has net operating losses and other tax attributes available to offset taxable income. However, once those tax losses or other tax attributes have been fully utilized, the Company will then be required to pay taxes at an estimated annual effective tax rate of 40%, as adjusted for timing differences.
Trends and Challenges in and Opportunities for our Businesses
In response to the economic recession and the credit crisis that adversely impacted the volume of authentication and grading submissions to us during fiscal 2009, we implemented a cost reduction program to reduce our costs of revenue and our operating expenses to bring those costs and expenses more in line with our revenues and, thereby, increase our gross profits and operating income. During fiscal 2010 and 2011, that program, combined with the increase in our coin authentication and grading revenues, enabled us to realize increased gross profit margin and operating income when operating income is adjusted for a non-cash impairment charge of $1.4 million in fiscal 2011, and cash flows from continuing operations.
Critical Accounting Policies and Estimates
General. In accordance with accounting principles generally accepted in the United States of America (“GAAP”), we record our assets at the lower of cost or fair value. In determining the fair value of certain of our assets, principally accounts and notes receivable inventories, goodwill and intangible assets, we must make judgments, estimates and assumptions regarding circumstances or trends that could affect the value of those assets, such as economic conditions or trends that could impact, e.g., our ability to fully collect our accounts receivable or realize the value of our inventories in future periods. Those judgments, estimates, and assumptions are based on current information available to us at that time. Many of those conditions, trends and circumstances on which our judgments or estimates are based; however, are outside of our control and, if changes were to occur in the events, trends or other circumstances on which our judgments or estimates were based, or other unanticipated events were to happen that might affect our operations, we may be required under GAAP to adjust our earlier estimates. Changes in such estimates may require that we reduce the carrying value of the affected assets on our balance sheet (which are commonly referred to as “write-downs” of the assets involved).
It is our practice to establish reserves, allowances, charges or losses to record such downward adjustments or write-downs in the carrying value of assets, such as, for example, accounts and notes receivable and inventory. Such write-downs are recorded as charges to income or increases in expense in our statement of operations in the periods when those reserves, allowances, charges or losses are established or increased to take account of changed conditions or events. As a result, our judgments, estimates and assumptions about future events and changes in the conditions, events or trends upon which those estimates and judgments were made, can and will affect not only the amounts at which we record such assets on our balance sheet, but also our results of operations.
The decisions as to the timing of adjustments or write-downs of this nature also require subjective evaluations or assessments about the effects and duration of events or changes in circumstances. For example, it is difficult to predict whether events or conditions, such as increases in interest rates or economic slowdowns, will have short or longer term consequences for our business, and it is not uncommon for it to take some time after the occurrence of an event or the onset of changes in economic circumstances for their full effects to be recognized. Therefore, management makes such estimates based upon the information available at that time and reevaluates and adjusts its reserves, allowances, charges or losses for potential write-downs on a quarterly basis.
In prior years, we acquired certain businesses and assets (some of which are now classified as part of discontinued operations, as we have closed, or disposed of such assets), and in accordance with GAAP, we accounted for those acquisitions using the purchase method of accounting. That accounting method required us to allocate amounts paid for those businesses in excess of the fair value of the assets acquired and the liabilities assumed, and to classify that excess as goodwill. In accordance with GAAP, we evaluate goodwill for impairment at least annually or more frequently if we believe that goodwill has been impaired in the interim due to changing facts or events (see “Goodwill” below). Other intangible assets that are separable from goodwill and have definite lives are subject to amortization over their remaining useful lives (see “ Long-Lived Assets Other Than Goodwill ” below). Indefinite-lived intangible assets are subject to ongoing evaluation for impairment. Management formally evaluates the carrying value of its goodwill and other indefinite-lived intangible assets for impairment on the anniversary date of each of the business acquisitions that gave rise to the recording of such assets. If it is determined, from any such impairment analysis, that the estimated fair value of any such assets has declined below their carrying values, it would become necessary for us to recognize an impairment charge that would have the effect of reducing our income in the period when that charge is recognized.
We also estimate losses associated with the disposal of a business or the sale of assets when a decision has been made to dispose of or discontinue such business or sell such assets. In accordance with GAAP, assets available for sale are stated at the lower of costs or their net realizable value. In addition, the estimated fair value of liabilities for employee terminations is recognized as of the date such terminations are communicated to the affected employees and for lease obligations as of the date we cease using the real property or equipment subject to the lease.
In making our estimates and assumptions, we follow GAAP in order to enable us to make fair and consistent estimates of the fair value of assets and to establish adequate reserves, allowances, charges or losses for possible write-downs in the carrying values of our assets.
Set forth below is a summary of the accounting policies and critical estimates that we believe are material to an understanding of our financial condition and results of operations.
Revenue Recognition Policies . We generally record revenue at the time of shipment of the authenticated and graded collectible to the customer, net of any taxes collected. Due to the insignificant delay between the completion of our grading and authentication services and the shipment of the collectible or high-value asset back to the customer, the time of shipment corresponds to the completion of our services. Many of our authentication and grading customers prepay our authentication and grading fees when they submit their collectibles to us for authentication and grading. We record those prepayments as deferred revenue until the collectibles have been authenticated and graded and shipped back to them. At that time, we record the revenues from the authentication and grading services we have performed for the customer and deduct this amount from deferred revenue. For certain dealers to whom we extend open account privileges, we record revenue at the time of shipment of the authenticated and graded collectible to the dealer.
A portion of our net revenues is comprised of subscription fees paid by customers for memberships in our Collectors Club. Those memberships entitle members to access our on-line and printed publications and, sometimes also to receive vouchers for free grading services from us. We record revenue for this multi-element service arrangement by recognizing approximately 65% of the subscription fee in the month following the membership purchase. We review this estimate at least semi-annually by recalculating the percentage based on the relative values of the various elements in the Collectors Club offering and determining the appropriate percentage to attribute to the grading services and the remaining subscription. Our estimates have proven to be consistently around 65% on an ongoing basis. The balance of the membership fee is recognized as revenue over the life of the membership, which can range from one to two years.
With respect to our Expos trade show business, we recognize revenue generated by the promotion, management and operation of each of its collectibles conventions or trade shows in the fiscal period in which the convention or show takes place, and for PCGS’s CoinFacts subscription revenues, we recognize revenue over the subscription period.
We recognize the revenue from the sale of products when it is shipped to the customer and all the requirements for revenue recognition have been satisfied. Such products consist primarily of collectible coins that we purchase pursuant to our coin authentication and grading warranty program and those product sales are not considered an integral part of our ongoing revenue generating activities.
Accrual for Losses on Facility Leases . As a result of the discontinuance of and our exit from the jewelry authentication and grading businesses in fiscal 2009, we ceased the occupancy of facilities we had leased for their operations. We retained a commercial real estate broker to sublease those facilities on our behalf. Through June 30, 2009, we established estimated loss accruals of $4,454,000 for liabilities under those leases. The amount of those lease accruals was determined based on estimates on a discounted basis of (i) prevailing sublease rates in the real estate market where those facilities are located, as compared to our rental obligations under those leases; (ii) the time we expected it would take to sublet those facilities; and (iii) other direct costs associated with the leases. In fiscal 2010, the Company continued to re-evaluate its loss accruals for the lease obligations and recognized an additional accrual of $405,000 in the second quarter of fiscal 2010. In May 2010, the Company entered into agreements to reduce its lease obligations, whereby one of the spaces was sublet to a third party, and the second facility was returned to the landlord and the lease terminated with only a financial obligation remaining. As a result of these agreements, and in accordance with GAAP, the Company measured the change in cash flows using the same credit-adjusted risk-free rate that was used to measure the initial liabilities and the cumulative effect of the change of approximately $500,000 resulting from the revision, was recognized as a reduction to the liability in the fourth quarter of fiscal 2010. As a result of those changes, the payment of lease obligations and the recognition of accretion expense, the remaining obligations at June 30, 2011 were approximately $3,137,000. We will continue to review and, if necessary, make adjustments to these accruals on a quarterly basis.
Accounts Receivable, Notes Receivable and the Allowance for Doubtful Accounts. In the normal course of our authentication and grading business, we extend payment terms to many of the larger, more creditworthy dealers who submit collectibles to us for authentication and grading on an ongoing basis. Until the second quarter of fiscal 2009, we also made advances to selected coin dealers evidenced by notes receivable pursuant to a dealer-financing program, which have been substantially repaid or written down to zero at June 30, 2011. We regularly review our accounts receivable, estimate the amounts of, and establish an allowance for, uncollectible accounts in each quarterly period. The amount of that allowance is based on several factors, including the age and extent of significant past due accounts and known conditions or trends that may affect the ability of account debtors to pay their accounts receivable balances. Each quarter we review our estimates of uncollectible amounts and, if necessary, adjust the allowance to take account of changes in economic or other conditions or trends that we believe will have an adverse effect on the ability of any of the account debtors to pay their accounts in full. Since the allowance is increased by recording a charge against income that is reflected in general and administrative expenses, an increase in the allowance will cause an increase in such expenses. At June 30, 2011 and 2010 allowances for doubtful accounts were $66,000 and $75,000, respectively.
Inventory Valuation Reserves. Our collectibles inventories, which consist primarily of collectible coins that we have purchased pursuant to our coin warranty program, are valued at the lower of cost or fair value and have been reduced by an inventory valuation allowance to provide for potential declines in the value of those inventories below their carrying values. The amount of the allowance is determined and is periodically adjusted on the basis of market knowledge, historical experience and estimates concerning future economic conditions or trends that may impact the sale value of the collectibles inventories. Additionally, due to the relative uniqueness and special features of some of the collectibles included in our collectibles inventory and the volatility in the prices of precious metals, valuation of such collectibles often involves judgments that are more subjective than those that are required when determining the market values of more standardized products. As a result, we review the market values of the collectibles in our inventory on a quarterly basis and make adjustments to the valuation reserve that we believe are necessary or prudent based on our judgments regarding these matters. In the event that a collectible is sold for a price below its carrying value, we record a charge to operating income. At June 30, 2011 and 2010, collectibles coin inventories were $1,468,000 and $493,000, and inventory reserves were $126,000 and $144,000, respectively. See note 4 to the Consolidated Financial Statements. If we liquidate collectible coins at amounts below their carrying value, we may incur losses in excess of our recorded inventory reserves.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Our Business
Collectors Universe, Inc. (“we”, “us” “management” “our” or the “Company”) provides authentication and grading services to dealers and collectors of high-value coins, trading cards, event tickets, autographs, sports and historical memorabilia and stamps. We believe that our authentication and grading services add value to these collectibles by providing dealers and collectors with a high level of assurance as to the authenticity and quality of the collectible they seek to buy or sell; thereby enhancing their marketability and providing increased liquidity to the dealers, collectors and consumers that own, buy and sell such collectibles.
We generate revenues principally from the fees paid for our authentication and grading services. To a lesser extent, we generate revenues from other related services which consist of: (i) the sales of advertising and commissions earned on our websites, including Coinflation.com ™ , which we acquired in September 2011 (see note 4 to the condensed consolidated financial statements); (ii) the sales of printed publications and collectibles price guides and advertising in our publications and on our websites; (iii) the sales of membership subscriptions in our Collectors Club, which is designed primarily to attract interest in high-value collectibles among new collectors; (iv) the sales of subscriptions to our CCE dealer-to-dealer Internet bid-ask market for certified coins and to our CoinFacts ™ website, which offers a comprehensive one-stop source for historical U.S. numismatic information and value-added content; and (v) the management and operation of collectibles trade shows and conventions. We also generate revenues from and recognize costs associated with the sale of our collectibles inventory, which are primarily comprised of collectible coins that we have purchased under our coin grading warranty program; however, such product sales are neither the focus nor an integral part of our on-going revenue generating activities.
Factors That Can Affect our Operating Results and Financial Position
Factors That Can Affect our Revenues and Gross Profit Margins . Collectibles authentication and grading fees accounted for approximately 83% of our total net revenues for both the three and nine months ended March 31, 2012, respectively. The fees we generated from authentication and grading services and the gross profit margins we realize on those services are driven primarily by the volume and mix of coin and collectibles sales and purchase transactions by collectibles dealers and collectors, because our collectibles authentication and grading services generally facilitate sales and purchases of coins and other high value collectibles by providing dealers and collectors with a high level of assurance as to the authenticity and quality of the collectibles they seek to sell or buy. Consequently, dealers and collectors most often submit coins and other collectibles to us for authentication and grading at those times when they are in the market to sell or buy coins and other high-value collectibles.
In addition, our coin authentication and grading revenues are impacted by the level of modern coin submitted to us for grading, which can be volatile, primarily depending on the timing and size of modern coin marketing programs by the United States Mint and by customers or dealers who specialize in sales of such coins.
Our authentication and grading revenues and gross profit margins are affected by (i) the volume and mix of authentication and grading submissions among coins and trading cards on the one hand, and other collectibles on the other hand; (ii) in the case of coins and trading cards, the “turnaround” times requested by our customers, because we charge higher fees for faster service times; and (iii) the mix of authentication and grading submissions between vintage or “classic” coins and trading cards on the one hand, and modern coins and trading cards on the other hand, because dealers generally request faster turnaround times for vintage or classic coins and trading cards than they do for modern submissions, as vintage or classic collectibles are of significantly higher value and are more saleable by dealers than modern coins and trading cards; and (iv) as discussed above, the size and timing of marketing programs for modern coins. Furthermore, because a significant proportion of our costs of sales are fixed in nature in the short term, our gross profit margin is also affected by the overall volume of collectibles that we authenticate and grade in any period.
Our revenues and gross profit margins are also affected by the volume of submissions we receive at collectibles trade shows for on-site authentication and grading services that we provide to show attendees, because they typically request higher priced same-day turnaround for the coins they submit to us for authentication and grading at those shows. The level of trade show submissions varies from period to period depending upon a number of factors, including the number and the timing of the shows in each period and the volume of collectible coins that are bought and sold at those shows by dealers and collectors. In addition, the number of such submissions and, therefore, the revenues and gross profit margin we generate from the authentication and grading of coins at trade shows can be impacted by short-term changes in the prices of gold that may occur around the time of the shows, because gold prices can affect the willingness of dealers and collectors to sell and purchase coins at the shows.
Impact of Economic Conditions on our Financial Performance. As discussed above, our operating results are affected by the volume of collectibles transactions by collectibles dealers and collectors which, in turn, is primarily affected by (i) the cash flows generated by collectibles dealers and their confidence about future economic conditions, which affect their willingness and the ability of such dealers to purchase collectibles for resale; (ii) the availability and cost of borrowings because collectibles dealers often rely on borrowings to fund their purchases of collectibles, (iii) the disposable income available to collectors and their confidence about future economic conditions, because high-value collectibles are generally viewed as luxury goods and are purchased with disposable income; (iv) prevailing and anticipated rates of inflation and the strength or weakness of the U.S. dollar, and more recently worries about sovereign debt obligations and credit ratings in the United States and Europe, because conditions of this nature often lead investors and consumers to purchase or invest in gold and silver coins as a hedge against inflation or reductions in the purchasing power of the U.S. currency; and as an alternative to investments in government bonds and other treasury instruments; and (v) the performance and volatility of the gold and other precious metals markets, which can affect the level of purchases and sales of collectible coins, because investors and consumers will often increase their purchases of gold coins, as well as other hard assets if they believe that the market prices of those assets will increase. As a result, the volume of collectibles transactions and, therefore, the demand for our authentication and grading services, generally increase during periods characterized by increases in disposable income and the availability of lower cost borrowings, on the one hand, or increases in inflation or in gold prices, economic uncertainties and declines in business and consumer confidence or a weakening of the U.S. dollar on the other hand. By contrast, collectibles transactions and, therefore, the demand for our services generally declines during periods characterized by economic downturns or recessions, declines in consumer and business confidence, an absence of inflationary pressure, or declines in the market prices of gold. However, these conditions can sometimes counteract each other as it is not uncommon, for example, for investors to shift funds from gold to other investments during periods of economic growth and growing consumer and business confidence and from stocks and other investments to gold during periods of economic uncertainties and decreases in disposable income and consumer and business confidence.
We believe that these economic uncertainties and conditions, which led to an increase in coin transactions, not only by collectibles dealers and collectors, but also by investors, contributed to the 17% increase in total revenue from the authentication and grading of collectible coins (which is our largest authentication and grading market) in the nine months ended March 31, 2012. We believe those increases are primarily the result of continued high prices of gold, concerns among collectors and investors about inflation, the continued weakness of the U.S. dollar and, more recently, about the ability of governments to meet their sovereign debt obligations, as well as customer-specific marketing initiatives that drive the grading of modern coins. Our revenues are discussed in more detail below under the caption Results of Operations: “ Net Revenues.”
Factors That Can Affect our Liquidity and Financial Position . A substantial number of our authentication and grading customers prepay our authentication and grading fees when they submit their collectibles to us for authentication and grading. As a result, we have historically been able to rely on internally generated cash and have never incurred borrowings to fund our continuing operations. We currently expect that internally generated cash flows and current cash and cash equivalent balances will be sufficient to fund our continuing operations at least through the end of fiscal 2012.
In addition to the day-to-day operating performance of our business, our overall financial position can also be affected by the dividend policy adopted by the Board of Directors from time to time, the Company’s decisions to invest in and to fund the acquisition of established and/or early stage businesses and any capital raising activities or stock repurchases. In the first nine months of fiscal 2012, our dividend policy provided for the payment of cash dividends of $0.325 per share per quarter. In addition, our liquidity and financial position are affected by our tax position, because we have had net operating losses and other tax attributes available to offset or reduce taxes payable by us. Through March 31, 2012, we have fully utilized all of our federal net operating losses and other tax attributes and have begun making estimated tax payments for federal income tax purposes at an estimated tax rate of approximately 34%.
Critical Accounting Policies and Estimates
Except as discussed below, during the three and nine months ended March 31, 2012, there were no changes in our critical accounting policies or estimates which are described in Item 7 of our Annual Report on Form 10-K, filed with the SEC, for the fiscal year ended June 30, 2011. Readers of this report are urged to read that Section of that Annual Report for a more complete understanding and detailed discussion of our critical accounting policies and estimates.
Goodwill. We test the carrying value of goodwill and other indefinite-lived intangible assets at least annually on their respective acquisition anniversary dates, or more frequently if indicators of impairment are determined to exist. When testing for impairment, in accordance with Accounting Standards Update No. 2011-08, we consider qualitative factors, and where determined necessary by management, we proceed to the two-step goodwill impairment test. When applying the two-step impairment test, we apply a discounted cash flow model or an income approach in determining a fair value that is used to estimate the fair value of the reporting unit on a total basis, which is then compared to the carrying value of the reporting unit. If the fair value of the reporting unit exceeds the carrying value of the reporting unit, no impairment of goodwill exists as of the measurement date. If the fair value is less than the carrying value, then there is the possibility of goodwill impairment and further testing and re-measurement of goodwill is required.
During the first quarter ended September 30, 2011, we completed the annual goodwill impairment evaluations with respect to the goodwill acquired in our fiscal year 2006 purchases of CCE and CoinFacts. We assessed qualitative factors, including the significant excess of fair value over carrying value in prior years, and any material changes in the estimated cash flows of the reporting unit and determined that it was more likely than not that the fair value of CCE and CoinFacts exceeded its carrying value, including goodwill, and therefore it was not necessary to proceed to the two-step impairment test.
With respect to our Expos trade show business, as previously reported in our Form 10-K for the year ended June 30, 2011, based on our impairment testing of that business at June 30, 2011, we recognized an impairment loss of approximately $1.4 million in the fourth quarter of that fiscal year. We have determined that no further impairments existed at March 31, 2012
Revenue Recognition
We record revenue at the time of shipment of the authenticated and graded collectible to the customer, net of any taxes collected. Due to the insignificant delay between the completion of our authentication and grading services and the shipment of the collectible or high-value asset back to the customer, the time of shipment corresponds to the completion of our services. Many of our authentication and grading customers prepay our authentication and grading fees when they submit their collectibles to us for authentication and grading. We record those prepayments as deferred revenue until the collectibles have been authenticated and graded and shipped back to them. At that time, we record the revenues from the authentication and grading services we have performed for the customer and deduct this amount from deferred revenue. For certain dealers to whom we extend open account privileges, we record revenue at the time of shipment of the authenticated and graded collectible to the dealer. With respect to our Expos trade show business, we recognize revenue generated by the promotion, management and operation of collectibles conventions and trade shows in the periods in which the event takes place.
A portion of our net revenues is comprised of subscription fees paid by customers for memberships in our Collectors Club. Those memberships entitle members access to our on-line and printed publications and, in some cases, vouchers for free grading services. Through the second quarter of fiscal 2012, we recorded revenue for this multi-element service arrangement by recognizing approximately 65% of the subscription fee in the month following the membership purchase. The balance of the membership fee was recognized as revenue over the life of the membership, which can range from one to two years. We evaluated, at least semi-annually, the relative fair values of the deliverables and the percentage factors used to allocate the membership fees between the grading services and the other services provided to members. In the third quarter of fiscal 2012, arising from the upgrading of the Company’s accounting systems, which enables us to track separately the issuance and redemption of individual free grading vouchers, the Company began recognizing revenue attributed to free grading vouchers on a specific basis and to classify such revenues as part of grading and authentication fees rather than other related service revenues. The balance of the membership fee continues to be recognized over the life of the membership. This refinement of the Company’s revenue recognition policy resulted in approximately $150,000 of revenues being deferred that we otherwise would have recognized in the three months ended at March 31, 2012.
Stock-Based Compensation. We recognize share-based compensation attributable to service-based equity grants over the service period based on the grant date fair value. For performance-based share grants with a financial performance goal, we begin to recognize compensation expense when it becomes probable that we will achieve the financial performance goal based on the grant date fair value. Stock-based compensation in the three and nine months ended March 31, 2012, represents expenses attributable to (i) prior year grants of restricted stock and stock options, recognized over the remaining service periods of those grants; (ii) grants of 92,000 shares that were granted in July 2011 to executive officers and senior management (the “Fiscal 2012 Equity Incentive Grants”); and (iii) 11,000 restricted shares awarded to non-employee directors. The Fiscal 2012 Equity Incentive Grants included both service-based shares and performance-based shares. For the three and nine months ended March 31, 2012, the Company recorded stock-based compensation expense for both the service-based and performance-based shares.
Results of Operations for the Three and Nine Months Ended March 31, 2012 Compared to the Three and Nine Months Ended March 31, 2011.
Net Revenues
Net revenues consist primarily of fees that we generate from the authentication and grading of high-value collectibles, including coins, trading cards, autographs and stamps. To a lesser extent, we generate collectibles related service revenues (referred to as “other related revenues”) from sales of Collectors Club memberships and advertising and commissions earned on our websites (including Coinflation.com ™ which we acquired in September 2011-see note 4 to the condensed consolidated financial statements), and in printed publications and collectibles price guides; subscription-based revenues primarily related to our CCE dealer-to-dealer Internet bid-ask market for certified coins and CoinFacts; and fees earned from promoting, managing and operating collectibles conventions. Net revenues also include, to a significantly lesser extent, revenues from the sales of products, which consist primarily of coins that we purchase under our authentication and grading warranty policy. We do not consider such product sales to be the focus of or an integral part of our ongoing revenue generating activities.
For the three months ended March 31, 2012, our total service revenues increased by $448,000 or 3.6%, compared to the three months ended March 31, 2011 and included increases of $124,000 or 1.2% in authentication and grading fees and $324,000 or 17.5% in other related services. For the nine months ended March 31, 2012, our total service revenues increased by $4,580,000 or 14.5%, compared to the nine months ended March 31, 2011 and included increases of $3,593,000 or 13.4% in authentication and grading fees and $987,000 or 20.4% in other related services. Authentication and grading fees were lower in the third quarter and nine months ended March 31, 2012 by approximately $150,000, resulting from the refinement in the Company’s revenue recognition policy for Collectors Club. See Critical Accounting Policies and Estimates: Revenue Recognition.
The increased authentication and grading fees in the three months ended March 31, 2012, were primarily attributable to an increase in trading cards, authentication and grading fees with coins and stamps at substantially the same levels as the three months ended March 31, 2011. For the nine months ended March 31, 2012, the increase in authentication and grading fees was primarily attributable to an increase in coin authentication and grading fees of $3,058,000 or 16%. In addition, our trading cards fees increased by $605,000 or 9%. Our stamp authentication and grading fees decreased by $70,000.
The 16% increase in our coin authentication and grading fees, compared to a 3.5% increase in the number of coins authenticated and graded in the nine months ended March 31, 2012, relates to an increase in the average service fee earned on coins in the nine months, primarily driven by increases in the average service fees earned for the authentication and grading of modern and world coins, due to the mix of services provided and due to pricing initiatives on certain of our modern coin programs.
Our modern coin authentication and grading fees were substantially unchanged, compared to the third quarter of fiscal 2011 and increased $1.3 million or 17% in the nine months ended March 31, 2012, compared to the same period of the prior year, reflecting marketing programs by the U.S. Mint and by our dealers and customers. World coin authentication and grading revenues grew by approximately $83,000 or 11% and $1.5 million or 100% in the three and nine-months ended March 31, 2012, respectively, compared to the same periods of the prior year, reflecting increased submissions of world coins, including grading at our Paris, France facility and in Hong Kong. Show authentication and grading revenues increased by approximately $15,000 or 1% and $165,000 or 6% for the three and nine months ended March 31, 2012, respectively, reflecting higher average grading fees earned per show in the current year periods. Vintage authentication and grading fees decreased by $109,000 in the third quarter and increased by $59,000 for the nine months ended March 31, 2012. The decrease in the vintage authentication and grading fees in the third quarter was attributable to a refinement in the Company’s revenue recognition policy for Collectors Club, which resulted in an increased deferral of coin fees of approximately $115,000.
As discussed under “Factors That Can Affect our Operating Results and Financial Position”, the level of modern coin and trade show revenues can be volatile, and therefore it is uncertain what level of growth in those revenues, if any, will be achieved in future quarters. In addition, the increase in our authentication and grading fees earned, also reflects increased submissions of world coins from overseas, particularly Asia, and authentication and grading at our Paris, France and Hong Kong facilities, and it is uncertain whether the increased fees earned from the authentication and grading of world coins can continue at the levels achieved in the first nine months of the year or whether we can expect continued future growth. However, management plans to continue to focus attention on world coins as a growth opportunity for us.
The relatively higher growth of 16% in our coin authentication and grading fees in the nine months ended March 31, 2012, compared to no growth in the three months ended March 31, 2012, reflects the fact that the Company achieved record coin fees in the third quarter of fiscal 2011, and therefore revenue growth was more challenging in the current third quarter. In addition, our coin business and, in particular, our modern coin business, entered the fourth quarter of fiscal 2012 with slower momentum than in the fourth quarter of fiscal 2011, and this slower momentum has continued through the first part of the quarter. Notably, year-to-date sales of Silver and Gold Eagles from the US Mint are down approximately 24% and 44%, respectively, as compared to the same period last year. This general market decline is impacting our customers who submit modern coins to us. Therefore, it is uncertain what level of growth, if any, we can expect or if we may experience a decline in coin revenues in the fourth quarter of fiscal 2012, compared to the fourth quarter of fiscal 2011.
Due to the strong performance of our coin authentication and grading business relative to our other businesses in the first nine months of the year, our coin business represented approximately 67% of total revenues, compared to 65% of total revenues in the nine months of last year, which reflects the continued importance of our coin authentication and grading business to our overall financial performance.
The increases in revenues from other related services of $324,000 or 17.5% and $987,000 or 20.4% in the three and nine months ended March 31, 2012, respectively, included increases in advertising and commission revenues (including revenues earned by Coinflation.com, which we acquired in September 2011 and which accounted for revenues of $110,000 and $242,000 in the three and nine months ended March 31, 2012), revenues from web-based subscriptions related fees and Collector Club memberships, partially offset by a reduction in the revenues of our Expos collectibles trade show management business.
Gross Profit
Gross profit is calculated by subtracting the cost of revenues from net revenues. Gross profit margin is gross profit stated as a percentage of net revenues. The cost of authentication and grading revenues consist primarily of labor to authenticate and grade collectibles, production costs, credit card fees, warranty expense and occupancy, security and insurance costs that directly relate to providing authentication and grading services. Cost of revenues also includes printing, other direct costs of the revenues generated by our other non-grading related services and the costs of product revenues, which represent the carrying value of the inventory of products (primarily collectible coins) that we sold and any inventory related reserves, considered necessary.
CONF CALL
Michael McConnell
Thank you and welcome everybody to today’s conference call. I touch briefly on the quarter’s results and relate them to our overall strategy. I will then turn the call over to our Chief Financial Officer, Joe Wallace, who will provide a more detailed explanation of the financial results. At the conclusion of Joe’s remarks, we will open the call to questions.
Your company produced solid financial results for the third quarter of fiscal year 2012, with record sales revenue of $13.1 million, the highest quarterly revenue in the company’s 26 year history. With that as the headline, I would like to comment on several key elements to the quarter.
First, I will explain the major drivers to the increases in sales and marketing, and G&A expenses as compared to the third quarter last year. The increases are primarily driven by three strategic activities, expansion into Asia, our Paris operation, and investment in information technology. We consider these appropriate and necessary investments to support the second plank of our strategy, namely to extend prudently and pragmatically.
During the last week of March and the first week of April, we officially planted our flag on the Asian continent. A team of our employees was in Hong Kong for the Hong Kong International Coin Convention Show. In preparation for this important growth initiative, we incurred launch costs in the quarter, specifically those costs totaled approximately $280,000, and have been recorded primarily in the sales and marketing and G&A line items.
The show achieved revenues of approximately 225,000, with an average selling price of $32. Because the show straddles Q3 and Q4, approximately 160,000 of the revenue from the show will not hit the P&L until Q4. Therefore the net impact to this quarter, the third quarter’s P&L of our expansion into Asia was a negative approximately $215,000. Lastly we incurred start-up [ph] capital expenditures for Hong Kong in the quarter of approximately $150,000.
We also held one more show in Paris then during the comparable quarter last year. This difference led to an increase in sales and marketing by approximately $60,000. Further, related to our international expansion, this year we held three international shows in Q3, typically our busiest quarter anyway, as compared to one international show in the comparable quarter last year.
This puts stress on the overall organization and cost us some efficiency. We will evolve and learn from our mistakes and calibrate the application of our human resources as we move forward with our international initiatives. Next, as we have refined the completion of our software upgrade, NuVision [ph], and invested in various IT related service enhancements for operations, we incurred additional IT and consulting costs in the quarter of approximately $110,000.
It has been a year of significant investment in our overall information technology and information technology infrastructure, and we expect this to moderate in the future. Next, I want to draw your attention to the refinement of our accounting for Collectors Club memberships, and the significant impact on grading revenue and profit this quarter. Historically, we brought into revenue that portion of a client membership fee, relating to the grading vouchers provided within the first 60 days of that new member.
Because of the upgrade to our financial software in the second quarter, we can now track the redemption of each individual voucher. As a result, $150,000 of high margin revenue that would have historically been brought into the P&L in the quarter, has instead been recorded as deferred revenue, and will come into sales when the specific vouchers are redeemed. Importantly, the cash for the membership has been received. Further, over the next year, we will gain a better understanding of the estimate for the number of unused vouchers.
Finally, looking forward, we are seeing a slowdown in our bulk modern business. As indicated in the past, this aspect of our business is volatile, difficult to predict, and subject to production volume impediments [ph] and precious metal prices. Compared to last year at the same time, there has been a noticeable decline in the production of gold and silver eagles at the US Mint. Additionally, precious metal market prices have been choppy to declining.
Together this has caused our customers to use a current phrase, take risk off in their business and commit to a demand fewer products from the mints. Thus we get fewer submissions and we have seen a shift in our mix towards what we call vintage bulk, which typically holds a lower ASP. These forces, largely uncontrollable are the realities of the bulk part of our overall business.
Despite the current slowdown, we are on track to be within 2% of our total revenue forecast for the bulk division that we set at the beginning of the year, which frankly is very good for a portion of our business that is so difficult to predict. Overall, this year has been a balancing act of investing in selected growth initiatives, while driving growth and profit from our core activities.
We remain excited about our international opportunities on both the European continent and Asia. We will continue to drive growth from our digital activities and these will record a record result this year for the company, and the momentum of our PSA DNA division is solid, and it will likely beat its internal revenue forecast for the fiscal year.
Finally, we held a two day off-site strategic retreat for the senior team in April, and confirm our corporate strategy, which is simply put, we are going to protect our core business and we are going to extend prudently and pragmatically in those core businesses.
With that I will turn the call over to Joe.
Joe Wallace
Thank you Mike, and good afternoon everyone. I will now give a brief overview of the financial results for the third quarter of fiscal 2012. For the third quarter, the company reported service revenues, which comprised our grading, authentication and related services of $13 million, operating income of $2.9 million and after-tax income from continuing operations of $1.7 million or $0.22 per diluted share.
This compares to service revenues of $12.6 million, operating income of $3.3 million and after tax income from continuing operation of $2 million or $0.25 per diluted share for the third quarter of fiscal 2011. For the nine months, the company’s net service revenues were $36.2 million, operating income was $7.3 million and after tax income from continuing operations was $4.3 million or $0.54 per diluted share.
This compares to net service revenues of $31.6 million, operating income of $6.8 million and after-tax income from continuing operations of $4.1 million or $0.52 per diluted share in the nine months ended March 31, 2011. As discussed previously and in our filings, we do not consider product sales to be an integral part of our ongoing revenue generating activities.
In the three months ended March 31, 2012, service revenues increased by $0.4 million, and operating income decreased by $0.4 million, compared to the three months ended March 31, 2011. The reduction in operating income primarily related to one, the refinement of the company’s Collector Club revenue recognition policy, which led to the deferral of approximately $150,000 of revenue in the third quarter. And two, set up on tradeshow costs incurred related to the company attending its first show in Hong Kong, with reduced operating income by approximately $0.2 million in the third quarter.
For the three and nine months ended March 31, 2011, our estimated effective annual tax rate was approximately 41%. Due to the availability of net operating loss and other tax attributes to offset current taxable income, the provision for income taxes for the nine months ended March 31, 2012, mainly represents the non-realization of deferred tax assets.
However, through March 31, 2012, we have fully utilized all our Federal net operating loss and other tax attributes, and have made estimated tax payments of approximately $0.5 million for federal and state purposes in the nine months ended March 31, 2012. The small income from discontinued operations in the third quarter related to a license fee income of $51,000 for the most part offset by ongoing accretion expense for the New York facility obligations of our former jewelry businesses.
Our service revenues increased by $0.4 million or 4% quarter-on-quarter and comprised increases of $0.1 million in authentication and grading fees, and $0.3 million in other related services. For the nine months service revenues increased by $4.6 million or 14% and comprised increases in grading and authentication fees of $3.6 million and $1 million in other related services. The increased authentication grading fees in the three months ended March 31, 2012, mainly related to an increase in trading card fees, with coins and stamps at substantially the same levels at the three months ended March 31, 2011.
For the nine months ended March 31, 2012, the increase in authentication grading fees was related to increase in coin fees [ph] of $3.1 million or 16%, and trading card fees of $0.6 million or 9%. Our modern coin authentication grading fees were substantially unchanged compared to the third quarter of last year, which increased $1.3 million or 17% in the nine months compared to the same period in the prior year, reflecting marketing progress by the US Mint and by our dealers and customers.
World coin authentication and grading revenues grew by approximately $0.1 million or 11%, and $1.5 million or 100% in the three months ended March 31, 2012 compared to the same period in the prior year, reflecting increased submissions of world coins, including grading at our Paris, France, facility and in Hong Kong. Show authentication and grading revenues increased by approximately 15,000 or 1% [ph], and $0.2 million or 6% for the three and nine months ended March 31, 2012, reflecting higher average grading fees earned per show in the current year periods.
Vintage authentication and grading fees decreased by $0.1 million in the third quarter, and increased by $0.1 million for the nine months. The decrease in the vintage authentication and grading fees in the third quarter related to the refinement in the company’s revenue recognition policy, the Collectors Club, which resulted in an increased deferral of coin fees of approximately $0.1 million for the quarter.
As discussed previously, and in our filings, the level of modern coin and trade show revenues can be volatile, and therefore it is uncertain what level of growth in those revenues, if any, will be achieved in future quarters. In addition, the increase in our authentication and grading fees also reflects increased submissions of world coins from overseas, particularly Asia, and authentication and grading at our Paris, France, facility and Hong Kong.
As it is uncertain what the increased fees earned from the authentication and grading of world coins can continue at the levels achieved in the first nine months of the year, or whether we can expect continued future growth. However, we continue to focus attention on world coins as a growth opportunity for us. With a relatively higher growth of 16% of our coin authentication grading fees in the nine months ended March 31, 2012, compared to no growth in the three months ended March 31, 2012, reflects the fact that the company achieved record coin fees in the third quarter of fiscal ’11, and therefore revenue growth was more challenging in the current third quarter.
In addition, our coin business, and in particular our modern coin business, entered the fourth quarter of fiscal 2012, with slower momentum in the fourth quarter of fiscal ’11, and this slower momentum has continued through the first part of the quarter. Notably, year-to-date sales of silver and gold eagles from the US Mint are down approximately 24% and 44% respectively, as compared to the same period of last year.
This general market decline is impacting our customers who submit modern coins to us. Therefore, it is uncertain what level of growth if any, we can expect, and if we may experience a decline in coin revenues in the fourth quarter of fiscal 2012, compared to the fourth quarter of fiscal ’11. Due to the strong performance of our coin authentication and grading business relative to our other businesses in the first nine months of the year, our coin business represented approximately 67% of total revenues, compared to 65% of total revenues in the nine months of last year, which reflects the continued importance of our coin authentication and grading business to our overall financial performance.
The increases in revenues from other related services of $0.3 million or 17%, and $1 million or 20% in the three and nine months ended March 31, 2012, respectively included increases in advertising and commission revenues, revenues from web-based subscriptions related fees, and Collector Club memberships, partially offset by a reduction in the revenues of our Expo collectible trade show management business.
Our services gross profit margin was 62% and 61% for the three and nine month ended March 31, 2012, compared to 63% and 61% for the three and nine months ended March 31, 2011. There can be some period to period variability in the gross profit margin depending upon the mix of revenues in any quarter and seasonality. During the fiscal year ended June 30, 2011, our quarterly service gross profit margin varied between 59% and 63%.
The increases in selling and marketing expense of $0.3 million and $0.7 million in the three and nine months ended March 31, 2012, compared to the same periods of the prior year, mainly related to the company’s coin business, and comprised increased trade show and business development costs of $0.2 million in the quarter, and $0.3 million for the nine months, which is inclusive of the costs associated with attending and providing authentication and grading services for the first time in Hong Kong.
Increases in performance related incentives of $0.2 million in the nine months, and general sales and marketing increase in support of the growth of the business in the current year periods. G&A expenses increased by $0.2 million and $1.3 million for the three and nine months ended March 31, 2012, compared to the same periods of fiscal ’11. The [inaudible] increases included compensation and performance related incentive costs of approximately $0.2 million and $0.7 million in the three and nine month periods, related to improved financial performance of the business, and increased personnel costs to support the growth of the business.
Also consulting and outside services of $0.1 million and $0.2 million for the three and nine month periods in connection with system modifications upgrades and temporary help. In addition, non-cash stock-based compensation increased by $45,000 and $0.1 million in the three and nine months ended March 31, 2012. Those cost increases in the three months ended March 31, 2012, were partially offset by cost reductions, primarily related to lower legal and professional fees.
For the nine months ended March 31, 2012 the remaining cost increases included higher legal and professional fees and other cost increases arising from the growth of the business. The resulting operating income of $2.9 million for the quarter and $7.3 million for the nine months compared to $3.3 million and $6.7 million for the three and nine months ended March 31, 2011.
Turning to our balance sheet, the company’s cash position at March 31, 2012 was $20.5 million compared to $21.9 at June 30, 2011. Net cash used of $1.4 million for the nine months comprised of cash generated from continuing operations of $7.7 million and proceeds received from the exercise of stock options of $0.6 million; offset by cash payments of $7.8 million for dividends to stockholders, $1.1 million for capital expenditures, $0.5 million for the purchase of Coinflation.com, and $0.3 million used in our discontinued operations.
At March 31, 2012, the company continued to have $0.7 million remaining under its previously announced stock buyback program. The company has not made any open market repurchases on this program since the fourth quarter of fiscal 2008. On April 26, 2012, the company announced its quarterly cash dividend of $0.325 per share to be paid on June 1, 2012 to stockholders of record on May 18, 2012.
With that, I would like to thank you for your attention. Operator, we are now ready to take questions from the audience.
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Fund Letters
