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We believe that, over time, the high-end collectibles market will continue to grow as a result of increased nostalgia for memorabilia, an increase in leisure and disposable income, the desirability of owning collectibles, and investor confidence that collectibles will appreciate in value. We also believe that the convenience and efficiency of the Internet will stimulate further growth in the high-end collectibles market. It is also our view that this growth is dependent upon the availability of reliable authentication and grading services, authoritative information necessary to value collectibles, and trading forums or venues that enable buyers and sellers of collectibles to maximize the value of their collectibles. As a provider of these services to the collectibles markets, we have the opportunity to benefit directly from such growth in terms of increased demand for our services.
Collectors Universe, Inc. is a collectibles company engaged in the grading, auctioning, selling, and authentication of collectible coins, sports cards, currency, stamps, sports and entertainment memorabilia, autographs, and other collectibles. Trademarks include Collectors Universe, Professional Coin Grading Service, Professional Sports Authenticators, Bowers and Merena, and Lyn Knight Currency Auctions. The company conducts multi-venue auctions at which dealer and collectors buy and sell high-end collectibles and operates an online collectibles marketplace where it publishes information about items for auction. It also operates co-branded Web sites with ebay and Yahoo!.
1986-90: Standardized Coin Grading
Early in 1986, an increase in public awareness and interest in the investment market for coins--in part caused by a sharp rise in gold prices--led a group of leading coin dealers to agree to abide by the opinion of a trio of California-based coin dealers in assessing the value of traded coins. These 32 dealers formed Professional Coin Grading Service (PCGS) to standardize grading and make it possible for dealers to buy and sell coins sight unseen. By year's end, 50 dealers nationwide agreed to recognize PCGS's grading standards.
Reliable grading is critical to the coin-trading industry because, along with rarity and demand, it determines a coin's price. Prior to the 1950s, dealers employed a system of descriptive terms, such as "uncirculated," "brilliant uncirculated," or "gem brilliant uncirculated" to convey aspects of the coin's appearance which determine its level of preservation. Then in 1949, Dr. William Sheldon devised a 70-point system, now widely accepted on this continent, which assigns a coin in poorest condition the grade of 1, while a perfect or uncirculated coin received the grade of Mint State (MS) 70.
Dealers had traditionally graded coins themselves, creating a potential conflict of interest. In addition, their grade was often not honored by other dealers. In the early 1980s, scams and inconsistencies became so rampant that state and federal regulators considered regulating coins as securities. It was in response to this state of affairs that David G. Hall, a native Californian and a rare coin enthusiast from an early age, came up with the idea for Professional Coin Grading Service.
Coins graded by PCGS graders were sealed after being graded, offering not just an opinion, but a guarantee of the grade assigned. PCGS's rating made use of Dr. Sheldon's scale, using various criteria for selecting a grade, such as wear and tear, scratches, nicks, marks, luster, and color. The service guaranteed to pay the difference in market price for any PCGS-graded coin later determined to be of a lower grade than originally assigned.
The possibility of rating coins using a precise, universally accepted numerical grading system did not win advocates in every corner, however. "Grading is primarily a subjective art," according to Harvey Stack of Stack's Coin Company, as quoted in the New York Times of October 18, 1986. "Adjectival language has a bit more elasticity and can cover a broader horizon." However, by 1989 nearly all 500 major dealers nationwide belonged to PCGS, making it the largest coin grading operation in the nation. PCGS's system had become the industry standard. The company slabbed 70,000 to 90,000 coins a month, up from 8,000 when it started three years earlier. The company has also established a computerized exchange, the American Numismatic Information Exchange (ANIE), through which selected dealer-members entered daily bids and asking prices for as many as 200,000 coins.
In 1990, PCGS changed the industry again, introducing the ultimate grader: a computer called The Expert that was used in tandem with human graders. The Expert used a camera system to "see" each coin as a whole and to scan and scrutinize its surface section by section, noting flaws, nicks, and other signs of wear. It also looked at "light flow," or "reflective analysis," to measure the coin's depth of mirror and luster and its overall "mood." In all, the computer made about 2.2 billion calculations per coin before completing its "digital fingerprint"--storing its data on an optical disk for later use in tracking in the event it was lost or stolen.
In response to The Expert's introduction, the American Numismatic Association sold its own human grading system, opting to independently monitor grading services and set standards without conflicts of interest. In fact, initial faith in The Expert's capabilities led PCGS to make some advertised statements about it that came under scrutiny by the Federal Trade Commission (FTC). Hall conceded that the company's claims about its grading accuracy were overstated and, in 1990, agreed to submit its advertising to the FTC for review for the next five years.
1991-99: Growth of a Professional Sports Authenticator
The following year, convinced that sports card hobbyists needed a way to be sure that the vintage cards they were buying were real and had not been re-glossed or re-cut, Hall founded Professional Sports Authenticator (PSA). Convincing dealers to come on board this time, however, was not easy: they were afraid the grading service would diminish the price of their wares, and for its first three years, PSA lost an average of $10,000 a month and stayed afloat only through infusions from PCGS. Then, as more card buyers demanded it, dealers began to submit cards to PSA. By 1996, PSA was grading almost 10,000 cards a month. When sports card trading on the Internet exploded in 1999, PSA, with 90 percent of the card-grading market, increased its business almost fivefold to roughly 80,000 per month. It had become the largest and most respected sports card grading service in the nation.
1999-2001: Growth Through Acquisition
The Internet created new opportunities for trading in the site-unseen collectibles market. In February 1999, Hall combined PSA and PCGS along with three other companies in the collectibles and auction industry and formed Collectors Universe, Inc. For its first fiscal year ending that June, Collectors Universe totaled more than $20 million in sales. However, the company's initial public offering (IPO) that year raised only a lackluster $24 million.
Collectors Universe opened a new auction site, Sports Collectors Universe, selling items on consignment via the Internet. Conducting online auctions proved to be the company's fastest growing revenue stream; however, the bulk of its sales--more than 78 percent--continued to come from its authentication and grading services. The company also launched a PSA spin-off service in 1999--PSA/DNA, Guaranteed Authentic--allowing collectors to mark their memorabilia with a unique strand of synthetic DNA contained in an invisible ink compound. It later branched out to include sports autograph verification, relying upon four specialists who independently compared autographs in question to images of authentic autographs in PSA's computers. In a much publicized event in 1999, PSA/DNA DNA-stamped Mark McGwire's 70th home run ball and 900 Sammy Sosa autographs. In 2000, PSA/DNA was selected by the NFL and National Football League Players Incorporated to authenticate all player-related merchandise for the new NFL Auction on ebay. Ebay also partnered with Collectors Universe to feature its authentication and quality verification services online.
Collectors Universe also began to grow through acquisitions. In late 1999, Professional Stamp Experts joined Collectors Universe and began service on the Internet in January 2000. In 2000, Collectors Universe acquired the assets of three companies owned by the renowned coin dealer Q. David Bowers and his business partner, Raymond N. Merena: Auctions by Bowers and Merena Inc., Bowers and Merena Galleries Inc., and Bowers and Merena Research Inc. Of the ten highest prices for U.S. coins sold at auction, Bowers and Merena had been responsible for seven, including the highest seller, the 1804 Childs Silver dollar, auctioned in 1999 for $4,100,000. The combined revenue for the Bowers and Merena companies in 1999 was $13 million. Bowers continued to head the trio of companies as a division of Collectors Universe, and Merena joined the Collectors Universe board of directors.
In 2000, Collectors Universe acquired the privately held Odyssey Publications Inc., which published Autograph Collectors Magazine and other periodicals and price guides for celebrity autograph collectors. The company expanded Odyssey's operations to include the sale of celebrity and historical autographs and memorabilia and transferred publication of its Sports Market Report to Odyssey. In April 2001, Sports Market Report, formerly distributed to members of PSA's Collectors Club only, became a magazine with national distribution. Collectors Universe also purchased James Spence Autographs, one of the foremost sports autographs authorities in the United States in 2000. This acquisition enabled the company to increase its authentication services for sports autographs and memorabilia, a service in demand since the sports card market had not long before come under scrutiny by the FBI for its widespread misrepresentation.
Business was booming. In 2000, Record revenues of $42 million for the company as a whole were up about 88 percent from the prior year. PCGS became the official grading and authentication service for the gold treasure of pre-1858 coins recovered in 1989 from the SS Central America. Collectors Universe entered into partnerships in 2000 with Yahoo! Inc. and Shop At Home Inc. In 2001, Collectors Universe began a three-year agreement with The Topps Company, Inc. to grade selected limited quantity sports cards prior to sale. Inter@ctive Week, a weekly Internet trade magazine, listed Collectors Universe as the highest-ranking Internet company in the collectibles category of e-commerce companies. PC Magazine called it the top coin auction site, and Yahoo! Life named it the top collector's site.
However, 2001 brought concern that the slowing economy and lower stock market prices would dampen collectibles prices. In 2000, in fact, the company had discontinued its weekly Internet auctions due to sizeable losses. However, at Collectors Universe the view was that the market for collectibles had begun to stabilize in the new millennium. The company underwent a change of guard when Roger W. Johnson succeeded David G. Hall as CEO but remained focused on its strategy of consolidating the major collectibles markets and maintaining the number one position in each important market.
Principal Subsidiaries: Lyn Knight Currency Auctions, Inc.
Principal Competitors: Certified Sports Authentication; Sportscard Guaranty Co.; ebay Inc.; Yahoo Inc.; Sotheby's Inc.; Christie's Inc.
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