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Collectors Universe provides authentication and grading services
in five different markets with very little competition; New market opportunities in the
Collectors Universe Inc.
1921 East Alton Avenue
Santa Ana, CA 92705
Michael R. Haynes
Chief Executive Officer
Interview conducted by:
Lynn Fosse, Senior Editor
August 11, 2005
MICHAEL R. HAYNES has served as Chief Executive Officer and Director since January
1, 2003. He served as Chief Operating Officer, Chief Financial Officer and Director
of Tangible Asset Galleries, Inc. from 2000 to 2002. From 1997 to 2000, Mr. Haynes
was Executive Vice President of Emiliani Enterprises, Inc. He has held key high
level positions such as President, Chief Operating Officer and/or Chief Financial Officer
of eight collectibles, precious metals, specialty retail, distribution, e-commerce and
manufacturing businesses. Overall, Mr. Haynes has more than 25 years of experience
in managing the growth and development of fast growing companies, which includes over 19
years experience in managing both public and private companies engaged in the business of
selling collectibles at auction, retail and wholesale. He was also one of the
co-founding board members of the Industry Council for Tangible Assets, a Washington,
D.C.-based trade association for dealers and auctioneers of tangible and collectible
assets, where he served for nine years. Mr. Haynes holds a Master's degree in
Business and a Bachelor of Science degree in mechanical engineering, both from Southern
Methodist University. He is a Certified Public Accountant and a Certified Financial
Collectors Universe, Inc. is a leading provider of value added services to the high-value
collectibles markets. The Collectors Universe brands are among the strongest and best
known in their respective markets. The Company authenticates and grades collectible coins,
sports cards, autographs and stamps. The Company also compiles and publishes authoritative
information about collectible sports cards and sports memorabilia, United States and world
coins, and entertainment memorabilia. This information is accessible to collectors and
dealers at the Company's web site, http://www.collectors.com,
and is also published in print.
CEOCFO: Mr. Haynes, what
attracted you to Collectors Universe?
Mr. Haynes: Collectors Universe has one of the best and
most unique business models I have ever seen. We are actually creating an entire new
category of business worldwide. I was familiar with Collectors Universe before I joined
and was very excited at the prospect of being a part of the Collectors Universe management
team because of the tremendous value proposition that the company offers, its services and
the exciting development of an entirely new business category.
CEOCFO: What has changed
since you have been there?
Mr. Haynes: When I arrived, the company was in two
parts. It had its core business, which had the authentication and quality rating service,
and high-value secondary market assets. In addition to that, the company had also entered
into a variety of businesses, which were buying and selling those very same secondary
market assets. The income statements of the two businesses were quite different, so we
began to examine the allocation of resources. We looked at not only the financial
resources, but also the intellectual resources in identifying which area would have the
higher growth opportunity. We concluded that the Company should divest its
transaction-based businesses and focus on its authentication and quality-rating services.
We did this primarily because the transaction businesses are quite competitive but on the
quality rating side, there was not much competition and there was also a huge need for
this service in the marketplace. We liquidated all of our transaction-oriented business
and began to focus our time, attention, and resources - both human and capital -into
growing and expanding our quality rating services.
CEOCFO: Tell us about
Mr. Haynes: We are a lot like the credit rating
agencies, Standard & Poors and Moodys, in many respects. For those
agencies, issuers of credit bring their credit document and the entire backup to these
institutions to provide a rating on the credit quality that is offered in the marketplace.
Whether it is A, AA or AAA type of ratings, the marketplace has an objective and common
standard to measure and evaluate the different types of credit issuers. We essentially do
the exact same thing except the assets that we are examining are credit instruments that
are actually physical assets. About 80% of our unit volume comes from dealers in these
assets as well as auctioneers, both of which are in the commercial business of trading
these assets. They want to get the assets rated for quality so that the marketplace, to
which they are distributing these assets to, will have the same knowledge about the
underlying quality. As a result of these quality ratings, the confidence of the buyers has
increased and as the confidence of the buyers increases, so does the buyers
willingness to pay more money for the same asset because there is no longer any ambiguity
about the underlying quality or authenticity. The vast majority of our volume comes from
the commercial side of the business.
CEOCFO: What is the
competitive landscape for your services?
Mr. Haynes: We are in five different markets right now.
In all five markets, we have a fairly dominant market share for products that are
authenticated and rated in those various markets. We command more than 50% market share in
each of those markets except for one, where we have one main competitor; we have about a
45% share and they have about a 40% share. In the other markets, there are no significant
CEOCFO: How are you
sure, the quality is there with the authenticators?
Mr. Haynes: Generally speaking, high value secondary
market assets have traded for thousands of years. If you go back to the Egyptians periods,
jewelry and pottery were useful in trade for long periods in time. There are always two
questions that the buyer has for the dealer; first, is it authentic or genuine and an
original. The second question is: has it been altered, wrecked, fixed, repaired or
remanufactured. Another question that is equally important and in some cases more
important is: what is its quality or state of preservation and how close is this to its
original state of manufacture and creation. For all of these thousands of years, the
seller has always made those representations. Obviously depending upon who the seller
might be, there is a tendency toward bias to push the edge of the quality or make
judgments about authenticity. When entering a marketplace, there is a need for a third
party such as Collectors Universe, that has no interest in the buying or selling or any
financial interest in how much an asset may trade for. Collectors Universe focuses
strictly on examining the asset based on the standards that most likely the authenticator
has established. Once these standards are widely known in the marketplace for both
authenticity and quality then this asymmetry of knowledge between the buyer and seller
evaporates. The consumer knows just as much about the authenticity and quality and the
asset as the seller. Therefore, it is difficult if not impossible for the seller to
overstate or misrepresent the authenticity and quality of the underlying good, which is
ultimately, related to value.
We also have a number of checks and balances in our process to ensure that we remain
independent and maintain integrity in our process. There are three keys to the integrity
of our process; the first is we remain independent of the submitters of these goods, which
are primarily commercial individuals, dealerships and corporations, who are looking to
sell these goods but we also have some that are submitted by individual holders. We remain
independent in that as goods come in, we strip all the packaging off the goods so that
there is no indication on the asset, of the identity of the submitter. We physically
examine everything in our facilities so that it is not done by long-distance or random
sample. We look at everything. The first step to remain independent is we tell our
computer the submitters identity on everything and then we label every item with a
non-descript barcode and a unique tracking number to follow the assets through our
internal control system. The second key step is that on all of our vintage goods, two
experts or two of our evaluators who are independent of one another must agree anonymously
with each other on the authenticity and quality. This means that when goods move into our
expert pool, our experts do not know whether they are the first or the second to examine
or what anyone else has done, or the identity of the submitter. They are simply applying
our standards of authenticity and quality to the good that is examined, and key that into
the computer. The third key point in maintaining the integrity of our process is our
verification step; two experts must anonymously agree on the exact quality rating for
every asset. Our most senior expert reviews every asset before it goes out the door to
ensure that the senior expert agrees with the evaluation of the two experts that have
agreed anonymously. We have these three key steps that not only help to maintain our
independence but the integrity of process. These checks and balances are integral in
allowing us to remain independent and consistent long term.
CEOCFO: Are there new
technologies for authentication that you are able to use?
Mr. Haynes: The technology that applies here is not
that significant. We have some visual name technology; imaging type technology, and some
magnification type technology that does help. Generally, we are talking about standards
that we have written and propagated and published in the marketplace so that everyone
knows what those standards are. Our people, who are highly trained experts in their
respective fields, apply those standards to each item. It is more of an apprentice type
CEOCFO: Will you tell us
about the revenue model?
Mr. Haynes: Our fee structure is similar to Federal
Express; the quicker you want something back, the higher the fee. The fee structure is
relatively independent of the underlying value of the good. Our fees range from the low
end of about $8.00 to the high end of about $200.00. The determining factor is turnaround
time. It can take anywhere for a normal service from 30-60 days to one day or in some
cases, just a few hours to turn an item around. These are independent of the underlying
value of the goods.
CEOCFO: You have had
nice revenues, how do you keep that going?
Mr. Haynes: There are a few elements to this but the
primary element is that we exist, as all businesses do, in a macro environment that we do
not control. There are four key macro indicators that we have identified as influential to
our business environment. The first economic macro condition we look at is real interest
rates or the nominal rate less inflation depending upon which you want to use. For the
last couple of years, this has ranged from 1% to minus 1% on an annual basis. When you
have financial instruments with these types of real yields on them, money tends to flee
interest bearing instruments and move into more tangible assets such as real estate, oil
and gas, forestry, metals and that type of category; our category of assets are similar to
those. The second indicator is gold prices. Gold prices relative to the dollar is really a
referendum on the dollar. When the dollar is weak, individuals want to own just about
anything not in stock denominated to dollars, so they move to other assets. This macro has
been favorable for the last few years and gold prices are probably up around 50%. In the
last three to six months, it has been a little flatter as the dollar relative to other
currencies has been doing better. The third element is disposable personal income, which
has a luxury good kind of feel to it. Disposable personal income is up three to four
percent year-over-year. That is a positive number for luxury goods, and some of our assets
have that luxury goods kind of feel. Lastly, as general stock prices rise, people feel
more affluent and as they feel more affluent, they spend money on things they like,
whether it is fishing or jewelry or whatever it is. This particular one has been somewhat
flat over the last eighteen months or so.
As we look at our four macros, three have been relatively positive over the last two
years, two have been positive over the last six months and two have been flat. Inside of
that, we do not have a tremendous amount of competition in our various markets, but we are
constantly marketing our brand, which is our authentication of a secondary market asset.
We market our brand at the consumer level or in a poll strategy where we talk directly to
those markets. If you are going to buy something at $500 or more, it does not matter what
it is; you certainly like someone to come along beside you and give you some comfort that
the asset you are buying is authentic or genuine, and is a proper quality. We do a lot of
marketing at the retail level, encouraging people just to buy things that are already
certified with our brand. On the other side of the distribution channel, we work with
those commercial entities that utilize our service and encourage them to get more of their
goods certified because it increases the liquidity of the underlying asset, increases
turnover of the asset base. In some cases, it increases the margins in which they are able
to offer goods into a more confident marketplace. We do co-marketing and co-branding with
our commercial entities so that we can assist them in moving product through the channels.
We take a close look at the macro world as well as our distribution channel and marketing
plans to take both a pull and push strategy.
CEOCFO: Are there any
collectibles that you do not certify now, that you could add?
Mr. Haynes: We believe so; we are only in five markets
now. We do not look at us as being solely in the collectibles market;
we look at ourselves as being authenticators in a quality rating service in all secondary
market assets. Many categories have high-value assets, for which we believe our rating
services would be beneficial to the market. We are focused on high-value and portable
CEOCFO: In closing, why
should potential investors be interested and what should they know about the company that
they might not realize at first?
Mr. Haynes: At the moment, ratings levels, speaking
from an investors prospect, we have about a little over $7.00 a share in cash, which
means our enterprise value could be $8.00 to $10.00 a share. In our cash (free cash flow
on an annual basis), it is quite substantial, so looking at it from a pure value
prospective, it is a good value. Secondly, underlying the business is a business concept
and a value proposition that benefits the consumer and there are many more markets that we
can enter and grow. When you look at our history, we are growing very well organically in
our existing markets. We have opportunities to grow both in our existing markets as well
as in new markets, which we have proven we can do since we originally started our business
with one market and now we are in five. You look at the balance sheet and see it is
conservative; it is mostly cash, because we are prepaid generally for our services, so we
do not have receivables or inventory and we have no debt. When you look at our operating
side, we have large and consistent gross margins. We have been averaging 62% over many
years and those margins have been slightly increasing over the last five years.
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