UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2004
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _________ to _________
Commission File No. 0-27121
SUPERIOR GALLERIES, INC.
------------------------
(Name of Small Business Issuer in Its Charter)
DELAWARE 35-2208007
-------- ----------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification Number)
9478 WEST OLYMPIC BLVD
BEVERLY HILLS, CALIFORNIA 90212
(Address of Principal Executive Offices) (Zip Code)
(310) 203-9855
(Issuer's Telephone Number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
(None)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $0.001
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports); and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's class of
common equity as of the latest practicable date:
Title of each class of Common Stock Outstanding as of April 16, 2004
- ----------------------------------- --------------------------------
Common Stock, $0.001 par value 4,485,942
Unless otherwise specified herein, all share, warrant and option
amounts give effect to a 1-for-20 reverse stock split effective as of June 30,
2003.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
TABLE OF CONTENTS
-----------------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets at March 31, 2004 (Unaudited)
and June 30, 2003.
Consolidated Statements of Operations (Unaudited) for the nine months
and three months ended March 31, 2004 and 2003.
Consolidated Statements of Cash Flows (Unaudited) for the nine months
ended March 31, 2004 and 2003.
Notes to Interim Consolidated Financial Statements (Unaudited) at
March 31, 2004.
Item 2. Management's Discussion and Analysis or Plan of Operation.
Item 3. Controls and Procedures
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
SUPERIOR GALLERIES, INC.
CONSOLIDATED BALANCE SHEETS
March 31, June 30,
2004 2003
(Unaudited)
----------- -----------
ASSETS
CURRENT ASSETS
Cash $ 254,861 $ 88,872
Accounts receivable, net of allowance for uncollectible
accounts of $250,007 (Mar. '04) and $270,663 (Jun. '03) 1,356,895 2,825,699
Inventories 6,066,339 2,497,435
Prepaid expense and other 111,606 89,788
Auction and customer advances 3,730,636 3,495,335
----------- -----------
Total current assets 11,520,337 9,597,129
Property and equipment, net 145,934 216,424
Other assets 13,779 13,779
----------- -----------
TOTAL ASSETS $11,680,050 $ 9,827,332
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit - related party $ 5,800,000 $ --
Line of credit 2,500,000 2,500,000
Accounts payable and accrued expenses 3,198,170 6,838,143
Notes payable to a related party 300,000 559,970
Series A stock redemption payable 275,000 --
Notes payable -- 56,832
----------- -----------
Total current liabilities 12,073,170 9,954,945
----------- -----------
LONG-TERM LIABILITIES
Notes payable to a related party, net of current portion 650,000 800,000
Series A stock redemption payable, net of current portion 412,500 --
Notes payable, net of current portion -- 7,008
----------- -----------
Total long-term liabilities 1,062,500 807,008
----------- -----------
TOTAL LIABILITIES 13,135,670 10,761,953
----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTES 5, 7, 8 AND 9)
Series A $5.00 redeemable 8% convertible preferred stock
$0.001 par value, 1,400,000 shares designated, 125,000
shares issued and outstanding with a liquidation
preference of $637,500 (Note 9) -- 637,469
----------- -----------
3
SUPERIOR GALLERIES, INC.
CONSOLIDATED BALANCE SHEETS
March 31, June 30,
2004 2003
(Unaudited)
------------- -------------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, 3,193,000 shares undesignated,
none outstanding
Series B convertible preferred stock $1.00 par value
3,400,000 shares designated 3,400,000 shares issued
and outstanding with a liquidation preference of $3,400,000 2,966,500 2,966,500
Series D convertible preferred stock $1.00 par value
2,000,000 shares designated 2,000,000 shares issued
and outstanding with a liquidation preference of $2,000,000 1,931,456 1,931,456
Common stock, $0.001 par value, 12,500,000 shares
authorized; 4,485,942 outstanding at March 31, 2004 and
2,640,836 outstanding at June 30, 2003 4,486 2,641
Additional paid in capital 7,896,644 7,939,925
Accumulated deficit (14,254,706) (14,412,612)
------------- -------------
Total stockholders' equity (deficit) (1,455,620) (1,572,090)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 11,680,050 $ 9,827,332
============= =============
See accompanying notes to unaudited interim consolidated financial statements
4
SUPERIOR GALLERIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Ended Three Months Ended
March 31, March 31, March 31, March 31,
2004 2003 2004 2003
------------- ------------- ------------- -------------
Net sales $ 18,236,348 $ 14,024,164 $ 8,250,544 $ 6,867,485
Commission income 2,293,474 1,485,865 1,208,304 693,823
------------- ------------- ------------- -------------
TOTAL REVENUE
20,529,822 15,510,029 9,458,848 7,561,308
COST OF SALES 15,987,472 12,098,698 7,119,664 5,567,994
------------- ------------- ------------- -------------
GROSS PROFIT 4,542,350 3,411,331 2,339,184 1,993,314
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 4,299,838 5,307,205 1,603,542 1,430,782
IMPAIRMENT OF GOODWILL -- 591,521 -- --
------------- ------------- ------------- -------------
Income (loss) from operations 242,512 (2,487,395) 735,642 562,532
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE)
Interest income 383,905 59,576 123,513 25,328
Interest expense (397,427) (544,340) (115,159) (186,230)
Other expense, net (23,962) (66,519) 780 1,135
------------- ------------- ------------- -------------
Total other income (expense) (37,484) (551,283) 9,134 (159,767)
------------- ------------- ------------- -------------
INCOME (LOSS) BEFORE PROVISION FOR TAXES 205,028 (3,038,678) 744,776 402,765
INCOME TAX PROVISION 9,621 8,368 5,000 --
------------- ------------- ------------- -------------
NET INCOME (LOSS) $ 195,407 $ (3,047,046) $ 739,776 $ 402,765
============= ============= ============= =============
Calculation of net income (loss) per share:
Net income (loss) $ 195,407 $ (3,047,046) $ 739,776 $ 402,765
Preferred stock accretion (50,031) (50,004) (16,677) (16,668)
Preferred stock dividend (37,500) (416,767) (12,500) (360,267)
------------- ------------- ------------- -------------
Net income (loss) applicable to common shares $ 107,876 $ (3,513,817) $ 710,599 $ 25,830
============= ============= ============= =============
NET INCOME (LOSS) PER SHARE
basic $ 0.03 $ (1.63) $ 0.16 $ 0.01
============= ============= ============= =============
fully diluted $ 0.01 $ (1.63) $ 0.09 $ --
============= ============= ============= =============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
basic 4,331,061 2,156,668 4,485,942 2,355,336
============= ============= ============= =============
fully diluted
8,068,508 2,156,668 8,223,389 7,259,310
============= ============= ============= =============
See accompanying notes to unaudited interim consolidated financial statements
5
SUPERIOR GALLERIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
March 31, March 31,
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 195,407 $(3,047,046)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 71,346 101,442
Bad debt -- 130,714
Loss on retirement of property and equipment 23,962 48,786
Loss on investments -- 16,872
Impairment of goodwill -- 591,521
Fair value of common stock options and warrants granted 6,750 29,020
Increase (decrease) in cash from changes in assets
and liabilities:
Accounts receivable 1,468,804 2,596,759
Other receivables -- 26,844
Inventories (3,568,904) (222,724)
Prepaid expenses and other (21,818) 12,208
Other assets -- 220,909
Auction and customer advances, net (235,301) 324,996
Accounts payable and accrued expenses (3,639,973) (2,397,556)
Customer Deposits -- (241,880)
------------ ------------
Net cash used in operating activities (5,699,727) (1,809,135)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (34,993) (30,778)
Proceeds from sale of property and equipment 10,174 20,480
Collection on HI sale note receivable -- 69,286
------------ ------------
Net cash (used in) provided by investing activities (24,819) 58,988
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under related party line of credit 9,000,000 --
Repayments under related party line of credit (3,200,000) --
Borrowings under lines of credit 3,300,000 2,500,000
Repayments under lines of credit (3,300,000) (376,393)
Borrowings under notes payable -- 2,191,325
Repayments under notes payable (63,840) (3,555,586)
Borrowings under related party debt -- 359,970
Repayments under related party debt (409,970) --
Repayments under repurchase agreement -- (556,361)
Repayment on obligations under capital lease -- (3,646)
Issuance of common stock 1,845 --
Purchase of common shares -- (644)
Issuance of Series D preferred stock, net of offering expenses -- 1,931,456
Payment of dividends on preferred stock (37,500) (76,767)
------------ ------------
Net cash provided by financing activities 5,290,535 2,413,354
------------ ------------
Net (decrease) increase in cash and equivalents (434,011) 663,207
Cash and cash equivalents, beginning of period 688,872 33,464
------------ ------------
Cash and cash equivalents, end of period $ 254,861 $ 696,671
============ ============
6
SUPERIOR GALLERIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
March 31, March 31,
2004 2003
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 611,571 $ 443,035
============ ============
Income taxes $ 8,974 $ 2,310
============ ============
NON-CASH INVESTING AND FINANCING ACTIVITIES
Accretion of redemption value of Series A preferred stock $ 50,031 $ 50,004
Redemption of Series A preferred stock $ 687,500 $ --
Issuance of common stock on conversion of Series C
preferred stock $ -- $ 700,000
Fair value of re-priced warrants as dividends on Series B
preferred stock $ -- $ 340,000
Fair value of re-priced warrants as interest on related party debt $ -- $ 29,020
Cancellation of treasury common stock $ -- $ 644
See accompanying notes to unaudited interim consolidated financial statements
7
SUPERIOR GALLERIES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The accompanying unaudited consolidated interim financial statements
have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission for the presentation of interim
financial information, but do not include all the information and
footnotes required by accounting principles generally accepted in the
United States of America. The consolidated balance sheet as of June 30,
2003 has been derived from the audited consolidated financial statements
of Superior Galleries, Inc. ("Superior" or the "Company") at that date.
These unaudited consolidated interim financial statements include the
accounts of the Company's wholly owned subsidiary Superior Galleries
Beverly Hills, Inc. ("SGBH, Inc."). Effective July 1, 2003 the Company
ceased active operations in SGBH, Inc. and in February 2004 began the
process of surrendering the corporate charter of SGBH, Inc.
In the opinion of management, all adjustments considered necessary for a
fair presentation have been included. Operating results for the
three-month and nine-month periods ended March 31, 2004 are not
necessarily indicative of the results that may be expected for the year
ending June 30, 2004. For further information, refer to the consolidated
financial statements for the year ended June 30, 2003 contained in
Superior's consolidated financial statements included in its Annual
Report on Form 10-KSB filed on September 17, 2003.
2. DESCRIPTION OF BUSINESS
Superior is primarily a wholesaler, retailer and auctioneer of rare
coins. The Company is based in Beverly Hills, California.
3. INVENTORIES
Inventories are comprised of the following:
March 31, June 30,
2004 2003
------------- -------------
Rare coins $ 6,066,339 $ 2,147,435
Fine and decorative arts -- 1,015,138
Reserve -- (665,138)
------------- -------------
$ 6,066,339 $ 2,497,435
============= =============
The Company, from time to time, enters into joint ventures or purchase
financing agreements with third parties that include vendors and
customers for the purchase and sale of specific rare coins or fine
collectibles. These agreements may include profit sharing provisions
ranging from 25% to 50% of the gross profit on specific transactions
adjusted for agreed upon expenses and interest costs. At any given time,
the Company may be involved in up to 10 of these agreements. As of March
31, 2004 and June 30, 2003, inventory totals reflected the Company's
total appropriate ownership and does not include any minority interest
claims in regard to such joint venture or partnership arrangements.
The inventory reserve of $665,138 at June 30, 2003 was the result of
management's estimate of the liquidation value of the entire art
inventory based on management's decision to exit the art business
segment.
SUPERIOR GALLERIES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
4. AUCTION AND CUSTOMER ADVANCES
Superior has established two short-term lending programs consisting of
(i) advancing consignment customers cash based on consigned inventory
acquired for upcoming auctions, and, (ii) advancing customers cash based
on the customer's assigning specific rare coins in their inventory to
Superior as collateral. Superior can advance a customer up to 70% of
consigned or assigned rare coin(s)' wholesale value. For auction
advances, Superior will advance cash to a customer and take control of
the inventory to be held on consignment for auction. The customer will
sign a note receivable for the funds advanced to be secured by the
consigned inventory. As consigned inventory is sold, the proceeds will
be collected, repaying Superior for the auction advance and any auction
fees, with the remaining amount due to the consignor. For customer
inventory advances, Superior will advance cash to a customer and take
control of the assigned inventory. The customer will sign a promissory
note for the funds advanced to be secured by the assigned inventory.
Superior will retain control of the assigned inventory until the
customer repays the advance. The total advanced funds under these notes
was $3,730,636 as of March 31, 2004.
Auction and customer advances consist of:
March 31, June 30,
2004 2003
------------- -------------
Auction advances $ 1,402,000 $ 3,495,335
Customer inventory advances 2,328,636 --
------------- -------------
$ 3,730,636 $ 3,495,335
============= =============
5. LINES OF CREDIT
On July 9, 2002 and July 26, 2002 the Company entered into temporary
working capital loan agreements with a private Lender ("Lender") in the
amounts of $1,500,000 and $1,000,000 respectively. These loans bore
interest at the prime lending rate plus 7% per annum (11.00% at December
31, 2003), were secured by the inventory of the Company and a personal
guarantee of the Company's Chief Executive Officer ("CEO"), and, were
due to be repaid in 60 days. On August 8, 2002 the Company converted the
two loans from the Lender into a Line of Credit with the Lender by
executing a Secured Revolving Line of Credit Agreement ("Line of
Credit"). The Line of Credit bore interest at the prime lending rate
plus 7% per annum, was due on September 9, 2002, was secured by
substantially all the assets of the Company and a personal guarantee of
the Company's CEO. The Line of Credit provides for interest payments to
made in cash, inventory or restricted common shares of the Company at
the sole discretion of the Lender. On September 16, 2002 the Line of
Credit was amended to extend the due date to October 15, 2002. In
November 2002 the Lender became deceased and the aforementioned Line of
Credit became an asset of the Estate of the Lender ("Lender Estate"). On
September 30, 2003 the Company and the executor of the Lender Estate
executed a Renewal and Modification Agreement that amended the Line of
Credit. In exchange for a payment of $230,000 representing interest in
arrears through September 30, 2003, the Lender Estate agreed to reduce
the interest rate to 6% effective October 1, 2003, release its first
priority lien position on all accounts receivable of the Company and to
consider the default cured at that time. The amendment also requires
monthly interest payments beginning on November 1, 2003. The executor of
the Lender Estate orally agreed to discuss repayment terms at a future
date, but the Line of Credit is callable with five days notice and there
is no guarantee that the Line of Credit will not be called for repayment
at any time. There can be no assurance that the Company will be able to
negotiate a repayment schedule for this obligation on terms acceptable
to the Company. As of March 31, 2004 the outstanding Line of Credit
balance was $2,500,000.
On February 21, 2003, Superior entered into an auction line of credit
agreement ("Auction LOC") with a private lender whereby the lender would
advance funds to Superior for the sole purpose of providing auction
advances to its consignment customers. The maximum limit of the Auction
LOC was $2,000,000 and it bore interest at a rate of 10% per annum. The
Auction LOC was secured by the collateralization of inventory consigned
by Superior's auction advance customers and the assignment of the
auction advance agreements to the private lender. The lender and the
Company could have terminated this arrangement at any time. In September
2003, the private lender agreed to temporarily increase the Auction LOC
maximum limit to $2,800,000. On October 28, 2003, the Auction LOC was
repaid in full and the lender and the Company mutually agreed to
terminate the agreement.
9
SUPERIOR GALLERIES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
6. NOTES PAYABLE
Notes payable consist of the following:
Note payable for the acquisition of the assets of Superior's auction
line of business, secured by assets acquired, and guaranteed by the
Company and its CEO. The loan provided for periodic payments through
January 2002, however, the Company suspended loan payments. The Company
renegotiated the payment terms by increasing the note balance by $49,110
to cover unpaid interest, established a new interest rate of 4.5% over
the prime-lending rate, to be paid in biweekly installments over one
year. On November 1, 2002 the Company made a lump-sum payment of
$179,350 and renegotiated the terms of payment for the balance due with
the creditor. The Company made ten principal and interest installments
of $19,133 each that began on December 1, 2002 with interest at the rate
of 12% per annum. The loan was repaid in full on September 1, 2003.
Long-term loan agreement dated October 17, 2000, secured by a delivery
van, payable in 60 monthly installments of principal and interest at an
annual interest rate of 5.9%. The loan was repaid in full on December
16, 2003.
7. NOTES PAYABLE TO A RELATED PARTY
On April 10, 2002 the Company executed a subordinated note payable to
the Company's CEO bearing interest at 9% per annum with quarterly
installment payments of $150,000 plus interest. No principal payments
had been made. As the chief executive officer did not enforce the
repayment obligation, the amount had been classified as long term. On
February 14, 2003, the terms of the note were modified to provide for
repayment of principal in the amount of $50,000 per quarter commencing
on September 30, 2003 and for interest to be paid monthly. The Company's
CEO has verbally agreed to delay principal payments that were due on
December 31, 2003 and March 31, 2004 totaling $100,000 until June 30,
2004. As of the March 31, 2004, the outstanding balance was $950,000.
On December 10, 2002 the Company's CEO advanced $289,970 to the Company
for the purpose of paying off a bank line of credit. The Company
executed a promissory note in favor of the CEO in the amount of $289,970
payable on demand and bearing interest at the rate of 12% per annum. On
October 23, 2003, the Company repaid the loan in full as part of the
sale of its art inventory to the CEO (see Note 10.)
On December 13, 2002 the Company's CEO advanced $70,000 to the Company
for working capital purposes. The Company executed a promissory note in
favor of the CEO in the amount of $70,000 payable on demand and bearing
interest at the rate of 12% per annum. On October 23, 2003, the Company
reduced the loan by $60,030 as part of the sale of its art inventory to
the CEO (see Note 10.) On February 4, 2004, the remaining balance of
$9,970 was repaid.
8. EQUITY
On July 24, 2003, the Company issued 1,845,100 common shares pursuant to
the exercise of 1,845,100 warrants to purchase the Company's common
stock with an exercise price of $0.001 per common share.
10
SUPERIOR GALLERIES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
Our Series A Preferred Stock contains redemption provisions that require
us, upon request by the holders, to redeem one tenth of the holders'
shares of such securities each quarter for ten consecutive quarters,
commencing March 31, 2004. All of the holders of the Series A Preferred
Stock have requested redemption of their shares. However, because our
liabilities currently exceed our assets, we are prohibited under
Delaware corporation law from commencing this redemption, and have
informed the stockholders of this redemption prohibition. We intend to
begin the redemption once we are legally allowed to do so. We have
reflected the Series A Preferred Stock redemption payable as a liability
on its Balance Sheet. As of March 31, 2004 the balance payable with
respect to the Series A Preferred Stock redemption is $687,500
During the nine month period ended March 31, 2004, the Company granted
to employees, directors and independent contractors 135,000 stock
options to purchase common shares with exercise prices ranging from
$0.24 to $0.33, of which 35,000 stock options were cancelled or expired.
Certain options vest immediately and other vest over time. The Company
recorded an expense of $6,750 during the period to reflect management's
estimate of the fair value of the option grants.
9. CONTINGENCIES
GUARANTEED LIQUIDITY AND BUY BACK
The Company provides a Guaranteed Liquidity and Buy Back at Grade
warranty (the "Guarantee") to its retail rare coin customers. Retail
rare coin sales amounted to $5,542,831 and $6,642,684 for the nine
months ended March 31, 2004 and 2003 respectively. The policy grants the
customer the opportunity to sell their coins back to the Company at the
prevailing market "bid" (below the current wholesale price). The Company
determines the "bid" price based on the prevailing market price at which
the Company believes it could readily liquidate the coin. The "bid"
price may be substantially below what the customer originally paid for
the coin.
The values of the rare coins sold to retail customers continually
fluctuate. Furthermore, retail customers continually resell or trade
coins purchased from the Company with third parties. Once retail
customers resell the rare coins to third parties, the Guarantee is void.
Lastly, the Company has had minimal historical experience with customers
exercising the Guarantee. As a result, it is not possible for the
Company to determine the potential repurchase obligation pursuant to the
Guarantee that it may be subject to as a result of previous sales of
retail rare coins.
LEGAL PROCEEDINGS
The Company may from time to time be involved in various claims,
lawsuits, disputes with third parties, actions involving allegations of
discrimination, or breach of contract actions incidental to the
operation of its business.
STATE SALES AND USE TAXES
The Company does not collect sales and use taxes for interstate sales.
Management believes that the Company's sales to interstate customers are
generally tax-exempt due to varying state exemptions relative to the
definitions of being engaged in business in particular states and the
lack of current internet taxation. While the Company has not been
contacted by any state authorities seeking to enforce sales or use tax
regulations, there is no assurance that the Company will not be
contacted by authorities in the future with inquiries relative to
compliance with current statutes, nor is there any assurance that future
statutes will not be enacted that affect the sales and use aspects of
the Company's business.
11
SUPERIOR GALLERIES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
10. RELATED PARTY TRANSACTION
On October 23, 2003 the Company's Board of Directors approved the sale
of its art inventory to the CEO, who is also an independent dealer of
fine art, for $350,000. The Company solicited bids from third parties
and the bid from the CEO was the highest. The Company realized a gross
profit of $15,860 on sale of the art inventory to the CEO. The sale was
paid in full by reductions of notes payable to the CEO (see Note 7).
11. GOING CONCERN
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United
States of America, which contemplate continuation of the Company as a
going concern. However, the Company has sustained recurring operating
losses, negative cash flows from operations, significant debt that is
callable by the creditor at any time, and has limited working capital.
These items raise substantial doubt about the Company's ability to
continue as a going concern.
Management is currently engaged in reversing or solving these
significant issues through the implementation of its turnaround plan. In
November 2002, the Company began to execute a plan of exiting the art
business with exception of art auctions on a consignment basis to reduce
losses in its operations. This plan included the reduction of five
employees, which was completed in January 2003, the reduction of sales,
marketing and administrative expenses associated with the art business
segment and the liquidation of its art inventory by June 30, 2003. With
the sale of its art inventory in October 2003 (see Note 10), the Company
completed its exit of the art business segment. The Company is planning
to increase its retail rare coin sales force and has established
targeted sales and marketing budgets to assist in growing its retail
rare coin business. There can be no assurance that the Company will be
successful in growing this part of its business.
The Company has reorganized and streamlined its structure in its efforts
to return to a profitable state with positive cash flows. The Company
consolidated all operations into one corporate entity and eliminated
duplicative financial and operational systems to further control and
reduce expenditures. These consolidation efforts included the
combination of all operations with the exception of retail rare coins
sales activities to the Beverly Hills location that occurred in February
24, 2003. In September 2003, the retail rare sales activities were
transferred to Beverly Hills and the Newport Beach location was
permanently closed. This operational consolidation has resulted in the
elimination of duplicated finance, inventory control, administration,
sales, marketing and auction activities at the Newport Beach location.
Separate information systems for operations and finance were eliminated
as part of the consolidation. Effective January 1, 2003 the Company has
out-sourced all payroll, employee benefits and human resources
administration to a professional employer organization. The Company is
exploring opportunities to reduce its occupancy costs at its Newport
Beach location prior to the lease termination on September 30, 2004.
Both the exit of the art business and the consolidation of operations
have reduced related insurance and administrative costs. The
consolidation of operations into one location has allowed for enhanced
coordination of all business activities and provided better control of
costs. The operational consolidation has facilitated the coordination of
sales and marketing efforts and expenditures, as the Company is
promoting itself as one entity, rather than its parent and subsidiary.
Through the renewed focus on both retail and wholesale rare coin sales
with an emphasis on increased inventory turns while maintaining solid
gross margins, management anticipates these activities will provide some
of the liquid capital to fund operations. During the quarter ended March
31, 2004, the Company returned to profitability on a year-to-date basis.
12
SUPERIOR GALLERIES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(UNAUDITED)
In February 2003, the Company completed an additional equity capital
financing of $2 million with Stanford and the Company's CEO converted
7,000 shares of the Company's $100 Series C Preferred Stock into
$700,000 of the Company's common stock. In September 2003, the Company
renegotiated a $2.5 million dollar line of credit (Note 5) that was in
default and callable by the creditor. Although management does not
anticipate the creditor calling the loan, there can be no assurances
that this obligation will not become immediately due. Given the current
cash position of the Company, it would be unable to satisfy this
obligation in cash. The Company is continuing to negotiate a repayment
schedule with the creditor, but there can be no assurance that this
obligation will be able to be refinanced on terms acceptable to the
Company. In October 2003, the Company completed negotiations with
Stanford to provide a line of credit of $7.5 million for auction
advances, inventory financing and inventory loans to other dealers and
collectors. Management believes that combination of increased rare coin
sales and inventory turns, the additional equity capital and the line of
credit financing will be sufficient to fund the Company's operations.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
CAUTIONARY STATEMENTS
This Quarterly Report on Form 10-QSB contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. We intend that such
forward-looking statements be subject to the safe harbors created by such
statutes. The forward-looking statements included herein are based on current
expectations that involve a number of risks and uncertainties. Accordingly, to
the extent that this Quarterly Report contains forward-looking statements
regarding our financial condition, operating results, business prospects or any
other information or aspect of our company, you are advised that our actual
financial condition, operating results and business performance may differ
materially from that projected or estimated by us in forward-looking statements.
The differences may be caused by a variety of factors, including but not limited
to:
o those identified under "Risk Factors" below,
o adverse economic conditions,
o unexpected costs and operating deficits,
o lower sales and revenues than forecast,
o loss of customers,
o litigation and administrative proceedings involving our company,
o the possible acquisition of new businesses that result in
operating losses or that do not perform as anticipated, resulting
in unanticipated losses,
o adverse publicity and news coverage,
o inability to carry out our marketing and sales plans,
o changes in interest rates and inflationary factors, and
o other specific risks that may be referred to in this Quarterly
Report or in other reports that we have issued.
In addition, our business and operations are subject to substantial
risks that increase the uncertainty inherent in the forward-looking statements.
The inclusion of forward-looking statements in this Quarterly Report should not
be regarded as a representation by us or any other person that we will achieve
our objectives or plans.
The following discussion should be read in conjunction with, and is
qualified in its entirety by, our Consolidated Financial Statements and related
notes thereto included elsewhere in this Quarterly Report. Historical results of
operations, percentage margin fluctuations and any trends that may be inferred
from the discussion below are not necessarily indicative of the operating
results for any future period.
COMPANY OVERVIEW
Our principal line of business is the sale of rare coins on a
wholesale, retail and auction basis. Our wholesale and retail operations are
conducted in virtually every state in the United States and in several foreign
countries. We also provide auction services for customers seeking to sell their
own rare coins. We market our services nationwide through broadcasting and print
media and independent sales agents, as well as on the Internet through third
party websites such as eBay and through our own websites at www.sgbh.com. Our
headquarters are in Beverly Hills, California.
We were originally organized as a Nevada corporation in 1995. On June
30, 2003, our stockholders approved and we completed a reincorporation of our
company in the State of Delaware and changed our corporate name from Tangible
Asset Galleries, Inc. to Superior Galleries, Inc. These changes were effective
at the close of business on June 30, 2003.
14
CRITICAL ACCOUNTING POLICIES
Our Consolidated Financial Statements are based on the selection and
application of significant accounting policies, which require our management to
make estimates and assumptions that affect the amounts reported in the
Consolidated Balance Sheets and the Consolidated Statements of Operations. We
believe that the following are the most critical areas that may affect our
financial condition and results of operations.
(1) Accounts Receivable
We are required to estimate the collectibility of our accounts
receivables. A considerable amount of judgment is required in assessing
the collectibility of these receivables, including judgments about the
current creditworthiness and financial condition of each client and
related aging of past due balances. We evaluate specific accounts
receivable balances when we become aware of a situation where a client
may not be able to meets its financial obligations to us. The amount of
the required allowance is based on the facts available to us and is
reevaluated and adjusted as additional information is available.
Allowances are also established for probable loss inherent in the
remainder of the accounts receivable based on our historical bad debt
loss information. As a result of expansion of our rare coin auction
business, we may attract new customers that may adversely affect our
estimates of accounts receivable collectibility, and, the
creditworthiness of our clients may deteriorate. These factors would
require the reassessment of our estimates and additional allowances
resulting in a reduction of our operating results.
(2) Auction and Customer Advances
We are required to estimate the collectibility of our auction and
customer advances. All of our advances are secured by rare coins.
Although we make our decision to advance funds based on customers'
creditworthiness, business history, and collateral valuation, the
collectibility of advances is primarily based on our estimate of sale
of customers' rare coin collateral on a whole liquidation basis. We
evaluate specific advance balances when we become aware of situations
where a client may not be able to meet its financial obligations to us
or the value of collateral securing the advance is impaired. Due to the
availability of a line of credit from Stanford, we have recently and
significantly expanded our auction and customer advance activities and
we do not have historical data to estimate probable loss nor have we
had any significant history of losses. It is difficult to assess future
performance of the rare coin market. A rapid adverse change in the rare
coin market could diminish the value of the collateral and the
creditworthiness of our clients may deteriorate. These factors would
require the reassessment of our estimates and additional allowances
resulting in a reduction of our operating results.
15
RESULTS OF OPERATIONS
The following table sets forth the percentage of net revenue
represented by each item in our consolidated statements of operations for the
periods indicated:
Nine Months Ended Nine Months Ended
March 31, 2004 March 31, 2003
------------------ -----------------
Net Sales 88.8% 90.4%
Commission Income 11.2% 9.6%
------------------ -----------------
Total Revenue 100.0% 100.0%
Cost of Sales 77.9% 78.0%
------------------ -----------------
Gross Profit 22.1% 22.0%
Selling, general and administrative expenses 20.9% 34.2%
Impairment of goodwill 0.0% 3.8%
------------------ -----------------
Income (loss) from operations 1.2% -16.0%
Other income (expense) -0.2% -3.6%
------------------ -----------------
Income (loss) before income taxes 1.0% -19.6%
Income taxes 0.0% 0.0%
------------------ -----------------
Net income (loss) 1.0% -19.6%
================== ==================
FOR THE NINE MONTHS ENDED MARCH 31, 2004 AND 2003
Our income for the nine months ended March 31, 2004 was $195,407 or
$0.03 and $0.01 per share on a basic and fully diluted basis, respectively, as
compared to a loss of $3,047,046 or $1.63 per share on both a basic and fully
diluted basis for the nine months ended March 31, 2003. The improved results of
operations in the nine months ended March 31, 2004 was primarily due to the
continued strength of the rare coin market that increased both sales and gross
margin and decreases in operating expenses.
REVENUES
The table below reflects the comparative breakdown of our aggregate
sales:
Nine Months Ended Nine Months Ended
March 31, 2004 March 31, 2003
------------------------ -------------------------
Net Sales
Rare Coins - Wholesale $12,315,109 60.0% $ 6,692,363 43.2%
Rare Coins - Retail 5,545,161 27.0 6,642,684 42.8
Art, Collectibles & Other 376,078 1.8 689,117 4.4
------------- ---------- -------------- ----------
Total Net Sales 18,230,914 88.8 14,024,164 90.4
Commission Income 2,293,474 11.2 1,485,865 9.6
------------- ---------- -------------- ----------
TOTAL REVENUE $20,529,822 100.0% $ 15,510,029 100.0%
============= ========== ============== ==========
16
Total revenue for the nine months ended March 31, 2004 increased
$5,019,793 or 32.4% to $20,529,822 from $15,510,029 for the nine months ended
March 31, 2003. This increase in revenues is primarily due to the increase in
sales of rare coins. Wholesale rare coin sales for the nine months ended March
31, 2004 increased $5,622,746 or 84.0% to $12,315,109 from $6,692,363 for the
comparable period in 2003. This increase was primarily due the strong market
demand from other dealers and our higher levels of inventory available for sale.
Retail rare coin sales for the nine months ended March 31, 2004 decreased
$1,097,523 or 16.5% to $5,545,161 from $6,642,684 for the comparable period in
2003. This decrease was primarily due to our aggressive pricing in 2003 to
generate cash flow from inventory that resulted in higher sales, but reduced
gross margin. Fine art, collectibles and other sales for the nine months ended
March 31, 2004 decreased $313,039 or 45.4% to $376,078 from $689,117 for the
comparable period in 2003. This decrease was due to our having exited the art
business. On October 23, 2003, we sold our remaining art inventory and we do not
anticipate any further revenue from the art business. Commission income for the
nine months ended March 31, 2004 was $2,293,474, an increase of $807,609 or
54.4% as compared to $1,485,865 for the nine months ended March 31, 2003. This
increase was primarily due to continued strength of our rare coin auction
business, the overall marketplace, and our November 2003 Santa Clara Elite rare
coin auction that did not occur in the comparable period in 2003. Auction sales
(hammer prices realized) were $22,718,228 for the nine months ended March 31,
2004 as compared to $15,994,900 for the nine months ended March 31, 2003.
Although we establish our auction schedule as much as two years in advance and
we anticipate that for the foreseeable future the number and timing of auctions
will be generally consistent from year to year, we cannot assure you that this
schedule will remain constant, and changes in the schedule could impact our
future results and their comparability.
COST OF SALES
Cost of sales for the nine months ended March 31, 2004 increased
$3,888,774 to $15,987,472 or 77.9% of net revenue, from $12,098,698 or 78.0% of
net revenue for the nine months ended March 31, 2003. The increase in cost of
sales over the comparable period in 2003 was primarily due to the increased rare
coin sales during the current period that resulted from continued strength in
the rare coin market. Commission income has minimal cost of sales associated
with it. The cost of sales as a percentage of revenue will vary from period to
period as the mix of revenue between wholesale and retail rare coins, and
commission income will vary from period to period.
GROSS PROFIT
Gross profit for the nine months ended March 31, 2004 increased
$1,131,019 to $4,542,350 or 22.1% of net revenue from $3,411,331 or 22.0% of net
revenue for the nine months ended March 31, 2003. The increase in gross profit
in the current period over the comparable period in 2003 was primarily due to
increased volume on rare coin sales both at auction and from our own inventory.
The gross profit as a percentage of revenue will vary from period to period with
changes in the mix of revenue between wholesale and retail rare coins, and with
period to period changes in commission income.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the nine months ended
March 31, 2004 decreased $1,007,367 or 19.0% to $4,299,838 from $5,307,205 for
the nine months ended March 31, 2003. These expenses represent 20.9% of
aggregate revenue for the nine months ended March 31, 2004 as compared to 34.2%
of aggregate revenue for the nine months ended March 31, 2003. The decrease in
these expenses, both as a percentage of revenue and in the aggregate, were due,
in part, to effects of our operational consolidation efforts that were completed
during the last half of the fiscal year ending June 30, 2003. The prior
comparable period also included a $418,000 fee to be the official auctioneer at
a national rare coin trade show, and, two unusual bad debts totaling $330,714;
there were no such costs in the comparable current period.
IMPAIRMENT OF GOODWILL
In July 2001, we recorded goodwill of $591,521 in connection with the
acquisition of our auction operations through our subsidiary, Superior Galleries
Beverly Hills, Inc. During the nine months ended March 31, 2003, based on our
management's annual fair value assessment to determine the impairment, if any,
of goodwill, we determined that the goodwill purchased had become fully impaired
resulting in a charge of $591,521. There was no similar charge during the nine
months ended March 31, 2004.
17
OTHER INCOME AND EXPENSES
Other expenses for the nine months ended March 31, 2004 decreased
$513,799 to $37,484 from $551,283 for the nine months ended March 31, 2003. This
decrease was primarily due to the combination of increases in interest income
from customer advances of $260,392 and reductions in interest expenses of
$282,268 for the nine months ended March 31, 2004 as compared to the nine months
ended March 31, 2003. The interest expense reductions were primarily the result
of interest rate reductions on existing and replacement debt that occurred in
October 2003.
PROVISION FOR INCOME TAXES
Although we recorded income for the current period, we have losses
carried forward from previous years and we have only recorded income taxes
expenses for state and other minimum taxes of $9,621 and $8,368 during the nine
month periods ending March 31, 2004 and 2003 respectively.
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
The following table sets forth the percentage of net revenue
represented by each item in our consolidated statements of operations for the
periods indicated:
Nine Months Ended Nine Months Ended
March 31, 2004 March 31, 2003
------------------ -----------------
Net Sales 87.2% 90.8%
Commission Income 12.8% 9.2%
------------------ -----------------
Total Revenue 100.0% 100.0%
Cost of Sales 75.3% 26.4%
------------------ -----------------
Gross Profit 24.7% 26.4%
Selling, general and administrative expenses 17.0% 18.9%
------------------ -----------------
Income from operations 7.7% 7.4%
Other income (expense) 0.1% -2.1%
------------------ -----------------
Income before income taxes 7.8% 5.3%
Income taxes 0.1% 0.0%
------------------ -----------------
Net income 7.7% 5.3%
================== =================
Our net income for the three months ended March 31, 2004 was $739,776 or $0.16
and $0.09 per share on a basic and a fully diluted basis, respectively, an
increase in net income of $337,011 as compared to a net income of $402,765 or
$0.01and $0.00 per share on a basic and a fully diluted basis, respectively, for
the three months ended March 31, 2003. The increase in net income in the three
months ended March 31, 2004 was primarily due to increases in revenues and gross
profit on rare coin sales and auctions.
18
insert
REVENUES
The table below reflects the comparative breakdown of our aggregate
sales:
Three Months Ended Three Months Ended
March 31, 2004 March 31, 2003
------------------------ -------------------------
Net Sales
Rare Coins - Wholesale $ 5,942,859 62.8% $ 4,047,977 53.5%
Rare Coins - Retail 2,307,685 24.4 2,795,947 37.0
Art, Collectibles & Other -- 0.0 23,561 0.3
------------- ---------- -------------- ----------
Total Net Sales 8,205,544 87.2 6,867,485 90.8
Commission Income 1,208,304 12.8 693,823 9.2
------------- ---------- -------------- ----------
TOTAL REVENUE $ 9,458,848 100.0% $ 7,561,308 100.0%
============= ========== ============== ==========
Total revenue for the three months ended March 31, 2004 increased $1,897,540 or
25.1% to $9,458,848 from $7,561,308 for the three months ended March 31, 2003.
This increase in revenues is primarily due to the continued strength of the rare
coin market. Wholesale rare coin sales for the three months ended March 31, 2004
increased $1,849,882 or 46.8% to $5,942,859 from $4,047,977 for the comparable
period in 2003. This increase was primarily due to the strong market demand from
other dealers and our higher levels of inventory available for sale. Retail rare
coin sales for the three months ended March 31, 2004 decreased $488,262 or 24.4%
to $2,307,685 from $2,795,947 for the comparable period in 2003. This decrease
was primarily due to temporary reduction of retail sales staffing during this
period as we are restructuring our retail sales organization. We are currently
seeking to hire additional retail sales staff. Fine art, collectibles and other
sales for the three months ended March 31, 2004 decreased $23,561 or 100.0% to
$0 from $23,561 for the comparable period in 2003. This decrease was due to our
having exited the art business and we do not anticipate any further revenue from
the art business. Commission income for the three months ended March 31, 2004
was $1,208,304, an increase of $514,481, as compared to $693,823 for the three
months ended March 31, 2003. This increase was primarily due to the strength of
the rare coin market and the impact of our marketing efforts to increase the
size of our auctions. Auction sales (hammer prices realized) were $10,794,211
for the three months ended March 31, 2004 as compared to $7,752,850 for the
three months ended March 31, 2003.
COST OF SALES
Cost of sales for the three months ended March 31, 2004 increased
$1,551,670 to $7,119,664 or 75.3% of net revenue, from $5,567,994 or 73.6% of
net revenue for the three months ended March 31, 2003. The increase in cost of
sales in the current period over the comparable period in 2003 was a combination
of our increased revenues and a higher proportion of wholesale sales. Commission
income has minimal cost of sales associated with it. The cost of sales as a
percentage of revenue will vary from period to period as the mix of revenue
between wholesale and retail rare coins, and commission income will vary from
period to period.
GROSS PROFIT
Gross profit for the three months ended March 31, 2004 increased
$345,870 to $2,339,184 or 24.7% of net revenue from $1,993,314 or 26.4% of net
revenue for the three months ended March 31, 2003. The increase in gross profit
in the current period over the comparable period in 2003 was primarily due to
increased rare coin auction commissions that resulted from the continued
strength in the marketplace. The gross profit as a percentage of revenue will
vary from period to period with changes in the mix of revenue between wholesale
and retail rare coins, and with period to period changes in commission income.
19
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three months ended
March 31, 2004 increased $172,760 or 12.1% to $1,603,542 from $1,430,782 for the
three months ended March 31, 2003. These expenses represent 17.0% of aggregate
revenue for the three months ended March 31, 2004 as compared to 18.9% of
aggregate revenue for the three months ended March 31, 2003. The increase in
these expenses were primarily due to increased selling and marketing expenses
that both assisted in generating, and resulted from, higher revenue.
OTHER INCOME AND EXPENSES
Other income for the three months ended March 31, 2004 was $9,134 as
compared to other expenses of $159,767 for the three months ended March 31,
2003. This positive turnaround of $168,901 was due to the combination of
increases in interest income from customer advances of $98,185 and decreases in
interest expenses of $71,071 for the three months ended March 31, 2004 as
compared to the three months ended March 31, 2003. The reductions in interest
expenses were primarily the result interest rate reductions on existing and
replacement debt that occurred in October 2003.
PROVISION FOR INCOME TAXES
Although we recorded income for the three months ended March 31, 2004
and 2003, we have net operating losses carried forward from previous years and
we had a year-to-date tax losses in 2003. However, we recorded income tax
expense resulting from state and other minimum taxes of $5,000 and $0 during the
three month periods ending March 31, 2004 and 2003 respectively.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2004, we had a working capital deficiency of $552,833. We
recorded net income of $195,407 and used cash in operating activities of
$5,699,727 for the nine month period ending March 31, 2004. Given our March 31,
2004 cash balance of $254,861 and our projected operating cash requirements, we
anticipate that our existing capital resources may not be adequate to satisfy
our cash flow requirements through June 30, 2005. We may require additional
funding. Our cash flow estimates are based upon achieving certain levels of
sales and maintaining operating expenses at current levels. Should sales be less
than forecast, expenses be higher than forecast or the liquidity not be
available through financings of debt and/or equity, we may not have adequate
resources to fund operations. We were in default under one of our lines of
credit until September 30, 2003 when we renegotiated the line of credit with our
creditor and cured the default. However, the line of credit is callable by the
lender on demand, and although we are continuing to seek an agreement with the
lender for extend payment terms, there is no guarantee the lender will agree to
provide such extended terms. We do not expect future fixed obligations through
June 30, 2005 to be paid solely by cash generated from operating activities. We
intend to satisfy fixed obligations from the following sources, among others:
(i) additional debt/equity financings; (ii) extending vendor payments; and (iii)
liquidation of inventory.
OPERATING ACTIVITIES
Cash decreased $434,011 for the nine months ended March 31, 2004 to
$254,861 from $688,872 at June 30, 2003.
Cash used in our operating activities totaled $5,699,727 resulting
primarily from increases in inventories of $3,568,904 and decreases in accounts
payable of $3,639,973, offset by the Company's net income of $195,407 and
decreases in accounts receivable, and auction and customer advances of
$1,468,804 and $235,301 respectively.
20
We will continue to strive to gain operating efficiencies by turning
our coin inventory more quickly and offering competitive pricing, although there
is no assurance we will achieve these efficiencies.
INVESTING ACTIVITIES
Cash used in investing activities for the nine months ended March 31,
2004 was $24,819, primarily consisting of purchases of property and equipment in
the amount of $34,993 that were partially offset by proceeds from the
disposition of property and equipment in the amount of $10,174.
FINANCING ACTIVITIES
Until the quarter ended March 31, 2004, we had incurred losses since
July 1999 and have financed these losses through short-term and long-term
borrowings, by issuing shares in various private placement transactions and by
liquidating assets. Cash provided by financing activities totaled $5,290,535 for
the nine months ended March 31, 2004 reflecting the following transactions:
FINANCING ACTIVITIES - DEBT
On October 17, 2000 we entered into a long-term loan agreement, secured
by a delivery van, payable in 60 monthly installments of $457 each consisting of
principal and interest at an annual interest rate of 5.9%. The loan was repaid
in full on December 16, 2003. During the nine months ended March 31, 2004, the
note was reduced by $7,008.
On July 6, 2001, the Company executed a note payable for the
acquisition of the auction operation assets of Superior, secured by assets
acquired, and guaranteed by the Company's CEO. The loan provided for periodic
payments through January 2002, however, the Company suspended loan payments. The
Company renegotiated the payment terms by increasing the note balance by $49,110
to cover unpaid interest, established a new interest rate of 4.5% over the
prime-lending rate, to be paid in biweekly installments over one year. On
November 1, 2002 the Company made a lump-sum payment of $179,350 and
renegotiated the terms of payment for the balance due with the creditor. The
company is making ten principal and interest installments of $19,133 each that
began on December 1, 2002 with interest at the rate of 12% per annum. The note
payable was repaid in full on September 1, 2003. During the nine months ended
March 31, 2004, the note was reduced by $56,832.
On April 10, 2002 we executed a subordinated note payable to our CEO
bearing interest at 9% per annum with quarterly installment payments of $150,000
plus interest. No principal payments had been made. As the CEO did not enforce
the repayment obligation, the amount had been classified as long term. On
February 14, 2003, the terms of the note were modified to provide for repayment
of principal in the amount of $50,000 per quarter commencing on September 30,
2003 and for interest to be paid monthly. As of the March 31, 2004, the
outstanding balance was $950,000. During the nine months ended March 31, 2004,
the note was reduced by $50,000.
On July 9, 2002 and July 26, 2002 we entered into temporary working
capital loan agreements with a private Lender ("Lender") in the amounts of
$1,500,000 and $1,000,000 respectively. On August 8, 2002 we converted the two
loans from the Lender into a Line of Credit with the Lender by executing a
Secured Revolving Line of Credit Agreement ("Line of Credit"). The Line of
Credit bears interest at the prime lending rate plus 7% per annum, was due on
September 9, 2002, is secured by substantially all the assets of Superior and a
personal guarantee of our CEO. The Line of Credit provides for interest payments
to made in cash, inventory or restricted common shares of Superior at the sole
discretion of the Lender. On September 16, 2002 the Line of Credit was amended
to extend the due date to October 15, 2002. In November 2002 the Lender became
deceased and the Line of Credit became an asset of the Estate of the Lender
("Lender Estate"). On September 30, 2003 Superior and the executor of the Lender
Estate executed a Renewal and Modification Agreement that amended the Line of
Credit. In exchange for payment of $230,000 representing interest in arrears
through September 30, 2003, the Lender Estate agreed to reduce the interest rate
to 6% effective October 1, 2003, release its priority lien position on all the
accounts receivable of Company and to consider the default cured at that time.
The amendment also requires monthly interest payments that began on November 1,
2003. The executor of the Lender Estate orally agreed to discuss repayment terms
at a future date, but the Line of Credit is callable with five days notice and
there is no guarantee that the Line of Credit will not be called for repayment
at any time. There can be no assurance that we will be able to negotiate a
repayment schedule for this obligation on terms acceptable to us. As of March
31, 2004 the outstanding Line of Credit balance was $2,500,000.
21
On December 10, 2002 and December 13, 2002, our CEO advanced Superior
$289,970 and $70,000 respectively for working capital purposes. We executed two
unsecured promissory notes both payable on demand and bearing interest at the
rate of 12% per annum. On October 23, 2003, we reduced our unsecured notes
payable to our CEO by $350,000 as a result of his purchase of our art inventory
for $350,000 (see Other Liquidity Plans.) On February 4, 2004 the remaining
balance of the unsecured notes payable to our CEO of $9,970 was repaid. During
the nine months ended March 31, 2004 the notes payable were reduced by $359,970.
On February 21, 2003, Superior entered into an auction line of credit
agreement ("Auction LOC") with a private lender whereby the lender would advance
funds to Superior for the sole purpose of providing auction advances to our
consignment customers. The maximum limit of the Auction LOC was $2,000,000 and
it bore interest at a rate of 10% per annum. The Auction LOC was secured by the
collateralization of inventory consigned by Superior auction advance customers
and the assignment of the auction advance agreements to the private lender. Both
Superior and the lender could have terminated this arrangement at any time. In
September 2003, the private lender agreed to temporarily increase the Auction
LOC maximum limit to $2,800,000. On October 28, 2003 the Auction LOC was repaid
in full and the lender and Superior mutually agreed to terminate the agreement.
On October 13, 2003, we executed a Commercial Loan and Security
Agreement ("LOC"') with Stanford Financial Group Company, an affiliate of a
principal stockholder, Stanford Venture Capital Holdings, Inc., to provide us
with a $7.5 million line of credit for purposes of financing our inventory,
auction advances and inventory loans to other rare coin dealers and collectors.
The LOC bear interest at the prime-lending rate and is secured by substantially
all of our assets. As of March 31, 2004 the outstanding LOC balance was
$5,800,000. This balance reflects the net borrowing against the LOC for the nine
months ended March 31, 2004.
OTHER LIQUIDITY PLANS
In November 2002, we began to reduce operations focused on the art
segment of our business. Our initial plans included using both our own and third
party auction houses and Internet sites to sell our inventory. From July 1, 2002
through June 30, 2003, we sold approximately $750,000 of our art inventory while
still maintaining modest gross margins on these sales. In June 2003, management
determined that our initial liquidation plans were no longer effective and a
decision was made to solicit offers from other art dealers and collectors for
them to purchase our remaining art inventory. Based on our continuing assessment
of the recoverability of the art inventory including our evaluation of the
current art market and informal offers from other art dealers, we established a
reserve of $665,000 or approximately 65% of carrying cost at June 30, 2003. On
October 23, 2003, our Board of Directors, after reviewing other bids to purchase
our art inventory, approved the sale of the art inventory to our CEO for
$350,000. This amount represented the highest bid that we received. With this
transaction, we completed our exit from the art business segment. However, at
some future date, we may resume our activities, on a limited basis, as a
consignment auctioneer and dealer in some areas of the art business segment.
While we have completed most of our cost reduction plans and have plans
to secure additional financing and/or to raise additional capital, there are no
assurances that we will be successful in completing these critical tasks. If we
are unable to successfully complete these critical tasks, we may be forced to
significantly and materially reduce our operations and/or liquidate inventory at
amounts below current carrying value to generate the necessary working capital
to fund any ongoing operations.
22
CAPITAL EXPENDITURES
The Company did not incur any material capital expenditures for
property and equipment during the three months ended March 31, 2004 and does not
presently have any plans for material capital expenditures through the current
fiscal year ending June 30, 2004.
RISK FACTORS
WE HAVE A RECENT HISTORY OF LOSSES AND MAY INCUR FUTURE LOSSES, AND LIMITED
WORKING CAPITAL.
We may not be able to sustain profitability or significantly increase
our revenues. Although we recorded net income of $195,407 for the nine months
ended March 31, 2004, we incurred a net loss of $3,491,003 for the twelve months
ended June 30, 2003 and had incurred losses since July 1999. We have implemented
several initiatives that we believe will enable us to sustain profitability,
including exiting unprofitable lines of business, reducing costs, and increasing
our higher margin retail business. Our working capital deficiency at March 31,
2004 was $552,833, which reflects an increase of $195,017 from our working
capital deficiency of $357,816 at June 30, 2003. There can be no assurance that
our revenue or results of operations will not decline in the future, that we
will not continue to have losses, or that we will be able to continue funding
such losses if they continue. The unavailability of adequate capital could
adversely affect our ability to continue our operations.
OUR AUDIT OPINION COULD ADVERSELY AFFECT OUR STOCK PRICE.
Our auditors have expressed an opinion on our financial statements for
the year ended June 30, 2003 that contains an explanatory paragraph that
expresses substantial doubt about our ability to continue as a going concern due
to recurring operating losses, negative cash flows from operations, significant
debt in default, and limited working capital.
OUR BUSINESS OF SELLING PREMIUM COLLECTIBLES IS HIGHLY COMPETITIVE. IF WE ARE
UNABLE TO COMPETE SUCCESSFULLY, OUR REVENUE WILL DECREASE.
The business of selling coins and other collectibles to retail and
wholesale consumers and at auction is highly competitive. We compete with a
number of comparably sized, smaller firms, as well as a number of larger firms
throughout the United States. Many of our competitors have the ability to
attract customers as a result of their reputation and the quality collectibles
they obtain through their industry relationships. Additionally, other reputable
companies that sell or auction rare coins and other collectibles may decide to
enter our markets to compete with us. These companies have greater name
recognition and have greater financial and marketing recourses than we do. If
these auction companies are successful in entering the specialized market for
premium collectibles in which we participate or if dealers and sellers
participate less in our auctions, we may attract fewer buyers and our revenue
could be decreased.
ADVERSE MARKET CONDITIONS COULD REDUCE THE AMOUNT SPENT ON RARE COINS AND REDUCE
OUR SALES AND REVENUE.
A decline in consumer spending could harm our business. Sales of rare
coins depend on discretionary consumer spending and are affected by general
market conditions. Many factors affect discretionary consumer spending,
including the unemployment rate, business conditions, interest rates, inflation
and tax rates. Spending on the types of luxury items that we typically auction
are impacted by these factors more than sales of consumer products in general.
Some of the market conditions that could cause the dollar volume spent
in our auctions to decrease include the following:
o fewer rare coins offered for sale;
o a decline in the prices buyers are willing to pay; and
o shifts in consumer trends
23
As buyers' tastes change and economic conditions fluctuate, the supply,
demand and dollar volume of rare coin sales could decrease, which could have a
material adverse effect on our business, operating results and financial
condition.
OUR BUSINESS COULD BECOME SUBJECT TO HEIGHTENED GOVERNMENT REGULATION THAT COULD
INCREASE OUR OPERATING COSTS.
Recently, there have been indications that the rare coin market may
become the subject of possible new government regulation. Compliance with any
new regulations governing our business would likely impose costs and
administrative burdens on us and could impact our profitability. In addition,
any such regulation could require us to change our business practices.
WE DO NOT COLLECT CALIFORNIA SALES TAX ON MAIL-ORDER SALES TO OUT-OF-STATE
CUSTOMERS, NOR DO WE COLLECT USE TAX ON OUR INTERSTATE MAIL ORDER SALES.
We believe that our sales to interstate customers are generally
tax-exempt due to varying state exemptions relative to the definitions of being
engaged in business in particular states and the lack of current internet
taxation. While we have not been contacted by any state authorities seeking to
enforce sales or use tax regulations, there is no assurance that we will not be
contacted by authorities in the future with inquiries relative to our compliance
with current statutes, nor is there any assurance that future statutes will not
be enacted that affect the sales and use aspects of our business.
IF THE POPULARITY OF RARE COINS DECLINES, OUR SALES AND REVENUES WILL BE
NEGATIVELY IMPACTED.
The popularity of rare coins may vary over time due to perceived
scarcity, subjective value, general consumer trends, changes in the prices of
precious metals, interest rates and other general economic conditions. We derive
a significant portion of our revenues from commissions paid to us on the sale of
rare coins in our auctions and sales of rare coins from our own inventory. A
decline in popularity of rare coins would cause a decrease in the number of
transactions in our auctions and fewer sales from our inventory, which would
reduce our sales and revenue and harm our business.
TEMPORARY POPULARITY OF CERTAIN COINS COULD CAUSE OUR REVENUES TO FLUCTUATE.
Temporary consumer popularity or "fads" among collectors temporarily
may inflate the volume of rare coins that we appraise, auction and sell. These
trends may result in significant fluctuations in our operating results from one
quarter to the next. Any decline in the popularity of the rare coins we
appraise, auction and sell as a result of changes in consumer trends could harm
our business.
OUR SUCCESS DEPENDS ON OUR MANAGEMENT TEAM AND OTHER KEY PERSONNEL, INCLUDING
PERSONS WHO HAVE ONLY RECENTLY STARTED WORKING TOGETHER IN OUR RAPIDLY EVOLVING
INDUSTRY.
Our success and future performance depends on the continued services of
our senior management and other key personnel, including persons who have only
recently started working together in the rapidly evolving rare coin industry.
The loss of the services of any of our senior management or other key personnel
could harm our business. Some of our executive officers and key employees are
experts in the market for rare coins and have reputations for purchasing and
appraising rare coins and for preparing auctions that will be attractive to
buyers of rare coins. In particular, the services of our chief executive
officer, Silvano DiGenova, would be difficult to replace. Although our executive
management team has experience in operating businesses engaged in the sale of
rare coins, due to the changing nature of our industry, it is more difficult to
assess and evaluate management in our industry than it is in other industries.
24
OUR QUARTERLY OPERATING RESULTS MAY VARY, WHICH MAY CAUSE VOLATILITY OR A
DECLINE IN THE PRICE OF OUR COMMON STOCK.
Our revenue, expenses and operating results may vary significantly from
quarter to quarter due to a number of factors, some of which are beyond our
control. These factors include, among others:
o the supply and demand of rare coins in wholesale and retails markets;
o consumer trends affecting the popularity of rare coins that we auction
and sell from time to time;
o fluctuations in the prices of precious metals;
o our success in expanding our retail sales of rare coins;
o personnel changes;
o our inability to maintain customer satisfaction;
o the size and timing of capital expenditures and other costs associated
with the expansion of our business and infrastructure;
o our inability to resell our inventory of rare coins in a timely manner;
o price competition or changes in our pricing policies or those of our
competitors and pricing changes in our industries;
o our inability to maintain gross margins;
o the availability and cost of financing to continue and complete our
expansion and the development of our on-line business; and
o our success in expanding our sales and distribution channels.
Additional factors that may affect our quarterly operating results
generally include technical difficulties or network downtime and general
economic conditions and economic conditions specific to our industries.
OUR OPERATING RESULTS ARE PARTICULARLY SENSITIVE TO FLUCTUATIONS IN REVENUE.
Because we rely on revenue forecasts when committing to a significant
portion of our future expenditures, we may be unable to adjust our spending in
the event of revenue shortfalls. Consequently, such shortfalls would negatively
impact our operating results and profitability. We also plan on increasing our
operating expenditures to finance the cost of our expansion and to fund our
expanding sales and marketing efforts, general and administrative activities and
to strengthen our infrastructure. To the extent that these expenses are not
accompanied by a commensurate increase in revenue, our quarterly results could
fluctuate significantly in the future.
Due to the factors noted above and the other risks discussed in this
section, you should not rely on period-to-period comparisons of our operating
results. Further, quarterly results are not necessarily meaningful and you
should not rely on them as an indication of future performance. It is possible
that in some future periods our operating results may be below the expectations
of public market analysts and investors. In that case, the price of our common
stock may fall substantially.
WE MAY REQUIRE SUBSTANTIAL AMOUNTS OF CAPITAL IN ORDER TO ACCOMPLISH OUR FUTURE
PLANS.
Since our business involves the financing of inventory, receivables and
auction advances, we may require substantial amounts of capital in order to
achieve and accomplish our future business plans. However, to the extent we are
in need of any additional financing, there can be no assurance that any such
additional financing will be available to us on acceptable terms, or at all. If
we raise additional funds through the issuance of equity securities, further
dilution to our existing shareholders may result.
25
OUR INABILITY TO EFFECTIVELY MANAGE OUR GROWTH COULD RESULT IN UNFORESEEN COSTS.
We have experienced significant periods of growth and increased
personnel, marketing and acquisition related costs, and we anticipate that
further expansion will be required to address potential growth in our customer
base and market opportunities. This expansion has placed, and we expect it will
continue to place, a significant strain on our management and our operational
and financial resources. Our ability to manage future increases, if any, in the
scope of our operations or personnel will depend on the expansion of our
marketing and sales, management, operational and financial capabilities. The
failure of our management to effectively manage the expansion of our business
could result in unforeseen costs and negatively impact our profitability. To
manage this growth we must do the following:
o establish and develop operational, financial and management systems;
o train, manage and motivate our employee base;
o hire additional technology and operations personnel; and
o hire additional rare coin specialists and appraisers.
We may be unable to complete the improvements to our systems,
procedures and controls necessary to support our future operations in a timely
manner. In addition, we may be unable to attract or retain required personnel,
and our management may be unable to develop an effective business strategy to
support our continued growth and expansion.
If additional appropriate opportunities present themselves, we also
intend to acquire businesses, technologies, services or products that we believe
will help us develop and expand our business. The process of integrating an
acquired business, technology, service or product may result in operating
difficulties and expenditures that we cannot anticipate and may absorb
significant management attention that would otherwise be available for further
development of our existing business. Moreover, the anticipated benefits of any
acquisition may not be realized. Any future acquisition of other businesses,
technologies, services or products might require us to obtain additional equity
or debt financing, which might not be available to us on favorable terms or at
all, and might dilute the interests of our existing stockholders. Additionally,
we may be unable to identify, negotiate or finance successfully future
acquisitions or to integrate acquisitions with our current business.
FROM TIME TO TIME, WE MAY DEPEND ON A SMALL NUMBER OF KEY CUSTOMERS FOR A
SUBSTANTIAL PORTION OF OUR REVENUE.
During the nine month period ended March 31, 2004, none of our
customers accounted for more than 10% of our sales, however, at times, we may
depend on a small number of key customers for a substantial portion of our sales
and revenue. The loss of any of these key customers would reduce our revenue and
could negatively impact our profitability.
WE MAY INCUR LOSSES AS A RESULT OF ACCUMULATING INVENTORY.
In addition to auctioning rare coins on consignment, a substantial
portion of the aggregate sales price of rare coins that we sell are from our own
inventory. We purchase these rare coins from dealers and collectors and assume
the inventory and price risks of these items until they are sold. If we are
unable to resell the rare coins that we purchase when we want or need to, or at
prices sufficient to generate a profit from their resale, or if the market value
of our inventory of purchased rare coins were to decline, our revenue would
likely decline.
THE SUPPLY OF RARE COINS IS LIMITED AND OUR INABILITY TO OBTAIN RARE COINS FOR
RESALE AND FOR SALE AT AUCTIONS COULD HARM OUR BUSINESS.
Our business depends substantially on our ability to obtain rare coins
for sale and auction. We depend on the availability of rare coins through
dealers and collectors, and we can provide no assurance that rare coins will
continue to be available as before. Although we deal with numerous dealers and
collectors from whom we are able to obtain rare coins for resale and for our
auctions, only a limited number of dealers exist with the capacity to supply
rare coins for resale and auction on a regular basis. A change in our
relationships with suppliers or dealers could impact negatively our ability to
obtain, resell or auction rare coins in the quantities and at the times we
desire. A shortage in the supply of rare coins could impair our ability to
attract customers, which would harm our business, operating results and
financial condition.
26
OUR AUCTION OPERATIONS MAY NEVER BECOME PROFITABLE.
Our future operating results also depend on the success of our auction
operations and the amount of resources that we will need to devote to the
continual upgrade and enhancement of our Internet website, the performance of
which may be impacted by fast, continuous changes in technology. Our auction
operations currently are not profitable and we are presently unable to predict
when our auction business will become profitable. We will need to achieve
significant growth in our Internet business in order for our auction operations
to become profitable. We are in the early stages of development of several new
portions of our website that will offer content and auctions for rare coins that
may have a lower average selling price than many of the rare coins in the
markets we currently serve. Continued development of our website will require
significant resources. The planned expansion of our website may not result in
increased revenue, which could increase our losses and harm our business.
OUR OPERATING RESULTS COULD BE HARMED IF WE EXPERIENCE AN INCREASE IN THE
RESCISSION OF SALES.
Our operating results could suffer if we experience a significant
increase in the number of sales that are rescinded due to questions about title,
provenance or authenticity of an item. We warrant the title, provenance and
authenticity of each item that we sell, including items sold at auction. If a
buyer believes that any of these characteristics is in doubt, he or she must
notify us in writing within a certain number of days after the date of sale of
the property. If we cannot substantiate the questioned characteristics, the
buyer may rescind his or her purchase and we will refund the price paid at
auction to the buyer. When a purchase is rescinded, the seller is required to
refund the hammer (the price for which an item sells) less sellers' commissions
and other sellers' fees.
OUR WEBSITE MAY NOT BE ADEQUATE TO MEET THE GROWING NEEDS OF OUR BUSINESS.
The satisfactory performance, reliability and availability of our
website and network infrastructure are and will be critical to our reputation
and our ability to attract and retain customers and technical personnel and to
maintain adequate customer service levels. Any system interruptions or reduced
performance of our website could materially adversely affect our reputation and
our ability to attract new customers and technical personnel. Our website may be
vulnerable to security breaches and similar threats which could result in our
liability for damages and harm to our reputation.
OUR WEBSITE MAY BE VULNERABLE TO SECURITY BREACHES AND SIMILAR THREATS WHICH
COULD RESULT IN OUR LIABILITY FOR DAMAGES AND HARM TO OUR REPUTATION.
Despite the implementation of network security measures, our website is
vulnerable to computer viruses, break-ins and similar disruptive problems caused
by Internet users. These occurrences could result in our liability for damages,
and our reputation could suffer. The circumvention of our security measures may
result in the misappropriation of such proprietary information. Any such
security breach could lead to interruptions and delays and the cessation of
service to our customers and could result in a decline in revenue and income.
DUE TO ALL OF THE FOREGOING FACTORS, IT IS POSSIBLE THAT IN SOME FUTURE QUARTER,
OUR OPERATING RESULTS MAY BE BELOW THE EXPECTATIONS OF THE PUBLIC MARKET,
ANALYSTS AND INVESTORS. IN SUCH EVENT, OUR COMMON STOCK WOULD LIKELY BE
MATERIALLY ADVERSELY AFFECTED.
27
ITEM 3 - CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer (our principal
executive officer and principal financial officer, respectively) have concluded,
based on their evaluation as of April 5, 2004 ("Evaluation Date"), that the
design and operation of our "disclosure controls and procedures" (as defined in
Rules 13a-14 (c) and 15d-14 (c) under the Securities Exchange Act of 1934, as
amended ("Exchange Act")), are effective to ensure that information required to
be disclosed by us in reports filed or submitted by us under the Exchange Act is
accumulated, recorded, processed, summarized and reported to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding whether or not disclosure is
required.
There were no significant changes in our internal controls or in other
factors that could significantly affect our internal controls subsequent to the
Evaluation Date.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company may from time to time be involved in various claims,
lawsuits, disputes with third parties, actions involving allegations of
discrimination, or breach of contract actions incidental to the operation of its
business. The Company is not currently involved in any litigation which it
believes could have a materially adverse effect on its financial condition or
results of operations.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Our Series A Preferred Stock contains redemption provisions that require us,
upon request by the holders, to redeem one tenth of the holders' shares of such
securities each quarter for ten consecutive quarters, commencing March 31, 2004.
All of the holders of the Series A Preferred Stock have requested redemption of
their shares. However, because our liabilities currently exceed our assets, we
are prohibited under Delaware corporation law from commencing this redemption,
and have informed the stockholders of this redemption prohibition. We intend to
begin the redemption once we are legally allowed to do so. We have reflected the
Series A Preferred Stock redemption payable as a liability on its Balance Sheet.
As of March 31, 2004 the balance payable with respect to the Series A Preferred
Stock redemption is $687,500
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 - OTHER INFORMATION
None.
28
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
31 Certifications of the chief executive officer and chief
financial officer as required pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32 Certifications of chief executive officer and chief financial
officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, are
furnished herewith pursuant to SEC Release No. 33-8238.
_______________
* Previously filed
(B) REPORTS ON FORM 8-K
None.
29
SIGNATURES
In accordance with the requirement of the Exchange Act, the registrant
has duly caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: April 16, 2004 SUPERIOR GALLERIES, INC.
By /s/ Silvano A. DiGenova
----------------------------------
Silvano A. DiGenova
President and Chief Executive Officer
Dated: April 16, 2004 SUPERIOR GALLERIES, INC.
By /s/ Paul Biberkraut
----------------------------------
Paul Biberkraut, Chief Financial Officer
30
EXHIBITS FILED WITH THIS REPORT ON FORM 10-QSB
Exhibit 31 Certifications of chief executive officer and chief financial
officer as required pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 32 Certifications of chief executive officer and chief financial
officer pursuant to 18 U.S.C Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, are
furnished herewith pursuant to SEC Release No. 33-8238.
31