AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 24, 2004
REGISTRATION NO. 333-______________
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U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
SUPERIOR GALLERIES, INC.
(Name of small business issuer in its charter)
DELAWARE 35-2208007
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5094
(Primary Standard Industrial
Classification No.)
9478 WEST OLYMPIC BOULEVARD, BEVERLY HILLS, CALIFORNIA 90212
(310) 203-9855
(Address and telephone number of Registrant's principal executive offices
and principal place of business)
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PAUL BIBERKRAUT
CHIEF FINANCIAL OFFICER
SUPERIOR GALLERIES, INC.
9478 WEST OLYMPIC BOULEVARD
BEVERLY HILLS, CALIFORNIA 90212
(310) 203-9855
(Name, Address and Telephone Number of Agent for Service)
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COPIES TO:
THOMAS G. BROCKINGTON, ESQ.
KIM RIKER, ESQ.
RUTAN & TUCKER, LLP
611 ANTON BOULEVARD, 14TH FLOOR
COSTA MESA, CALIFORNIA 92626
(714) 641-5100
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to
time after this registration becomes effective.
IF ANY OF THE SECURITIES BEING REGISTERED ON THIS FORM ARE TO BE OFFERED ON A
DELAYED OR CONTINUOUS BASIS PURSUANT TO RULE 415 UNDER THE SECURITIES ACT OF
1933, CHECK THE FOLLOWING BOX. [X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration number of the earlier effective registration
statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If the delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
===================================================================================================================================
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED (1) OFFERING PRICE PER UNIT PRICE REGISTRATION FEE
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Common stock, $.001 par value 4,690,667(2) $1.25 (3) $5,863,334 $742.88
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(1) The common stock being registered hereby includes both outstanding shares
of common stock and shares that are issuable upon the conversion of
outstanding shares of convertible preferred stock. The amount being
registered includes an indeterminate number of shares issuable upon
conversion of the convertible preferred stock, as such number may be
adjusted as a result of stock splits, stock dividends and similar
transactions in accordance with Rule 416 of the Securities Act of 1933.
(2) Represents shares of common stock being offered by selling security
holders, including shares of common stock that are issuable upon conversion
of convertible preferred stock.
(3) The proposed maximum offering price per share has been estimated solely for
the purpose of calculating the registration fee pursuant to Rule 457(c) of
the Securities Act of 1933 and is based upon the last reported sale price
of the Registrant's common stock on the OTC Bulletin Board on August 10,
2004.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT BECOMES EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING UNDER SECTION 8(a), MAY DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
THE SELLING SECURITY HOLDERS IDENTIFIED IN THIS PROSPECTUS MAY NOT SELL
SECURITIES UNDER THIS PROSPECTUS UNTIL THE REGISTRATION STATEMENT OF WHICH THIS
PROSPECTUS IS A PART BECOMES EFFECTIVE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 24, 2004
PROSPECTUS
SUPERIOR GALLERIES, INC.
4,690,667 SHARES OF COMMON STOCK
An aggregate of 1,524,000 issued and outstanding shares of our common
stock and an aggregate of 3,166,667 shares of our common stock underlying
convertible preferred stock are being offered for resale under this prospectus
by some of our security holders identified in this prospectus for their own
accounts.
Our common stock currently trades on the OTC Bulletin Board Market
under the symbol "SPGR." The last reported sale price of our common stock on
August 10, 2004 was $1.25 per share.
Our principal offices are located at 9478 West Olympic Boulevard,
Beverly Hills, California 90212 and our telephone number is (310) 203-9855.
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INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
PLEASE SEE "RISK FACTORS" BEGINNING ON PAGE 3.
-------------------------
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not authorized anyone to provide you with
information different from that contained in this prospectus.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THIS PROSPECTUS IS NOT AN OFFER TO SELL THOSE SECURITIES AND IS NOT
SOLICITING AN OFFER TO BUY THOSE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE
IS NOT PERMITTED.
The date of this prospectus is ___________, 2004.
1
TABLE OF CONTENTS
Description Page No.
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Prospectus Summary...........................................................3
Risk Factors.................................................................5
Use of Proceeds.............................................................13
Price Range of Common Stock.................................................14
Capitalization..............................................................16
Management's Discussion and Analysis of Financial Condition
and Results of Operations..............................................17
Business....................................................................25
Management..................................................................32
Certain Relationships and Related Transactions..............................36
Principal and Selling Shareholders..........................................37
Plan of Distribution........................................................39
Description of Capital Stock................................................42
Legal Matters...............................................................46
Experts.....................................................................46
Where You Can Find More Information.........................................47
Index to Financial Statements..............................................F-1
2
PROSPECTUS SUMMARY
This summary highlights some information from this prospectus. Because
it is a summary, it necessarily does not contain all of the information
necessary to your investment decision. To understand this offering fully, you
should read carefully the entire prospectus.
OUR COMPANY
Our principal line of business is the sale of rare coins on a retail,
wholesale, and auction basis. Our retail and wholesale 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 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 website at 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. ("Tangible") to Superior Galleries, Inc. ("Superior").
These changes were effective at the close of business on June 30, 2003. Unless
the context otherwise requires, all references in this prospectus to "us," "we,"
"our" or "Superior" shall mean Superior Galleries, Inc. and Tangible, as
Superior's predecessor.
Our principal executive offices are located at 9478 West Olympic
Boulevard, Beverly Hills, California 90212, and our telephone number is (310)
203-9855.
3
THE OFFERING
Common stock offered by selling security holders 4,690,667 (1)
Common stock outstanding prior to this offering 4,509,942 (2)
Common stock outstanding following this offering 7,676,609 (1)(2)
if all shares are sold
Use of Proceeds All proceeds of this
offering will be received
by selling security
holders for their own
accounts.
Risk Factors You should read the "Risk
Factors" section
beginning on page 5, as
well as other cautionary
statements throughout
this prospectus, before
investing in shares of
our common stock.
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(1) Includes 3,166,667 shares of common stock issuable upon conversion of
presently outstanding convertible preferred stock.
(2) As of September 24, 2004, a total of 4,509,942 shares of common stock
were outstanding, excluding:
o shares of common stock issuable upon conversion of convertible
preferred stock whose underlying shares of common stock are
covered by this prospectus;
o approximately 970,063 shares of common stock issuable or to
become issuable upon exercise or conversion of outstanding
warrants, options and other convertible securities, other than
the convertible preferred stock whose underlying shares of
common stock are covered by this prospectus; and
o any additional shares of common stock we may issue from time
to time after September 24, 2004.
4
RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. IN
ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, YOU SHOULD CAREFULLY
CONSIDER THE FOLLOWING RISK FACTORS BEFORE DECIDING TO INVEST IN SHARES OF OUR
COMMON STOCK. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCURS, IT IS LIKELY THAT
OUR BUSINESS, FINANCIAL CONDITION AND OPERATING RESULTS WOULD BE HARMED. AS A
RESULT, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU COULD LOSE
PART OR ALL OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
WE HAVE A RECENT HISTORY OF LOSSES AND MAY INCUR FUTURE LOSSES.
We may not be able to sustain profitability or significantly increase
our revenues. Although we recorded a net income of $552,266 for the year ended
June 30, 2004, we incurred a net loss of $3,491,003 for the year ended June 30,
2003 and have incurred losses in prior fiscal years since July 1999. We cannot
assure you that we will be profitable in the future.
WE HAVE LIMITED WORKING CAPITAL.
Our working capital deficiency at June 30, 2004 was $286,128. There can
be no assurance that our revenue or results of operations will not decline in
the future, that we will not have losses in the future, or that we will be able
to continue funding such losses if they occur. Our limited 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 years ended June 30, 2004 that contains an explanatory paragraph that
expresses doubt about our ability to continue as a going concern due to
recurring negative cash flows from operations, significant debt that is callable
on demand, 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 and 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 connections. 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 resources 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 decrease.
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,
5
including the unemployment rate, business conditions, interest rates, inflation
and tax rates. Spending on the types of luxury items that we typically sell and
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.
As buyers' tastes change and economic conditions fluctuate, the supply,
demand and dollar volume of rare coins sales could decrease, which could have a
material adverse effect on our business, operating results and financial
condition.
IF THE POPULARITY OF RARE COINS DECLINES, OUR SALES AND REVENUES WILL DECREASE.
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 the 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 RARE COINS COULD CAUSE OUR REVENUES TO
FLUCTUATE.
Temporary consumer popularity or "fads" among collectors temporarily
may inflate the volume of rare coins that we auction and sell. These trends may
result in significant fluctuations in our operating results from one quarter to
the next.
OUR BUSINESS COULD BECOME SUBJECT TO HEIGHTENED GOVERNMENT REGULATION THAT COULD
INCREASE OUR OPERATING COSTS.
From time to time, 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 concerning our compliance
with current statutes, nor is there any assurance that future statutes will not
be enacted that affect the sales and use tax aspects of our business.
6
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 personnel 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 may be more difficult
to assess and evaluate management in our industry than it is in other
industries.
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 (without limitation):
o the supply of and demand for rare coins in wholesale and
retails markets;
o the timing of coin auctions;
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 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; 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
affect 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 and 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
7
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 and customer 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.
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 affect 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 fiscal year ended June 30, 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
8
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 appraisal, 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 negatively affect 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.
OUR AUCTION OPERATIONS MAY NOT BE ABLE TO SUSTAIN PROFITABILITY.
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 were profitable in the most recent fiscal year, however we are
presently unable to predict whether our auction division will remain profitable.
We will need to achieve significant growth in our Internet business in order for
our auction operations to sustain profitability. We are in the process of
development and/or enhancement of several 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.
9
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.
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 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.
RISKS RELATED TO THIS OFFERING
SHARES OF OUR COMMON STOCK ELIGIBLE OR TO BECOME ELIGIBLE FOR PUBLIC SALE COULD
ADVERSELY AFFECT OUR STOCK PRICE AND MAKE IT DIFFICULT FOR US TO RAISE
ADDITIONAL CAPITAL THROUGH SALES OF EQUITY SECURITIES.
As of September 24, 2004, we had outstanding 4,509,942 shares of common
stock, of which all but 1,837,685 shares were restricted under the Securities
Act of 1933. Of the restricted shares, substantially all are eligible for resale
without registration pursuant to Rule 144 under the Securities Act of 1933, as
amended, subject to compliance with certain volume limitations and other
requirements of that Rule. Of the restricted shares eligible for sale under Rule
144, approximately 325,400 shares are subject to lockup agreements that restrict
their resale. These agreements expire at various times through October 31, 2005.
As of September 24, 2004, we also had outstanding options, warrants and
preferred stock that were exercisable for or convertible into approximately
4,136,730 shares of common stock, including 3,166,667 shares which are being
offered pursuant to this prospectus. Sales of a substantial number of shares of
our common stock in the public market, or the perception that sales could occur,
could adversely affect the market price of our common stock. Any adverse effect
on the market price of our common stock could make it difficult for us to raise
additional capital through sales of equity securities at a time and at a price
that we deem appropriate.
IF OUR SECURITY HOLDERS ENGAGE IN SHORT SALES OF OUR COMMON STOCK, INCLUDING
SALES OF SHARES TO BE ISSUED UPON CONVERSION OR EXERCISE OF DERIVATIVE
SECURITIES, THE PRICE OF OUR COMMON STOCK MAY DECLINE.
Selling short is a technique used by a shareholder to take advantage of
an anticipated decline in the price of a security. A significant number of short
sales or a large volume of other sales within a relatively short period of time
can create downward pressure on the market price of a security. The decrease in
market price would allow holders of our derivative securities that have
conversion or exercise prices based upon a discount on the market price of our
common stock to convert or exercise their derivative securities into or for an
increased number of shares of our common stock. Further sales of common stock
issued upon conversion or exercise of our derivative securities could cause even
greater declines in the price of our common stock due to the number of
additional shares available in the market, which could encourage short sales
that could further undermine the value of our common stock. Therefore, you could
experience a decline in the value of your investment as a result of short sales
of our common stock.
10
OUR COMMON STOCK PRICE IS SUBJECT TO SIGNIFICANT VOLATILITY, WHICH COULD RESULT
IN SUBSTANTIAL LOSSES FOR INVESTORS AND IN LITIGATION AGAINST US.
Because we are a small company have low trading volume in our stock,
the market price of our common stock may fluctuate significantly in the future
in response to various factors, many of which are beyond our control and which
include:
o variations in our quarterly operating results;
o changes in market valuations of similar companies and stock
market price and volume fluctuations generally;
o economic conditions specific to the markets in which we
operate;
o regulatory developments;
o additions or departures of key personnel; and
o future sales of our common stock or other debt or equity
securities.
If our operating results in future quarters fall below the expectations
of market makers, securities analysts and investors, the price of our common
stock likely will decline, perhaps substantially. In the past, securities class
action litigation often has been brought against a company following periods of
volatility in the market price of its securities. We may in the future be the
target of similar litigation. Securities litigation could result in substantial
costs and liabilities and could divert management's attention and resources.
Consequently, the price at which you purchase shares of our common stock may not
be indicative of the price that will prevail in the trading market. You may be
unable to sell your shares of common stock at or above your purchase price,
which may result in substantial losses to you.
BECAUSE WE ARE SUBJECT TO THE "PENNY STOCK" RULES, THE LEVEL OF TRADING ACTIVITY
IN OUR STOCK MAY BE REDUCED.
Broker-dealer practices in connection with transactions in "penny
stocks" are regulated by penny stock rules adopted by the Securities and
Exchange Commission. Penny stocks, like shares of our common stock, generally
are equity securities with a price of less than $5.00 (other than securities
registered on certain national securities exchanges or quoted on Nasdaq). The
penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document that provides information about penny stocks and the nature
and level of risks in the penny stock market. The broker-dealer also must comply
with several other disclosure and substantive requirements. Consequently, these
requirements may have the effect of reducing the level of trading activity, if
any, in the secondary market for a security subject to the penny stock rules,
and investors in our common stock may find it difficult to sell their shares.
BECAUSE OUR STOCK IS NOT LISTED ON A NATIONAL SECURITIES EXCHANGE, YOU MAY FIND
IT DIFFICULT TO DISPOSE OF OR OBTAIN QUOTATIONS FOR OUR COMMON STOCK.
Our common stock trades under the symbol "SPGR" on the OTC Bulletin
Board. Because our stock trades on the OTC Bulletin Board rather than on a
national securities exchange, you may find it difficult to either dispose of, or
to obtain quotations as to the price of, our common stock.
11
OUR PREFERRED STOCK MAY DELAY OR PREVENT A TAKEOVER OF OUR COMPANY, POSSIBLY
PREVENTING YOU FROM OBTAINING HIGHER STOCK PRICES FOR YOUR SHARES.
Our board of directors has the authority to issue shares of preferred
stock and to fix the rights, preferences, privileges and restrictions, including
voting rights of those shares, without any further vote or action by our
shareholders. The rights of the holders of our common stock will be subject to,
and may be adversely affected by, the rights of the holders of any preferred
stock that we may issue in the future. The issuance of preferred stock, while
providing desired flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of our outstanding voting stock, which would
delay, defer or prevent a change in control of our company. Furthermore,
preferred stock may have other rights, including economic rights senior to the
common stock, and, as a result, the issuance of preferred stock could adversely
affect the market value of our common stock.
THE VOTING POWER OF SUPERIOR GALLERIES, INC. IS SUBSTANTIALLY CONTROLLED BY
STANFORD VENTURE CAPITAL HOLDINGS, INC. AND A GROUP OF AFFILIATED PERSONS. THIS
CONCENTRATION OF VOTING POWER MAY, AMONG OTHER THINGS, DELAY OR FRUSTRATE THE
REMOVAL OF INCUMBENT DIRECTORS OR A TAKEOVER ATTEMPT, EVEN IF SUCH EVENTS MAY BE
BENEFICIAL TO OUR SHAREHOLDERS.
Stanford Venture Capital Holdings, Inc., or "Stanford," and certain of
its affiliates collectively hold 58% of our voting securities. Consequently,
Stanford and its affiliates have sufficient voting power to control the outcome
of virtually all corporate matters submitted to the vote of our common
shareholders. Those matters could include the election of directors, changes in
the size and composition of the board of directors, and mergers and other
business combinations involving Superior Galleries, Inc. In addition, through
this control of the board of directors and voting power, Stanford is able to
control certain decisions, including decisions regarding the qualification and
appointment of officers, dividend policy, access to capital (including borrowing
from third-party lenders and the issuance of additional equity securities), and
our acquisition or disposition of assets. Also, the concentration of voting
power in the hands of Stanford could have the effect of delaying or preventing a
change in control of our company, even if the change in control would benefit
our shareholders, and may adversely affect the market price of our common stock.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, including among
others:
o our business strategy for expanding our presence in the rare
coin market;
o anticipated trends in our financial condition and results of
operations; and
o our ability to distinguish ourselves from our current and
future competitors.
You can identify forward-looking statements generally by the use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"intends," "plans," "should," "could," "seeks," "pro forma," "anticipates,"
"estimates," "continues," or other variations thereof, including their use in
the negative, or by discussions of strategies, opportunities, plans or
intentions. You may find these forward-looking statements under the captions
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and "Business," as well as captions elsewhere in this
prospectus. A number of factors could cause results to differ materially from
those anticipated by forward-looking statements, including those discussed under
"Risk Factors" and "Business."
These forward-looking statements necessarily depend upon assumptions
and estimates that may prove to be incorrect. Although we believe that the
assumptions and estimates reflected in the forward-looking statements are
12
reasonable, we cannot guarantee that we will achieve our plans, intentions or
expectations. The forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to differ in
significant ways from any future results expressed or implied by the
forward-looking statements.
Any of the factors described above or in the "Risk Factors" section
below could cause our financial results, including our net income (loss) or
growth in net income (loss) to differ materially from prior results, which in
turn could, among other things, cause the price of our common stock to fluctuate
substantially.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the shares of
common stock offered under this prospectus by the selling security holders.
Rather, the selling security holders will receive those proceeds directly.
13
PRICE RANGE OF COMMON STOCK
MARKET INFORMATION
Our common stock is quoted in the National Quotation Bureau's Pink
Sheets and listed on the NASD's OTC Electronic Bulletin Board under the symbol
"SPGR." Prior to July 1, 2003 our symbol was "TAGZ." Due to the reduced volume
of trading over the past 60 days, no public market is deemed to exist for our
common stock at this time.
The following table shows the trading price data for our common stock
as reported by the OTC Bulletin Board as the range of representative bid prices
for our common stock for the quarters indicated. The quotations reflect
inter-dealer prices, without retail mark-up, markdown or commission, may not
represent actual transactions and have been retroactively restated to reflect
the one-for-twenty reverse split of our common stock on June 30, 2003.
Fiscal 2004
---------------------------
Fiscal Quarter Ended: High Low
------------ ------------
June 30 $2.15 $0.75
March 31 1.92 0.75
December 31 1.06 0.60
September 30 1.01 0.24
Fiscal 2003
---------------------------
Fiscal Quarter Ended: High Low
------------ ------------
June 30 $1.50 $0.02
March 31 0.60 0.02
December 31 0.60 0.20
September 30 2.40 0.60
HOLDERS
The number of holders of record of our common stock as of the close of
business on September 8, 2004 was approximately 372. Within the holders of
record of our common stock are depositories such as Cede & Co. that hold shares
of stock for brokerage firms which, in turn, hold shares of stock for beneficial
owners.
DIVIDENDS
To date, we have declared no cash dividends on our common stock, and do
not expect to pay cash dividends in the near future. We intend to retain future
earnings, if any, to provide funds for the operation of our business. The terms
of our Series A Redeemable 8% Convertible Preferred Stock, or Series A Preferred
Stock, prohibit us from paying dividends on shares of our common stock unless
dividends in such amount shall have been simultaneously paid or declared and set
apart for payment to the holders of our Series A Preferred Stock. In addition,
the terms of our Series B $1.00 Convertible Preferred Stock, or Series B
Preferred Stock, prohibit us from making any distributions on our common stock
without the vote or written consent of the holders of a majority of the
outstanding shares of the Series B Preferred Stock, voting as a separate class.
14
STOCK OPTIONS
At June 30, 2004, there were 426,000 options outstanding under our 2003
Omnibus Stock Option Plan at a weighted average exercise price of $1.50.
15
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2004.
You should read this information together with our consolidated financial
statements and the notes relating to those statements appearing elsewhere in
this prospectus. The table excludes an aggregate of approximately 3,981,730
shares of common stock that were issuable upon conversion or exercise of
outstanding convertible notes, options and warrants as of June 30, 2004.
JUNE 30, 2004
-------------
Long term debt, less current portion(1) ........................... $ 943,750
-------------
Stockholders' deficit:
Series B Preferred Stock, $0.001 par value, Authorized
3,400,000 shares; issued and outstanding 3,400,000 shares ..... $ 2,966,500
Series D Preferred Stock, $0.001 par value, Authorized
2,000,000 shares; issued and outstanding 2,000,000 shares ..... $ 1,931,456
Common stock, $.001 par value. Authorized 12,500,000 shares; ....
issued and outstanding, 4,485,942 ............................. 4,486
Additional paid in capital ...................................... 7,911,988
Accumulated deficit ............................................... (13,897,847)
-------------
Total stockholders' deficit .................................. $ (1,083,417)
-------------
Total capitalization (unaudited) ............................. $ (139,667)
-------------
(1) Long term debt includes $343,750 attributable to Series A $5.00 Redeemable
8% Convertible Preferred Stock $0.001 par value, which is currently the subject
of redemption. On March 31, 2004, in accordance with the redemption provisions
of the Series A Preferred Stock, all the holders of the Series A Preferred Stock
requested the redemption of their shares. However, because our liabilities
exceeded our assets at the time, and continue to exceed our assets presently, we
are prohibited under Delaware corporation law from commencing the redemption. We
have informed the stockholders of these restrictions on redemption. 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 our Balance Sheet.
As of June 30, 2004, the balance payable with respect to the Series A Preferred
Stock redemption was $687,500. Of this amount, $343,750 is reflected as a
current liability. We will continue to make quarterly dividend payments as long
as the Series A Preferred Stock redemption payable remains outstanding. See Note
11 of Notes to Financial Statements.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION
WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND NOTES AND THE INFORMATION
INCLUDED UNDER THE CAPTION "RISK FACTORS" INCLUDED ELSEWHERE IN THIS PROSPECTUS.
CAUTIONARY STATEMENTS
This Prospectus 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
Prospectus 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" herein,
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
prospectus 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 Prospectus 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 Financial Statements and related notes thereto
included elsewhere herein. 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.
CRITICAL ACCOUNTING POLICIES
Our 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 Balance Sheets and the
Statements of Operations. We believe that the following are the most critical
areas that may affect our financial condition and results of operations.
17
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 the 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.
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 wholesale 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 Financial Group Company, which is an affiliate of our principal
shareholder, Stanford Venture Capital Holdings, Inc. ("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.
RESULTS OF OPERATIONS
The following table sets forth the percentage of net revenue
represented by each item in our statements of operations for the periods
indicated:
YEAR ENDED YEAR ENDED
JUNE 30, 2004 JUNE 30, 2003
------------- -------------
Net Sales 89.7% 88.6%
Commission Income 10.3% 11.4%
Total Revenue 100.0% 100.0%
Cost of Sales 77.9% 78.4%
Gross Profit 22.1% 21.6%
Selling, general and administrative expenses 19.9% 32.8%
Impairment of goodwill 0.0% 2.9%
Income (loss) from operations 2.2% -14.1%
Other income (expense) -0.3% -3.0%
Income (loss) before taxes 1.9% -17.1%
Income taxes 0.1% 0.1%
Net Income (loss) 1.8% -17.2%
18
YEARS ENDED JUNE 30, 2004 AND 2003
Our net income for the year ended June 30, 2004 was $552,266 or $0.11
and $0.06 per share on a basic and fully diluted basis respectively as compared
to a net loss of $3,491,003 or $1.75 per share on both a basic and fully diluted
basis for the year ended June 30, 2003. The improvement in our operating results
were primarily due to revenue growth resulting from the strength in the rare
coin market, decreased overhead costs and lower net interest expenses.
TOTAL REVENUE. The table below sets forth our primary sources of
revenue for the periods indicated:
YEAR ENDED YEAR ENDED
JUNE 30, 2004 JUNE 30, 2003
------------------------------ ------------------------------
Net Sales
Coins - Wholesale $ 19,195,220 64% $ 9,050,773 44%
Coins - Retail 7,344,986 25% 8,263,941 41%
Art, collectibles & other 376,078 1% 729,112 4%
------------- ------------- ------------- -------------
Total Net Sales 26,916,284 90% 18,043,826 89%
Commission Income 3,081,028 10% 2,311,082 11%
------------- ------------- ------------- -------------
Total Revenue $ 29,997,312 100% $ 20,354,908 100%
============= ============= ============= =============
We recorded total revenue of $29,997,312 for the year ended June 30,
2004, an increase of $9,642,404 or 47% over the total revenue of $20,354,908
recorded for the year ended June 30, 2003. The increase in revenue is primarily
due to increased wholesale coin sales. Wholesale coin sales, which represented
64% of total revenue, increased $10,144,447 or 112% to $19,195,220. This
increase was primarily due to the strong market demand from other dealers and
our higher level of inventory available for sale. Retail coin sales, which
represented 25% of total revenue, decreased $918,955 or 11% to $7,344,986. This
decrease was primarily due to our aggressive pricing in 2003 to generate cash
from inventory that resulted in higher sales, but reduced gross margins.
Fine art, collectibles and other sales decreased $353,034 or 48% to
$376,078 during the year ended June 30, 2004. The decrease was primarily due to
the completion of the liquidation of our art inventory. In November 2002, we
made the decision to substantially reduce our art business segment operations
and by March 2003 all operational activities had ceased with the exception of
our efforts to liquidate the balance of our art inventory. The final liquidation
of our art inventory occurred in October 2003. Since that date that we have had
no material sales of fine art and other collectibles.
Commission income, which represented 10% of total revenue, increased
$769,946 or 33% to $3,081,028 for the year ended June 30, 2004. The increase in
commission income was primarily due to the continued strength in the rare coin
market and the number of rare auctions increasing to seven in fiscal 2004, as
compared to six in fiscal 2003. Auction sales (hammer prices realized) were
$30,032,985 for the year ended June 30, 2004 as compared to $25,023,893 for the
year ended June 30, 2003.
COST OF SALES. Cost of sales increased $7,429,890 to $23,381,949 for
the year ended June 30, 2004, representing 78% of total revenue, compared to
$15,952,059, for the year ended June 30, 2003, which also represented 78% of
total revenue. The stability, year to year, of the cost of sales as percentage
of total revenue is primarily due to comparable price increases both when
selling and purchasing rare coins and our ability in the current strong market
to maintain our historical inventory turn rate of four to five times per year.
The cost of sales as a percentage of revenue will vary from period to period
19
with variations in the mix of revenue and margins between wholesale and retail
rare coin sales and commission income.
GROSS PROFIT. Gross profit for the year ended June 30, 2004 increased
$2,212,514 or 50% to $6,615,363. This represented 22% of total revenue for the
year ended June 30, 2004, as compared to $4,402,849 for the year ended June 30,
2003, which also represented 22% of total revenue for that year. The stability,
year to year, of the gross profit as percentage of total revenue is primarily
due to comparable price increases both when selling and purchasing rare coins
and our ability in the current strong market to maintain our historical
inventory turn rate of four to five times per year. The increase in the gross
profit was primarily due to the increase in rare coins sales while maintaining
margins and increased auction commission revenue. Gross profit as a percentage
of revenue will vary from period to period with variations in the mix of revenue
and margins between wholesale and retail rare coin sales and commission income.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $716,800 or 11% to $5,958,829 for the year
ended June 30, 2004 from $6,675,629 for the year ended June 30, 2003. These
expenses represented 20% of total revenue for the year ended June 30, 2004 as
compared to 33% of total revenue for the year ended June 30, 2003. The decrease
in these expenses, both as a percentage of revenue and in the aggregate, were
due in part to the effect of our operational consolidation efforts that were
completed during the last half of the fiscal year ending June 30, 2003. The
prior year 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 current year.
IMPAIRMENT OF GOODWILL. In July 2001, we recorded goodwill of $591,521
in connection with acquisition of our SGBH auction unit. Based on our annual
fair value assessment to determine the impairment, if any, of goodwill, we
determined that the SGBH goodwill had become fully impaired resulting in charge
of $591,521 for the year ended June 30, 2003. There was no similar charge for
the year ended June 30, 2004.
OTHER INCOME AND EXPENSES. Other expenses decreased $521,494 on a net
basis to $91,812 for the year ended June 30, 2004 from $613,306 for the year
ended June 30, 2003. This decrease is attributable primarily to an increase in
interest income of $350,789 and reductions in interest rates on debt that
decreased interest expense by $137,050 for the year ended June 30, 2004 as
compared to the year ended June 30, 2003. During the year ended June 30, 2004 we
were able to significantly increase auction and customer advances as result of a
$7.5 million line of credit facility provided by Stanford Financial Group
Company in October 2003.
PROVISION FOR INCOME TAXES. Although we recorded income for the current
year, we have net operating losses ("NOL") carried forward from previous years
and we have only recorded income tax expenses of $12,456 for state and other
minimum taxes for the year ended June 30, 2004. We incurred a loss for the year
ended June 30, 2003 and we recorded income taxes expense of $13,396 for state
and other minimum taxes for that year. For federal income tax purposes, we have
a NOL carryforward of approximately $9,620,000 which is available to offset
future federal taxable income through 2023. For state income tax purposes, we
also have a NOL carryforward of approximately $5,370,000, which is available to
offset state taxable income through 2012. The use of these NOL carryforwards in
future years will be limited due to past changes in our ownership, the full
effect of which has yet to be calculated. In addition, NOL carryforwards for the
purposes of offsetting California state taxable income have been suspended for
the tax years beginning in 2002 and 2003.
20
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2004, we had working capital deficiency of $286,128. We
recorded net income of $552,266 and used cash in operating activities of
$6,237,294 for the year then ended. Given our June 30, 2004 cash balance of
$446,530 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 reductions
in operating expenses. 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 will 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 lender 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 extended payments 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: (i) additional debt/equity financings; (ii) extending vendor
payments; and (iii) liquidation of inventory . No assurance can be given that we
will be able to pay or satisfy our fixed obligations from these sources. If we
are unable to satisfy our fixed obligations as they become due, our creditors
will be entitled to take legal action against us. If they do, our business could
be materially harmed.
OPERATING ACTIVITIES. Cash decreased $242,342 during the year ended
June 30, 2004 to $446,530 from $688,872 at June 30, 2003.
Cash used in our operating activities totaled $6,237,294, resulting
primarily from increases in our accounts receivable, inventories, and auction
and customer advances of $887,167, $3,609,158 and $2,906,538 respectively and
were partially offset by our net income of $552,266 and an increase in our
accounts payable of $422,671. The increases in receivable, inventories, and
auction and customer advances are primarily the result the significant increases
in total revenues as compared to the previous year.
We will continue to strive to gain operating efficiencies by turning
our inventory more quickly and monitoring the amount of inventory that we carry,
although there is no assurance we will achieve these efficiencies.
INVESTING ACTIVITIES. Cash used in investing activities during year
ended June 30, 2004 was $45,583 consisting of purchases of property and
equipment of $55,757 and offset by $10,174 in proceeds on the sale of property
and equipment.
FINANCING ACTIVITIES. Until the quarter ending 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 $6,040,535 for the year ended June 30, 2004 resulting from
the transactions described below.
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 year ended June 30, 2004, the note was reduced by $7,008.
On July 6, 2001, we executed a note payable for the acquisition of the
assets of SGBH, secured by the assets acquired, and guaranteed by our CEO. The
loan provided for periodic payments through January 2002. We failed to pay the
loan in full at that date but continued to make loan payments through July 2002.
21
In October 2002 we renegotiated the payment terms by increasing the note balance
by $49,110 to cover unpaid interest and establishing 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 we made a lump-sum payment of $179,350 and renegotiated the
terms of payment for the balance due with the creditor. This note required ten
principal and interest installments of $19,133 each, beginning 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 year ended June 30, 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 through February 2003. 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 June 30, 2004 the
outstanding balance was $900,000. During the year ended June 30, 2004, the note
was reduced by $100,000.
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. These loans bore interest at the prime
lending rate plus 7% per annum, were secured by our inventory and a personal
guarantee of our CEO and were due to be repaid in 60 days. 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 bore interest at the prime lending rate plus 7% per annum, was
due on September 9, 2002, and was secured by substantially all the assets of the
Company and a personal guarantee of our CEO. The Line of Credit provides for
interest payments to be 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 died and the Line of Credit became an asset of the Estate of the
Lender ("Lender Estate"). On September 30, 2003, we 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 of our accounts receivable and
to consider the default cured at that time. The amendment also required 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 June 30, 2004 the outstanding
balance was $2,500,000, not including accrued interest. No payments were made to
reduce the Line of Credit during the year ended June 30, 2004.
On December 10, 2002 and December 13, 2002, our CEO advanced us
$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 year ended June 30, 2004 the notes payable were reduced by $359,970.
On February 21, 2003, we entered into an auction line of credit
agreement ("Auction LOC") with a private lender whereby the lender would advance
funds to us 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 our auction advance customers and
the assignment of the auction advance agreements to the private lender. The
22
lender had the right to terminate 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 ("Commercial 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 Commercial LOC bears interest at the prime-lending rate (4.00% at June 30,
2004) and is secured by substantially all of our assets. As of June 30, 2004 the
outstanding Commercial LOC balance was $6,600,000. This balance reflects the net
borrowing against the Commercial LOC for the year ended June 30, 2004.
FINANCING ACTIVITIES - EQUITY. In April 2002 we raised $3,000,000
through the private placement of our Series B Preferred Stock. In February 2003
we raised an additional $2,000,000 through the private placement of our Series D
Preferred Stock and our CEO converted his Series C Preferred Stock, which were
equity securities that carry redemption obligations similar to debt, into
$700,000 of our common stock at $1.20 per common share, which was the equivalent
conversion price of the Series D Preferred Stock. We have invested the net
proceeds from each private placement in our current operations and to reduce
debt. However, this equity capital may be insufficient to permit us to execute
our operating plan.
OTHER LIQUIDITY PLANS. In November 2002, we began to reduce our
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 $700,000 of our Art inventory while still maintaining modest gross
margins on these sales. In February 2003, in addition to our exit from the Art
business segment, we began to consolidate all our operations into our Beverly
Hills, California location. This operational consolidation allowed us to reduce
overhead costs by eliminating duplicative operational and administrative
expenses. In June 2003, we determined that our initial liquidation plans were no
longer effective and we decided to solicit offers from other art dealers and
collectors for them to purchase the balance of the Art inventory owned by us. In
June 2003, based on our continued assessment of recoverability of the art
inventory including our evaluation of the current Art market and informal offers
from other art dealers, we established a reserve to $665,000 or approximately
65% of our carrying cost. 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 in some areas of the Art business
segment.
While we have completed 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.
CAPITAL EXPENDITURES
The Company did not incur any material capital expenditures for
property and equipment during the year ended June 30, 2004 and does not have any
plans for material capital expenditures through the current fiscal year ending
June 30, 2005.
23
Pursuant to a lease agreement executed on August 6, 2002, we extended
our lease on our corporate headquarters and primary gallery located in Beverly
Hills, California. The monthly base rent is $17,193 and the lease will expire on
September 30, 2007.
The following table outlines payments due under our significant
contractual obligations over the next four years, exclusive of interest:
PAYMENT DUE BY PERIOD
---------------------
CONTRACT OBLIGATIONS LESS THAN LESS THAN LESS THAN AFTER
AT JUNE 30, 2004 TOTAL 1 YEAR 2 YEARS 3 YEARS 3 YEARS
- ---------------------------------------- ------------- ------------- ------------- ------------- -------------
Short Term Debt $ 9,100,000 $ 9,100,000 $ -- $ -- $ --
Long Term Debt 1,587,500 643,750 475,000 268,750 200,000
Operating Leases 765,981 261,135 224,376 224,376 56,094
------------- ------------- ------------- ------------- -------------
Total Contractual Cash Obligations $ 11,453,481 $ 10,004,885 $ 699,376 $ 493,126 $ 256,094
============= ============= ============= ============= =============
The above table outlines our obligations as of June 30, 2004 and does
not reflect any changes in our obligations that have occurred after that date.
24
BUSINESS
COMPANY OVERVIEW
Our principal line of business is the sale of rare coins on a retail,
wholesale, and auction basis. Our retail and wholesale 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 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 website at 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. ("Tangible") to Superior Galleries, Inc. ("Superior").
These changes were effective at the close of business on June 30, 2003. Unless
the context otherwise requires, all references in this prospectus to "us," "we,"
"our" or "Superior" shall mean Superior Galleries, Inc. and Tangible, as
Superior's predecessor.
HISTORY OF THE COMPANY
Tangible Investments of America, Inc. ("TIA") our predecessor, was
originally founded by our current chief executive officer ("CEO"), Silvano
DiGenova, in 1977 when Mr. DiGenova first exhibited his coins at a national coin
dealer's convention. That same year, Mr. DiGenova first became involved in other
collectibles such as fine arts and antiques. Mr. DiGenova has collected rare
coins since 1971 (when he was nine years old). While attending the Wharton
School of Business in the early 1980s, Mr. DiGenova continued to develop TIA,
and in May 1984, prior to graduating, Mr. DiGenova took a leave of absence from
Wharton and incorporated TIA in Pennsylvania.
In 1991, Mr. DiGenova relocated TIA to Laguna Beach, California and
continued to develop its rare coin, fine art and collectibles retail and
wholesale business, continuing to expand on a national level. We acquired TIA on
April 28, 1999 through a reverse-merger acquisition.
In December 1999, we acquired all of the outstanding common shares of
Gehringer and Kellar, Inc. d.b.a. Keystone Coin & Stamp Exchange, or Keystone.
Keystone is a wholesaler, retailer and auctioneer of rare coins located in
Allentown, Pennsylvania. We transferred the operations of this company to
certain members of its management in November 2001 and completed the sale of the
assets of this company in February 2002. In June 2001, we acquired all of the
outstanding common shares of HotelInteractive, Inc., or HI, an Internet-based
publisher of news and information. In February 2002, we sold this company to a
corporation controlled by Mr. Richard Viola, who was serving as a director on
our board at that time.
In November 2002, we began to reduce our operations that were focused
on the fine art, jewelry and collectibles ("Art") segment of our business. By
March 2003, with exception of activities specifically related to the liquidation
of our remaining art inventory, all Art business segment operations had ceased.
We completed the liquidation of our art inventory in October 2003. We may, at
some future date and on a limited basis, re-enter some of the Art business
segment as a consignment auctioneer.
25
BACKGROUND OF THE COIN AND COLLECTIBLES INDUSTRY
Throughout history, coins have been highly prized and universally
regarded as a store of value, particularly those struck in precious metals.
Coins have been highly esteemed for their beauty and appeal as a solid store of
wealth. Over the past 300 years, coin collecting for enjoyment and profit has
gained increasing prominence. The coin industry has been active in trading since
the 17th century. Today, coins and collectibles are bought and sold throughout
the world in galleries, shops, stores, auctions and on the Internet at fixed
prices.
According to experts in the field, it is difficult to determine the
total annual sales volume of the coin and collectibles business. Sotheby's
Holdings, Inc. (NYSE: BID), one of the two largest auctioneers in the world in
the coin and collectibles markets, reported annual auction and related revenue
from the sale of art and collectibles of $309 million for the year ended
December 31, 2003. With specific regard to coins, the U.S. Mint, in its 2003
annual report for the year ending September 30, 2003, reported that there are
over 130 million people collecting the new quarter dollar coins from the 50
State Quarters(TM) program developed by the Mint. This program was designed to
increase coin collecting and the number of collectors by minting five new
designs annually of the quarter dollar with each design featuring one each of
the 50 states over a ten year period from 1998 through 2008. In addition, the
U.S. Mint reported non-bullion numismatic revenue of $235 million in its 2003
annual report.
Typically, the coins that we buy and sell were originally manufactured
in the late 1700's to mid-1900's. Many of the items that we sell are
one-of-a-kind, or have very few examples on the market at any time. We believe
that coin buyers generally start with a modest purchase amount and increase the
size of their transactions and the rarity of the items that they purchase as
they gain experience as a buyer in the market.
COIN GRADING AND TRADING SYSTEMS
Determining the market value of a given coin plays a vital role in
buying and selling rare coins. Rare coins are graded on a numerical scale from 0
to 70. Zero represents the basal state (or lowest condition or state of
preservation) and 70 represents an uncirculated (or mint state) specimen that is
perfect in condition or state of preservation in every aspect. As a result of
this numerical scale relating to condition or quality, there is a correlation to
value in that the higher its numerical grade, the more valuable a coin is to
collectors or dealers. A one point difference, not even discernible to a
layman's eye, can result in a difference in value of thousands of dollars.
Therefore, consistent grading according to a standard universally accepted by
the marketplace is very important. In 1986, the first uniform grading system was
implemented by the Professional Coin Grading Service, or the PCGS. Silvano
DiGenova, our chief executive officer, was a co-founder of the PCGS and assisted
in the development of the grading system used by the PCGS. Mr. DiGenova sold his
interest in the PCGS in 1987 and, since that time, has not been affiliated with
the PCGS, except as a customer of its services. A year after the PCGS was
founded, the Numismatic Guaranty Corporation, or the NGC, was formed. Mr.
DiGenova is not affiliated with NGC except as a customer of its services.
These two firms established a uniform coin-grading standard, which has
gained almost universal acceptance throughout the world. Once a coin has been
graded and certified, both firms encapsulate the coin in tamper-proof acrylic
holders and register them by number, grade, date and mintmark. If applicable,
they identify variety and pedigree as well. Rare coins graded and certified by
either one of these services can then be traded with confidence. The advent of
certified grading has led to the formation of the Certified Coin Exchange, or
the CCE, which is a nationwide computerized trading network for rare coins. The
CCE is also the number one source of instantaneous price information. Coins can
be bought and sold sight unseen because of the certification and confidence
instilled in the market place by the CCE, the PCGS and the NGC. Mr. DiGenova was
26
a founder and board member of the CCE, and assisted in the organization of the
association. Mr. DiGenova sold his interests in the CCE in the late 1980s and
has not been affiliated with that entity since that time except as a user of its
services.
RETAIL AND WHOLESALE SALES
We sell rare coins on a wholesale and retail basis. On a wholesale
basis, our contacts include approximately 5,000 rare coin dealers across the
country who we contact through telephone, email, fax, electronic exchanges and
in person at the approximately 30 shows or expositions annually. Wholesale
transactions are usually completed with recognized dealers in the trade and are
often for immediate payment or with approved credit relationships, by payment
within 30 days from the date of sale. Retail transactions typically do not
involve the extension of any credit terms and payment is made at the time of
sale.
Our CEO in consultation with senior management team members approves
trade credit. In wholesale transactions, selling prices for rare coins are
determined by the marketplace and usually individually negotiated with the
buyer. There are several printed pricing guides, some published weekly, which
provide pricing indications as well as the CCE, a real-time exchange with bids
and asks on many of the coins in the market. Often, a wholesale customer is
buying rare coins from us because the wholesale customer has another customer,
whether wholesale or retail, already identified. Wholesale sales prices for rare
coins are determined primarily by the grade of the coins and are often
influenced by non-market factors such as the purchasing or selling dealer's
liquidity, the relative desire or need for the specific rare coin, the length of
time the selling dealer has held the rare coins and other factors. We have an
inventory turnover of four to five times per year.
When selling rare coins on a retail basis, we utilize direct mail,
telephone, fax, email and Internet-based retail and auctions, both private and
public, as channels of distribution. We maintain a database of over 30,000
potential customers for rare coins who are solicited regularly through these
channels. We currently maintain our website, www.sgbh.com to offer rare coins
both at retail and at private auction. We have ongoing campaigns on eBay, a
third party website, to sell rare coins at its Internet public auction site. At
retail, we typically sell for immediate payment, holding the rare coins until
good funds are received. In a few instances, on large purchases, we will
consider financing a sale for a retail buyer. In these situations, we will hold
the rare coins as collateral. In retail transactions, the market determines sale
prices for rare coins and there are several pricing guides available to the
retail buyer including monthly and weekly publications and auction prices
realized. The price to be paid by a retail buyer for a rare coin is primarily
based on the coin's condition and rarity as determined by its grade but is also
influenced by the buyer's desire for the particular rare coin, the time it has
taken to find a suitable example for the buyer's collection, the relative rarity
of the coin to others held by the buyer and other factors. In retail
transactions, we principally sell rare coins that have been certified for
authenticity and quality by an independent recognized authority.
ACQUISITION OF INVENTORY
We acquire inventory of rare coins at wholesale through other dealers
in the trade, retail customers, trusts or estates desiring to sell their
holdings or by auction. We are not dependent on any major suppliers. During the
year ended June 30, 2004, no supplier provided more than 10% of our aggregate
purchases of coins. When purchasing from other dealers in the trade, we are
typically offered 15 days to pay the net invoice amount. Purchases from retail
customers, trusts and estates or at auction by an independent auction company
require immediate payment upon taking title and possession of the property. On
occasion, we may trade items from our inventory to either a dealer or a retail
customer in exchange for property from the dealer or retail customer. When
buying inventory from a dealer, the majority of these purchases are completed at
27
shows and expositions around the country, although a significant volume is
transacted over the telephone. Purchasing at auction is another major source of
inventory in rare coins. Purchase prices are negotiated by our buyers with
dealers in the trade and with the retail customers, trusts and estates. When
buying at auction, our buyers compete with other buyers in determining the final
bid for any given lot of property.
AUCTION OPERATIONS
On July 6, 2001, we acquired substantially all of the assets of
Superior Galleries, Inc., a California corporation, a company that was an
auctioneer of rare coins and collectibles located in Beverly Hills, California
("SGBH," which is not the same legal entity as Superior), for cash and a note.
Through June 30, 2003 we were operating this business as a subsidiary under the
name Superior Galleries Beverly Hills, Inc. although the seller retained certain
rights to the Superior Galleries name in the stamp and space memorabilia markets
for a period of two years from the date of the acquisition. As a result, we were
restricted until July 6, 2003 from doing business in either the rare stamp or
space memorabilia markets under this name for such period. Effective July 1,
2003, the auction operations of SGBH were combined with the remainder of our
operations.
Superior, as an auctioneer of rare coins and collectibles, has a
history dating back to 1929 with sales primarily in the rare coin and rare stamp
markets. We believe that we are the largest rare coin auction firm in the
Western United States and one of the largest three in the United States. With
our long time location in Beverly Hills, our customers and clients include many
well-recognized names in the entertainment and sports fields.
We solicit and accept consignments of rare coins from individuals,
dealers and trusts and estates and charge a seller's commission along with a
buyer's premium on each lot sold. The combination of the seller's commission and
the buyer's premium on each lot equals approximately 5%-25% but averages
approximately 10%.
We market our services by advertising in trade journals, direct mail
and telemarketing and through attendance at major shows and exhibitions and by
personal visits. Each consignment of goods is evidenced by a contract signed by
both the consignor and Superior. In some instances, we may loan the consignor
funds in an amount up to approximately 60% of the expected prices realized from
the sale of the property in the consignment. The consignor loan amount maximums
are determined by a loan-to-value ratio based on our estimate of the wholesale
liquidation value in the event the consigned items do not sell at auction. In
this event, the consignor also executes a note and security agreement evidencing
the debt and providing a security interest to us in the consigned items. The
proceeds from the sale of the property are used to repay the loan amount and the
excess funds are paid to the consignor. Upon receipt of the consigned goods, we
record the receipt on our records and then catalog and photograph the items,
storing the information in digital format.
Auction sale dates are established approximately one year in advance.
As deadlines for each auction date approaches, we organize all of the digitized
information into a catalog of goods with photographs and subcontract the
printing and mailing of the catalog to be sent to our mailing list of buyers. In
addition, we load the digitized catalog on our web-site and into software
managed by Internet seller eBay, so that bidders on the Internet worldwide may
also leave absentee bids to be executed by us at the live auction. Our web-site
with its live auction capabilities and eBay's software also allows for Internet
bidders to bid competitively with the live auction in real time in competition
with the bidders present at the auction site.
28
Generally, the purchase price from the sale of rare coins is due upon
the completion of the auction, although we maintain credit relationships with
certain dealers in the trade and offers payment terms of 30 days to those
selected dealers. A contract with a consignor requires payment to the consignor,
less any loan amounts, accrued interest and commissions, to be made within 45
days of the sale date.
COMPETITION
The business of selling rare coins is highly competitive. We compete
with a number of smaller, comparably sized, and larger firms throughout the
United States. These include: Heritage Rare Coin Galleries, a large scale coin
dealer and auctioneer; National Gold Exchange, a large wholesale coin and
bullion dealer; Spectrum, a large scale coin wholesaler and auctioneer and a
subsidiary of Greg Manning Auctions, Inc., a publicly traded company; American
Numismatic Rarities, a comparably sized coin auction company; U.S. Coins, a
medium sized coin wholesaler; and other companies. These competitors are
generally larger and better capitalized than we are. However, we believe that we
are able to compete with these competitors due to our staff expertise,
reputation and generally high quality inventory. However, we cannot assure you
that we can continue to compete successfully with other established companies
that have greater financial resources, experience and market share than us.
REGULATION
The rare coin markets are not currently subject to direct federal,
state or local regulation. However, the Federal Trade Commission, or FTC, and
many state attorneys general have shown an interest in regulating the sales of
rare coins and other tangible assets as investments. The State of New York has
determined that under certain circumstances, rare coins may be treated as
securities under state law, thereby requiring rare coin dealers to register as
broker-dealers and permitting investors all legal and equitable remedies
otherwise available to buyers of securities. We rely upon a 1998 U.S. Federal
Court ruling that the ordinary retail sale of rare coins to investors does not
constitute the sale of a security under the federal securities laws, and we
believe that our operations are not subject to regulation as involving the sale
of securities. There is no assurance, however, that at some time in the future,
the sale of rare coins will not be subject to increased regulation, and that our
business will not be materially adversely affected by such regulation. Any
increased regulation of our business could increase our costs of operation or
require us to change our business practices, either of which could have a
material and adverse impact on our business.
Over the past 15 years, the FTC has filed suits against numerous rare
coin dealers alleging that the dealers' representations about coins were false
or misleading or that the dealers' retail markups were so high that their
representations about investment risk and appreciation potential became
misleading or untrue. These cases have not, however, created any clear rules by
which dealers such as us can assure themselves of compliance. On January 1,
1996, the FTC's Telemarketing Sales Rule, authorized by the 1994 Telemarketing
and Consumer Fraud and Abuse Prevention Act, took effect. "Telemarketing" is
defined as any plan, program, or campaign that is conducted to induce payment
for goods and services by use of more than one interstate telephone call. This
rule applies to all sales of "investment opportunities," which are defined by
whether the seller's marketing materials generally promote items on the basis of
representations about "income, profit, or appreciation." We believe that all of
our retail sales are covered by this rule, even those to collectors.
The Telemarketing Sales Rule requires us to inform customers of the
following before accepting payment: the number of items being sold, the purchase
price, and our refund/exchange/buyback policy. The rule also prohibits us from
misrepresenting the "risk, liquidity, earnings potential, and profitability" of
the items that we sell. This in itself did not materially change prior law.
However, during debates on the Telemarketing Sales Rule in 1995, FTC staff
attorneys tried to impose additional specific requirements that dealers in
29
"tangible assets" disclose to retail customers their actual cost for the items
they sell, and also disclose "all material facts" about their goods before
accepting any money from the customer. This would have required us to disclose
our actual margins to our retail customers, as well as impose on us the burden
of determining what facts were material to the purchase of coins or other
collectibles. Although the FTC ultimately removed these additional requirements
from the final version of the rule, the behavior of the FTC staff has
demonstrated its particular concern for telemarketing of coins as investments.
We cannot assure you that the FTC will not amend the rule in the future to
impose these or other additional regulations, or that individual states will not
impose such regulations, and that our business will not be harmed as a result.
In addition, many investors favor rare coins because they can be
bought, owned and sold privately, i.e., without registering with or notifying
any government agency. However, the Internal Revenue Service now requires
dealers such as us to report all sales of coins in which more than $10,000 in
cash or a cash-like instrument is used as payment. The private nature of rare
coin ownership has occasionally resulted in rare coins being purchased by
taxpayers for the purpose of concealing unreported income, or used to "launder"
income derived from unlawful activities. This has caused local authorities to
consider imposing registration and/or reporting requirements upon rare coin
dealers, although we believe that the only such regulation enacted to date (in
the City of Chicago) has not been enforced against full-time dealers in rare
coins. We cannot assure you that additional regulations will not be imposed upon
us in the future, and that our business will not be harmed as a result.
TAXATION OF MAIL ORDER SALES
We do not collect California sales tax on mail order sales to
out-of-state customers, because interstate sales generally are tax-exempt. Nor
do we collect use tax on our interstate mail order sales. Most states impose a
use tax on "retailer(s) engaged in business in this state" on sales of "tangible
personal property for storage, use, or other consumption in this state." Use tax
is usually set at the same rate as sales tax, and its purpose is to equalize the
tax affects on local retailers who pay sales tax and out-of-state mail order
companies who do not. Some states exempt rare coin sales over $1,000 from sales
or use tax, but most do not. Although the United States Constitution restricts
the right of states to tax interstate commerce, states can assess use tax on any
transaction where the out-of-state mail order firm is deemed to be "engaged in
business" in the state. A retailer which has a "nexus" with the state, i.e., any
physical presence in the state, regardless of whether the sales themselves arise
from that local presence, is deemed to be "engaged in business" in the state.
"Nexus" includes attending conventions, although at least one state (California)
provides a seven-day "safe harbor" for out-of-state dealers attending
conventions and whose sales are less than a certain dollar threshold. It also
would include attending auctions or making buying or selling trips. On that
basis, we may be deemed to have "nexus" in many states.
Payment of use tax is the buyer's obligation, but states require
retailers engaged in business in that state to collect the tax on sales to
customers in that state and remit it to the state along with a use tax return.
There is no statute of limitations for use tax if the dealer has filed no
returns. To date, we have not been assessed for use tax by the taxing authority
of any other state for sales to customers in that state claiming that we are
engaged in business in that state and therefore required to collect and remit
the tax, nor have we received any inquiry indicating that we were being audited
for the purposes of such an assessment. However, there is no assurance that we
will not be audited by state taxing authorities and be assessed for unpaid use
taxes (plus interest and penalties) for a period of many years.
In addition to use tax, many states impose income and franchise taxes
on out-of-state companies that derive net income from business with their
residents. For example, California applies an income-based franchise tax to
out-of-state corporations operating in California for the privilege of using the
30
corporate form. The maximum California corporate tax rate is approximately 9%,
with a minimum tax of $800 per year. Income derived outside of California is not
taxed, and in-state income of taxpayers liable for tax in more than one state is
calculated using a formula contained in the Uniform Division of Income for
Taxation Purposes Act, a statute in effect in about one-half of the states. As
with use tax, nexus principles apply, and the U.S. Supreme Court requires "a
minimal connection between the interstate activities and the taxing state, and a
rational relationship between the income attributed to the State and the
intrastate values of the enterprise."
Assuming the existence of nexus, we could be subject to income-based
taxes in each of the states in which we have had a physical presence at
conventions, auctions or otherwise. The only exceptions would be in states where
we are protected by a federal law, 15 U.S.C. ss. 381, which immunizes companies
from state income taxes if the company's only business activities in the taxing
state consists of "solicitation of orders for interstate sales." There is no
statute of limitations for income or franchise tax if the dealer has filed no
return. To date, we have not been assessed for income tax or franchise tax by
the taxing authority of any other state, nor have we received any inquiry
indicating that we were being audited for purposes of such an assessment.
However, we cannot assure you that we will not be audited by state taxing
authorities and be assessed for unpaid income or franchise taxes (plus interest
and penalties) for a period of many years.
CUSTOMERS/DEPENDENCE ON KEY CUSTOMERS
We generally sell to a large variety of individual retail purchasers as
well as several wholesale purchasers throughout the nation and world. During the
fiscal year ended June 30, 2004, none of our customers accounted for more than
10% of our sales.
NUMBER OF EMPLOYEES
As of September 24, 2004, we co-employed or obtained contract services
from 29 persons, of which 27 were full-time co-employees. Our co-employment
relationship is with Administaff, as a professional employer organization. We
believe that our future success depends in part upon our ability to recruit and
retain qualified numismatists, marketing and other personnel. We consider our
relations with our employees to be good. None of our employees is represented by
a labor union.
FACILITIES
Our principal offices are located at 9478 West Olympic Boulevard,
Beverly Hills, California. We have another location located at 3444 Via Lido,
Newport Beach, California that we closed in September 2003. On June 1, 2004, we
entered into a short-term agreement to sub-lease a portion of the Newport Beach
facility. The Newport Beach office lease will not be renewed upon the
termination of the current lease on September 30, 2004 and the sub-lease ends
concurrently with our lease. We believe that our facilities are adequate for our
needs for the near future.
LEGAL MATTERS
From time to time, we may 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 our business. However,
we are not currently involved in any litigation which we believe could have a
materially adverse effect on our financial condition or results of operations.
31
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers are as follows:
NAME AGE POSITION
- ---- --- --------
Silvano DiGenova 42 Chairman of the Board, Chief Executive Officer
and Director
J. Michael Wolfe 46 Chief Operating Officer and Executive Vice
President
Paul Biberkraut 43 Chief Financial Officer, Executive Vice
President, Secretary and Director
Lee Ittner 42 Director
David Rector 57 Director (1)
- ---------------
(1) Chairman of Compensation Committee; Acting Chairman of Audit Committee.
SILVANO DIGENOVA is our chairman of the board, chief executive officer
and a director. Mr. DiGenova has also served as our acting chief financial
officer from September 2002 through December 2002. Mr. DiGenova founded TIA,
which would later become our company, in 1977. Mr. DiGenova is a recognized
leader in the numismatic and fine arts field. In 1986, Mr. DiGenova helped form
the Professional Coin Grading Service, the first widely accepted uniform grading
system for rare coins. Mr. DiGenova attended the Wharton School of Business at
the University of Pennsylvania for four years. However, Mr. DiGenova left
Wharton in his fourth year to develop TIA, our predecessor, and did not obtain a
degree from Wharton.
J. MICHAEL WOLFE is our chief operating officer and executive vice
president. Mr. Wolfe has served in this role since July 2004. Mr. Wolfe has over
twenty years of experience in management roles in sales and marketing,
operations and executive management. Prior to joining our company, Mr. Wolfe was
a principal in a privately-held direct marketing start-up company from April
2002 to June 2004. Mr. Wolfe was the president and chief operating officer from
1992 to 2000 and chief executive officer from 2000 to 2002 of Concepts Direct,
Inc., a publicly traded company specializing in catalog and Internet retailing.
PAUL BIBERKRAUT is our chief financial officer, executive vice
president, secretary and a director. Mr. Biberkraut has served in this role
since December 2002 and previously was our chief financial officer and vice
president of finance from October 1999 to December 2000. Mr. Biberkraut has over
fifteen years of experience in management roles with varying levels of
responsibilities for finance, accounting, information technology, operations and
human resources. Prior to returning to our company Mr. Biberkraut was a senior
finance manager for information technology at PacifiCare Health Systems, Inc.
from December 2000 to November 2002 and was the corporate controller of Quality
Systems, Inc. from November 1997 to June 1999. Mr. Biberkraut also served as the
chairman of the audit committee for an Orange County, California based credit
union from 1997 to 1999 and had served as a board member, treasurer and
president of an Orange County, California based not-for-profit social service
agency from 1989 to 1998.
LEE ITTNER is one of our directors. Mr. Ittner has served in the role
since May 2003. Mr. Ittner is currently the Vice President for Latin America for
Kyocera Wireless Corp., a position he has held since 2001. Prior to that time,
Mr. Ittner was Senior Vice President of the Americas Region for Cellstar
Corporation. Mr. Ittner has over 14 years of experience in both domestic and
32
international operational management, sales and marketing, customer relations
and strategic planning in the communications industry.
DAVID RECTOR is one of our directors. Mr. Rector has served in this
role since May 2003. Mr. Rector is currently the chief executive officer,
president and director of Nanoscience Technologies, Inc., a publicly traded
company, a position he has held since May 2004. From 1992 to 2004, Mr. Rector
had been a principal management consultant with The David Stephen Group, where
he provided executive management services for several companies, overseeing
operations and strategic planning. Mr. Rector has over twenty years of
experience as a senior executive focusing on general management with Fortune 100
and developmental companies.
All directors hold office until the next annual meeting of shareholders
or until their respective successors are elected or until their earlier death,
resignation or removal. Executive officers are appointed by and serve at the
discretion of the board of directors. We currently have one vacant seat on our
board of directors, which we are seeking to fill with a candidate who qualifies
as an audit committee financial expert.
EXECUTIVE COMPENSATION
The summary compensation table below shows certain compensation
information for services rendered in all capacities to us by our chief executive
officer and by each other executive officer whose total annual salary and bonus
exceeded $100,000 during the fiscal years ended June 30, 2004, 2003 and 2002.
Other than as set forth below, no executive officer's total annual salary and
bonus exceeded $100,000 during our last fiscal year.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION AWARDS
------------------------------------------ --------------
OTHER SECURITIES
ANNUAL OPTIONS/ UNDERLYING
NAME AND SALARY BONUS COMPENSATION SARs
PRINCIPAL POSITION YEAR ($) ($) ($) (#)
- ---------------------------------------- ------ ------------ ------------ ------------ --------------
Silvano DiGenova, 2004 $375,000 $37,500 -0- 10,000
Chairman of the Board, Chief Executive 2003 $350,000 -0- -0- -0-
Officer and President 2002 $308,333 -0- -- 2,500
Paul Biberkraut, 2004 $127,500 $30,000 -0- 60,000
Chief Financial Officer, Executive Vice 2003 $61,585 -0- -0- -0-
President and Secretary(1) 2002 -- -- -- --
Stephen Deeds, 2004 n/a n/a n/a n/a
Executive Vice President(2) 2003 $215,625 -0- $115,436(3) -0-
2002 $210,938 -0- $63,999(3) -0-
- -------------------
(1) Mr. Biberkraut became an officer of the company in December 2002.
(2) Mr. Deeds resigned as an officer of our company effective June 30, 2003
and on July 1, 2003 we entered into an independent contractor agreement
with Stephen Deeds, Inc., a company controlled by Mr. Deeds, to provide
certain consulting services. The agreement to provide consulting services
was terminated in February 2004.
(3) Consists of sales commissions.
33
STOCK OPTIONS GRANTED TO EXECUTIVE OFFICERS DURING FISCAL 2004
The following table summarizes options to purchase shares of our common
stock that we granted during the fiscal year ended June 30, 2004 to each of the
executive officers identified in the summary compensation table above. We have
never granted any stock appreciation rights.
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE(S) EXPIRATION
NAME GRANTED (#) FISCAL YEAR (%) ($/SHARE) DATE(S)
- ------------------------- --------------- --------------- ------------ -------------
Silvano DiGenova 10,000 4.55% $0.33 May 2009
Paul Biberkraut 10,000 4.55% $0.30 May 2009
Paul Biberkraut 25,000 11.36% $0.30 December 2012
Paul Biberkraut 25,000 11.36% $1.01 April 2013
- ---------------
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUES
The following table summarizes exercises of stock options during the
fiscal year ended June 30, 2004 by each of the executive officers named in the
summary compensation table above and the year-end value of unexercised options
for these executive officers.
NUMBER OF
UNEXERCISED SECURITIES VALUE OF UNEXERCISED
SHARES VALUE UNDERLYING OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED REALIZED AT FISCAL YEAR END AT FISCAL YEAR END
NAME ON EXERCISE ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ----------------------- ----------- --------- ------------------------- -------------------------
Silvano DiGenova 0 N/A 37,500/0 $17,950/0
Paul Biberkraut 0 N/A 16,250/43,750 $26,000/$52,250
DIRECTORS' COMPENSATION. Each of our non-employee directors currently
receive cash compensation in the amount of $6,000 per year for service on our
board of directors and all directors are reimbursed for certain expenses in
connection with attendance at board meetings. Committee chairpersons receive an
additional $3,000 per year. At the discretion of our board of directors,
directors may be granted stock options. During the fiscal year ended June 30,
2004, our five directors were each granted options to purchase 10,000 shares of
our common stock at an exercise price of $0.30 per share. These options fully
vested on May 31, 2004 and are exercisable for a period of five years after
vesting or for three months, if vested, following the termination or resignation
of the director from the board. On July 15, 2004, we also issued options to
purchase an additional 10,000 shares to each of our directors at an exercise
price of $2.00 per share. These options fully vest on June 30, 2005, and are
also exercisable for a period of five years after vesting or for three months,
if vested, following the termination or resignation of the director from the
board.
EMPLOYMENT AGREEMENTS. On June 15, 2001, we entered into an employment
agreement with Silvano DiGenova under which we agreed to pay an annual salary of
$375,000 and bonus arrangements based on a sliding scale of 5% to 50% of base
salary based on a corresponding fiscal year pre-tax income (as defined) of our
company from $250,000 to $4,000,000, a bonus of 25% of base salary payable in
34
our common stock if market capitalization of our common stock exceeds
$50,000,000 for a specified period and a bonus of 5% of the base salary payable
in our common stock if average market capitalization increases by 20% over the
average market capitalization of the prior fiscal year subject to certain
limitations.
On December 27, 2002 we entered into an employment agreement with our
Chief Financial Officer, Paul Biberkraut, under which we agreed to pay an annual
salary of $120,000 and bonus arrangements of up to 50% of base salary based on
personal and Company performance. Effective April 1, 2004, Mr. Biberkraut's
agreement was modified to increase his annual base salary to $150,000 and reduce
the maximum bonus as a percentage of base salary to 30%.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
We are governed by Section 145 of the Delaware General Corporation Law.
This section provides for indemnification of directors, officers and other
employees in certain circumstances. Additionally, Section 102(b) (7) of the
Delaware General Corporation Law provides for the elimination or limitation of
the personal liability for monetary damages of directors under certain
circumstances.
Article VII of our certificate of incorporation eliminates the personal
liability for monetary damages of directors under certain circumstances. In
addition, we have entered into indemnification agreements with our executive
officers and directors on terms that are consistent with the provisions
described above. We believe that such agreements are necessary to attract and
retain qualified persons as directors and officers.
Our directors and officers are also presently covered by an insurance
policy indemnifying them against certain liabilities, including certain
liabilities arising under the Securities Act, which might be incurred by them in
such capacities and against which they may not be indemnified by us.
To the extent indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to our directors, officers and
controlling persons under the above provisions, or otherwise, we have been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable.
35
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 31, 2003, we entered into a consulting agreement with
Stanford Venture Capital Holdings, Inc., a principal stockholder, to provide
financial and advisory services to us for a three year period commencing on
April 1, 2003. The annual fee for such services is $60,000 and is payable on a
quarterly basis.
In February 2003 we issued 2,000,000 shares of our Series D Preferred
Stock in order to raise $2,000,000 in equity capital. As a condition of that
transaction, the exercise price of certain outstanding warrants was reduced to
$0.001 per common share. On July 24, 2003, these warrants were exercised,
resulting in the issuance of 1,845,100 common shares to the following related
parties and affiliates:
Silvano DiGenova - Chief executive officer and principal stockholder 345,100 shares
Stanford Venture Capital Holdings, Inc. - Principal stockholder 750,000 shares
Daniel Bogar - Employee of Stanford affiliate 187,500 shares
William Fusselmann - Employee of Stanford affiliate 187,500 shares
Osvaldo Pi - Employee of Stanford affiliate 187,500 shares
Ronald Stein - Employee of Stanford affiliate 187,500 shares
The total proceeds to us from the issuance of the above referenced
common stock was $1,845.
On October 13, 2003, we executed a Commercial Loan and Security
Agreement ("Commercial 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 Commercial LOC bear interest at the prime-lending rate (4.00% at June 30,
2004) and is secured by substantially all of our assets.
On October 23, 2003, our Board of Directors approved the sale of our
remaining fine art inventory to Silvano DiGenova, our chief executive officer
and a principal stockholder ("CEO"), who is also an independent dealer of fine
art, for $350,000. We solicited bids from third parties and the bid from the CEO
was the highest. We realized a gross profit of $15,860 on sale of the art
inventory to the CEO. The sale was paid in full by reductions in the balances
owing on notes payable to the CEO.
On May 28, 2004, our Board of Directors approved a short-term sub-lease
of a portion of our vacant Newport Beach facility to our CEO. The lease term is
from June 1, 2004 through September 30, 2004 and provides for a monthly rental
payment of $4,000. The sub-lease terminates concurrently with our master lease
of the Newport facility.
36
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth, as of September 24, 2004, certain
information with respect to the beneficial ownership of our stock by (i) each of
our executive officers named in the summary compensation table above, (ii) each
of our directors, (iii) each person known to us to be the beneficial owner of
more than 5% of each class of our outstanding voting securities, (iv) all of our
directors and executive officers as a group; and (v) all selling stockholders.
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING(1) AFTER OFFERING(3)
------------------------------------ --------------------------------------
SHARES
NAME AND ADDRES TITLE NUMBER % OF BEING TITLE OF NUMBER % OF
OF BENEFICIAL HOLDER OF CLASS OF SHARES CLASS OFFERED(2) CLASS OF SHARES CLASS
- -------------------------------- ----------- ----------- -------- ----------- ----------- ----------- ---------
Silvano DiGenova................ Common(4) 2,038,434 42.10% 0 Common 2,038,434 42.10%
9478 West Olympic Blvd. Series B 400,000 11.76% 0 Series B 400,000 100.00%
Beverly Hills, CA 90212 Preferred Preferred
Stock Stock
Stanford Venture Capital
Holdings, Inc................ Common(5)(6) 4,566,667 59.49% 3,916,667 Common(5) 0 *
6075 Poplar Avenue Series B 3,000,000 88.24% 0 Series B 0 *
Memphis, TN 38119 Preferred Preferred
Stock Stock
Series D 2,000,000 100.00% 0 Series D 0 *
Preferred Preferred
Stock Stock
Daniel T. Bogar(7).............. Common 162,500 3.6% 162,500 Common 0 *
1016 Sanibel Drive
Hollywood, FL 33019
William R. Fusselmann(7)........ Common 162,500 3.6% 162,500 Common 0 *
1541 Crandon Blvd, #427
Key Biscayne, FL 33149
Osvaldo Pi(7)................... Common 162,500 3.6% 162,500 Common 0 *
6405 SW 104th Street
Pinecrest, FL 33156
Ronald M. Stein(7).............. Common 162,500 3.6% 162,500 Common 0 *
6520 Allison Road
Miami, FL 33141
Coffin Partner LLC.............. Common 24,000 * 24,000 Common 0 *
1530 Ventura Blvd., Suite 303
Sherman Oaks, CA 91403-5866
Cisneros Capital Group, Inc..... Common 149,651(8) 3.32% 100,000 Common 49,651 *
4025 NE 2nd Avenue
Miami, FL 33137
All Executive Officers and
and Directors as a
Group (5 persons)............ Common(4)(9) 2,074,684 42.53% 0 Common(4)(9) 2,074,686 42.56%
Series B 400,000 11.76% 0 Series B 400,000 100.00%
Preferred Preferred
Stock Stock
- -----------------
* Less than 1%
(1) Based upon information furnished to us by the directors and executive
officers or obtained from our stock transfer books showing 4,509,942
shares of common stock outstanding as of September 10, 2004. We are
informed that these persons hold the sole voting and dispositive power
with respect to the common stock except as noted herein. For purposes of
37
computing "beneficial ownership" and the percentage of outstanding common
stock held by each person or group of persons named above as of September
10, 2004, any security which such person or group of persons has the
right to acquire within 60 days after such date is deemed to be
outstanding for the purpose of computing beneficial ownership and the
percentage ownership of such person or persons, but is not deemed to be
outstanding for the purpose of computing the percentage ownership of any
other person.
(2) The actual number of shares of common stock offered in this prospectus,
and included in the registration statement of which this prospectus is a
part, includes such additional number of shares of common stock as may be
issued or issuable upon conversion of the Series B Convertible Preferred
Stock and Series D Convertible Preferred Stock by reason of any stock
split, stock dividend or similar transaction involving the common stock,
in accordance with Rule 416 under the Securities Act of 1933.
(3) Assumes all shares are sold.
(4) Includes 132,500 shares of common stock issuable upon the exercise of
options and warrants, 200,000 shares of common stock issuable upon the
conversion of Series B Preferred Stock, all of which were convertible
within 60 days of the date of this table, and 1,000 shares held by Mr.
DiGenova's minor children, over which Mr. DiGenova exercises voting
control.
(5) Includes 1,500,000 shares of common stock issuable upon the conversion of
Series B Preferred Stock and 1,666,667 shares of common stock issuable
upon the conversion of Series D Preferred Stock both of which are
currently convertible within the next 60 days.
(6) Includes an aggregate of 650,000 shares of common stock owned by four of
Stanford's employees, Daniel Bogar, William Fusselmann, Osvaldo Pi and
Ronald Stein, in equal amounts.
(7) Messrs. Bogar, Fusselman, Pi and Stein are employees of Stanford Venture
Capital Holdings, Inc., which is our majority stockholder, and which has
provided us with a line of credit (see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources; Financing Activities." We pay Stanford Venture Capital
Holdings, Inc. a management fee of $5,000 per month, provide auction
services to parties affiliated with them, and from time to time sell
coins to them and their affiliates
(8) Includes 49,651 shares of common stock held by James B. Cisneros, who is
an affiliate of Cisneros Capital Group, Inc.
(9) Includes 16,250 shares of common stock issuable upon the exercise of
options held by Paul Biberkraut and 10,000 shares each of common stock
issuable upon the exercise of options held by Lee Ittner and David
Rector, all of which were exercisable within 60 days of the date of this
table.
38
PLAN OF DISTRIBUTION
The selling security holders and any of their donees, pledgees,
assignees and other successors-in-interest may, from time to time, sell any or
all of their shares of common stock being offered under this prospectus on any
stock exchange, automated inter-dealer quotation system, market or trading
facility on which the shares are traded, or in the over-the-counter market, or
private transactions. These sales, which may include block transactions, may be
at fixed or negotiated prices. The selling security holders may use any one or
more of the following methods when disposing of shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell
the shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resales by the
broker-dealer for its own account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o short sales, which are contracts for the sale of shares of
stock that the seller does not own, or certificates for which
are not within the seller's control, so as to be available for
delivery at the time when, under applicable rules, delivery
must be made;
o transactions to cover short sales;
o through the distribution of the shares by any selling security
holder to its partners, members or stockholders;
o broker-dealers may agree with the selling security holders to
sell a specified number of shares at a stipulated price per
share;
o one or more underwritten offerings on a firm commitment or
best efforts basis;
o a combination of any of these methods of sale; or
o any other method permitted by applicable law.
The sale price to the public may be:
o the market price prevailing at the time of sale;
o a price related to the prevailing market price;
o at negotiated prices; or
o a price the selling security holder determines from time to
time.
The shares may also be sold under Rule 144 under the Securities Act, if
available, rather than under this prospectus. The selling security holders have
the sole and absolute discretion not to accept any purchase offer or make any
sale of shares if they deem the purchase price to be unsatisfactory at any
particular time.
The selling security holders may also engage in short sales against the
box, which are sales where the seller owns enough shares to cover the borrowed
shares, if necessary, puts and calls and other transactions in our securities or
derivatives of our securities and may sell or deliver shares in connection with
these trades. The selling security holders may pledge their shares to their
brokers under the margin provisions of customer agreements. If a selling
security holder defaults on a margin loan, the broker may, from time to time,
offer and sell the pledged shares.
39
Notwithstanding the terms of this plan of distribution, the selling
security holders may not use shares offered under this prospectus to cover short
sales or short sales against the box that are made before the registration
statement of which this prospectus is a part becomes effective.
Broker-dealers engaged by the selling security holders may arrange for
other broker-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the selling security holders (or, if any
broker-dealer acts as agent for the purchaser of shares, from the purchaser) in
amounts to be negotiated, which commissions as to a particular broker or dealer
may be in excess of customary commissions to the extent permitted by applicable
law.
If sales of shares offered under this prospectus are made to
broker-dealers as principals, we would be required to file a post-effective
amendment to the registration statement of which this prospectus is a part. In
the post-effective amendment, we would be required to disclose the names of any
participating broker-dealers and the compensation arrangements relating to such
sales.
The selling security holders and any broker-dealers or agents that are
involved in selling the shares offered under this prospectus may be deemed to be
"underwriters" within the meaning of the Securities Act in connection with these
sales. Commissions received by these broker-dealers or agents and any profit on
the resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. Any broker-dealers or agents
that are deemed to be underwriters may not sell shares offered under this
prospectus unless and until we set forth the names of the underwriters and the
material details of their underwriting arrangements in a supplement to this
prospectus or, if required, in a replacement prospectus included in a
post-effective amendment to the registration statement of which this prospectus
is a part.
The selling security holders may sell all or any part of the shares
offered under this prospectus through an underwriter. To our knowledge, no
selling security holder has entered into any agreement with a prospective
underwriter, and we cannot assure you as to whether any such agreement will be
entered into. If a selling security holder informs us that it has entered into
such an agreement or agreements, any material details will be set forth in a
supplement to this prospectus or, if required, in a replacement prospectus
included in a post-effective amendment to the registration statement of which
this prospectus is a part.
The selling security holders and any other persons participating in the
sale or distribution of the shares offered under this prospectus will be subject
to applicable provisions of the Exchange Act and the rules and regulations under
that act, including Regulation M. These provisions may restrict activities of,
and limit the timing of purchases and sales of any of the shares by, the selling
security holders or any other person. Furthermore, under Regulation M, persons
engaged in a distribution of securities are prohibited from simultaneously
engaging in market making and other activities with respect to those securities
for a specified period of time prior to the commencement of such distributions,
subject to specified exceptions or exemptions. All of these limitations may
affect the marketability of the shares.
This prospectus does not cover the sale or other transfer of any of the
derivative securities whose underlying shares of common stock are being offered
for sale pursuant to this prospectus. If a selling security holder transfers
those derivative securities prior to conversion, then the transferee of those
derivative securities may not sell the underlying shares of common stock under
this prospectus unless we amend or supplement this prospectus to cover such
sales.
In addition, if any of the shares of common stock offered for sale
pursuant to this prospectus are transferred other than pursuant to a sale under
this prospectus, then subsequent holders could not use this prospectus until a
post-effective amendment or prospectus supplement is filed, naming such holders.
40
We offer no assurance as to whether any of the selling security holders will
sell all or any portion of the shares offered under this prospectus.
For the period a selling security holder holds a derivative security
whose underlying shares of common stock are being offered for sale pursuant to
this prospectus, the selling security holder has the opportunity to profit from
a rise in the market price of our common stock without assuming the risk of
ownership of the underlying shares of common stock. The terms on which we could
obtain additional capital during the period in which those derivative securities
remain outstanding may be adversely affected. The holders of derivative
securities are most likely to voluntarily convert their derivative securities
when the conversion price is less than the market price for our common stock.
However, we offer no assurance as to whether any of those derivative securities
will be converted.
We have agreed to pay expenses, other than broker discounts and
commissions, if any, in connection with this prospectus. We have agreed with
some of the selling security holders to prepare and file all amendments and
supplements to the registration statement of which this prospectus is a part as
may be necessary under the rules and regulations of the Securities Act of 1933
to keep it effective until the earlier of:
o the date that all shares of common stock offered under this
prospectus may be resold by those holders in a public
transaction without time, volume or manner limitations
pursuant to Rule 144 under the Securities Act; and
o the date that all shares of common stock offered by those
holders under this prospectus have been resold.
We will not receive any of the proceeds from the sale of the shares of
common stock offered by the selling security holders.
41
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 12,500,000 shares of common
stock, $0.001 par value per share, and 10,000,000 shares of preferred stock,
$.001 par value per share. As of September 24, 2004, there were 4,509,942 shares
of common stock, 125,000 shares of Series A Preferred Stock, 3,400,000 shares of
Series B Convertible Preferred Stock and 2,000,000 shares of Series D
Convertible Preferred Stock outstanding. The following is a summary description
of our capital stock.
COMMON STOCK
The holders of outstanding shares of our common stock are entitled to
receive dividends out of assets legally available at times and in amounts as the
board of directors may from time to time determine, subordinate to any
preferences that may be granted to the holders of preferred stock. Holders of
common stock are entitled to one vote per share on all matters on which the
holders of common stock are entitled to vote.
The common stock is not entitled to preemptive rights and may not be
redeemed or converted. Upon our liquidation, dissolution or winding up, the
assets legally available for distribution to our shareholders are divided among
the holders of the common stock in proportion to the number of shares of common
stock held by each of them, after payment of all of our debts and liabilities
and fulfillment of the rights of any outstanding class or series of preferred
stock that has priority to distributed assets. The rights of holders of common
stock are subordinate to those of holders of any series of preferred stock.
SERIES A PREFERRED STOCK
We currently have 125,000 shares of Series A Preferred Stock
outstanding. The Series A Preferred Stock has not voting rights, but is entitled
to cumulative dividends, payable either in cash or in shares of our Common Stock
at our election, at the rate of 8% per annum. The Series A Preferred Stock is
also entitled to participate pari passu with shares of Common Stock in
connection with any dividends declared with respect to the our Common Stock,
with each Series A Preferred share being treated for this purpose the same as
eleven (11) shares of Common Stock. Dividends are payable quarterly. The Series
A Preferred Stock is not entitled to preemptive rights.
Each share of Series A Preferred Stock is entitled to a liquidation
preference of $5.10 per share in preference to our Common Stock and any other
shares that are junior in priority to the Series A Preferred Stock. Under the
Certificate of Designation for the Series A Preferred Stock, with certain
exceptions we are prohibited from granting a lien on our inventory to a third
party, unless such interest is subordinated to the interests of the Series A
Preferred Stock.
Each share of Series A Preferred Stock is convertible into 0.55 shares
of Common Stock at the election of the holder, and automatically converts into
Common Stock on the sale of substantially all of our assets, the consummation of
a merger, or the sale or exchange of all or substantially all of our Common
Stock. The conversion ratio is subject to automatic adjustment upon a
recapitalization, reorganization, stock dividend, and certain other similar
events.
The Series A Preferred Stock is subject to redemption at the option of
the Company for cash in the amount of $5.10 per share, and may be redeemed for
Common Stock at the conversion rate if the closing sale price of our Common
Stock has been $0.90 or more for any consecutive 5 trading days. In addition,
the Series A Preferred Stock is redeemable at the option of the holder for cash
in the amount of $5.50 per share or for shares of our Common Stock in accordance
with the conversion rate. If a holder or the Series A Preferred Stock exercises
42
this redemption right, such shares shall be redeemed at the rate of 1/10 of such
shares per quarterly period for any 10 consecutive quarterly periods commencing
after March 31, 2004. Our obligation to redeem the Series A Preferred Stock is
subject to compliance with applicable law, which may prohibit us from redeeming
the Series A Preferred Stock if we are insolvent or fail to meet certain
financial requirements.
SERIES B $1.00 CONVERTIBLE PREFERRED STOCK
We currently have 3,400,000 shares of Series B $1.00 Convertible
Preferred Stock, or Series B Preferred Stock, outstanding. The Series B
Preferred Stock has voting rights with respect to all matters presented to our
stockholders, and each share of Series B Preferred Stock is entitled to the
number of votes equal to the number of shares of Common Stock into which it is
convertible at the time of voting. The Series B Preferred Stock is not entitled
to dividends or preemptive rights.
Each share of Series B Preferred Stock is entitled to a liquidation
preference of $1.00 per share in preference to our Common Stock and pari passu
with our Series D Preferred Stock, but subject to payment of the liquidation
preference on our Series A Preferred Stock.
Each share of Series B Preferred Stock is convertible into 0.5 shares
of Common Stock at the election of the holder. The conversion ratio is subject
to automatic adjustment upon a merger, stock dividend, stock split, reverse
stock split, reclassification, and certain other similar events. In addition,
the conversion ratio is adjusted upon our issuance of Common Stock or securities
convertible into Common Stock at a price less than $1.00 per share.
The Series B Preferred Stock is not subject to redemption. We are
prohibited from taking a number of corporate actions without the approval of the
holders of a majority of the outstanding Series B Preferred Stock, including: o
selling all or substantially all of our assets or taking any action with results
in the holders of our capital stock prior to the transaction owning less than
50% of the voting power of our capital stock after such transaction;
o amending our Certificate of Incorporation or Bylaws;
o changing the nature of our business;
o making any distributions on or redemptions of any capital
stock other than those made pursuant to the certificates of
designation for our Series A Preferred Stock or Series B
Preferred Stock;
o issuing securities other than pursuant to certain securities,
options or warrants outstanding at the time the Series B
Preferred Stock was issued;
o making certain acquisitions of fixed assets in an amount of
more than $100,000 in any 12 month period
o entering into any credit facility or incurring debt, with
certain exceptions, involving more than $100,000;
o increasing the size of our board of directors to more than 5;
43
o entering into transactions with our affiliates; or
o filing a bankruptcy petition or taking certain other actions
relating to bankruptcy.
SERIES D $1.00 CONVERTIBLE PREFERRED STOCK
We currently have 2,000,000 shares of Series D $1.00 Convertible
Preferred Stock, or Series D Preferred Stock, outstanding. The Series D
Preferred Stock has voting rights with respect to all matters presented to our
stockholders, and each share of Series D Preferred Stock is entitled to the
number of votes equal to the number of shares of Common Stock into which it is
convertible at the time of voting. The Series D Preferred Stock is not entitled
to dividends or preemptive rights.
Each share of Series D Preferred Stock is entitled to a liquidation
preference of $1.00 per share in preference to our Common Stock and pari passu
with our Series B Preferred Stock, but subject to payment of the liquidation
preference on our Series A Preferred Stock.
Each share of Series D Preferred Stock is convertible into 0.833 shares
of Common Stock at the election of the holder. The conversion ratio is subject
to automatic adjustment upon a merger, stock dividend, stock split, reverse
stock split, reclassification, and certain other similar events. In addition,
the conversion ratio is adjusted upon our issuance of Common Stock or securities
convertible into Common Stock at a price less than $1.00 per share.
The Series D Preferred Stock is not subject to redemption. We are
prohibited from taking a number of corporate actions without the approval of the
holders of a majority of the outstanding Series D Preferred Stock, including:
o selling all or substantially all of our assets or taking any
action with results in the holders of our capital stock prior
to the transaction owning less than 50% of the voting power of
our capital stock after such transaction;
o amending our Certificate of Incorporation or Bylaws;
o changing the nature of our business;
o making any distributions on or redemptions of any capital
stock other than those made pursuant to the certificates of
designation for our Series A Preferred Stock or Series B
Preferred Stock, and except for redemptions or repurchases of
up to $10,000 in any fiscal year;
o issuing securities other than pursuant to certain securities,
options or warrants outstanding at the time the Series B
Preferred Stock was issued;
o making certain acquisitions of fixed assets in an amount of
more than $100,000 in any 12 month period
o entering into any credit facility or incurring debt, with
certain exceptions, involving more than $100,000;
o increasing the size of our board of directors to more than 5;
44
o entering into transactions with our affiliates; or
o filing a bankruptcy petition or taking certain other actions
relating to bankruptcy.
UNDESIGNATED PREFERRED STOCK
Preferred stock may be issued from time to time in one or more series,
and our board of directors, without action by the holders of common stock, may
fix or alter the voting rights, redemption provisions, dividend rights, dividend
rates, claims to our assets superior to those of holders of our common stock,
conversion rights and any other rights, preferences, privileges and restrictions
of any wholly unissued series of preferred stock. The board of directors,
without shareholder approval, can issue shares of preferred stock with rights
that could adversely affect the rights of the holders of common stock. The
issuance of shares of preferred stock could adversely affect the voting power of
the holders of common stock and could have the effect of making it more
difficult for a third party to acquire, or could discourage or delay a third
party from acquiring, a majority of our outstanding common stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Stalt, Inc.
Its telephone number is (775) 831-3335.
45
LEGAL MATTERS
The validity of the shares of common stock offered under this
prospectus will be passed upon by Rutan & Tucker, LLP, Costa Mesa, California.
EXPERTS
The financial statements of Superior Galleries, Inc. as of June 30,
2004, and for the year then ended have been included herein and in the
registration statement in reliance upon the report of Singer Lewak Greenbaum &
Goldstein LLP, independent registered public accounting firm, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
The consolidated financial statements of Superior Galleries, Inc. and
subsidiaries as of June 30, 2003 and for the year then ended have been included
herein and in the registration statement in reliance upon the report of Haskell
& White LLP, independent registered public accounting firm, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
46
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a
registration statement on Form SB-2 under the Securities Act, and the rules and
regulations promulgated under the Securities Act, with respect to the common
stock offered under this prospectus. This prospectus, which constitutes a part
of the registration statement, does not contain all of the information contained
in the registration statement and the exhibits and schedules to the registration
statement. While material elements of the contracts and documents referenced in
this prospectus are contained in this prospectus, statements contained in this
prospectus as to the contents of any contract or other document referred to are
not necessarily complete, and in each instance reference is made to the full
text of the contract or other document which is filed as an exhibit to the
registration statement.
For further information with respect to us and the common stock offered
under this prospectus, reference is made to the registration statement and its
exhibits and schedules. The registration statement, including its exhibits and
schedules, may be inspected without charge at the Public Reference Room
maintained by the Securities and Exchange Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such documents may be obtained from the
Securities and Exchange Commission upon the payment of the charges prescribed by
the Securities and Exchange Commission. The public may obtain information on the
operation of the Public Reference Room by calling the Securities and Exchange
Commission at 1-800-SEC-0330.
The Securities and Exchange Commission maintains an Internet web site
that contains reports, proxy and information statements and other information
regarding issuers that file electronically with the Securities and Exchange
Commission. The Securities and Exchange Commission's web site address is
http://www.sec.gov. Our web site address is http://www.sgbh.com.
All trademarks or trade names referred to in this prospectus are the
property of their respective owners.
47
SUPERIOR GALLERIES, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Registered Public Accounting Firms' Reports.....................F-2
Financial Statements
Balance Sheets.........................................................F-4
Statements of Operations...............................................F-6
Statements of Stockholders' Equity (Deficit)...........................F-8
Statements of Cash Flows..............................................F-10
Notes to Financial Statements.........................................F-13
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Superior Galleries, Inc.
Beverly Hills, California
We have audited the balance sheet of Superior Galleries, Inc. as of June 30,
2004, and the related statements of operations, stockholders' equity (deficit)
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Superior Galleries, Inc. as of
June 30, 2004, and the results of its operations and its cash flows for the year
then ended in conformity with accounting principles generally accepted in the
United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 14 to the
financial statements, the Company has suffered negative cash flows from
operations, has significant debt that is callable on demand, and has limited
working capital. This raises substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 14. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
July 27, 2004
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Superior Galleries, Inc. and Subsidiaries
Beverly Hills, California
We have audited the accompanying consolidated balance sheet of Superior
Galleries, Inc. and subsidiaries (the "Company") as of June 30, 2003, and the
related consolidated statement of operations, stockholders' equity (deficit) and
cash flows for the year ended June 30, 2003. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Superior Galleries,
Inc. and subsidiaries as of June 30, 2003, and the results of their operations
and their cash flows for the year ended June 30, 2003, in conformity with
accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 14 to
the consolidated financial statements, the Company has suffered recurring losses
from operations, negative cash flows from operations, is in default on a
significant debt obligation, and has limited working capital that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 14. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ HASKELL & WHITE LLP
Irvine, California
September 5, 2003
F-3
SUPERIOR GALLERIES, INC.
BALANCE SHEETS
June 30, 2004 June 30, 2003
------------- -------------
ASSETS
(NOTE 6 AND 7)
CURRENT ASSETS
Cash and cash equivalents (Note 1) $ 446,530 $ 688,872
Accounts receivable, net of allowance for
uncollectible accounts of $259,007 (2004)
and $270,663 (2003) (Note 1) 3,712,866 2,825,699
Auction and customer advances (Notes 1, 5 and 6) 6,401,873 3,495,335
Inventories (Notes 1, 2, 6, 7 and 9) 6,106,593 2,497,435
Prepaid expense and other 50,574 89,788
------------- -------------
Total current assets 16,718,436 9,597,129
Property and equipment, net (Notes 1 and 3) 135,361 216,424
Other assets 11,100 13,779
------------- -------------
TOTAL ASSETS $ 16,864,897 $ 9,827,332
============= =============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities
Line of credit - related party (Note 6) $ 6,600,000 $ --
Line of credit (Note 7) 2,500,000 2,500,000
Accounts payable and accrued expenses 7,260,814 6,838,143
Notes payable to a related party (Note 9) 300,000 559,970
Series A stock redemption payable (Note 11) 343,750 --
Notes payable (Note 8) -- 56,832
------------- -------------
Total current liabilities 17,004,564 9,954,945
------------- -------------
(See accompanying notes to Financial Statements)
F-4
SUPERIOR GALLERIES, INC.
BALANCE SHEETS (CONTINUED)
June 30, 2004 June 30, 2003
------------- -------------
LONG-TERM LIABILITIES
Notes payable to a related party, net of
current portion (Note 9) $ 600,000 $ 800,000
Series A stock redemption payable, net of
current portion (Note 11) 343,750 --
Notes payable, net of current portion (Note 8) -- 7,008
------------- -------------
Total long-term liabilities 943,750 807,008
------------- -------------
TOTAL LIABILITIES 17,948,314 10,761,953
------------- -------------
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 11) -- 637,469
------------- -------------
COMMITMENTS, CONTINGENCIES AND SUBSEQUENT EVENTS
(NOTES 5, 6, 7, 9, 10, 11, 12 AND 14)
STOCKHOLDERS' EQUITY (DEFICIT) (NOTE 11)
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, $.001 par value, 12,500,000
shares authorized, 4,485,942 (2004) and
2,640,836 (2003) issued and outstanding 4,486 2,641
Additional paid in capital 7,911,988 7,939,925
Accumulated deficit (13,897,847) (14,412,612)
------------- -------------
Total stockholders' equity (deficit) (1,083,417) (1,572,090)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 16,864,897 $ 9,827,332
============= =============
(See accompanying notes to Financial Statements)
F-5
SUPERIOR GALLERIES, INC.
STATEMENTS OF OPERATIONS
Year Ended Year Ended
June 30,2004 June 30,2003
------------- -------------
Net sales $ 26,916,284 $ 18,043,826
Commission income 3,081,028 2,311,082
------------- -------------
TOTAL REVENUE 29,997,312 20,354,908
COST OF SALES 23,381,949 15,952,059
------------- -------------
GROSS PROFIT 6,615,363 4,402,849
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 5,958,829 6,675,629
IMPAIRMENT OF GOODWILL (NOTES 1 AND 4) -- 591,521
------------- -------------
Income (loss) from operations 656,534 (2,864,301)
------------- -------------
OTHER INCOME (EXPENSE)
Interest income 476,300 125,511
Interest expense (Notes 6, 7, 8 and 9) (535,248) (672,298)
Other expense, net (32,864) (66,519)
------------- -------------
Total other income (expense) (91,812) (613,306)
------------- -------------
INCOME (LOSS) BEFORE INCOME TAX PROVISION 564,722 (3,477,607)
INCOME TAX PROVISION (NOTE 10) 12,456 13,396
------------- -------------
NET INCOME (LOSS) $ 552,266 $ (3,491,003)
============= =============
(See accompanying notes to Financial Statements)
F-6
SUPERIOR GALLERIES, INC.
STATEMENTS OF OPERATIONS (CONTINUED)
Year Ended Year Ended
June 30,2004 June 30,2003
------------ ------------
Calculation of net income (loss) per share:
Net income (loss) $ 552,266 $(3,491,003)
Preferred stock accretion (50,031) (66,681)
Preferred stock dividend (37,500) (429,267)
------------ ------------
Net income (loss) applicable to common shares $ 464,735 $(3,986,951)
============ ============
NET INCOME (LOSS) PER COMMON SHARE:
from net income (loss), basic $ 0.11 $ (1.75)
============ ============
from net income (loss), fully diluted $ 0.06 $ (1.75)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING:
Basic 4,369,675 2,277,672
============ ============
Fully diluted 8,098,265 2,277,672
============ ============
(See accompanying notes to Financial Statements)
F-7
SUPERIOR GALLERIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003
Series B Series D
Preferred Stock Preferred Stock Retained Total
---------------------- ---------------------- Additional Earnings Stock-
Common paid (Accumulated holder's
Shares Amount Shares Amount Shares Amount in Capital Deficit) Equity
---------- ----------- ---------- ----------- ----------- -------- ------------ ------------- ------------
Balance, June 30, 2002 3,400,000 $2,966,500 -- $ -- 2,060,573 $ 2,061 $ 6,938,810 $(10,492,343) $ (584,972)
Issuance of Series D
Preferred stock,
net of offering cost
(Note 11) -- -- 2,000,000 1,931,456 -- -- -- -- 1,931,456
Issuance of common
stock in exchange
for Series C
Preferred Stock
(Note 11) -- -- -- -- 583,333 583 699,417 -- 700,000
Fair value of
re-priced warrants
as dividends on
Series B Preferred
Stock (Note 11) -- -- -- -- -- -- 340,000 (340,000) --
Fair value of
re-priced warrants
pursuant to Series D
Preferred Stock
offering (Note 11) -- -- -- -- -- -- 29,020 -- 29,020
Purchase and
cancellation of
common stock -- -- -- -- (3,070) (3) (641) -- (644)
Accretion of
redemption value of
Series A Preferred
Stock (Note 11) -- -- -- -- -- -- (66,681) -- (66,681)
Dividends on
preferred stock -- -- -- -- -- -- -- (89,266) (89,266)
Net loss -- -- -- -- -- -- -- (3,491,003) (3,491,003)
---------- ----------- ---------- ----------- ----------- -------- ------------ ------------- ------------
Balance June 30, 2003 3,400,000 2,966,500 2,000,000 1,931,456 2,640,836 2,641 7,939,925 (14,412,612) (1,572,090)
(See accompanying notes to Financial Statements)
F-8
SUPERIOR GALLERIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 2004 AND 2003 (continued)
Series B Series D
Preferred Stock Preferred Stock Retained Total
---------------------- ---------------------- Additional Earnings Stock-
Common paid (Accumulated holder's
Shares Amount Shares Amount Shares Amount in Capital Deficit) Equity
---------- ----------- ---------- ----------- ----------- -------- ------------ ------------- ------------
Reverse split
adjustment -- -- -- -- 6 -- -- -- --
Issuance of common
stock (Note 11) -- -- -- -- 1,845,100 1,845 -- -- 1,845
Fair value of options
granted -- -- -- -- -- -- 22,094 -- 22,094
Accretion of
redemption value of
Series A Preferred
Stock (Note 11) -- -- -- -- -- -- (50,031) -- (50,031)
Dividends on preferred
stock -- -- -- -- -- -- -- (37,500) (37,500)
Net income -- -- -- -- -- -- -- 552,265 552,265
---------- ----------- ---------- ----------- ----------- -------- ------------ ------------- ------------
Balance, June 30, 2004 3,400,000 $2,966,500 2,000,000 $1,931,456 4,485,942 $ 4,486 $ 7,911,988 $(13,897,847) $(1,083,417)
========== =========== ========== =========== =========== ======== ============ ============= ============
(See accompanying notes to Consolidated Financial Statements)
F-9
SUPERIOR GALLERIES, INC.
STATEMENTS OF CASH FLOWS
Year Ended Year Ended
June 30, 2004 June 30, 2003
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 552,266 $(3,491,003)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 93,781 127,376
Bad debts -- 130,714
Loss on retirement of property and equipment 32,864 48,786
Loss on investments -- 16,872
Impairment of goodwill -- 591,521
Fair value of options, warrants and common stock granted 22,094 29,020
Increase (decrease) in cash from changes in assets and
liabilities
Accounts receivable (887,167) 2,428,989
Other receivables -- 26,844
Inventories (3,609,158) 786,409
Prepaid expenses and other 39,214 (34,631)
Other assets 2,679 222,609
Auction and customer advances, net (2,906,538) (1,647,167)
Accounts payable and accrued expenses 422,671 (124,791)
Customer deposits -- (241,880)
------------- ------------
Net cash used in operating activities (6,237,294) (1,130,332)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (55,757) (48,464)
Proceeds from sale of property and equipment
10,174 20,480
Collection on sale note receivable -- 69,286
------------- ------------
Net cash (used in) provided by investing activities (45,583) 41,302
------------- ------------
(See accompanying notes to Financial Statements)
F-10
SUPERIOR GALLERIES, INC.
STATEMENTS OF CASH FLOWS (continued)
Year Ended Year Ended
June 30, 2004 June 30,2003
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under related party line of credit 11,000,000 --
Repayments under related party line of credit (4,400,000) --
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) (4,212,002)
Borrowings under related party debt -- 359,970
Repayments under related party debt (459,970) --
Repayments on obligations under capital lease -- (3,646)
Repayments under repurchase agreement -- (556,361)
Issuance of common shares 1,845 --
Issuance of Series D preferred shares, net of offering
expenses -- 1,931,456
Purchase of common stock for cancellation
-- (644)
Payment of dividends on preferred stock (37,500) (89,267)
------------- ------------
Net cash provided by financing activities 6,040,535 1,744,438
------------- ------------
Net (decrease) increase in cash and equivalents (242,342) 655,408
Cash and cash equivalents beginning of year 688,872 33,464
------------- ------------
Cash and cash equivalents, end of year $ 446,530 $ 688,872
============= ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 749,393 $ 458,124
============= ============
Income taxes $ 9,008 $ 2,310
============= ============
(See accompanying notes to Financial Statements)
F-11
SUPERIOR GALLERIES, INC.
STATEMENTS OF CASH FLOWS (continued)
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITY
During the years ended June 30, 2004 and 2003, the Company completed non-cash
transactions as follows:
Year Ended Year Ended
June 30, 2004 June 30,2003
------------- ------------
NON-CASH INVESTING AND FINANCING ACTIVITIES
Accretion of redemption value of Series A Preferred stock 50,031 66,681
Series A preferred stock redemption liability 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
Cancellation of treasury common stock -- 644
(See accompanying notes to Financial Statements)
F-12
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Superior Galleries, Inc. ("Superior" or the "Company") is a wholesaler,
retailer, and auctioneer of rare coins. The Company is based in Beverly
Hills, California. On June 30, 2003 as part of a reincorporation in the
State of Delaware the Company's name was changed to Superior Galleries,
Inc. from Tangible Asset Galleries, Inc. Additionally, the Company's
subsidiary Superior Galleries, Inc., a Nevada corporation, name was
changed to Superior Galleries Beverly Hills, Inc. ("SGBH"). As of July
1, 2003, all operations in SGBH ceased and were transferred to
Superior.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
At June 30, 2003, the consolidated financial statements include the
accounts of Superior and SGBH. At June 30, 2004 the financial
statements include only the accounts of Superior as all the accounts
and operations in SGBH were transferred effective July 1, 2003. For
purposes of presentation, the balances as at and the results of
operations for the year ended June 30, 2003 were consolidated, but the
balances as at and the results of operations for the year ended June
30, 2004 were not consolidated. The corporate charter of SGBH was
surrendered during the year ending June 30, 2004.
For purposes of the consolidated financial statements during the year
ending, and, at June 30, 2003, all significant inter-company balances
and transactions have been eliminated in consolidation.
See also Note 14 for discussions of going concern matters.
RECLASSIFICATIONS
Certain amounts may have been reclassified in the 2003 consolidated
financial statements to conform to the basis of presentation used in
2004. Such amounts, if any, are not material.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less when purchased to be cash
equivalents. The Company places its cash with high credit quality
institutions. The Federal Deposit Insurance Corporation ("FDIC")
insures cash accounts at each institution for up to $100,000. From time
to time, the Company maintains cash in excess of the FDIC limit.
INVENTORIES
Inventories consisting of rare coins are stated at the lower of cost
(on a specific identification basis) or market.
F-13
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated or
amortized (as applicable) using the straight-line method over the
estimated useful lives of the related assets, ranging from three to
seven years. Maintenance and repairs are charged to expense as
incurred. Significant renewals and betterments are capitalized. At the
time of retirement or other disposition of property and equipment, the
cost and accumulated depreciation and amortization are removed from the
accounts and any resulting gain or loss is reflected in operations.
The Company assesses the recoverability of property and equipment by
determining whether the depreciation and amortization of property and
equipment over its remaining life can be recovered through projected
un-discounted future cash flows. The amount of property and equipment
impairment, if any, is measured based on fair value and is charged to
operations in the period in which property and equipment impairment is
determined by management. At June 30, 2004 and 2003, management of the
Company has not identified any impaired assets.
GOODWILL
Effective July 1, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets". SFAS 142 requires that goodwill be tested for impairment on an
annual basis. As the Company recorded goodwill for its purchase of its
SGBH subsidiary in July 2001, it tested the goodwill for impairment
during the quarter ended December 31, 2002. Management estimated the
fair value of the reporting unit (i.e. Company as a whole) using a
present value model on estimated future cash flows. This value was then
adjusted to calculate the implied fair value of goodwill based on the
allocation of the reporting units assets and liabilities. The
calculation identified that the implied fair value was less than the
carrying amount of goodwill, indicating that the goodwill had been
impaired. Based on this analysis, goodwill was determined to be fully
impaired and the Company had recorded an impairment of goodwill charge
to operations of $591,521 during the quarter ended December 31, 2002.
F-14
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reported periods.
Actual results could materially differ from those estimates. Areas
where significant estimation is involved include, but are not limited
to, the evaluation of the collectibility of accounts receivable, and,
auction and customer advances, and the realizability and valuation of
inventories.
REVENUE RECOGNITION
The Company generates revenue from wholesale and retail sales of rare
coins and precious metals bullion. The recognition of revenue varies
for wholesale and retail transactions and is, in large part, dependent
on the type of payment arrangements made between the parties.
The Company sells rare coins to other wholesalers/dealers within its
industry on credit, generally for terms of 15 to 60 days, but in no
event greater than one year. The Company grants credit to new dealers
based on extensive credit evaluations and for existing dealers based on
established business relationships and payment histories. The Company
generally does not obtain collateral with which to secure its accounts
receivable when the sale is made to a dealer. The Company maintains
reserves for potential credit losses based on an evaluation of specific
receivables and the Company's historical experience related to credit
losses. As of June 30, 2004 and 2003, management has established an
accounts receivable reserve of $259,007 and $270,663, respectively.
Revenues for monetary transactions (i.e., cash and receivables) with
dealers are recognized when the merchandise is shipped to the related
dealer.
The Company also sells rare coins to retail customers on credit,
generally for terms of 30 to 60 days, but in no event greater than one
year. The Company grants credit to retail customers based on extensive
credit evaluations and for existing retail customers based on
established business relationships and payment histories. When a retail
customer is granted credit, the Company generally collects a payment of
25% of the sales price, establishes a payment schedule for the
remaining balance and holds the merchandise as collateral as security
against the customer's receivable until all amounts due under the
credit arrangement are paid in full. If the customer defaults in the
payment of any amount when due, the Company may declare the customer's
obligation in default, liquidate the collateral in a commercially
reasonable manner using such proceeds to extinguish the remaining
balance and disburse any amount in excess of the remaining balance to
the customer.
Under this retail arrangement, revenues are recognized when the
customer agrees to the terms of the credit and makes the initial
payment. Less than 5% of the Company's sales are retail credit sales.
The Company's has a limited-in-duration money back guaranty policies
(as discussed below).
F-15
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED)
In limited circumstances, the Company exchanges merchandise for similar
merchandise and/or monetary consideration with both dealers and retail
customers, for which the Company recognizes revenue in accordance with
APB No. 29, "ACCOUNTING FOR NON-MONETARY TRANSACTIONS." When the
Company exchanges merchandise for similar merchandise and there is no
monetary component to the exchange, the Company does not recognize any
revenue. Instead, the basis of the merchandise relinquished becomes the
basis of the merchandise received, less any indicated impairment of
value of the merchandise relinquished. When the Company exchanges
merchandise for similar merchandise and there is a monetary component
to the exchange, the Company recognizes revenue to the extent of
monetary assets received and determines the cost of sale based on the
ratio of monetary assets received to monetary and non-monetary assets
received multiplied by the cost of the assets surrendered.
The Company has a return policy (money-back guarantee). The policy
covers retail transactions involving graded rare coins only. Customers
may return graded rare coins purchased within 7 days of the receipt of
the rare coins for a full refund as long as the rare coins are returned
in exactly the same condition as they were delivered. In the case of
rare coin sales on account, customers may cancel the sale within 7 days
of making a commitment to purchase the rare coins. The receipt of a
deposit and a signed purchase order evidences the commitment.
Historically, the Company's retail customers have not exercised their
rights to money-back guarantees and as such, the Company's management
has not provided a reserve for sales returns in the accompanying
financial statements. Revenues from the sale of consigned goods are
recognized as commission income on such sale if the Company is acting
as an agent for the consignor. If in the process of selling consigned
goods, the Company makes an irrevocable payment to a consignor for the
full amount due on the consignment and the corresponding receivable
from the buyer(s) has not been collected by the Company at that payment
date, the Company records that payment as a purchase and the sale of
the consigned good(s) to the buyer as revenue as the Company has
assumed all collection risk.
The Company's auction businesses generate revenue in the form of
commissions charged to buyers and sellers of auction lots. Auction
commissions include buyers' commissions, sellers' commissions, and
buyback commissions, each of which are calculated based on a percentage
of the hammer price.
Buyers' and sellers' commissions are recognized upon the confirmation
of the identification of the winning bidders. Funds charged to winning
bidders include the hammer price plus the commission. Only the
commission portion of the funds received by winning bidders is recorded
as revenue.
F-16
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED)
Buyback commissions represent an agreed upon rate charged by the
Company for goods entered in the auction and not sold. Goods remain
unsold when an auction lot does not meet the consignor reserve, which
is the minimum sales price as determined prior to auction, and when
items sold at auction are returned subsequent to the winning bidder
taking possession. Buyback commission is recognized along with sellers'
commission or at the time an item is returned. Returns from winning
bidders are very limited and primarily occur when a rare coin sold
auction has an error in its description in which the winner bidder
relied upon to purchase the item.
ADVERTISING
Advertising costs are expensed as incurred. During the years ended June
30, 2004 and 2003, advertising expenses were $578,116 and $502,260
respectively.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "ACCOUNTING FOR INCOME TAXES", ("SFAS
109"). Under SFAS 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. A valuation allowance is provided
for significant deferred tax assets when it is more likely than not
that such assets will not be recovered.
STOCK-BASED COMPENSATION
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 123 "ACCOUNTING FOR STOCK-BASED
COMPENSATION," encourages, but does not require companies to record
compensation cost for stock-based employee compensation plans at fair
value. As permitted under SFAS No. 123 and as amended by SFAS No. 148,
"ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE -
AN AMENDMENT OF STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 123",
the Company accounts for stock-based compensation using the intrinsic
value method prescribed by Accounting Principles Board Opinion No. 25
("APB 25"), "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES" and related
interpretations, and provides the pro forma disclosure. Accordingly,
compensation cost for the stock options is measured as the excess, if
any, of the fair value of the Company's stock at the date of the grant
over the amount an employee must pay to acquire the stock.
F-17
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION (CONTINUED)
Pro forma information regarding net income (loss) and income (loss) per
share is required by SFAS 123, and is to be determined as if the
Company had accounted for its employee stock options granted under the
fair value method pursuant to SFAS 123, rather than the intrinsic
method pursuant to APB 25. The fair value of these options was
estimated at the date of grant using a Black-Scholes option pricing
model with the following range of assumptions for 2004 (there were no
options granted in 2003):
2004 2003
---- ----
Risk free interest rate 1 - 2% n/a
Dividends -- n/a
Volatility factor 275% n/a
Expected life 1 - 3 years n/a
For purpose of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro-forma information for years ending June 30, 2004 and 2003
as follows:
2004 2003
---- ----
Net income (loss) applicable to common shares,
as reported $ 464,735 $ (3,986,951)
Less: Total stock-based employee compensation
Expense determined under Black-Scholes
option pricing model, net of tax effects 21,030 --
------------ --------------
Pro forma net income (loss) $ 443,705 $ (3,986,951)
============ ==============
Earnings (loss) per share - as reported:
Basic $ 0.11 $ (1.75)
Diluted $ 0.06 $ (1.75)
Earnings (loss) per share - pro forma:
Basic $ 0.10 $ (1.75)
Diluted $ 0.05 $ (1.75)
F-18
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS (LOSS) PER SHARE
Basic "Earnings Per Share ("EPS")," is computed as net income (loss)
applicable to common shares divided by the weighted average number of
common shares outstanding for the period. Net income (loss) applicable
to common shares is calculated as net income (loss) less dividends and
accretion on preferred stock. Dividends and accretion on preferred
stock totaled $37,500 and $50,031, respectively, for the year ended
June 30, 2004. Dividends and accretion on preferred stock totaled
$429,267 and $66,681, respectively, for the year ended June 30, 2003.
Diluted EPS reflects the potential dilution that could occur from
common shares issuable through stock options, warrants and other
convertible securities. The total potential common shares that have not
been included in the calculation of diluted net loss per common share
totaled 5,671,209 at June 30, 2003, as the effects of such are
anti-dilutive for that year. All share and per share amounts have been
retroactively adjusted for the effect of a one-for-twenty reverse stock
split of the Company's common stock at June 30, 2003.
SEGMENT REPORTING
The Company adopted SFAS No. 131 ("SFAS 131"), "DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION," during fiscal 1999.
SFAS 131 establishes standards for the way that public companies report
information about operating segments and related disclosures about
products and services, geographic areas and major customers in annual
financial statements. The Company views its operations and manages its
business as one segment, collectibles.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 established new rules for the reporting and display of
comprehensive income and its components in a full set of
general-purpose financial statements. The adoption of SFAS 130 had no
effect on the accompanying financial statements, because the Company
had and continues to have no other components of comprehensive income.
F-19
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CUSTOMER AND VENDOR CONCENTRATIONS
During the years ended June 30, 2004 and 2003, the Company had no
customer that accounted for 10% or more of the Company's net sales. As
of June 30, 2004, the Company had one customer that represented 18% of
accounts receivable as of such date; and as of June 30, 2003, the
Company had two customers that represented 31% of accounts receivable
as of such date.
During the years ended June 30, 2004 and 2003, the Company did not
purchase 10% or more of its inventories from any single vendor. As of
June 30, 2004, the Company had no vendor that represented more than 10%
of accounts payable of such date; and as June 30, 2003 the Company had
one vendor that represented more than 21% of accounts payable as of
such date.
RISKS AND UNCERTAINTIES
MARKET RISK
Over time, market demand for investment grade coins will vary due to
perceived scarcity, subjective valuation, general consumer trends,
variations in the price of precious metals, and other general economic
conditions. The Company derives a significant portion of its revenues
from wholesale dealers and retail collectors on the sales of investment
grade coins. Declines in market demand for investment grade coins would
likely cause a decrease in annual sales revenue and have an overall
negative effect on operations.
INVENTORY RISK
The Company purchases investment grade coins from dealers and
collectors and assumes the inventory and price risks of these items
until sold. If the Company were unable to sell such inventory, or if
the prices were insufficient to generate a profit, or if the market
value of such inventory were to decline, the ultimate amounts realized
by the Company from the sale of such inventory could be less than the
carrying values reflected in the accompanying balance sheets.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "DISCLOSURES ABOUT
FAIR VALUE OF FINANCIAL INSTRUMENTS", requires the disclosure of the
fair value, if reasonably obtainable, of the Company's financial
instruments. The Company's financial instruments consist of its cash,
accounts receivable, line of credit, accounts payable and accrued
expense; note payable and notes payable to related parties. Management
has determined that, except for notes payable (see Note 9) to related
parties, the fair values of the Company's financial instruments
approximate their carrying values at June 30, 2004 and 2003. Management
was unable to determine the fair value of the notes payable to related
parties, as an active market for such instruments does not exist.
F-20
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS
2. INVENTORIES
Inventories are comprised of the following:
June 30, 2004 June 30, 2003
------------- -------------
Rare coins $ 6,106,593 $ 2,147,435
Fine and decorative arts -- 1,015,138
Reserve -- (665,138)
------------ ------------
$ 6,106,593 $ 2,497,435
============ ============
Inventory totaling $1,228,813 and $904,677 was on consignment with
third parties at June 30, 2004 and 2003, respectively. Inventory
totaling $0 and $171,562, was held for display at the residence of the
chief executive officer at June 30, 2004 and 2003, respectively.
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 June 30, 2004 and 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 is 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. The Company completed the liquidation of the Art inventory in
October 2003 (see Note 13).
F-21
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
June 30, 2004 June 30, 2003
------------- -------------
Furniture and equipment $ 133,847 $ 232,615
Computer equipment 216,674 268,906
Vehicles -- 24,676
Leasehold improvements 111,580 152,542
---------- ----------
462,101 678,739
Accumulated depreciation
and amortization (326,740) (462,315)
---------- ----------
$ 135,361 $ 216,424
========== ==========
Depreciation expense for the years ended June 30, 2004 and 2003 were
$93,781 and $127,376, respectively.
4. GOODWILL
On July 6, 2001, the Company recorded goodwill for its purchase of its
SGBH subsidiary in the amount of $591,521. The Company tested the
goodwill for impairment during the quarter ended December 31, 2002.
Management estimated the fair value of the reporting unit (i.e. Company
as a whole) using a present value model on estimated future cash flows.
This value was then adjusted to calculate the implied fair value of
goodwill based on the allocation of the reporting units assets and
liabilities. The calculation identified that the implied fair value was
less than the carrying amount of goodwill, indicating that the goodwill
had been impaired. Based on this analysis, goodwill was determined to
be fully impaired and the Company recorded an impairment of goodwill
charge to operations of $591,521 during the year ended June 30, 2003.
5. 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. Auction and customer
advances consist of the follows:
F-22
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS
5. AUCTION AND CUSTOMER ADVANCES (CONTINUED)
June 30, 2004 June 30, 2003
------------- -------------
Auction advances $4,453,873 $3,495,335
Customer inventory advances 1,948,000 --
----------- -----------
$6,401,873 $3,495,335
=========== ===========
6. LINE-OF-CREDIT - RELATED PARTY
On October 13, 2003, Superior 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 the Company with a $7.5 million line of credit for purposes of
financing inventory, auction advances and inventory loans to other rare
coin dealers and collectors. The LOC bear interest at the prime-lending
rate (4.00% at June 30, 2004) and is secured by substantially all of
Superior's assets. The LOC expires on October 1, 2004. As of June 30,
2004 the outstanding LOC balance was $6,600,000. This balance reflects
the net borrowing against the LOC for the year ended June 30, 2004.
During the year ended June 30, 2004, Superior incurred interest expense
on the line of credit - related party totaling $104,206.
F-23
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS
7. 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% at June 30,
2003), were secured by the inventory of the Company and a personal
guarantee of the Company's chief executive officer and a principal
stockholder, 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 provided 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 required 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. The Company is current with monthly interest payments, but has
not made principal repayments during the years ended June 30, 2004 and
2003. As of June 30, 2004 the outstanding balance was $2,500,000.
On February 21, 2003, the Company entered into an oral 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 rate of
10% per annum with interest payable monthly. 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 could have terminated this
arrangement and demanded payment 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.
F-24
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS
8. NOTES PAYABLE
Notes payable consist of the following:
June 30, 2004 June 30, 2003
------------- -------------
Note payable for acquisition of assets of SGBH, secured by assets
acquired, and guaranteed by the Company and principal stockholder and
chief executive officer. The loan provided for periodic payments
through January 2002, however, payments were suspended by the Company.
The Company renegotiated payment terms by increasing the note balance
by $49,110 to cover unpaid interest, establishing a new rate of 4.5%
over prime lending rate, to be paid in biweekly installments over one
year. In November 2002 , the Company and creditor renegotiated the
payment terms. 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 note payable was repaid in full on September 1,
2003. -- $ 56,832
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. -- 7,008
-------------- -------------
-- 63,840
Less current portion -- (56,832)
-------------- -------------
$ -- $ 7,008
============== =============
F-25
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS
9. NOTES PAYABLE TO A RELATED PARTY
Notes payable to a related party consist of the following:
June 30, 2004 June 30, 2003
------------- -------------
Subordinated note payable to Company's chief executive officer and
principal stockholder "CEO", secured by inventory, bearing interest at
9% per annum. In April 2002 the note was renegotiated to include
quarterly installment payments of $150,000 plus accrued interest. No
principal payments had been made. In February 2003, pursuant to the
sale of Series D preferred stock (Note 10), the note was amended to
include quarterly payments of principal of $50,000 commencing September
30, 2003. The current portion of the Notes Payable to a Related Party
reflect the current portion of the subordinated note payable. During
the year ending June 30, 2004, $100,000 of principal payments were
made. The CEO has verbally agreed to delay two principal payments of
$50,000 each that were due on March 31, 2004 and June 30,
2004 to September 30, 2004 $ 900,000 $ 1,000,000
Demand note payable to Company's chief executive officer and
principal stockholder that bore interest at 12% per annum. On
October 23, 2003, the Company repaid the loan as part of the
sale of its art inventory to the CEO (see Note 13) - 289,970
Demand note payable to Company's chief executive officer and
principal stockholder that bore interest at 12% per annum. On
October 23, 2003, the Company repaid $60,030 of the loan
principal as part of the sale of its art inventory to the CEO
(see Note 13). On February 4, 2004, the remaining balance was
repaid - 70,000
------------- -------------
900,000 1,359,970
Less current portion (300,000) (559,970)
------------- -------------
$ 600,000 $ 800,000
============= =============
F-26
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS
9. NOTES PAYABLE TO A RELATED PARTY (CONTINUED)
Interest expense incurred to related parties during the year ended June
30, 2004 and 2003 totaled $101,392 and $121,855 respectively. Future
minimum payments under notes payable to a related party are as follows:
Year Ending
June 30 Amount
------- --------
2005 $300,000
2006 $200,000
2007 $200,000
2008 $200,000
---------
$900,000
=========
10. INCOME TAXES
The provision for income taxes consists of the following components:
Year Ended Year Ended
June 30, 2004 June 30, 2003
--------------- ---------------
Current:
Federal $ -- $ --
State 12,456 13,396
--------------- ---------------
12,456 13,396
--------------- ---------------
Deferred:
Federal -- --
State -- --
--------------- ---------------
-- --
--------------- ---------------
$ 12,456 $ 13,396
=============== ===============
F-27
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS
10. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amount of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. The income tax effects of significant items comprising the
Company's net deferred income tax assets and liabilities are as
follows:
June 30, 2004 June 30, 2003
------------- -------------
Deferred tax assets:
Unearned income $ 7,465 $ 6,941
Net operating loss carryforwards 3,746,449 3,040,308
Inventory reserve -- 264,954
Goodwill 202,726 204,211
Intangible asset 8,389 7,800
Accrued vacation pay 29,171 22,096
Allowance for doubtful accounts 110,959 189,762
Contributions 1,187 1,104
Options and warrants not exercised 54,489 41,865
Depreciation 11,553 36,063
Other 7,772 308,538
------------ ------------
Gross deferred tax assets 4,180,160 4,123,592
Valuation allowance (3,987,921) (4,011,206)
------------ ------------
Deferred tax assets, net of reserve 192,239 112,386
Deferred tax liabilities:
Depreciation (192,239) (112,386)
------------ ------------
Net deferred tax liabilities $ -- $ --
============ ============
At June 30, 2004 and 2003, a 100% valuation allowance has been provided
on the net deferred income tax assets since the Company cannot
determine that it is "more likely than not" they will be realized.
The income tax benefit differs from the amount of income tax determined
by applying the expected U.S. Federal income tax rate to pretax loss
for the fiscal periods as a result of:
Year Ended Year Ended
June 30, 2004 June 30, 2003
------------- -------------
Computed tax benefit $ 192,005 $(1,182,386)
Decrease (increase) in income tax
benefit resulting from:
Nondeductible expenses 12,348 4,152
State income tax expense 46,250 2,112
Change in valuation allowance (238,147) 1,173,586
Other -- 15,932
------------ ------------
$ 12,456 $ 13,396
============ ============
F-28
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS
10. INCOME TAXES (CONTINUED)
At June 30, 2004, the Company has a Federal tax net operating loss
("NOL") carryforward of approximately $9,620,000, which expires at
various dates though 2023, and a state net operating loss carryforward
of approximately $5,370,000, which expires at various dates through
2012.
A portion of the NOLs described above are subject to provisions of the
Internal Revenue Code ss.382 which limits the use of NOL carryforwards
when changes of ownership of more than 50% occur during a three-year
testing period. During the year ended June 30, 2003, the cumulative
effects of Stanford's investment in the Company through the Sale of
Series B and Series D preferred stock on April 3, 2002 and February 14,
2003, respectively, the Company ownership changed by more than 50%. The
issues of common and preferred stock during the years-ended June 30,
2002 and 2003 will limit the use of these NOLs. Further changes in
common or preferred stock ownership in future years potentially limit
the use of NOLs. The effect of such limitations has yet to be
determined. In addition, NOL carryforwards for the purposes of
offsetting California state taxable income have been suspended for the
tax years beginning in 2002 and 2003.
F-29
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS
11. EQUITY
AUTHORIZED CAPITAL CHANGES
On June 30, 2003, the Company's stockholders at the Annual Meeting of
the Shareholders approved both an amendment to the Company's articles
of incorporation to effect a one-for-twenty reverse split of the
Company's common shares and the Company's re-incorporation into the
State of Delaware with authorized common stock of 12,500,000 and
preferred stock of 10,000,000. The Series A, B and D preferred shares
retained the same rights and privileges as previously granted. All
common share amounts presented have been retroactively adjusted to
reflect a one-for-twenty reverse stock split.
COMMON STOCK TRANSACTIONS
On December 26, 2002, the Company purchased 3,222 of its own common
stock for $644. The common stock was held as treasury shares until they
were cancelled on March 26, 2003.
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 (see additional
discussion of warrants in Sale of Series D Convertible Preferred Stock
below).
SALE AND REDEMPTION OF SERIES A CONVERTIBLE PREFERRED STOCK
On July 3, 2001, the Board of Directors of the Company authorized
15,000,000 shares of $.001 par value preferred stock and
simultaneously, the Company commenced a private placement of Series A
$5.00 Redeemable 8% Convertible Preferred Stock ("Series A Preferred
Stock"). The Series A Preferred Stock carried an annual dividend of
$0.40 per share payable quarterly in cash or common stock of the
Company at the Company's election, was convertible into 11 shares of
the Company's common stock and provided for cash redemption or
conversion into common stock of the Company based on elections by the
holder or by the Company with certain contingencies. In addition, the
Series A Preferred Stockholders had lien rights on the Company's
inventory. The Company was prevented for allowing any liens on
inventory, unless subordinated to the interests of the Series A
Preferred Stockholders. The interest was 150% of the aggregate value of
the outstanding Series A Preferred Stock, or $937,500 at June 30, 2003.
The offering closed on October 31, 2001 with sales of 125,000 shares of
preferred stock with aggregate proceeds from the offering of $625,000.
The Series A Preferred Stock was redeemable after March 31, 2004 for
cash, at the option of the holder, in the amount of $5.50 per share,
with such aggregate amount for each holder payable in ten (10) equal
quarterly installments, the first such payment due the quarter
immediately following the redemption date. Since the option to redeem
into cash was at the option of the holder, the Company had classified
this security on the balance sheet outside of stockholders' equity. The
Series A Preferred Stock would have automatically converted into shares
of the Company's common stock upon sale of all the Company's assets,
any merger or consolidation where the Company was not to survive, or
any sale or exchange of all outstanding shares on the company's common
stock. Prior to the reincorporation and merger of the Company into a
Delaware corporation on June 30, 2003, the Series A Preferred Stock's
certificate of designation was amended, as approved by a majority of
the Series A Preferred
F-30
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS
11. EQUITY (CONTINUED)
SALE AND REDEMPTION OF SERIES A CONVERTIBLE PREFERRED STOCK (CONTINUED)
Stockholders, so that the Series A Preferred Stock would not
automatically convert into shares of the Company's common stock as a
result of the reincorporation and merger. The Company had the option to
redeem the Series A Preferred Stock for cash in the amount of $5.10 per
share, or for shares of the Company's common stock in accordance with
the conversion rate, in the event the closing quoted market price of
the Company's common stock is greater than or equal to $18.00 for any
consecutive five day period.
Since the redemption amount of the Series A Preferred Stock exceeded
the net proceeds of the offering, the carrying value of the issuance
was being increased through accretion up to the future redemption value
at the redemption date, March 31, 2004.
The offering required that the Company file a registration statement of
the common stock of the Company issuable upon the conversion of the
Series A Preferred Stock sixty days following the closing of the
offering, or March 31, 2002. Because the Company was engaged in
negotiations for a private placement of a Series B preferred stock that
would also require a registration statement, the Company did not timely
file the registration statement pursuant to the offering of the Series
A Preferred Stock, but rather planned on combining the two registration
statements. As of June 30, 2003 no registration statement had been
filed. As a result, the Company was obligated to issue warrants to
purchase an aggregate of 6,250 shares of common stock of the Company to
the holders of the Series A Preferred Stock with an exercise price
equal to the average of the closing price of the common stock for the
five days preceding the date the registration statement should have
been filed with an exercise period of three years.
On March 31, 2004, in accordance with the redemption provisions of the
Series A Preferred Stock, all the holders of the Series A Preferred
Stock requested the redemption of their shares. However, because the
Company's liabilities did and currently exceed its assets, the Company
is prohibited under Delaware corporation law from commencing the
redemption. The Company has informed the stockholders of the redemption
provision. The Company intends to begin the redemption once it is
legally allowed to do so. The company has reflected the Series A
Preferred Stock redemption payable as a liability on its Balance Sheet.
As of June 30, 2004, the balance payable with respect to the Series A
Preferred Stock redemption is $687,500. Of this amount, $343,750 is
reflect as a current liability. The Company will continue to make
quarterly dividend payments as long as the Series A Preferred Stock
redemption payable remains outstanding.
Future minimum payments under the Series A Preferred Stock redemption
payable are as follows:
Year Ending
June 30 Amount
------- ---------
2005 $343,750
2006 $343,750
---------
$687,500
=========
F-31
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS
11. EQUITY (CONTINUED)
SALE OF SERIES D CONVERTIBLE PREFERRED STOCK
On February 14, 2003, the Company issued 2,000,000 shares of newly
created Series D $1.00 convertible preferred stock ("Series D stock")
for a purchase price of $2,000,000 pursuant to a stock purchase and
warrant agreement ("purchase agreement") with Stanford. On that date
$1,500,000 of the purchase price was paid with $500,000 in cash and the
conversion of $1,000,000 in bridge loans that Stanford granted to the
Company in anticipation of the closing of the purchase agreement. The
balance of the purchase price less interest due on the converted bridge
loans and legal fees was paid on March 14, 2003. The Series D stock is
convertible into common shares of the company at any time at the option
of Stanford at the conversion rate 0.833333 common shares for each
Series D share subject to certain anti-dilution adjustments. The Series
D stockholders are entitled to vote on all matters requiring a vote of
the shareholders and are entitled to the number of votes equal to the
number of common shares into which the Series D stock is convertible.
The purchase agreement also provided for the reduction to $0.001 per
common share of the purchase price of 1,500,000 warrants that were
issued to Stanford and their designated warrant holders as part of the
Series B stock sale in April 2002. In connection with warrant price
reduction the Company recorded a dividend of $300,000 on the Series B
stock as its estimate of the fair value of the transaction. The reduced
warrant price contemplated the reverse stock split that was provided
for in the purchase agreement and that was subsequently approved by the
Company's stockholders on June 30, 2003. The warrants were exercised on
July 24, 2003. Concurrently with the closing of the purchase agreement,
the Company, Stanford and the CEO enter into a share exchange and note
modification agreement ("modification agreement"). Under the
modification agreement the CEO exchanged 7,000 Series C shares of the
Company for 583,333 common shares of the Company. The modification
agreement provided for a reduction to $0.001 per common share of the
exercise price of 345,100 warrants that were previously issued to the
CEO. The previously issued warrants consist of 200,000 warrants issued
in connection with the Series B stock in April 2002 and 145,100
warrants issued in connection with personal loan guarantees by the CEO
for the Company's debt. In connection with the warrant price reductions
the Company recorded a dividend of 40,000 on the Series B stock and
interest expense of $29,020 as its estimates of the fair value of the
transactions. The reduced warrant price contemplated reverse stock
split that was provided for in the purchase agreement and that was
subsequently approved by the Company's stockholders on June 30, 2003.
The warrants were exercised on July 24, 2003. Additionally, the CEO
agreed to amend his $1,000,000 promissory note due from the Company, to
provide for quarterly principal payments of $50,000 that were to
commence on September 30, 2003 (Note 9).
The shareholders of preferred stock issued by the Company have a
liquidation preference over the common shareholders. The Series A
Preferred shareholders have primary preferential liquidation rights at
$5.10 per share, followed by the Series B and Series D Preferred
shareholders at $1.00 per share each.
F-32
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS
11. EQUITY (CONTINUED)
SERIES B CONVERTIBLE PREFERRED STOCK
The Company currently has 3,400,000 shares of Series B $1.00
Convertible Preferred Stock, or Series B Preferred Stock, outstanding.
The Series B Preferred Stock has voting rights with respect to all
matters presented to our stockholders, and is entitled to the number of
votes equal to the number of shares of Common Stock into which it is
convertible. The Series B Preferred Stock is not entitled to dividends
or preemptive rights. Each share of Series B Preferred Stock is
convertible into 0.5 shares of Common Stock at the election of the
holder subject to certain adjustments, and is adjustable upon our
issuance of Common Stock or securities convertible into Common Stock at
a price less than $1.00 per share.
STOCK OPTIONS
During the year ended June 30, 2004, the Company granted to certain
employees and non-employees, 410,000 stock options to purchase common
stock at an average exercise price of $0.77. The range of exercise
prices of options issued during the year was $0.24 to $1.01. Certain
stock options vest immediately and others vest over time. All are
exercisable over period of up to four years and expire at earlier of
five years after the vesting date of each option or one month after the
termination of employment or service agreement with the Company. The
stock options were granted at strike prices, which were set at closing
price of the Company's stock as listed on the NASDAQ Over-the-counter
Bulletin Board and Pink Sheets as of the date of grant. During the year
ended June 30, 2004, the Company cancelled 97,750 that expired or had
not vested at the time of employees and non-employees discontinued
service with the Company. The stock option grants during the year ended
June 30, 2004 include 50,000 stock options to Board of Director
members. No options were granted during the year ended June 30, 2003.
The following table summarizes information about stock option
transactions for the years shown:
Year Ended Year Ended
June 30, 2004 June 30, 2003
-------------------- --------------------
Weighted Weighted
Average Average
Option Exercise Option Exercise
Shares Price Shares Price
-------- --------- -------- ---------
Outstanding at beginning of period 113,750 $ 6.05 119,750 $ 14.20
Options granted 410,000 0.77 -- --
Options canceled (97,750) 3.74 (6,000) 25.45
Options exercised -- -- -- --
Outstanding at end of period 426,000 $ 1.50 113,750 $ 6.05
Exercisable at end of period 121,250 $ 2.96 95,667 $ 6.76
The weighted average remaining contractual life of the options
outstanding at June 30, 2004, is 7.6 years.
F-33
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS
11. EQUITY (CONTINUED)
As of June 30, 2004 and 2003, the Company had reserved shares of common
stock for the following purposes:
June 30, June 30,
2004 2003
---------- ----------
Options 426,000 113,750
Warrants 189,063 2,122,042
Series A Convertible Preferred Stock -- 68,750
Series B Convertible Preferred Stock 1,700,000 1,700,000
Series D Convertible Preferred Stock 1,666,667 1,666,667
---------- ----------
Total 3,981,730 5,671,209
========== ==========
F-34
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS
12. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases office space in Beverly Hills and Newport Beach,
California under operating lease agreements expiring in September 2007
and September 2004, respectively. Future minimum rental payments
required under the above leases as of June 30, 2004 are as follows:
YEARS ENDING JUNE 30
2005 $ 261,135
2006 224,376
2007 224,376
2008 56,094
---------------
$ 765,981
================
Rent expense for all leases for the years ended June 30, 2004 and 2003
was $385,966 and $387,750 respectively.
2003 OMNIBUS STOCK OPTION PLAN
On May 1, 2003, the Company's Board of Directors approved, subject to
shareholder approval which was obtained on June 30, 2003, a stock
option plan to attract and retain competent personnel and to provide to
participating officers, directors, employees and consultants long-term
incentive for high levels of performance and for unusual efforts to
improve the financial performance of the Company. The Plan provides for
both incentive stock options specifically tailored to the provisions of
the Internal Revenue Code and for options not qualifying as incentive
stock options. Employees and consultants of the Company, including
officers and directors, are eligible to receive options granted under
the Plan. The shares subject to the options will generally be made
available from authorized, but unissued shares. The Board of Directors
("Board") will administer the Plan. The Board has full authority to
award options under the Plan, to establish the terms of the option
agreements, and to take all other action deemed appropriate for
administration of the Plan. This Plan replaced the 2000 Omnibus Stock
Option Plan.
2000 OMNIBUS STOCK OPTION PLAN
On August 1, 2000, the Company's Board of Directors approved, subject
to shareholder approval which was obtained, a stock option plan to
attract and retain competent personnel and to provide to participating
officers, directors, employees and consultants long-term incentive for
high levels of performance and for unusual efforts to improve the
financial performance of the Company. The Plan provides for both
incentive stock options specifically tailored to the provisions of the
Internal Revenue Code and for options not qualifying as incentive stock
options. Employees and consultants of the Company, including officers
and directors, are eligible to receive options granted under the Plan.
The shares subject to the options will generally be made available from
authorized, but unissued shares. The Board of Directors ("Board") will
administer the Plan. The Board has full authority to award options
under the Plan, to establish the terms of the option agreements, and to
take all other action deemed appropriate for administration of the
Plan. This Plan was terminated on May 1, 2003 and was replaced by the
2003 Omnibus Stock Option Plan.
F-35
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 $7,344,986 and $8,263,941 for years ended
June 30, 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.
PROFIT SHARING PLANS
The Company had a 401(k) profit sharing plan covering all employees who
have met certain service requirements. Through December 31, 2002,
employees were allowed to make contributions to the plan of up to 15%
of their salary. The Company was required to make nondiscretionary
matching contributions of 3% of eligible employees' salaries. Effective
January 1, 2003 no further contributions by employees were permitted as
all of the Company's employees became co-employees of Administaff, a
professional employer organization. The Company terminated the plan
effective January 1, 2004. The Company had failed to make timely
nondiscretionary matching contributions, caught up prior to the plan
termination, but may be subject to penalties. The amount of the
potential penalties, if any, is indeterminable at this time.
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
such litigation which it believes could have a material adverse effect
on its financial condition or results of operations.
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.
F-36
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS
13. RELATED PARTY TRANSACTIONS
On January 31, 2003, the Company entered into a consulting agreement
with Stanford Venture Capital Holdings, Inc., a principal stockholder
to provide financial and advisory services for a three year period
commencing on April 1, 2003. The annual fee for such services is
$60,000 and is payable on a quarterly basis.
On October 23, 2003, the Company's Board of Directors approved the sale
of Superior's remaining fine art inventory to the Company's chief
operating officer and a principal stockholder ("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 8).
On May 28, 2004, the Company's Board of Directors approved a short-term
sub-lease of a portion of Superior's vacant Newport Beach facility to
the CEO. The lease term is from June 1, 2004 through September 30, 2004
and provides for a monthly rental payment of $4,000. The sub-lease
terminates concurrently with the Company's master lease of the Newport
facility.
See also notes 2, 6, 7, 8, 9 and 11 for discussion of additional
transactions with related parties.
14. GOING CONCERN
The accompanying 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, although the Company has returned to profitability in
the last six month of the year ended June 30, 2004, the Company
continues to have negative cash flows from operations, significant debt
that is callable on demand by the creditor, and has limited working
capital. These items raise doubt about the Company's ability to
continue as a going concern.
The Company has made and is continuing to make efforts to raise
additional permanent debt and equity and renegotiate debt. On February
14, 2003, the Company completed an additional equity capital financing
of $2 million with Stanford and the Company's chief executive officer
converted 7,000 shares of the Company's $100 Series C Preferred Stock
into $700,000 of the Company's common stock (see Note 11).
On September 30, 2003, the Company renegotiated a $2.5 million dollar
line of credit (Note 7) that was in default and callable by the
creditor. The default was cured, but the line of credit is callable
with 5 days notice. Although management does not anticipate the
creditor calling the loan, there can be no assurance 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 continues to seek opportunities to refinance the
line of credit with Stanford and is having on-going discussions with
the lender to grant extended payments terms. However there can be no
assurance that this obligation will be able to be refinanced on terms
acceptable to the Company.
F-37
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS
14. GOING CONCERN (CONTINUED)
In October 2003, the Company completed negotiations with Stanford to
provide a line of credit of $7.5 million (see Note 6) for auction
advances, inventory financing, and, inventory loans to other dealers
and collectors. The Company is intending to request an expansion of the
line of credit over the current limit of $7.5 million when the line of
credit comes up for renewal on October 1, 2004. Although there can be
no assurance that the Stanford line of credit will be renewed and
expanded on terms acceptable to the Company, management believes that
the line of credit will be sufficient to continue to fund the Company's
operations.
F-38
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits a
corporation to indemnify its directors and officers against expenses, judgments,
fines and amounts paid in settlement actually and reasonably incurred in
connection with a pending or completed action, suit or proceeding if the officer
or director acted in good faith and in a manner the officer or director
reasonably believed to be in the best interests of the corporation.
The registrant's amended and restated certificate of incorporation
provides that, except in certain specified instances, a director of the
registrant shall not be personally liable to the registrant or its stockholders
for monetary damages for breach of fiduciary duty as a director.
Those provisions require the registrant to indemnify the executives in
connection with third party actions and in connection with proceedings by or in
the right of the registrant, and to advance expenses prior to the final
disposition of an action or proceeding, to the fullest extent permitted by
Section 145 of the DGCL. Those provisions also prohibit the registrant from
bringing an action against the executives after the expiration of two years from
the date the executives cease to serve in the capacities covered by the
employment agreements.
The registrant and certain of the selling security holders in the
offering covered by this registration statement each have agreed to indemnify
the other and their respective officers, directors and other controlling persons
against certain liabilities in connection with this registration statement,
including liabilities under the Securities Act, and to contribute to payments
such persons may be required to make in respect thereof.
To the extent that indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons controlling
the registrant under the provisions described above, the registrant has been
informed that in the opinion of the Commission, indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable.
II-1
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses in connection
with the offering described in this Registration Statement:
SEC Registration $ 743
NASD Fees --
Accounting Fees and Expenses 20,000
Legal Fees and Expenses 30,000
Blue Sky Fees and Expenses 10,000
Placement Agent Fees and Expenses --
Printing Costs 2,000
Miscellaneous Expenses 1,000
---------
TOTAL $ 63,743
=========
All of the above estimated expenses have been or will be paid by the
Registrant.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
All of the share amounts and prices described below have been adjusted
to give effect to the 1-for-20 reverse stock split that we performed in June
2003. There were no underwriters for any of the transactions described below.
1. On November 27, 2001, we issued options to purchase 10,000
shares of our common stock to an employee. The options have an
exercise price of $2.00 per share and expire November 26,
2011. On that same date, we issued options to purchase 2,500
shares of our common stock to each of our 6 directors. These
options had an exercise price of $1.00 per share and expire
November 26, 2006. This issuance was made without general
solicitation, was made to sophisticated purchasers, and was
exempt from registration under Section 4(2) of the Securities
Act.
2. On November 27, 2001, in connection with the extension of the
maturity date of a financing agreement between us and NRLP, a
lender controlled by Carl Fusco, one of our former directors,
we agreed to issue to NRLP 24,000 shares of our common stock
and a warrant to purchase 50,000 shares of our common stock.
We valued the stock at $24,000. The exercise price of the
warrant is $1.00 per share and it expires on November 26,
2006. The common stock and the warrants were issued to a
sophisticated purchaser in a transaction not involving any
general solicitation, and which was exempt from the
registration requirements of the Securities Act pursuant to
Section 4(2) of that Act.
3. On November 27, 2001, in connection with the agreement to
issue his personal guaranty for certain obligations of the
company, we agreed to issue to Silvano DiGenova, our chief
executive officer, a warrant to purchase 20,000 shares of our
common stock. The exercise price of the warrant is $1.00 per
share and it expires on November 26, 2006. The common stock
was issued to a sophisticated purchaser in a transaction not
involving any general solicitation, and which was exempt from
the registration requirements of the Securities Act pursuant
to Section 4(2) of that Act.
II-2
4. On June 25, 2001, we entered into an advisory agreement with
Robert Escobio, who at that time was a director of our
company. Under the terms of that agreement, Mr. Escobio was to
provide us with advice regarding financial planning and
corporate capital structure. In consideration for rendering
such services, we agreed to pay Mr. Escobio certain fees and
granted him a warrant to purchase 5,000 shares of our common
stock at an exercise price of $6.80 per share. The warrant
expired on June 25, 2002. On November 27, 2001, we issued
66,667 shares of our common stock to Mr. Escobio in full
satisfaction of our future obligations under this agreement
and the agreement was terminated. We valued the shares at
$66,667. The common stock was issued to a sophisticated
purchaser in a transaction not involving any general
solicitation, and which was exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) of
that Act.
5. On December 31, 2001, we issued a stock dividend of 2,750
shares of common stock to the holders of our Series A
Preferred Stock. These shares were issued without the receipt
of consideration by us, and therefore did not involve a "sale"
under the Securities Act of 1933. There were a total of 12
holders of the Series A Preferred Stock.
6. On January 1, 2002 we issued 6,250 warrants to purchase common
stock to the 12 holders of our Series A Preferred Stock. These
warrants were issued in settlement of the stockholders' claims
as a result of our failure to file a registration statement on
their behalf. The warrants have an exercise price of $1.00 per
share, and expire January 1, 2005. This issuance was made
without general solicitation, was made to sophisticated
purchasers, and was exempt from registration under Section
4(2) of the Securities Act.
7. On January 1, 2002, we issued a warrant to purchase 300 shares
of our common stock to a placement agent with an exercise
price of $18.00 per share. This warrant expires on January 1,
2005. This issuance was made without general solicitation, was
made to a sophisticated purchaser, and was exempt from
registration under Section 4(2) of the Securities Act.
8. On February 22, 2002 we issued 16,250 shares of our common
stock to 2 persons, in consideration of their agreement to
assume certain obligations that had been incurred by us. We
valued these shares at $16,250. This issuance was made without
general solicitation, was made to sophisticated purchasers,
and was exempt from registration under Section 4(2) of the
Securities Act.
9. On April 10, 2002, we completed the sale to Stanford Venture
Capital Holdings, Inc., or Stanford, of 3,000,000 shares of
our Series B Convertible Preferred Stock and three warrants,
each to purchase 500,000 shares of our common stock. Each
share of the Series B Preferred Stock is convertible into
shares of our common stock at the option of the holder at the
conversion price of $2.00 per common share, subject to certain
anti-dilution adjustments. Upon issuance, the Series B
Preferred Stock was immediately convertible into shares of our
common stock and the warrants were immediately exercisable for
five years at the option of the holder with one-third of the
shares underlying each warrant exercisable for $2.00 per
share, one-third for $3.00 per share and one-third for $4.00
per share. The shares of Series B Preferred Stock and the
warrants were issued to a sophisticated purchaser in a
transaction not involving any general solicitation, and which
was exempt from the registration requirements of the
Securities Act pursuant to Section 4(2) of that Act.
10. Also on April 10, 2002, pursuant to a Stock Purchase
Agreement, we sold 400,000 shares of our Series B Convertible
Preferred Stock, issued a warrant to purchase 200,000 shares
of our common stock and sold 7,000 shares of our newly created
Series C Convertible Preferred Stock to Mr. DiGenova, our
II-3
chief executive officer. Each share of the Series C
Convertible Preferred Stock carries a 9% dividend payable
quarterly and is convertible into shares of our common stock
at the option of the holder at the conversion price of $0.22
per common share, subject to certain anti-dilution
adjustments. In connection with the issuance of our Series B
Preferred Stock, we issued a secured and subordinated note to
Mr. DiGenova in the principal amount of $1,000,000 bearing
interest at the annual rate of 9% with interest and a
principal reduction payable quarterly of $150,000 until the
principal is paid in full. In payment for the aggregate amount
of $2,100,000 in new securities issued, Mr. DiGenova tendered
two notes previously issued by us to Mr. DiGenova in the
amounts of $1,400,000 and $700,000. The warrant is immediately
exercisable for a period of five years with one-third of the
shares underlying the warrant exercisable for $2.00 per share,
one-third exercisable for $3.00 per share and one-third
exercisable for $4.00 per share. These securities were issued
to a sophisticated purchaser in a transaction not involving
any general solicitation, and which was exempt from the
registration requirements of the Securities Act pursuant to
Section 4(2) of that Act.
11. On February 14, 2003, we issued 2,000,000 shares of newly
created Series D $1.00 Convertible Preferred Stock for a
purchase price of $2,000,000 pursuant to a stock purchase and
warrant agreement with Stanford Venture Capital Holdings, Inc.
("Stanford"). The Series D Convertible Preferred Stock and the
common shares issued upon exercise of those warrants were
issued to sophisticated purchasers in a transaction not
involving any general solicitation, and which was exempt from
the registration requirements of the Securities Act pursuant
to Section 4(2) of that Act.
12. On July 24, 2003, we issued 1,845,100 shares of our common
stock to our principal stockholders, Silvano DiGenova and
Stanford Venture Capital Holdings, Inc. ("Stanford"), and four
Stanford employees pursuant to the exercise of warrants held
by those persons. The total proceeds to the Company as a
result of this transaction were $1,845, constituting the
exercise price of these warrants. The common stock issued
pursuant to the exercise of these warrants was exempt from
registration under the Securities Act pursuant to Section 4(2)
and Regulation D thereunder. Both the warrants and the
underlying shares were issued to a small number of persons,
without general advertising or solicitation. Each of the
purchasers was a sophisticated investor with substantial
experience in investing in small companies.
13. On August 6, 2003 we issued options to purchase our common
stock to 6 persons, each of whom was an officer, director or
consultant to the company. A total of 110,000 shares were
covered by such options. The option term expires five years
after the date of issuance. The option exercise prices range
from $0.30 to 0.33 per share. The options were issued in a
private transaction exempt from registration under Section
4(2) of the Securities Act of 1933, with persons who had a
preexisting business relationship with us. No advertising or
general solicitation was made in connection with these
issuances. Of these options, 35,000 were subsequently
cancelled.
14. On September 12, 2003 we issued options to purchase our common
stock to 1 person who was a consultant to the company. A total
of 25,000 shares were covered by such options. The options
contain vesting provisions that provide that they will become
exercisable over a period of from one to four years after the
issuance date, and the option term expires five years after
the vesting date. The option exercise price was $0.24 per
share. The options were issued in a private transaction exempt
from registration under Section 4(2) of the Securities Act of
1933, with a person who had a preexisting business
relationship with us. No advertising or general solicitation
was made in connection with this issuance.
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15. On April 26, 2004 we issued options to purchase our common
stock to 12 persons, each of whom was an officer, employee or
consultant to the company. A total of 275,000 shares were
covered by such options. The options contain vesting
provisions that provide that they will become exercisable over
a period of from one to four years after the issuance date,
and the option term expires five years after the vesting date.
The option exercise price was $1.01 per share. The options
were issued in a private transaction exempt from registration
under Section 4(2) of the Securities Act of 1933, with persons
who had a preexisting business relationship with us. No
advertising or general solicitation was made in connection
with these issuances.
16. On July 15, 2004 we issued options to purchase our common
stock to 6 persons, each of whom was an officer or director of
the company. A total of 150,000 shares were covered by such
options. The options contain vesting provisions that provide
that they will become exercisable over a period of from one to
three years after the issuance date, and the option term
expires five years after the vesting date. The option exercise
price was $2.00 per share. The options were issued in a
private transaction exempt from registration under Section
4(2) of the Securities Act of 1933, with persons who had a
preexisting business relationship with us. No advertising or
general solicitation was made in connection with these
issuances.
17. On August 20, 2004 we issued 24,000 shares of our common stock
to an investor relations firm in exchange for services with a
value of $30,000. The shares were issued in a private
transaction exempt from registration under Section 4(2) of the
Securities Act of 1933, with persons who had a preexisting
business relationship with us. No advertising or general
solicitation was made in connection with these issuances.
ITEM 27. EXHIBITS.
(a) EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION
2.1 Agreement and Plan of Merger dated June 30, 2003 by and between
Tangible Asset Galleries, Inc. and Superior Galleries, Inc.
(incorporated herein by this reference to Exhibit C to the
definitive Proxy Statement of Tangible Asset Galleries, Inc.
filed under the Exchange Act on June 5, 2003).
3.1 Certificate of Incorporation of Superior Galleries, Inc.
(including Certificates of Designation of Superior Galleries,
Inc., relating to Series A $5.00 Redeemable 8% Convertible
Preferred Stock, Series B $1.00 Convertible Preferred Stock and
Series D $1.00 Convertible Preferred Stock) (incorporated herein
by this reference to Exhibit D to the definitive Proxy Statement
of Tangible Asset Galleries, Inc. filed under the Exchange Act on
June 5, 2003).
3.2 Bylaws of Superior Galleries, Inc. (incorporated herein by this
reference to Exhibit E to the definitive Proxy Statement of
Tangible Asset Galleries, Inc. filed under the Exchange Act on
June 5, 2003).
4.1 2003 Omnibus Stock Option Plan (incorporated herein by this
reference to Exhibit A to the definitive Proxy Statement of
Tangible Asset Galleries, Inc., filed under the Exchange Act on
June 5, 2003).
4.2 Form of Nonqualified Stock Option Agreement for 2003 Omnibus
Stock Option Plan (incorporated herein by this reference to
Exhibit 4.2 to the Annual Report on Form 10-KSB of Superior
Galleries, Inc., filed under the Exchange Act, for the fiscal
year ended June 30, 2003).
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EXHIBIT
NUMBER DESCRIPTION
4.3 Form of Employee Incentive Stock Option Agreement for 2003
Omnibus Stock Option Plan (incorporated herein by this reference
to Exhibit 4.3 to the Annual Report on Form 10-KSB of Superior
Galleries, Inc., filed under the Exchange Act, for the fiscal
year ended June 30, 2003).
4.4 Lockup Agreement dated April 3, 2002 by and among Stanford
Venture Capital Holdings, Inc. and certain stockholders of
Tangible Asset Galleries, Inc. (incorporated herein by this
reference to Exhibit G included in Exhibit 10.1 to the Current
Report on Form 8-K of Tangible Asset Galleries, Inc., filed under
the Exchange Act on April 24, 2002).
4.5 Form of Warrant to Purchase Common Stock Issued to Series A
Preferred Stock Investors (incorporated herein by this reference
to Exhibit 4.14 of the Annual Report on Form 10-KSB of Tangible
Asset Galleries, Inc., for the year ended June 30, 2002, filed
under the Exchange Act on February 19, 2003).
4.6 Warrant to Purchase 1,500,000 Shares of Common Stock dated June
15, 2001 Issued to Silvano DiGenova (incorporated herein by this
reference to Exhibit 4.9 of the Annual Report on Form 10-KSB of
Tangible Asset Galleries, Inc., for the year ended June 30, 2002,
filed under the Exchange Act on February 19, 2003).
4.7 Warrant to Purchase 1,000,000 Shares of Common Stock dated
November 27, 2001 Issued to NRLP (incorporated herein by this
reference to Exhibit 4.10 of the Annual Report on Form 10-KSB of
Tangible Asset Galleries, Inc., for the year ended June 30, 2002,
filed under the Exchange Act on February 19, 2003).
4.8 Warrant to Purchase 250,000 Shares of Common Stock dated June 26,
2001 Issued to NRLP (incorporated herein by this reference to
Exhibit 4.11 of the Annual Report on Form 10-KSB of Tangible
Asset Galleries, Inc., for the year ended June 30, 2002, filed
under the Exchange Act on February 19, 2003).
4.9 Warrant to Purchase 250,000 Shares of Common Stock dated November
14, 2000 Issued to NRLP (incorporated herein by this reference to
Exhibit 4.12 of the Annual Report on Form 10-KSB of Tangible
Asset Galleries, Inc., for the year ended June 30, 2002, filed
under the Exchange Act on February 19, 2003).
4.10 Warrant to Purchase 500,000 Shares of Common Stock dated July 3,
2001 Issued to KSH Investment Fund LLP (incorporated herein by
this reference to Exhibit 4.13 of the Annual Report on Form
10-KSB of Tangible Asset Galleries, Inc., for the year ended June
30, 2002, filed under the Exchange Act on February 19, 2003).
5.1 Opinion of Rutan & Tucker, LLP re legality (filed herewith)
9.1 Shareholders' Agreement dated April 3, 2002 by and among Silvano
DiGenova, Stanford Venture Capital Holdings, Inc. and Tangible
Asset Galleries, Inc. (incorporated herein by this reference to
exhibit E included in Exhibit 10.1 to the Current Report on Form
8-K of Tangible Asset Galleries, Inc., filed under the Exchange
Act on April 24, 2002).
10.1 Lease dated September 20, 1999 by and between Tangible Asset
Galleries, Inc. and LJR lido Partners LP (incorporated herein by
this reference to Exhibit 10.6 to the Registration Statement on
Form 10-SB/A of Tangible Asset Galleries, Inc. filed under the
Exchange Act on November 24, 1999).
10.2 First Amendment to Lease Agreement dated August 2001 by and
between LWB Lido Financial, LLC and Tangible Asset Galleries,
Inc. (incorporated herein by this reference to Exhibit 10.13 to
the Annual Report on Form 10-KSB of Tangible Asset Galleries,
Inc. for the year ended June 30, 2002, filed under the Exchange
Act on February 19, 2003).
10.3 Standard Multi-Tenant Office Lease-Gross dated August 6, 2002 by
and between DBKK, LLC and Tangible Asset Galleries, Inc.
(incorporated herein by this reference to Exhibit 10.14 to the
Annual Report on Form 10-KSB of Tangible Asset Galleries, Inc.
for the year ended June 30, 2002, filed under the Exchange Act on
February 19, 2003).
II-6
EXHIBIT
NUMBER DESCRIPTION
10.4 Registration Rights Agreement dated April 3, 2002 by and among
Tangible Asset Galleries, Inc. and holders of our Series B
Preferred Stock, Series C Preferred Stock and Certain Warrants
(incorporated herein by this reference to exhibit D included in
Exhibit 10.1 to the Current Report on Form 8-K of Tangible Asset
Galleries, Inc., filed under the Exchange Act on April 24, 2002).
10.5 Employment Agreement dated June 1, 2001 between Tangible Asset
Galleries, Inc. and Silvano DiGenova. (incorporated herein by
this reference to Exhibit 10.16 to the Annual Report on Form
10-KSB of Tangible Asset Galleries, Inc. for the year ended June
30, 2002, filed under the Exchange Act on February 19, 2003).
10.6 Employment Agreement dated December 27, 2002 between Tangible
Asset Galleries, Inc. and Paul Biberkraut (incorporated herein by
this reference to Exhibit 10.6 to the Annual Report on Form
10-KSB of Superior Galleries, Inc., filed under the Exchange Act,
for the fiscal year ended June 30, 2003).
23.1 Consent of Haskell & White LLP
23.2 Consent of Singer Lewak Goldstein & Greenbaum LLP
23.3 Consent of Rutan & Tucker, LLP (included in Exhibit 5.1)
- -----------------
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement to:
(i) include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933 (the "Securities Act");
(ii) reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the Registration Statement; and
(iii) include any additional or changed material information
on the plan of distribution.
(2) That, for determining liability under the Securities Act, each such
post-effective amendment shall be treated as a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(3) To file a post-effective amendment to remove from registration any
of the securities being registered that remain unsold at the end of the
offering.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
II-7
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-8
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the city of Beverly
Hills, State of California, on September 24, 2004.
SUPERIOR GALLERIES, INC.
By: /S/ SILVANO DIGENOVA
-------------------------------------
Silvano DiGenova
President and Chief Executive Officer
II-9
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned officers and
directors of Superior Galleries, Inc., a Delaware corporation, which is filing a
registration statement on Form SB-2 with the Securities and Exchange Commission
under the provisions of the Securities Act of 1933, as amended, hereby
constitute and appoints Silvano DiGenova and Paul Biberkraut, and each of them,
their true and lawful attorney-in-fact and agent; with full power of
substitution and resubstitution, for him or her and in his or her name, place
and stead, in any and all capacities, to sign such registration statement and
any or all amendments to the registration statement, including a prospectus or
an amended prospectus therein, and all other documents in connection therewith
to be filed with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all interests and purposes as they might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agents, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Name Title Date
- ----------------------------- --------------------------------------- ------------------
/S/ SILVANO DIGENOVA President, Chairman of the Board, Chief September 24, 2004
- ----------------------------- Executive Officer (principal executive
Silvano DiGenova officer) and Director
/S/ PAUL BIBERKRAUT Chief Financial Officer, Secretary September 24, 2004
- ----------------------------- (principal accounting officer) and
Paul Biberkraut Director
/S/ LEE ITTNER Director September 24, 2004
- -----------------------------
Lee Ittner
/S/ DAVID RECTOR Director September 24, 2004
- -----------------------------
David Rector
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INDEX TO EXHIBITS ATTACHED TO THIS REGISTRATION STATEMENT
Exhibit
Number Description
------ -----------
5.1 Opinion of Rutan & Tucker, LLP
23.1 Consent of Haskell & White LLP, independent registered public
accounting firm
23.2 Consent of Singer Lewak Goldstein & Greenbaum LLP, independent
registered public accounting firm
23.3 Consent of Rutan & Tucker, LLP (contained in Exhibit 5)
II-11