THOMAS G. BROCKINGTON
Direct Dial: (714) 641-3466
E-mail: tbrockington@rutan.com January 10, 2005
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0406
Attn: Matthew Benson, Esq.
Re: Superior Galleries, Inc.
Registration Statement on Form SB-2
Commission File No. 333-119253
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Dear Mr. Benson:
We are concurrently filing Amendment No. 2 to the Registration
Statement on Form SB-2 of Superior Galleries, Inc., File No. 333-119253. This
letter is in response to your comment letter of December 16, 2004. The paragraph
numbers set forth below correspond to the paragraph numbers set forth in your
December 16, 2004 letter. The page number references below are to the page
numbers of this Amendment No. 2 to the Registration Statement, not Amendment No.
1.
Please note that in addition to amending the Registration Statement in
response to your comments, we have also amended it to register the resale of an
additional 180,000 shares of common stock, which were issued in a private
transaction to a single purchaser on January 4, 2005.
The following are our responses to your comments.
The high level of our debt may limit our ability....
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1. As requested, we have revised the disclosure in the risk factor
captioned "The high level of our debt..." on page 6 to indicate that we
may need to incur more indebtedness to service our current
indebtedness.
Securities and Exchange Commission
January 10, 2005
Page 2
Our Series B Preferred Stock and Series D Preferred Stock have antidilution
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terms...
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2. As requested, we have deleted the mitigating language in the last three
sentences in the risk factor headed "Our Series B Preferred Stock and
Series D Preferred Stock..." In order to do so, we have deleted these
sentences in their entirety.
Management's Discussion and Analysis
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For the Three Months Ended September 30, 2004 and 2003
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3. We have revised the disclosure in the Management's Discussion and
Analysis section, on page 19 under "For the Three Months Ended
September 30, 2004 and 2003-Total Revenue," to describe the planned
upgrades to the Company's e-commerce functionality and the associated
costs.
Years Ended June 30, 2004 and 2003
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4. We have revised the disclosure in the Management's Discussion and
Analysis section, on page 23 under "Years Ended June 30, 2004 and
2003-Selling, General and Administrative Expenses," to provide
additional information regarding the estimated cost savings from the
consolidation of the Company's facilities, and the partially offsetting
costs from additional staff and marketing and advertising expenses.
5. We have added additional disclosure on page 22 under "Cost of Sales" to
describe the principal factors that affect the Company's cost of sales
from year to year, and thus its gross margin. We have described these
factors on an aggregate basis, as we assume that you are not asking
that we analyze cost of sales factors on a coin-by-coin basis. We have
added disclosure to make it clear that cost of sales on an aggregate
basis, and thus gross margin, is a function of two variables: the
volume of sales of coins and the price the Company pays for those
coins. We have explained the principal factors that affect the price
the Company pays for coins. The factors that affect the Company's
revenue, such as aggressive pricing to the Company's customers, do not
affect cost of sales.
Financing Activities
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6. Please note that the loan from the Company's CEO is not callable or
payable on demand. As disclosed in the third paragraph under "Financing
Activities - Debt" on page 25, this note requires monthly interest
payments and quarterly principal payments of $50,000. In addition,
$150,000 of deferred principal payments will be due March 31, 2005.
Thus, there is no risk that the CEO will require immediate payment of
the deferred portion of the outstanding balance, since he is not
entitled to do so. If the Company desires to obtain a further extension
of the deferred portion of the loan in March 2005, but the CEO is
unwilling to provide such an extension, the Company will be obligated
to liquidate sufficient inventory to make this payment.. We have added
disclosure to this effect at the end of this paragraph.
Securities and Exchange Commission
January 10, 2005
Page 3
7. Please note that the Company has now negotiated a payment schedule with
the holder of the $2,500,000 loan referred to in this comment. The
agreement that sets forth the new payment schedule is attached as
Exhibit 10.18, and there is disclosure in the Management's Discussion
and Analysis section under "Financing Activities - Debt" on page 24
that describes this arrangement. There is disclosure under "The high
level of our debt..." on page 6 in the Risk Factors section that
describes the Company's options if its debt is not renewed when it
becomes due, and that also describes the Company's past practice of
renegotiating debt where feasible.
Business
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Competition
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8. We have revised the disclosure under "Competition" on page 33 to more
clearly describe the Company's methods of competition.
Management
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9. You are advised that none of the companies referred to in Mr.
Gollihugh's bio are reporting companies. Disclosure to this effect has
been added to the Registration Statement.
Employment Agreements
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10. We have filed as Exhibit 10.19 the agreement by which Mr. DiGenova has
confirmed in writing his prior verbal waiver of rights to a bonus based
on the Company's capitalization. This agreement also extends his
current employment agreement to March 31, 2005.
Certain Relationships and Related Transactions
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11. As requested, we have disclosed that the Company believes that the
terms of the transactions described under this heading were comparable
to those that could have been obtained from an unrelated third party.
Securities and Exchange Commission
January 10, 2005
Page 4
Principal and Selling Shareholders
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12. As requested, we have added disclosure under this heading regarding the
purchase of the referenced securities for investment intent, and the
absence of agreements, etc. to distribute these securities. See
footnote 9 under this table.
13. We have revised the "Shares Being Offered" column in the Principal and
Selling Shareholder chart to reflect that the number of shares held by
Stanford Venture Capital Holdings, Inc., including those held by its
four employees, is the same as the number being offered, and therefore
the number shown in the column under "Shares Beneficially Owned After
the Offering" will be zero. The "Shares Being Offered" column
previously erroneously excluded those being sold by the Stanford
employees.
Financial Statement for the Year Ended June 30, 2004
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Independent Auditors' Report
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14. The auditors have corrected the language of the report of Singer Lewak
Greenbaum & Goldstein LLP to indicate that they audited the balance
sheet of the Company only for 2004.
Statement of Cash Flows
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15. As requested, we have revised the heading on the Statement of Cash
Flows on Page F-9.
Note 1. Summary of Significant Accounting Policies
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Shipping and Handling
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16. We submit that shipping income and the related shipping costs are
immaterial. The Company records shipping income as part of net sales
and records shipping expense as part of selling, general and
administrative expenses. For the year ended June 30, 2003 the Company
recorded $19,000 of shipping income and $41,000 of shipping expense.
This shipping income represented 0.1% of revenues, and the shipping
expense represented 0.6% of selling, general and administrative
expenses. For the year ended June 30, 2004 the Company recorded $22,000
of shipping income (0.1% of revenues) and $47,000 of shipping expense
(0.8% of selling, general and administrative expenses). For the three
month period ended September 30, 2004 the Company recorded $6,000 of
shipping income (0.1% of revenues) and $13,000 of shipping expense
(0.7% of selling, general and administrative expenses).
Securities and Exchange Commission
January 10, 2005
Page 5
Note 2. Inventories
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17. We have revised a portion of Note 2 to the Financial Statements to more
accurately reflect the Company's practices with respect to occasional
joint ownership of coins.
You are supplementally advised that at June 30, 2004 and 2003 the
Company had no inventory that was held in partnership, and any
partnership interests of third parties in coins that existed during
those years were bought out by the Company prior to the sale of the
corresponding rare coins. At September 30, 2004, the Company's
inventory included $27,600 of inventory representing the Company's half
interest in rare coins. The Company did not sell any coins that were
held in partnership for the three month period ending September 30,
2004. In December 2004 the Company bought out the partnership interest
in the rare coins that were held at September 30, 2004, and thus held a
100% interest in these coins at December 31, 2004.
Subsequent to the year ended June 30, 2002, the Company significantly
reduced the number of rare coin purchase transactions that involved
partnerships, as the Company instead relied on general corporate debt
and extended payment terms from vendors to finance its inventory
purchases.
When coins are held in partnership with customers or vendors, the
Company equally shares in the risk of loss in market value. Upon the
sale of a coin that is held in partnership, the Company shares in the
risk of accounts receivable collection, but in practice the Company
generally collects funds in advance of delivery or provides terms to
known dealers. The Company has had a very low instance of bad debts for
these and its other transactions. Either partner has the right to sell
and market the coin and take possession, and title to the rare coins is
held jointly. The identity of the partner that maintains possession of
the coin will depend on the circumstances. If a partner has a potential
customer, that partner will normally take possession of the coin to
show the customer. A partner may also take possession for purposes of
showing the coin at a trade show or sales event. The only instance
where our partner may not take possession of the coin is where that
partner does carry adequate insurance; in this instance, the Company
would maintain possession of the coin.
Note 11. Equity
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Sale and Redemption of Series A Convertible Preferred Stock
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18. The redemption provision for the Company's Series A Preferred Shares
that was exercised provides solely that the shareholders are entitled
to redeem one-tenth of the shares held by them each quarter, starting
March 31, 2004. There is no provision with regard to an acceleration of
the redemption of the remaining shares, if there is a default in the
redemption of any portion of the shares. As a result, the Company's
accounting treatment of showing both a long-term and short-term portion
of the redemption is correct.
Securities and Exchange Commission
January 10, 2005
Page 6
Financial Statements for the Quarter Ended September 30, 2004
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Note 9. Contingencies
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Legal Proceedings
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19. We have added to Footnote 12 the disclosure that appears in the body of
the Prospectus, which states: "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."
Part II
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Exhibits
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20. Exhibit 10.17 appears in Amendment No. 1 immediately after Exhibit
10.16. It seems that in the Edgarization process, a separate exhibit
tag was not created for Exhibit 10.17. However, while that Exhibit was
in fact filed, we have filed it again in this Amendment, so that it
appears with the proper Exhibit tag.
Form 10-KSB for the Year Ended June 30, 2004
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21. This will confirm that the Company will amend its Annual Report on Form
10-KSB for the year ended June 30, 2004 to reflect the changes made in
response to the Staff's comments on the this Registration Statement.
Form 10-QSB for the Quarter Ended September 30, 2004
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22. This will confirm that the Company will amend its Quarterly Report on
Form 10-QSB for the quarter ended September 30, 2004 to reflect the
changes made in response to the Staff's comments on the this
Registration Statement.
Item 3. Controls and Procedures
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23. This confirms that the Company will amend Item 3 of its Quarterly
Report on Form 10-QSB for the quarter ended September 30, 2004 as
required by your comment 23.
Securities and Exchange Commission
January 10, 2005
Page 7
I look forward to discussing the foregoing with you at your
convenience. My direct phone number is (714) 641-3466.
Very truly yours,
RUTAN & TUCKER, LLP
/S/ Thomas G. Brockington
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Thomas G. Brockington
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