U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended June 30, 2005
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______________ to ______________
Commission File No. 0-27121
SUPERIOR GALLERIES, INC.
(Name of Small Business Issuer in Its Charter)
DELAWARE 35-2208007
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization Identification Number)
9478 WEST OLYMPIC BLVD. 90212
BEVERLY HILLS, CALIFORNIA (Zip Code)
(Address of Principal Executive Offices)
(310) 203-9855
(Issuer's Telephone Number)
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
(None)
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
Common Stock, par value $0.001
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports); and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers in response
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
Based on the last sale price of its common stock on August 8, 2005
($2.45), the aggregate market value of the registrant's common stock held by
non-affiliates was approximately $4,322,000.(1) Unless otherwise specified
herein, all share, warrant and option amounts give effect to a 1-for-20 reverse
stock split effective as of June 30, 2003.
The number of outstanding shares of the registrant's common stock as of
August 8, 2005, was 4,819,942.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and
the part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document
is incorporated: (1) any annual report to security holders; (2) any proxy or
information statement; and (3) any prospectus filed pursuant to rule 424(b) or
(c) of the Securities Act of 1933 ("Securities Act"). The listed documents
should be clearly described for identification purposes.
None
_______________________
(1) For purposes of this calculation, shares owned by executive officers,
directors and 10% shareholders known to the registrant have been deemed to
be owned by affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
TABLE OF CONTENTS
Page
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PART I............................................................................................................1
ITEM 1. BUSINESS........................................................................................1
ITEM 2. PROPERTIES......................................................................................8
ITEM 3. LEGAL PROCEEDINGS...............................................................................8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................................8
PART II...........................................................................................................9
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES....................................................9
ITEM 6. SELECTED FINANCIAL DATA........................................................................11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.......................................................................14
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK......................................33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................................33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE........................................................................33
ITEM 9A. CONTROLS AND PROCEDURES........................................................................33
ITEM 9B. OTHER INFORMATION..............................................................................34
PART III.........................................................................................................35
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............................................35
ITEM 11. EXECUTIVE COMPENSATION.........................................................................37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.................................................................41
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................44
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.........................................................45
PART IV..........................................................................................................46
ITEM 15. EXHIBITS.......................................................................................46
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PART I
This Annual Report on Form 10-K includes forward-looking statements
within the meaning of the Securities Exchange Act of 1934, as amended, or the
Exchange Act. These statements are based on our beliefs and assumptions, and on
information currently available to us. Forward-looking statements include among
others, the information concerning possible or assumed future results of
operations of Superior Galleries, Inc. set forth under the heading "Financial
Information-Management's Discussion and Analysis of Financial Condition and
Results of Operations." Forward-looking statements also include statements in
which words such as "expect," "anticipate," "intend," "plan," "believe,"
"estimate," "consider" or similar expressions are used.
Forward-looking statements are not guarantees of future performance.
They involve risks, uncertainties and assumptions. Our future results and
shareholder values may differ materially from those expressed in these
forward-looking statements. We caution you not to put undue reliance on any
forward-looking statements contained in this document.
ITEM 1. 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. 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, Overstock.com and
Amazon.com and through our own website at SGBH.com. Our headquarters are in
Beverly Hills, California. Information regarding our revenues, profit or loss,
and total assets is contained in our financial statements included in this
Annual Report.
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 Annual Report 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.
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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.
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. 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. One of the two
largest auctioneers in the world in the coin and collectibles market reported
annual auction and related revenue from the sale of art and collectibles of $443
million for the year ended December 31, 2004. With specific regard to coins, the
U.S. Mint, in its 2004 annual report for the year ending September 30, 2004,
reported that there are over 130 million Americans 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 $279
million in its 2004 annual report.
Typically, the coins that we buy and sell were originally manufactured
in the late 1700's to the mid-20th century. 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
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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
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 approximately four 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 and
Overstock.com, third party websites, to sell rare coins at their Internet public
auction and listing sites. 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,
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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, 2005, 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
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. 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
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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. 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.
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 up to 60 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. Methods of
competition include pricing coins at levels that are lower than the published
prices of our competitors, charging reduced auction commissions to sellers,
increasing advertising and expanding Internet presence, and providing more
personalized service. 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 coin and bullion dealer; Spectrum, a large scale coin dealer 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 dealer; 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 in part because of the
reputation of our Chief Executive Officer, Silvano DiGenova, who has twenty-five
years of experience in the rare coin industry. We cannot assure you, though,
that we can continue to compete successfully with other established companies.
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
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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
"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. If the FTC or any state agency proposed additional
regulations relating to the telemarketing of coins, we could be required to
expend additional funds in order to hire staff and provide training. The expense
of complying with these requirements would likely reduce our profitability.
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.
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"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
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, 2005, none of our customers accounted for more than
10% of our sales.
On May 18, 2005, we entered into a Primary Supplier Agreement with
Stanford Coins & Bullion, Inc. ("Stanford C&B"), an affiliate of our principal
shareholder, Stanford International Bank Limited ("SIBL" or "Stanford") under
which we have been provided with a preferential right to source coins that
Stanford C&B is seeking for its customers. While we anticipate that this
arrangement will likely result in increased coins sales by us, we are unable to
predict the magnitude of that increase, and the amount of the increase may or
may not be material.
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NUMBER OF EMPLOYEES
As of August 3, 2005, we co-employed or obtained contract services from
40 persons, of which 36 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 are represented
by a labor union.
ITEM 2. PROPERTIES
Our corporate headquarters are located in an approximately 7,000 square
foot storefront facility located at 9478 West Olympic Boulevard, Beverly Hills,
California, which we lease from a company controlled by another rare coin
dealer. This facility includes administrative, customer support, auction,
gallery and retail space. The lease expires on September 30, 2007. The monthly
rental rate is $17,193, subject to annual increases based on increases in the
consumer price index. We believe that our facilities are adequate for our needs
in the near future.
ITEM 3. LEGAL PROCEEDINGS
We have been sued by Heritage Capital Corporation ("Heritage"), a
competitor of ours, in connection with our employment of Larry Abbott, a former
employee of Heritage. This case is pending in the Dallas County District Court
in Texas, pursuant to a petition filed June 3, 2005. The parties to this case
include Heritage, Superior Galleries, Inc. and Mr. Abbott. In this case,
Heritage has sued Mr. Abbott for breach of his employment agreement with that
company, following his resignation in May 2005. Heritage further alleges that
Mr. Abbott has misappropriated Heritage's trade secrets and that in hiring Mr.
Abbott we have wrongfully interfered with Mr. Abbott's employment contract and
employment relationship with Heritage. Heritage seeks actual and exemplary
damages, attorneys' fees and costs in unspecified amounts and an order from the
court concerning the enforceability and scope of the arbitration provisions of
his employment contract. We intend to vigorously defend the claims against us in
this matter.
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,
except as discussed above, 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
-8-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
Our common stock is traded on the NASDAQ over-the-counter Bulletin
Board under the symbol "SPGR." Prior to July 1, 2003 our symbol was "TAGZ." The
following table shows the trading price data for our common stock as reported by
NASDAQ as the range of representative bid prices for our common stock for the
quarters indicated. Our common stock is quoted in the National Quotation
Bureau's Pink Sheets and listed on the NASD's Electronic Bulletin Board. 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 2005
---------------------------
Fiscal Quarter Ended: High Low
-------- --------
June 30 $4.75 $2.90
March 31 4.20 1.50
December 31 1.52 0.65
September 30 2.00 1.25
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
HOLDERS
We have one class of common stock outstanding as of August 1, 2005. The
number of holders of record of our common stock as of the close of business on
August 2, 2005 was approximately 196. 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 on our common stock 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. The holders of our outstanding Series D $1.00
-9-
Convertible Preferred Stock, or Series D Preferred Stock and Series E $1.00
Convertible Preferred Stock, or Series E Preferred Stock, each voting separately
as a class, likewise must approve the payment of any dividends other than
dividends on our several outstanding series of Preferred Stock.
EQUITY COMPENSATION PLAN INFORMATION
Information regarding outstanding options to purchase our common stock
under equity compensation plans, and concerning related matters, is set forth
below under "Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters--Equity Compensation Plan Information."
RECENT SALES OF UNREGISTERED SECURITIES
On October 25, 2004 we issued 10,000 options to purchase our common
stock to a director. The option term expires six years after the date of
issuance. The option exercise price for these options was $1.25 per share. The
options were issued in a private transaction exempt from registration under
Section 4(2) of the Securities Act of 1933, to a sophisticated investor. No
advertising or general solicitation was made in connection with this issuance.
On December 21, 2004 we issued options to purchase our common stock to
2 persons, each of whom was an employee of the company. A total of 20,000 shares
were covered by such options. The option term expires nine years after the date
of issuance. The option exercise price for these options was $1.52 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.
On March 28, 2005 we issued options to purchase 10,000 of our common
stock to an employee. The option term expires nine years after the date of
issuance. The option exercise price was $3.80 per share. The options were issued
in a private transaction exempt from registration under section 4(2) of the
Securities Act of 1933, with person had a preexisting business relationship with
us. No advertising or general solicitation was made in connection with this
issuance.
On April 18, 2005 we issued options to purchase 50,000 shares of our
common stock to an employee. The option term expires nine years after the date
of issuance. The option exercise price was $3.80 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.
On April 25, 2005 we issued options to purchase 5,000 shares of our
common stock to an employee. The option term expires nine years after the date
of issuance. The option exercise price was $4.25 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.
On June 1, 2005 we issued options to purchase 100,000 shares of our
common stock to an employee. The option term expires nine years after the date
of issuance. The option exercise price was $4.00 per share. The options were
issued in a private transaction exempt from registration under section 4(2) of
the Securities Act of 1933, with a person who had a preexisting business
relationship with us. No advertising or general solicitation was made in
connection with this issuance.
-10-
On June 20, 2005 we issued 25,000 shares of our common stock to an
employee for services to be rendered with a value of $79,250. The common stock
was 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.
On June 20, 2005 we issued 50,000 shares of our common stock pursuant
to the exercise of outstanding warrants to purchase our common stock with an
exercise price of $1.00 per common share. The proceeds from the issuance of the
common stock was $50,000. The common stock was 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.
ITEM 6. SELECTED FINANCIAL DATA
The selected operating data for the fiscal years ended June 30, 2005,
2004 and 2003, and the selected balance sheet data at June 30, 2005 and 2004,
that are set forth below are derived from our audited financial statements
included elsewhere in this Report. The selected operating data for the fiscal
year ended June 30, 2002 and the six month period ended June 30, 2001 and the
related balance sheet data at June 30, 2003, 2002 and 2001 were derived from
audited consolidated financial statements that are not included in this Report.
The following data should be read in conjunction with our financial statements
and related notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included below in this report.
-11-
SIX MONTHS
ENDED
YEARS ENDED JUNE 30, JUNE 30,
---------------------------------------------------- ----------
STATEMENTS OF OPERATIONS DATA 2005 2004 2003 2002 2001(1)
---------- ---------- ---------- ---------- ----------
(in thousands, except per share data)
Total revenue $ 39,535 $ 29,997 $ 20,355 $ 18,797 $ 12,546
Cost of sales 32,027 23,382 15,952 16,092 11,163
---------- ---------- ---------- ---------- ----------
Gross profit 7,508 6,615 4,403 2,705 1,383
Selling, general and administrative expenses 7,708 5,959 6,676 6,406 1,683
Impairment of goodwill - - 591 - -
---------- ---------- ---------- ---------- ----------
Operating income (loss) (200) 656 (2,864) (3,701) (300)
Other income (expense) (415) (92) (614) (1,174) (512)
---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations before
income tax provision (615) 564 (3,478) (4,875) (812)
Income tax provision (benefit) 1 12 13 (8) 1
---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations (616) 552 (3,491) (4,867) (813)
Income (loss) from discontinued operations - (3,038) 404
---------- ---------- ---------- ---------- ----------
Net income (loss) $ (616) $ 552 $ (3,491) $ (7,905) $ (409)
========== ========== ========== ========== ==========
Calculation of net income (loss) per share
Net income (loss) $ (616) $ 552 $ (3,491) $ (7,905) $ (409)
Preferred stock accretion (50) (67) (44) -
Preferred stock dividends (37) (429) (62) -
---------- ---------- ---------- ---------- ----------
Net income (loss) applicable to common shares $ (616) $ 465 $ (3,987) $ (8,011) $ (409)
---------- ---------- ---------- ---------- ----------
Net income (loss) per common share: (2)
from continuing operations $ (0.13) $ 0.11 $ (1.75) $ (2.50) $ (0.84)
from discontinued operations - (1.53) 0.42
---------- ---------- ---------- ---------- ----------
from net income (loss), basic $ (0.13) $ 0.11 $ (1.75) $ (4.03) $ (0.42)
========== ========== ========== ========== ==========
from net income (loss), fully diluted $ (0.13) $ 0.06 $ (1.75) $ (4.03) $ (0.42)
========== ========== ========== ========== ==========
Weighted average shares outstanding: (2)
Basic 4,627 4,370 2,278 1,988 964
Fully diluted 4,627 8,098 2,278 1,988 964
- --------------------
(1) As of June 30, 2001, we changed our fiscal year end to June 30.
Accordingly, the fiscal year ended June 30, 2001 was a six month period.
(2) Per share data and weighted average shares outstanding have been
retroactively adjusted for a twenty-for-one reverse split, which was
effectuated on June 30, 2003
JUNE 30,
------------------------------------------------------------------
BALANCE SHEET DATA 2005 2004 2003 2002 2001
---------- ---------- ---------- ---------- ----------
(in thousands)
Cash and cash equivalents $ 417 $ 447 $ 689 $ 33 $ 226
Current assets 19,395 16,719 9,597 5,918 10,289
Total assets $ 19,615 $ 16,865 $ 9,827 $ 7,221 $ 13,902
Current liabilities $ 17,879 $ 17,004 $ 9,955 $ 5,528 $ 9,285
Long-term liabilities 400 944 807 1,007 819
Shareholders' equity (deficit) 1,336 (1,083) (1,572) (585) 3,797
Total liabilities and shareholders' equity (deficit) $ 19,615 $ 16,865 $ 9,827 $ 7,221 $ 13,902
The following data present unaudited quarterly financial information
for each of the eight quarters beginning with September 30, 2003 and ending on
June 30, 2005. The information has been derived from our unaudited quarterly
-12-
financial statements, which have been prepared by us on a basis consistent with
our audited financial statements appearing elsewhere in this Form 10-K. The
financial information set forth below includes all necessary adjustments,
consisting only of normal recurring adjustments, that management considers
necessary for a fair presentation of the unaudited quarterly results. The
following data should be read in conjunction with our financial statements and
related notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included below in this report.
FISCAL QUARTER ENDED
YEAR ENDED ----------------------------------------------------
JUNE 30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30,
STATEMENTS OF OPERATIONS DATA 2005 2005 2005 2004 2004
---------- ---------- ---------- ---------- ----------
(in thousands, except per share data)
Total revenue $ 39,535 $ 10,205 $ 11,658 $ 8,403 $ 9,269
Cost of sales 32,027 8,364 9,661 6,787 7,215
---------- ---------- ---------- ---------- ----------
Gross profit 7,508 1,841 1,997 1,616 2,054
Selling, general and administrative expenses 7,708 2,114 2,098 1,642 1,854
---------- ---------- ---------- ---------- ----------
Operating income (loss) (200) (273) (101) (26) 200
Other income (expense) (415) (135) (102) (104) (74)
---------- ---------- ---------- ---------- ----------
Income (loss) from before income tax provision (615) (408) (203) (130) 126
Income tax provision (benefit) 1 - - - 1
---------- ---------- ---------- ---------- ----------
Net income (loss) $ (616) $ (408) $ (203) $ (130) $ 125
========== ========== ========== ========== ==========
Net income (loss) per common share:
from net income (loss), basic $ (0.13) $ (0.09) $ (0.04) $ (0.03) $ 0.03
========== ========== ========== ========== ==========
from net income (loss), fully diluted $ (0.13) $ (0.09) $ (0.04) $ (0.03) $ 0.02
========== ========== ========== ========== ==========
Weighted average shares outstanding:
Basic 4,627 4,743 4,685 4,510 4,497
Fully diluted 4,627 4,743 4,685 4,510 8,170
FISCAL QUARTER ENDED
YEAR ENDED ----------------------------------------------------
JUNE 30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30,
STATEMENTS OF OPERATIONS DATA 2004 2004 2004 2003 2003
---------- ---------- ---------- ---------- ----------
(in thousands, except per share data)
Total revenue $ 29,997 $ 9,467 $ 9,459 $ 5,154 $ 5,916
Cost of sales 23,382 7,394 7,120 4,242 4,625
---------- ---------- ---------- ---------- ----------
Gross profit 6,615 2,073 2,339 912 1,291
Selling, general and administrative expenses 5,958 1,659 1,603 1,387 1,310
---------- ---------- ---------- ---------- ----------
Operating income (loss) 657 414 736 (475) (19)
Other income (expense) (92) (54) 9 2 (49)
---------- ---------- ---------- ---------- ----------
Income (loss) from before income tax provision 565 360 745 (473) (68)
Income tax provision (benefit) 13 3 5 6 (2)
---------- ---------- ---------- ---------- ----------
Net income (loss) $ 552 $ 357 $ 740 $ (479) $ (66)
========== ========== ========== ========== ==========
Calculation of net income (loss) per share
Net income (loss) $ 552 $ 357 $ 740 $ (479) $ (66)
Preferred stock accretion (50) - (17) (17) (17)
Preferred stock dividends (37) - (12) (13) (12)
---------- ---------- ---------- ---------- ----------
Net income (loss) applicable to common shares $ 465 $ 357 $ 711 $ (508) $ (95)
---------- ---------- ---------- ---------- ----------
Net income (loss) per common share:
from net income (loss), basic $ 0.11 $ 0.08 $ 0.16 $ (0.11) $ (0.02)
========== ========== ========== ========== ==========
from net income (loss), fully diluted $ 0.06 $ 0.04 $ 0.09 $ (0.11) $ (0.02)
========== ========== ========== ========== ==========
Weighted average shares outstanding:
Basic 4,370 4,486 4,486 4,486 4,020
Fully diluted 8,098 8,163 8,223 4,486 4,020
-13-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTIONARY STATEMENTS
This Annual Report on Form 10-K 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 Annual Report contains forward-looking statements regarding
our financial condition, operating results, business prospects or any other
information or aspect of our company, you are advised that our actual financial
condition, operating results and business performance may differ materially from
that projected or estimated by us in forward-looking statements. The differences
may be caused by a variety of factors, including but not limited to:
o those identified under "Risk Factors" below,
o adverse economic conditions,
o unexpected costs and operating deficits,
o lower sales and revenues than had been 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 Annual
Report or in other reports that we have issued.
In addition, our business and operations are subject to substantial
risks that increase the uncertainty inherent in the forward-looking statements.
The inclusion of forward-looking statements in this Annual Report should not be
regarded as a representation by us or any other person that we will achieve our
objectives or plans.
TRENDS AND UNCERTAINTIES
As a dealer and auctioneer of rare coins, our revenue and profitability
can be materially affected by economic factors such as interest rates,
inflation, stock market performance, the price of gold and other precious metals
and world political stability. The demand for and therefore the price of rare
coins tends to increase with the price of gold. During times of unstable stock
market performance and low interest rates rare coins may become more attractive
as an investment as compared to the stock market or interest bearing securities.
-14-
In times of strong stock market returns and high interest rates, rare coins may
be viewed as a less favorable investment. Political instability may also
increase the demand for rare coins as individuals may perceive the security and
portability of rare coins more favorably as compared to other financial assets
such as stocks, bonds or cash. While we are currently experiencing economic
conditions that have increased the demand for rare coins, resulting in higher
revenue and profitability for us, future changes in the economy such as rapid
increases in interest rates, a decrease in the price of gold or strong growth in
the stock market could materially reduce our revenue, margins and profitability
and affect our liquidity as inventory turns would diminish.
Furthermore, certain types of rare coins, as is the case with other
collectibles, may become more or less popular based on market trends that we
cannot predict. Although we carry a diverse range of categories of rare coins, a
decrease in popularity in a particular category could result in diminished
liquidity as inventory turns decrease for the affected category.
Within the rare coin industry many of our customers and suppliers are
other dealers. We may be materially affected by both external and internal
factors that could affect the financial stability and liquidity of other dealers
with whom we conduct business. Our revenues and profitability could
significantly decrease if several dealers faced financial difficulties that
curtailed their ability to sell or purchase rare coins either directly or at our
auctions.
Prior to the year ended June 30, 2004, we incurred substantial losses
that severely diminished our capital base and our liquidity. Although we have
significantly reduced the level of our losses and have had recent periods of
profitability, we have limited shareholders' equity and working capital and most
of our debt is short-term. Any significant unfavorable change in the economic
environment or in our industry could quickly result in declining revenue and a
return to operating losses. Our challenge is to both raise additional permanent
equity capital and restructure our debt to include a larger long-term portion.
Although we cannot assure you that we will be able to accomplish these
objectives, we believe that the achievement of these goals would permit us to
increase the levels of inventory that we have available for sale and increase
the funds available to loan to our consignment customers, thus enhancing our
revenues. Accordingly, it is our hope that if we are able to restructure our
debt and raise additional equity, we will mitigate some of the impact of a
future negative economic environment and conversely will benefit more sharply
from a positive environment.
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 in this Annual Report. Historical results of operations,
percentage margin fluctuations and any trends that may be inferred from the
discussion below are not necessarily indicative of the operating results for any
future period.
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.
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
-15-
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 International Bank Limited, 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.
REVENUE RECOGNITION. We generate 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.
We sell rare coins to other wholesalers/dealers within our industry on
credit, generally for terms of 15 to 60 days, but in no event greater than one
year. We grant credit to new dealers based on extensive credit evaluations and
for existing dealers based on established business relationships and payment
histories. We generally do not obtain collateral with which to secure our
accounts receivable when the sale is made to a dealer. We maintain reserves for
potential credit losses based on an evaluation of specific receivables and the
Company's historical experience related to credit losses. We recognize revenue
for monetary transactions (i.e., cash and receivables) with dealers when the
merchandise is shipped to a dealer.
We also sell rare coins to retail customers on credit, generally for
terms of 30 to 60 days, but in no event greater than one year. We grant credit
to retail customers based on credit evaluations and for existing retail
customers based on established business relationships and payment histories.
When a retail customer is granted credit, we generally collect a payment of 25%
of the sales price, establish a payment schedule for the remaining balance and
hold 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, we 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, we recognize revenue when our customer
agrees to the terms of the credit and makes the initial payment. Less than 5% of
our sales are retail credit sales. We have limited-in-duration money back
guaranty policies for our retail customers only, as discussed below.
-16-
In limited circumstances, we exchange merchandise for similar
merchandise and/or monetary consideration with both dealers and retail
customers, for which we recognize revenue in accordance with APB No. 29,
"Accounting for Non-monetary Transactions." When we exchange merchandise for
similar merchandise and there is no monetary component to the exchange, we do
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 we exchange merchandise for similar
merchandise and there is a monetary component to the exchange, we recognize
revenue to the extent of monetary assets received and determine 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.
We have a return policy (money-back guarantee). The policy covers
retail transactions involving graded rare coins only. Our 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, our 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, our retail customers have not exercised their rights to
money-back guarantees and as such, we have 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 we are
acting as an agent for the consignor. If in the process of selling consigned
goods, we make 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 us at that payment date, then we record that payment as a purchase
and the sale of the consigned good(s) to the buyer as revenue as we have assumed
all collection risk.
Our auction business generates 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. Buyback commissions represent an agreed
upon rate charged by us 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 which the winning
bidder relied upon to purchase the item.
INVENTORY VALUATION. We value our inventory at the lower of cost or
market. On a periodic basis our numismatic staff will review market data to
determine whether or not the cost of our inventory is above or below market
price. If the market value of a coin is significantly less than its cost to us,
we will establish a reserve against inventory to reflect that the market value
of our rare coin inventory in the aggregate is below cost, which results in
reflecting the value of our inventory at the lower of cost or market.
-17-
RESULTS OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2005 AND 2004
The following table sets forth the percentage of net revenue
represented by each item in our statements of operations for the periods
presented and the net changes and percentage of change for each item in our
statement of operations between the periods indicated:
YEAR ENDED (IN THOUSANDS)
------------------------------------------------
JUNE 30, JUNE 30, %
2005 % 2004 % CHANGE CHANGE
---------- -------- ---------- -------- ---------- --------
Net sales $ 37,340 94% $ 26,916 90% $ 10,424 39%
Commission Income 2,195 6% 3,081 10% (886) -29%
---------- -------- ---------- -------- ---------- --------
Total revenue 39,535 100% 29,997 100% 9,538 32%
Cost of sales 32,027 81% 23,382 78% 8,645 37%
---------- -------- ---------- -------- ---------- --------
Gross profit 7,508 19% 6,615 22% 893 13%
Selling, general and administrative expenses 7,708 19% 5,959 20% 1,749 29%
---------- -------- ---------- -------- ---------- --------
Income (loss) from operations (200) -1% 656 2% (856) -130%
Other income (expense) (415) -1% (92) 0% (323) 351%
---------- -------- ---------- -------- ---------- --------
Income (loss) before provision for taxes (615) -2% 564 2% (1,179) -209%
Income tax provision 1 0% 12 0% (11) -92%
---------- -------- ---------- -------- ---------- --------
Net Income (loss) $ (616) -2% $ 552 2% $ (1,168) -212%
========== ======== ========== ======== ========== ========
Our net loss for the year ended June 30, 2005 was $616,000 or $0.13 per
share on both a basic and fully diluted basis as compared to a net income of
$552,000 or $0.11 and $0.06 per share on a basic and fully diluted basis
respectively for the year ended June 30, 2004. The decline in our operating
results was primarily due to increased competition in our auction business,
infrastructure costs to support current and anticipated future growth and higher
net interest expenses.
TOTAL REVENUE
The table below sets forth our primary sources of revenue for the
periods indicated:
YEAR ENDED (IN THOUSANDS)
------------------------------------------------
JUNE 30, JUNE 30, %
2005 % 2004 % CHANGE CHANGE
---------- -------- ---------- -------- ---------- --------
Net Sales
Rare Coin-Wholesale $ 24,533 62% $ 19,195 64% $ 5,338 28%
Rare Coin-Retail 12,807 32% 7,345 24% 5,462 74%
Art, Collectibles and Other - 0% 376 1% (376) -100%
---------- -------- ---------- -------- ---------- --------
Total Net Sales 37,340 94% 26,916 90% 10,424 39%
Commission Income 2,195 6% 3,081 10% (886) -29%
---------- -------- ---------- -------- ---------- --------
Total Revenue $ 39,535 100% $ 29,997 100% $ 9,538 32%
========== ======== ========== ======== ========== ========
We recorded total revenue of $39,535,000 for the year ended June 30,
2005, an increase of $9,538,000 or 32% over the total revenue of $29,997,000
recorded for the year ended June 30, 2004. The increase in revenue is primarily
due to increased rare coin sales. Wholesale coin sales increased $5,338,000 or
28% over last year. This increase was primarily due to the strong market demand
which was caused, we believe, by an increase in the price of gold, low interest
rates and uncertainty in the stock market, and due to our higher level of
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inventory available for sale, which resulted from the availability to us of new
financing to purchase that inventory. Retail coin sales increased $5,462,000 or
74% over last year. This increase was primarily due to continued strength in
demand for rare coins as described above.
We completed our exit of the Art business in October 2003 and as a
result we had no sales of art, collectibles and other for the year ended June
30, 2005.
Commission income for the year ended June 30, 2005 decreased $886,000
or 29% over the last year. This decrease was primarily due to the entry of
additional auction houses into the rare coin market and aggressive pricing by
our competitors. Both of these factors served to reduce our market share and
resulted in a reduction in our average commission percentage. Auction sales
(hammer prices realized, which are the aggregate amount of winning bids at our
auctions excluding the buyer's commission) were $23,234,000 for the year ended
June 30, 2005 as compared to $30,033,000 for the year ended June 30, 2004, which
also contributed to the reduced commissions for the current year.
Our revenue and profitability during the year is subject to
seasonality. Our first and third fiscal quarters have traditionally been our
strongest because two well-attended auctions are normally scheduled during each
of these quarters and during these quarters there are more frequent and
better-attended trade shows. Our second fiscal quarter has traditionally been
our weakest because we conduct only one auction event and there are fewer, less
popular trade shows.
We believe that for our revenue to continue to grow in the future we
must continue to expand and diversify our distribution channels. We have
recently begun to consider, test and implement several growth strategies.
To expand our wholesale sales efforts we began to supply a television
home shopping channel with rare coins on a test basis in October 2004. We
evaluated our arrangement with this supplier through February 2005, and we
decided to discontinue this arrangement and to examine other home shopping
opportunities at some future date. In January 2005, we began to supply internet
retailer Amazon.com with rare coins on a test basis. Our current relationship
with Amazon.com is simply to provide that company, on a nonexclusive basis, with
coins to be offered for sale on its website. We pay Amazon.com a commission,
which is presently 15%, on any sales it makes through this relationship. We have
yet to determine the length of the test period with Amazon.com. Over the medium
and long-term our growth strategy for wholesale type distribution channels
includes hiring of additional numismatic traders, acquiring small rare coin
dealers and supplying rare coins to gift and catalog retailers. We have yet to
determine the associated costs of our medium and long-term growth strategies in
the areas discussed above. We may extend or terminate any of these arrangements
at any time.
To expand our retail distribution channels, we recently completed a
significant upgrade of our web-site. This upgrade includes software tools to
improve the ease of use of our internet shopping cart, enhance the presentation
of items for sale, automate our listing capabilities with e-Bay.com, Amazon.com
and Overstock.com, increase traffic to our web-site and improve on-line bidding
and customer want-list capabilities. The costs incurred this year for this
upgrade was approximately $80,000 and the annual maintenance cost associated
with this upgrade will be approximately $20,000. We are considering further
upgrades to our website in the coming year, but we have yet to determine the
costs associated with these potential upgrades. In March 2005, we began listing
rare coins with Overstock.com both in their regular listing format and on their
auction platform. Other growth plans include the expansion of our direct mail
advertising targeting high net worth collectors who are currently buying rare
coins or other fine collectibles.
-19-
We plan to expand our auction operations to include weekly
internet-only auctions through our strategic relationship with e-Bay.com. Under
this relationship, we have agreed that when we conduct internet-only auctions
through e-Bay.com, we will not simultaneously offer the auctioned items through
any other internet-based auction. We pay e-Bay.com a commission of 5% on sales
it makes, and when we auction coins in this manner we increase the charge to our
customer by 5%, to offset the commission paid to e-Bay.com. This arrangement
will complement the seven major live auctions that we currently hold during a
year. We anticipate ramping toward weekly internet-only auctions by October
2005. We would not hold an internet-only auction during the week that we held a
live auction as our live auctions are simultaneously broadcast over the
internet. We are considering adding an additional live auction event in the
fiscal quarter ending December 2005 so that we can have two live auctions per
quarter.
Our ability to expand our wholesale, retail and auction operations is
dependent in part upon the success of these strategies, which we have not yet
evaluated. The implementation of these strategies may not result in increased
revenues. We will seek to determine whether the expected benefits from these
strategies, measured principally in terms of increased revenue, justifies the
costs of implementing them. If we determine that any of these strategies is not
cost-effective, we will terminate or amend the strategy. We cannot assure you
that our growth plans will generate enough revenue to cover the additional
operating costs associated with these growth plans.
We also believe that over the long-term there are opportunities to
expand our collateralized customer lending activities. Currently, our primary
focus is to provide auction advances to our customers. However, we believe that
the potential exists to provide non-auction financing for rare coins and other
fine collectibles that we estimate will yield significantly higher interest
rates over what we currently charge our customers.
Our ability to expand our revenue is significantly contingent on the
availability of additional permanent equity and debt financing. As indicated in
our "Other Liquidity Plans" below we have plans to raise additional equity and
debt, but there is no assurances that we will be successful in doing so on terms
and conditions that are acceptable to us.
COST OF SALES
Cost of sales is primarily comprised of the acquisition price we pay
for coins, and is dependent on our skill in identifying coins that may be
offered for sale at advantageous prices, as well as supply and demand factors at
the time we are purchasing coins. Commission income has minimal cost of sales
associated with it. Cost of sales increased $8,645,000 or 37% to $32,027,000 for
the year ended June 30, 2005, representing 81% of total revenue, compared to
$23,382,000, for the year ended June 30, 2004, which represented 78% of total
revenue. The increase in the aggregate cost of sales was primarily due to the
increased sale of rare coins as discussed in "Total Revenue" above, rather than
factors that might have influenced the cost of any particular item of inventory.
Our cost of sales as percentage of revenue increased over last year as a result
of the decrease in our commission income. During our 2004 and 2005 fiscal years,
we had comparable success in purchasing coins at advantageous prices, which
results in our cost of sales as a percentage of revenue remaining similar.
Although cost of sales as percentage of total revenue may be similar from year
to year, this may result from a coincidental combination of factors that are not
always consistent. These factors, which we cannot predict from year to year,
include our success in buying coins that generate substantial margin, the supply
of coins that our customer wish to purchase, and the level of auction sales and
the percentage of commission on these sales that we earn.
-20-
GROSS PROFIT
Gross profit for the year ended June 30, 2005 increased $893,000 or 13%
to $7,508,000 or 19% of total revenue, from $6,615,000 or 22% of total revenue
for the year ended June 30, 2004. The increase in the total gross profit in 2005
over 2004 was primarily due to the increase in our rare coin sales. Gross profit
as a percentage of revenue will vary from period to period due to variations in
the factors discussed in "Cost of Sales, " above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $1,749,000 or
29% to $7,708,000 for the year ended June 30, 2005 from $5,959,000 for the year
ended June 30, 2004. These expenses represented 19% of total revenue for the
year ended June 30, 2005 as compared to 20% of total revenue for the year ended
June 30, 2004. The increase in these expenses was due to the following factors:
the hiring of new employees to enhance our operational infrastructure as we
anticipate continued growth in our revenue; additional employee compensation
costs of $711,000, which included commissions that resulted from our higher
level of sales; investor and public relations efforts that began during the
current year with a cost of $333,000; legal and audit cost increases primarily
associated with the preparation of registration statements, in the amount of
$164,000; increases in travel and entertainment costs of $160,000 due to the
larger number of trade shows we attended; and auction operation costs increased
by $262,000.
OTHER INCOME AND EXPENSES
Other expenses for the year ended June 30, 2005 increased $323,000 to
$415,000 from $92,000 for the year ended June 30, 2004. This increase was
primarily due to: (i) a decrease in interest income of $100,000 that resulted
from the decline in interest rates charged to our customers and lower levels of
lending; and (ii) increases in interest expenses of $253,000 that resulted from
the combination of increased use of our lines of credit to finance our own
inventory and increases in rates charged to us by our lenders for the year ended
June 30, 2005 as compared to the year ended June 30, 2004.
PROVISION FOR INCOME TAXES
Although we incurred a loss for the year ended June 30, 2005, we
recorded income taxes expense of $1,000 for state and other minimum taxes for
that year. Although we recorded income for the year ended June 30, 2004, we had
net operating losses ("NOL") carried forward from previous years and we had only
recorded income tax expenses of $12,000 for state and other minimum taxes for
the year ended June 30, 2004. For federal income tax purposes, we have a NOL
carry forward of approximately $9,416,000 which is available to offset future
federal taxable income through 2024. For state income tax purposes, we also have
a NOL carry forward of approximately $4,413,000, which is available to offset
state taxable income through 2014. The use of these NOL carry forwards 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 carry forwards for the purposes
of offsetting California state taxable income have been suspended for the tax
years beginning in 2002 and 2003, only.
-21-
FOR THE YEAR ENDED JUNE 30, 2004 AND 2003
The following table sets forth the percentage of net revenue
represented by each item in our statements of operations for the periods
presented and the net changes and percentage of change for each item in our
statement of operations between the periods indicated:
YEAR ENDED (IN THOUSANDS)
------------------------------------------------
JUNE 30, JUNE 30, %
2004 % 2003 % CHANGE CHANGE
---------- -------- ---------- -------- ---------- --------
Net sales $ 26,916 90% $ 18,044 89% $ 8,872 49%
Commission Income 3,081 10% 2,311 11% 770 33%
---------- -------- ---------- -------- ---------- --------
Total revenue 29,997 100% 20,355 100% 9,642 47%
Cost of sales 23,382 78% 15,952 78% 7,430 47%
---------- -------- ---------- -------- ---------- --------
Gross profit 6,615 22% 4,403 22% 2,212 50%
Selling, general and administrative expenses 5,959 20% 6,676 33% (717) -11%
Impairment of goodwill - 0% 591 3% (591) -100%
---------- -------- ---------- -------- ---------- --------
Income (loss) from operations 656 2% (2,864) -14% 3,520 122%
Other income (expense) (92) 0% (614) -3% 522 -85%
---------- -------- ---------- -------- ---------- --------
Income (loss) before provision for taxes 564 2% (3,478) -17% 4,042 116%
Income tax provision 12 0% 13 0% (1) -8%
---------- -------- ---------- -------- ---------- --------
Net Income (loss) $ 552 2% $ (3,491) -17% $ 4,043 115%
========== ======== ========== ======== ========== ========
Our net income for the year ended June 30, 2004 was $552,000 or $0.11
and $0.06 per share on a basic and fully diluted basis respectively as compared
to a net loss of $3,491,000 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 (IN THOUSANDS)
------------------------------------------------
JUNE 30, JUNE 30, %
2004 % 2003 % CHANGE CHANGE
---------- -------- ---------- -------- ---------- --------
Net sales
Rare Coin - Wholesale $ 19,195 65% $ 9,051 44% $ 10,144 112%
Rare Coin - Retail 7,345 24% 8,264 41% (919) -11%
Art, Collectibles and Other 376 1% 729 4% (353) -48%
---------- -------- ---------- -------- ---------- --------
Total Net Sales 26,916 90% 18,044 89% 8,872 49%
Commission Income 3,081 10% 2,311 11% 770 33%
---------- -------- ---------- -------- ---------- --------
Total Revenue $ 29,997 100% $ 20,355 100% $ 9,642 47%
========== ======== ========== ======== ========== ========
We recorded total revenue of $29,997,000 for the year ended June 30,
2004, an increase of $9,642,000 or 47% over the total revenue of $20,355,000
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
65% of total revenue, increased $10,144,000. This increase was primarily due to
the strong market demand which was caused, we believe, by an increase in the
price of gold, low interest rates and uncertainty in the stock market, and due
to our higher level of inventory available for sale, which resulted from the
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availability to us of new financing to purchase that inventory. Retail coin
sales, which represented 24% of total revenue, decreased $919,000 or 11%. 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 $353,000 or 48% 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 we have had no material
sales of fine art and other collectibles.
Commission income, which represented 10% of total revenue, increased
$770,000 or 33% 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 coin 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 $7,430,000 to $23,382,000 for the year ended
June 30, 2004, representing 78% of total revenue, compared to $15,952,000, for
the year ended June 30, 2003, which also represented 78% of total revenue. The
increase in the aggregate cost of sales was primarily due to the increased sale
of rare coins as discussed in "Total Revenue" above, rather than factors that
might have influenced the cost of any particular item of inventory. Thus, the
increase in the cost of sales in 2004 of 47% over 2003 is comparable to the net
increase in total revenue in 2004 of 47% over 2003. During our 2003 and 2004
fiscal years, we had comparable success in purchasing coins at advantageous
prices, which results in our cost of sales as a percentage of revenue remaining
similar.
GROSS PROFIT
Gross profit for the year ended June 30, 2004 increased $2,212,000 or
50% to $6,615,000. This represented 22% of total revenue for the year ended June
30, 2004, as compared to $4,403,000 for the year ended June 30, 2003, which also
represented 22% of total revenue for that year. The increase in the total gross
profit in 2004 was primarily due to the increase in our rare coin sales and
increased auction commission revenue. Gross profit as a percentage of revenue
will vary from period to period due to variations in the factors discussed in
"Cost of Sales," above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased $717,000 or 11%
to $5,959,000 for the year ended June 30, 2004 from $6,676,000 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. Our operational consolidation included the
elimination of our Newport Beach location, the reduction of staff as a result of
our exit of the art business segment and the elimination of duplicated systems
with regard to operations, accounting and sales and marketing. The cost savings
from operational consolidation were approximately $325,000; however these cost
savings were offset primarily by costs associated with increases in staff at our
Beverly Hills location of approximately $190,000 and increased advertising and
-23-
marketing costs of approximately $110,000. 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 $331,000. There were no such costs in the
current year.
IMPAIRMENT OF GOODWILL
In July 2001, we recorded goodwill of $591,000 in connection with
acquisition of our Superior Galleries Beverly Hills auction unit. Based on our
annual fair value assessment to determine the impairment, if any, of goodwill,
we determined that the goodwill associated with this acquisition had become
fully impaired resulting in a charge of $591,000 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 $522,000 on a net basis to $92,000 for the
year ended June 30, 2004 from $614,000 for the year ended June 30, 2003. This
decrease is attributable primarily to an increase in interest income of $351,000
as a result of higher level of advances to customers, and reductions in interest
rates on our outstanding debt that decreased interest expense by $137,000 for
the year ended June 30, 2004 as compared to the year ended June 30, 2003. Our
higher level of auction and customer advances during the year ended June 30,
2004 resulted of our $7.5 million line of credit facility provided by Stanford
Financial Group Company in October 2003. Our ability to increase the level of
auction and customer advances enabled us to obtain more consignments which in
turn increased our commission revenue
PROVISION FOR INCOME TAXES
Although we recorded income for the current year, we have net operating
losses carried forward from previous years and we have only recorded income tax
expenses of $12,000 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 $13,000 for state and other minimum taxes for that year.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2005, we had working capital of $1,517,000. We recorded a
net loss of $616,000 and used cash in operating activities of $4,868,000 for the
year then ended. Given our June 30, 2005 cash balance of $417,000 and our
projected operating cash requirements, we anticipate that our existing capital
resources will be adequate to satisfy our cash flow requirements through June
30, 2006. However, 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 or expenses be higher than forecast
then we may require additional financing through debt and/or equity, and we may
not have adequate resources to fund operations. We expect future fixed
obligations through June 30, 2006 to be paid solely by cash generated from
operating activities. However, if we are unable to do so, 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 $30,000 during the year ended June 30, 2005 to $417,000
from $447,000 at June 30, 2004.
-24-
Cash used in our operating activities totaled $4,868,000, resulting
primarily from our loss of $616,000, increases in our accounts receivable and
inventories of $1,256,000 and $2,606,000 respectively and a decrease in accounts
payable of $2,107,000 and were partially offset by a decrease in our auction and
customer advances of $1,451,000. The increases in accounts receivable and
inventories are primarily the result of 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, 2005 was
$164,000 consisting of purchases 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 $5,002,000 for
the year ended June 30, 2005 resulting from the transactions described below.
FINANCIAL ACTIVITIES - DEBT
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, 2005 the
outstanding balance was $750,000 and all interest payments were paid to date and
continue to be paid current on a monthly basis. The principal repayments that
were due on June 30, 2005, March 31, 2005 and December 31, 2004 were not paid
when due, but our CEO has agreed to further extend the due dates for these
payments to September 30, 2005. During the year ended June 30, 2005, the note
was reduced by $150,000. If we desire to obtain a further extension of the
deferred portion of this loan in September 2005, but our CEO is unwilling to
provide such an extension, we will be required to liquidate sufficient inventory
to make this payment.
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
-25-
to consider the default cured at that time. The amendment also required monthly
interest payments that began on November 1, 2003. On December 15, 2004, the
Company and the executor of the Lender Estate executed an amendment to the
Renewal and Modification Agreement described above that provided for principal
payments of $100,000 per month for three months starting January 31, 2005 with
the remaining principal balance of $2,200,000 to be repaid on January 31, 2006.
Effective July 31, 2005 the Renewal and Modification Agreement was further
amended to provide for principal payments in the aggregate amount of $500,000,
with minimum monthly payments of $50,000 beginning October 1, 2005, with the
remaining principal balance of $1,700,000 to be paid on September 1, 2006. As of
June 30, 2005 the outstanding Private Line of Credit balance was $2,200,000, not
including accrued interest. During the year ended June 30, 2005 we made payments
of $300,000 to reduce the balance of the Private Line of Credit.
On October 13, 2003, we executed a Commercial Loan and Security
Agreement ("Commercial LOC") with Stanford Financial Group Company, an affiliate
of our principal stockholder, Stanford International Bank Limited ("SIBL" or
"Stanford"), to provide us with a $7,500,000 line of credit for purposes of
financing our inventory, auction advances and inventory loans to other rare coin
dealers and collectors. A portion of this indebtedness was assigned to SIBL, and
on March 31, 2005, as described below, pursuant to SIBL's purchase of $2,500,000
of our Series E Preferred Stock, SIBL assumed, converted and cancelled
$2,500,000 of this indebtedness under the Commercial LOC. In addition, Stanford
Financial Group Company further amended the Commercial LOC increasing the line
of credit to $10,000,000. The Commercial LOC bears interest at the prime-lending
rate (6.00% at June 30, 2005) and is secured by substantially all of our assets.
As of June 30, 2005 the outstanding Commercial LOC balance was $9,250,000.
Effective July 21, 2005, the Commercial LOC was renewed through October 1, 2006.
The net amount of borrowing against the Commercial LOC for the year ended June
30, 2005 was $2,650,000.
During October 2004, we executed three demand notes payable with a
private lender totaling $650,000 for the purpose of financing inventory. These
notes payable bear interest at 10% per annum and are secured by specific
inventory. Interest is payable monthly. As of June 30, 2005 the outstanding
balance was $650,000, not including any accrued interest.
In April 2005, we began to make payments on account of our obligations
under our Series A Preferred Stock redemption payable. Upon the commencement of
this redemption provision in March 31, 2004 the total amount of the redemption
payable was $688,000. During the year ended June 30, 2005 we made redemption
payments totaling $413,000. We are currently in compliance with these redemption
provisions. As of June 30, 2005 the outstanding balance of the Series A
Preferred Stock redemption payable was $275,000.
Since the Line of Credit and the Commercial LOC are secured by
substantially all of our assets, if we default in the performance of our
obligations under any of these loans the lender could foreclose its security
interest, which could lead to a termination of our business or require us to
file a bankruptcy petition.
We are currently in compliance with all of the financial covenants
contained in our credit agreements.
FINANCING ACTIVITIES - EQUITY
Between March 17, 2005 and June 6, 2005 we issued 55,000 common shares
for cash of $27,000 pursuant to the exercise of stock options under our 2003
Omnibus Stock Option Plan.
-26-
On March 31, 2005 we issued 2,500,000 shares of newly created Series E
Preferred Stock for a purchase price of $2,500,000 pursuant to a stock purchase
agreement ("purchase agreement") with our principal shareholder, SIBL. On that
date the purchase price of $2,500,000 was paid by the conversion and
cancellation of $2,500,000 of indebtedness previously incurred under our
Commercial LOC with Stanford Financial Group Company. The Series E Preferred
Stock is convertible into our common shares at any time at the option of SIBL at
a conversion rate of six shares of Series E Preferred Stock into one common
share subject to certain anti-dilution adjustments. The Series E stockholders
are entitled to vote on all matters requiring a vote of the shareholders and
entitled to the number of votes equal to the number of common shares into which
the Series E Preferred Stock is convertible. The net proceeds of the sale of the
Series E Preferred Stock, after deducting legal fees, was $2,488,000.
On June 20, 2005 we issued 50,000 shares for cash of $50,000 pursuant
to the exercise of stock warrants.
OTHER LIQUIDITY PLANS
Although we have plans to secure additional financing and/or to raise
additional capital, we cannot assure you that we will be successful in
completing these critical tasks. If we are unable to successfully obtain such
financing, 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, 2005 and does not have any
plans for material capital expenditures through the current fiscal year ending
June 30, 2006.
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 periods shown, exclusive of interest:
PAYMENTS DUE BY PERIOD
----------------------------------------------------------------------------------------
CONTRACT OBLIGATIONS LESS THAN MORE THAN
AT JUNE 30, 2005 TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
- ----------------------------- ---------------- ---------------- ---------------- ---------------- ----------------
Long Term Debt $ 1,025,000 $ 625,000 $ 400,000 $ - $ -
Operating Leases 505,000 224,000 281,000 - -
Short Term Debt 11,450,000 11,450,000 - - -
---------------- ---------------- ---------------- ---------------- ----------------
Total Contractual Obligations $ 12,980,000 $ 12,299,000 $ 681,000 $ - $ -
================ ================ ================ ================ ================
The above table outlines our obligations as of June 30, 2005 and does
not reflect any changes in our obligations that have occurred after that date.
-27-
RISK FACTORS
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 net income of $552,000 for the year ended
June 30, 2004, we incurred a net loss of $616,000 for the year ended June 30,
2005 and a net loss of $3,491,000 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.
BECAUSE WE HAVE LIMITED WORKING CAPITAL, IT MAY BE DIFFICULT TO MAINTAIN OR
EXPAND OUR OPERATIONS.
Our working capital at June 30, 2005 was $1,517,000. 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.
IF WE ARE UNABLE TO COMPETE SUCCESSFULLY, OUR REVENUE AND PROFITABILITY
WILL DECREASE.
The business of selling coins and other collectibles 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. Our primary
competitors are Heritage Rare Coins, a large scale coin dealer and auctioneer,
the Spectrum Numismatic unit of Greg Manning Auctions, a large scale coin dealer
and auctioneer, National Globe Exchange, a large scale coin dealer and American
Numismatic Rarities, a comparably-sized coin auctioneer. 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.
THE VOTING POWER OF SUPERIOR GALLERIES, INC. IS SUBSTANTIALLY CONTROLLED BY
STANFORD INTERNATIONAL BANK LIMITED 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 International Bank Limited, or "Stanford," and certain of its
affiliates collectively hold 57% 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. 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.
-28-
THE HIGH LEVEL OF OUR DEBT MAY LIMIT OUR ABILITY TO IMPLEMENT BUSINESS
STRATEGIES TO GROW OUR REVENUE AND IMPROVE OUR PROFITABILITY.
At June 30, 2005, we had total indebtedness of $13,125,000, of which
$12,725,000 was short-term debt. Our high level of debt limits the amount of
additional funds we can borrow, which in turn limits our ability to increase
inventory or make additional customer advances, thus restricting our ability to
grow our revenues. We do not have sufficient cash flow from operations to
rapidly repay this debt, and therefore if this debt was not renewed we would
have to seek new debt or equity financing to refinance our existing debt, or
liquidate inventory, possibly on unfavorable terms. In the past, we have
renegotiated or renewed the terms of our indebtedness on various occasions, but
we cannot assure you that we will be able to do so in the future or that new
debt or equity financing will be available for this purpose. This could result
in losses from operations, or could even require us to seek protection under the
bankruptcy laws.
IF WE ARE UNABLE TO PAY OUR SECURED DEBT ON A TIMELY BASIS, THE LENDERS
COULD REQUIRE THAT OUR ASSETS BE SOLD IN A FORECLOSURE SALE, WHICH COULD
RESULT IN OUR BANKRUPTCY.
We have borrowed funds from a Stanford affiliate and another private
party, each of which has been granted a security interest in substantially all
of our assets. If we default in the repayment of these debts, these lenders
could, among other things, foreclose on their security interests, which could
result in the sale of substantially all of our assets, the proceeds of which
would be applied to repay our debts to them. If this were to occur, we could be
forced to file a bankruptcy petition, or could go out of business.
DECREASED DEMAND FOR RARE COINS COULD REDUCE OUR REVENUE AND PROFITABILITY.
We derive substantially all 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. Sales of rare coins depend on discretionary consumer spending and are
affected by general market conditions, including perceived scarcity, subjective
value, general consumer trends, changes in the prices of precious metals,
government regulation of rare coin transactions, interest rates and other
general economic conditions. Many factors affect discretionary consumer
spending, including the unemployment rate, business conditions, interest rates,
inflation and tax rates. Spending on the types of luxury items that we typically
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 reduce
our revenues and profits, or cause us to incur losses.
-29-
WE COULD BE SUBJECT TO SALES TAXES, INTEREST AND PENALTIES ON INTERSTATE
SALES FOR WHICH WE HAVE NOT COLLECTED TAXES.
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, we cannot assure you that we will not be
contacted by authorities in the future with inquiries concerning our compliance
with current statutes, nor can we assure you that future statutes will not be
enacted that affect the sales and use tax aspects of our business.
THE LOSS OF THE SERVICES OF OUR CHIEF EXECUTIVE OFFICER COULD SIGNIFICANTLY
REDUCE OUR REVENUE AND PROFITABILITY.
Our success and future performance depends on the continued services of
our Chief Executive Officer, Silvano DiGenova, on whom we rely heavily for his
expertise and reputation in the rare coin market. Specifically, Mr. DiGenova is
a substantial buyer, appraiser and seller of rare coins on our behalf as well as
a substantial draw to potential auction consigners. Mr. DiGenova's services
would be difficult to replace and the loss of these services could cause
significant harm to our business. While we previously had an employment
agreement with Mr. DiGenova that expired on March 31, 2005, this agreement has
not yet been renewed, and in any event such an employment agreement may not
provide us with meaningful assurance that we will continue to have his services
available to us in the future.
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 the following:
o potential unfavorable supply of or demand for rare coins;
o quarter-to-quarter variations due to the timing of coin
auctions;
o potential changes in consumer trends negatively affecting the
popularity of rare coins that we auction and sell from time to
time;
o unfavorable fluctuations in the prices of precious metals;
o costs associated with unanticipated personnel changes;
o our inability to maintain customer satisfaction;
o quarter-to-quarter variations due to 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 unexpected or severe price competition;
o our inability to maintain gross margins; and
o our inability to expand our sales and distribution channels.
-30-
Additional factors that may negatively affect our quarterly operating
results generally include technical difficulties or network downtime and general
economic conditions and economic conditions specific to our industries.
IF WE ARE UNABLE TO OBTAIN ADDITIONAL CAPITAL, OUR ABILITY TO INCREASE
REVENUE AND PROFITABILITY WILL BE LIMITED.
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, we cannot assure you 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.
THE COSTS ASSOCIATED WITH OUR GROWTH PLANS MAY RESULT IN REDUCED
PROFITABILITY.
We have experienced significant periods of growth and increased
personnel, marketing and other operational 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. To manage this growth we must do the following:
o establish and continue to 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 expect to incur significant costs in connection with these efforts.
If we underestimate the costs of these efforts or overestimate our anticipated
growth in revenue, we will incur reduced profitability or even losses.
WE MAY INCUR LOSSES AS A RESULT OF ACCUMULATING INVENTORY.
In addition to auctioning rare coins on consignment, a substantial
portion of the 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.
IF WE ARE UNABLE TO OBTAIN A SUFFICIENT SUPPLY OF RARE COINS FOR RESALE AND
FOR SALE AT AUCTIONS, WE WILL BE UNABLE TO SUSTAIN OR INCREASE OUR
REVENUES.
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 cannot assure you 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
-31-
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.
IF WE ARE UNABLE TO ATTRACT SUFFICIENT CONSIGNMENT MERCHANDISE FOR SALE AT
OUR AUCTIONS, OUR AUCTION OPERATIONS MAY INCUR A LOSS.
We incur certain fixed costs in connection with each auction. Our
auction operations generate commission revenue based on the successful sale of
consigned merchandise. If the volume of sales at our auctions does not generate
sufficient commission revenue to cover fixed costs, our auction operations will
generate a loss.
IF WE EXPERIENCE AN INCREASE IN THE RESCISSION OF SALES, OUR REVENUE AND
PROFITABILITY COULD DECREASE.
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 item's sale price less sellers' commissions and other sellers' fees.
OUR PLANNED EXPANSION AND ENHANCEMENT OF OUR WEBSITE AND INTERNET
OPERATIONS MAY NOT RESULT IN INCREASED PROFITABILITY.
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. 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
and expense. If the planned expansion of our website does not result in
increased revenue, we may experience decreased profitability.
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.
-32-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our financial
position, results of operations or cash flows due to adverse changes in
financial market prices, including interest rate risk, foreign currency exchange
rare risk, commodity price risk and other relevant market rate or price risks.
We are exposed to a degree of market risk through changes in short-term
interest rates. At June 30, 2005, we had a line of credit from a related party
with a balance payable of $9,250,000. This line of credit bears an interest rate
that is tied to the bank prime rate. We are exposed to the risk of increasing
short-term interest rates, but we do not consider this risk to be material.
We have no activities that would expose us to foreign currency exchange
rate risk or commodity price risks.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and corresponding notes to the financial
statements called for by this item appear under the caption "Index to Financial
Statements" beginning on Page F-1 of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer carried out an
evaluation of the effectiveness of the Company's "disclosure controls and
procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e)
or 15d-15(e)) as of June 30, 2005, as required by paragraph (b) of Exchange Act
Rules 13a-15 or 15d-15. While we will continually seek to evaluate and improve
our disclosure controls, management does not expect that our disclosure controls
or its internal controls over financial reporting will prevent all possible
errors and fraud. A control system, no matter how well designed and operated,
can provide only reasonable, not absolute, assurance that the control system's
objectives would be met.
Our Chief Executive Officer and Chief Financial Officer (our principal
executive officer and principal financial officer, respectively) have concluded,
based on their evaluation as of June 30, 2005 ("Evaluation Date"), that the
design and operation of our "disclosure controls and procedures" (as defined in
Rules 13a-14(c) and 15d-14(c) under Exchange Act), are effective to ensure that
information required to be disclosed by us in reports filed or submitted by us
under the Exchange Act is accumulated, recorded, processed, summarized and
reported to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding whether or
not disclosure is required. There were no significant changes in our internal
controls or in other factors that could significantly affect our internal
controls subsequent to the Evaluation Date.
-33-
CHANGES IN INTERNAL CONTROLS
There has been no change in our internal controls over financial
reporting during our most recent fiscal year and quarter that has materially
affected, or is reasonably likely to materially affect, our internal controls
over financial reporting.
We have not begun the detailed planning and implementation of our
project to document and test our internal control procedures in order to satisfy
the requirements of Section 404 of the Sarbanes-Oxley Act. We anticipate
commencing the project in our third quarter of fiscal 2006 and will consider
engaging a third party consulting firm to assist us in this effort. Our public
float is less than $75,000,000 and as a result we will not need to comply with
Section 404 until the end of fiscal 2007.
ITEM 9B. OTHER INFORMATION
None.
-34-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers are as follows:
NAME AGE POSITION
- ---------------------------- ------- ------------------------------------------------------------
Silvano DiGenova 43 Chairman of the Board, Chief Executive Officer and Director
Larry Abbott 42 Chief Sales Officer and Executive Vice President
Paul Biberkraut 44 Chief Financial Officer, Executive Vice President, Secretary
and Director
Anthony Friscia 57 Director (1)
Lee Ittner 43 Director
David Rector 58 Director (2)
- -------------------
(1) Chairman of Audit Committee. Our Audit Committee consists of Messrs.
Friscia, Ittner and Rector.
(2) Chairman of Compensation Committee.
SILVANO DIGENOVA is our chairman of the board, chief executive officer
and a director. He has served in these positions since the time our corporate
predecessor was formed in 1984. 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 has
extensive experience in the numismatic and fine arts fields. 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.
LARRY ABBOTT is our chief sales officer and executive vice president.
Mr. Abbott has served in this role since June 2005. Mr. Abbott has over twenty
years of experience in management roles in numismatic sales and marketing, and
executive management. Prior to joining our company, Mr. Abbott held various
sales and management positions including, most recently, executive vice
president, at Heritage Rare Coin Galleries, a privately-held rare coin dealer
and auctioneer from May 1999 to May 2005.
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., a
publicly traded health care insurance company from December 2000 to November
2002 and was the corporate controller of Quality Systems, Inc., a publicly
traded medical software developer, 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.
-35-
ANTHONY FRISCIA is one of our directors and the Chairman of our Audit
Committee. Mr. Friscia has served in this role since July 2005. Mr. Friscia is
currently an independent consultant to the entertainment industry, a position
that he has held since January 2005. From 1999 to 2005, Mr. Friscia was Vice
President, Free Television Contract Administration for Warner Brothers
International Television Distribution, Inc., a division of Time-Warner, Inc., a
public traded media and entertainment company. Mr. Friscia has over 25 years of
experience in financial, administrative and contract management within the
television and film industries.
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, a provider of wireless phone services. Mr. Ittner has over 14 years
of experience in both domestic and international operational management, sales
and marketing, customer relations and strategic planning in the communications
industry.
DAVID RECTOR is one of our directors and the Chairman of our
Compensation Committee. 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.
AUDIT COMMITTEE FINANCIAL EXPERT
From October 25, 2004 and through July 7, 2005, James Gollihugh served
as a Director and chairman of our Audit Committee, and was the Audit Committee
financial expert as defined by Item 401(e) of Regulation S-K. On July 7, 2005,
Anthony Friscia succeeded James Gollihugh as a Director and Chairman of our
Audit Committee and is our Audit Committee financial expert as defined by Item
401(e) of Regulation S-K.
CODE OF ETHICS
We have adopted a code of ethics as defined by Item 406 of Regulation
S-K.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, or
the Exchange Act, requires our executive officers and directors, and persons who
beneficially own more than 10% of our common stock to file initial reports of
ownership and reports of changes in ownership with the Securities and Exchange
Commission. These officers, directors and shareholders are required by
Commission regulations to furnish us with copies of all such reports that they
file.
We have reviewed copies of such reports furnished to us during the
fiscal year ended June 30, 2005 and thereafter, and written representations
received by us from our directors and officers and the beneficial owners of more
than 10% of our common stock concerning their compliance with Section 16(a) of
the Exchange Act. Based on this review, we believe that during the 2004 fiscal
year, there was no failure by any such person to timely file a report under
Section 16(a) of the Exchange Act.
-36-
ITEM 11. 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, 2005, 2004 and 2003.
Other than as set forth below, no executive officer's total annual salary and
bonus exceeded $100,000 during our last fiscal year.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------ ----------------------- -------------------------
SECURITIES
OTHER RESTRICTED UNDERLYING
ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
NAME AND SALARY BONUS COMPENSATION AWARDS SARS PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
- -------------------- -------- ---------- -------- ------------ ---------- ----------- --------- ------------
Silvano DiGenova, 2005 $403,845 $ -0- $ -0- -0- 10,000 -0- $ 3,733 (4)
Chairman of the 2004 $375,000 $ 37,500 -0- -0- 10,000 -0- -0-
Board, Chief 2003 $350,000 -0- -0- -0- -0- -0- -0-
Executive Officer
and President
Paul Biberkraut, 2005 $152,884 $ 38,212 -0- -0- 10,000 -0- $ 3,115 (4)
Chief Financial 2004 $127,500 $ 30,000 -0- -0- 60,000 -0- -0-
Officer, Executive 2003 $ 61,585 -0- -0- -0- -0- -0- -0-
Vice President and
Secretary
J. Michael Wolfe, 2005 $200,000 -0- -0- -0- 100,000 -0- -0-
Chief Operation 2004 n/a n/a n/a n/a n/a n/a n/a
Officer and 2003 n/a n/a n/a n/a n/a n/a n/a
Executive Vice
President (1)
Stephen Deeds, 2005 n/a n/a n/a n/a n/a n/a n/a
Executive Vice 2004 n/a n/a n/a n/a n/a n/a n/a
President (2) 2003 $215,625 -0- $115,436 (3) -0- -0- -0- -0-
- -------------------
(1) Mr. Wolfe was an officer of our company from July 6, 2004 until June 1,
2005. On June 1, 2005, Mr. Wolfe became our vice president of marketing
and business development and resigned from this position on June 30, 2005.
(2) Mr. Deeds resigned as an officer of our company effective June 30, 2003
and on July 1, 2003 we entered into an independent contractor agreement
with Stephen Deeds, Inc., a company controlled by Mr. Deeds, to provide
certain consulting services. The agreement to provide consulting services
was terminated in February 2004.
(3) Consists of sales commissions.
(4) Consist of matching contributions to 401 (k) plan administered by
Administaff under our co-employment agreement.
-37-
STOCK OPTIONS GRANTED TO EXECUTIVE OFFICERS DURING FISCAL 2005
The following table summarizes options to purchase shares of our common
stock that we granted during the fiscal year ended June 30, 2005 to each of the
executive officers identified in the summary compensation table above. We have
never granted any stock appreciation rights.
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE(S) EXPIRATION
NAME GRANTED (#) FISCAL YEAR (%) ($/SHARE) DATE(S)
- ----------------- ----------- --------------- --------- ------------
Silvano DiGenova 10,000 3.03% $2.20 June 2010
Paul Biberkraut 10,000 3.03% $2.00 June 2010
J. Michael Wolfe 100,000 30.30% $2.00 June 2006
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
The following table summarizes exercises of stock options during the
fiscal year ended June 30, 2005 by each of the executive officers named in the
summary compensation table above and the year-end value of unexercised options
for these executive officers.
NUMBER OF
UNEXERCISED SECURITIES VALUE OF UNEXERCISED
SHARES VALUE UNDERLYING OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED REALIZED AT FISCAL YEAR END AT FISCAL YEAR END
NAME ON EXERCISE ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- --------------------- ----------- -------- ------------------------- -------------------------
Silvano DiGenova 0 N/A 47,500/0 $32,325/0
Paul Biberkraut 10,000 33,145 28,750/31,250 $57,625/$72,625
J. Michael Wolfe 0 N/A 0/100,000 $0/$100,000
LONG-TERM INCENTIVE PLAN AWARDS
In fiscal 2005, no awards were given to the executive officers named in
the summary compensation table under long-term incentive plans.
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, 2005, our five directors were
each granted options to purchase 10,000 shares of our common stock at an
exercise prices ranging from of $1.25 to $2.20 per share. These options fully
vested on June 30, 2005 and are exercisable for a period of five years after
vesting or for one month, if vested, following the termination or resignation of
the director from the board.
REPRICING OF OPTIONS
No adjustments to, or repricing of, stock options previously awarded to
the executive officers named in the summary compensation table above occurred in
fiscal 2005.
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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. This agreement terminated on March 31, 2005. However,
the Board of Directors and Mr. DiGenova verbally agreed to continue to abide by
the agreement until a new agreement is agreed to and ratified by the Board of
Directors.
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%. This agreement expires
on December 27, 2005.
On June 1, 2005 we entered into an employment agreement with our Chief
Sales Officer, Larry Abbott, under which we agreed to pay an annual salary of
$200,000 and bonus arrangements of up to 150% of base salary based on Company
performance. This agreement expires on June 1, 2008.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No director or executive officer of the Company is known by the Company to
serve as an officer, director or member of a compensation committee of any other
entity for which an executive officer or director thereof is also a member of
the Company's Board.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
This report is provided by the compensation committee of our board of
directors to assist stockholders in understanding our objectives, policies and
procedures in establishing our executive compensation structure and system. The
compensation committee is responsible for reviewing and approving base salaries,
bonuses and incentive awards for all executive officers, and oversees our stock
incentive plan. The committee is comprised of three non-employee directors who
have no interlocking relationships as defined by the Securities and Exchange
Commission.
Our compensation philosophy and policy is based on the following
objectives:
o To align executive compensation with our business strategy and
performance.
o To provide an executive compensation structure and system that
is competitive with other companies within our industry and of
similar size.
o To attract, retain and motivate qualified executives critical
to our success.
o To align our financial results and the compensation paid to
our executive officers with the enhancement of stockholder
value.
Our compensation programs consist of base salary, an annual incentive
bonus, and the award of stock options and other equity-based incentives. Base
salary is targeted to recognize each executive officer's unique value and
historical contributions to our success in light of industry salary norms. The
compensation committee reviews the compensation of the chief executive officer,
and with the chief executive officer, the base compensation of all other
executive officers, on an annual basis to assure that a competitive position is
maintained.
Any annual incentive or bonus is based upon a comparison of actual
performance against pre-established quantitative and qualitative performance
objectives derived from our business plan and operating budgets, which may
include company, operating division and individual components. Our CEO's annual
-39-
incentive bonus is based entirely on the achievement of specified profitability
goals. Since we were not profitable this year, our CEO will receive no incentive
bonus. The incentive bonuses for our other executive officers are based on a
combination of company profitability, sales levels, and/or qualitative factors.
Our policy is not to disclose target levels with respect to specific
quantitative or qualitative performance-related factors or factors considered to
involve confidential business information, because their disclosure would have
an adverse effect on our company.
To further align the financial interests of our executive officers with
those of our company and its stockholders, our long-range executive incentive
programs are primarily equity-based and provide the opportunity for our
executive officers to earn stock options and consequently benefit, along with
all stockholders, from performance-driven increases in share value. The
compensation committee and/or the board of directors act as the manager of our
option plans and perform functions that include selecting option recipients,
determining the timing of option grant and whether options are incentive or
non-qualified, and assigning the number of shares subject to each option, fixing
the time and manner in which options are exercisable, setting option exercise
prices and vesting and expiration dates, and from time to time adopting rules
and regulations for carrying out the purposes of our plans.
The compensation committee continues to monitor and evaluate our
executive compensation system and its application throughout our organization to
assure that it continues to reflect our compensation philosophy and objectives.
Respectfully submitted,
Compensation Committee
Superior Galleries, Inc.
David Rector, Chairman
Lee Ittner
Anthony Friscia
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PERFORMANCE GRAPH
The following graph provides a comparison for our past five fiscal
years (including a 6 month fiscal year ended June 30, 2001, after we changed our
fiscal year end) of cumulative total returns for our Common Stock, the Standard
and Poor's 600 Small Cap Stock Index and the Russell 2000 Index. We operate in a
specialty market niche. There are no reasonably identifiable publicly held
competitors that have traded for a period of five years and that directly
operate in all the same markets as we do. Therefore, our comparison is limited
to public issuers with similar market capitalization in the Russell 2000 Index.
The graph assumes an investment of $100 on January 1, 2001 in Superior,
the stocks comprising the Standard & Poor's 600 Small Cap Stock Index and the
stocks comprising the Russell 2000 Index, and also assumes reinvestment of all
dividends.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN BETWEEN
SUPERIOR GALLERIES, INC., THE S&P 600 SMALL CAP INDEX
AND THE RUSSELL 2000 INDEX
[PERFORMANCE GRAPH APPEARS HERE]
Dec. 31, 2000 June 30, 2001 June 30, 2002 June 30, 2003 June 30, 2004 June 30, 2005
------------- ------------- ------------- ------------- ------------- -------------
Superior Galleries $ 100 $ 100 $ 48 $ 30 $ 38 $ 61
Russell 2000 $ 100 $ 106 $ 96 $ 93 $ 122 $ 132
S&P Small Cap 600 $ 100 $ 101 $ 101 $ 97 $ 129 $ 145
-41-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth, as of August 8, 2005, 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, and (iv) all of
our directors and executive officers as a group.
AMOUNT AND NATURE
OF BENEFICIAL PERCENTAGE OF
NAME AND ADDRESS OWNERSHIP OF COMMON STOCK
OF BENEFICIAL OWNER TITLE OF CLASS COMMON STOCK(1) OUTSTANDING(1)
------------------------------------ ------------------------ ------------------ --------------
Silvano DiGenova(2) Common(3) 2,050,764 39.71%
Series B Preferred Stock 400,000 11.76%
Larry Abbott(2) Common - -
Paul Biberkraut(2) Common(6) 28,750 *
Anthony Friscia(2) Common - -
Lee Ittner(2) Common(7) 20,000 *
David Rector(2) Common(8) 10,000 *
Stanford International Bank Limited Common (4) 4,666,667 58.79%
6075 Poplar Avenue Series B Preferred Stock 3,000,000 88.24%
Memphis, TN 38119 Series D Preferred Stock 2,000,000 100.00%
Series E Preferred Stock 2,500,000 100.00%
All Executive Officers and Directors Common(3)(5) 2,109,514 40.46%
as a Group (6 persons) Series B Preferred Stock 400,000 11.76%
* less than one percent
- -------------------
(1) Based upon information furnished to us by the directors and executive
officers or obtained from our stock transfer books showing 4,819,942
shares of common stock outstanding as of August 8, 2005. 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 computing
"beneficial ownership" and the percentage of outstanding common stock held
by each person or group of persons named above as of August 8, 2005, 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 address for Messrs. DiGenova, Abbott, Biberkraut, Friscia, Ittner and
Rector is 9478 West Olympic Blvd., Beverly Hills, California 90212
(3) Includes 142,500 shares of common stock issuable upon the exercise of
options and warrants, 202,330 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.
-42-
(4) Includes 1,517,472 shares of common stock issuable upon the conversion of
Series B Preferred Stock, 1,666,667 shares of common stock issuable upon
the conversion of Series D Preferred Stock, and 416,667 shares of common
stock issuable upon the conversion of Series E Preferred Stock all of
which are currently convertible within the next 60 days. Includes 600,000
shares of common stock owned by four of Stanford's affiliate's employees,
Daniel Bogar, William Fusselmann, Osvaldo Pi and Ronald Stein, in equal
amounts.
(5) Includes 10,000 shares of common stock owned by Lee Ittner, 28,750 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.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information about our common stock that
may be issued upon the exercise of options, warrants and rights that we have
granted under (a) our 2003 Omnibus Stock Option Plan and (b) individual
compensation arrangements in exchange for consideration in the form of goods or
services as of June 30, 2005.
EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF SECURITIES WEIGHTED AVERAGE NUMBER OF
TO BE ISSUED UPON EXERCISE PRICE OF SECURITIES
EXERCISE OF OUTSTANDING OUTSTANDING REMAINING
OPTIONS, WARRANTS OPTIONS, WARRANTS AVAILABLE FOR
PLAN CATEGORY AND RIGHTS(1) AND RIGHTS FUTURE ISSUANCE
- ---------------------------------------- ----------------------- ----------------- ---------------
Equity compensation plans approved by
security holders(2) 630,000 $2.25 109,000
Equity compensation plans not approved
by security holders(3) 6,000 $20.00 N/A
Total 636,000 $2.41 109,000
- -----------------------
(1) Number of shares is subject to adjustment in the future for changes in
capitalization resulting from stock splits, stock dividends and similar
events.
(2) Consists of our 2003 Omnibus Stock Option Plan. This Plan authorizes us to
grant options to purchase up to 800,000 shares of our common stock during
the term of our Plan. Our Plan permits grants of both incentive stock
options and non-qualified stock options. Options under all plans generally
vest over 1 to 5 years, though the vesting periods may vary from person to
person, and are exercisable subject to continued employment and other
conditions.
(3) Consists of options to purchase an aggregate of 6,000 shares of our common
stock granted to employees prior to the adoption of our 2000 Omnibus Stock
Option Plan which was replaced by our 2003 Omnibus Stock Option Plan that
came into effect on June 30, 2003.
Our 2003 Omnibus Stock Option Plan was adopted by our board of
directors on May 1, 2003 and approved by our shareholders at our annual
shareholders' meeting on June 30, 2003. This plan permits us to grant both
incentive stock options and nonqualified stock options. Options under this plan
generally vest over one to five years, though the vesting periods may vary from
person to person, and are exercisable subject to continued employment and other
conditions.
-43-
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 31, 2003, we entered into a consulting agreement with
Stanford Group Company, an affiliate of our principal stockholder, Stanford
International Bank Limited 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. These fees are
comparable to or lower than those that would be charged to us by an unrelated
third party.
On October 13, 2003, we executed a Commercial Loan and Security
Agreement ("Commercial LOC"`) with Stanford Financial Group Company, an
affiliate of our principal stockholder, Stanford International Bank Limited, 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. On March 31, 2005, the lending limit on the Commercial LOC was
increased to $10 million. The Commercial LOC bears interest at the prime-lending
rate (6.00% at June 30, 2005) and is secured by substantially all of our assets.
On March 31, 2005, we issued 2,500,000 shares of newly created Series E
Preferred Stock for a purchase price of $2,500,000 pursuant to a stock purchase
agreement with Stanford International Bank Limited, our principal stockholder.
On that date the purchase price of $2,500,000 was paid by the conversion and
cancellation of $2,500,000 of indebtedness under our Commercial LOC with
Stanford Financial Group Company, an affiliate of SIBL. The Series E Preferred
Stock is convertible into common shares at any time at the option of SIBL at a
conversion rate of six shares of Series E Preferred Stock into one common share
subject to certain anti-dilution adjustments. The holders of Series E Preferred
Stock 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 E Preferred Stock is convertible.
On May 18, 2005 we entered into a Primary Supplier Agreement with
Stanford Coins & Bullion, Inc. ("Stanford C &B"), which is an affiliate of our
principal shareholder, Stanford International Bank Limited. Under this
arrangement, which has a term of six months commencing June 1, 2005, Stanford
C&B is required to provide us with a preferential right to source coins on a
wholesale basis for that company. Stanford C&B will pay a flat 7% over our bid
for all rare coins and 3.5% over our bid for all generic coins. We will provide
marketing services for Stanford C&B , including providing information on
possible sales leads and making our inventory of coins available on Stanford
C&B's web site. For Stanford C&B's customers that sell coins through our
auctions, we will pay Stanford C&B a fee of 6%, and will pay their sales person
a commission of 2%. During year ending June 30, 2005 Stanford C&B purchased
$1,576,000 of rare coins from us. Most of these purchases occurred prior to the
effective date of the Primary Supplier Agreement.
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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table shows the fees paid or accrued by us for the audit
and other services provided by Singer Lewak Greenbaum & Goldstein LLP ("SLGG")
and Haskell & White LLP ("H&W") for the fiscal years shown.
2005 2004
-------------------------- --------------------------
SLGG H&W SLGG H&W
----------- ----------- ----------- -----------
Audit Fees $ 135,000 $ 31,000 60,000 $ 37,000
Audit - Related Fees 18,000 -- 10,000 --
Tax Fees -- -- -- $ 1,000
All Other Fees -- -- -- --
----------- ----------- ----------- -----------
Total $ 153,000 $ 31,000 $ 70,000 $ 38,000
=========== =========== =========== ===========
Audit fees consist of fees billed for professional services rendered
for the audit of our financial statements and review of the interim financial
statements included in quarterly reports and services that are normally provided
by the above auditors in connection with statutory and regulatory fillings or
engagements.
The Audit - Related Fees shown above all related to the performance of
agreed upon procedures required to be performed in connection with our line of
credit from Stanford Financial Group Company, and the Tax Fees shown above all
related to the preparation of our corporate tax returns.
Our Audit Committee approved the Audit Fees for fiscal 2005 and 2004,
but none of the other fees for 2005 and 2004. Our Audit Committee policies
require it to approve the fees and scope of work for all annual audits and
quarterly financial statement review.
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PART IV
ITEM 15. EXHIBITS
The following documents are filed as part of this Annual Report on Form
10-K.
(1) FINANCIAL STATEMENTS. The following Financial Statements and the
Reports of Independent Registered Public Accounting Firms are on page F-1
through F-38 hereof.
Reports of Independent Registered Public Accounting Firms
Balance Sheets
Statements of Operations
Statements of Stockholders' Equity
Statements of Cash Flows
Notes to Financial Statements
(2) FINANCIAL STATEMENT SCHEDULES. The following Financial Statement
Schedules are on page F-39.
Schedule II
(3) EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
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 Certificate of Designation of Superior Galleries, Inc., relating
to Series E $1.00 Convertible Preferred Stock (incorporated
herein by this reference to Exhibit 3.1 to the Current Report on
Form 8-K of Superior Galleries, Inc. filed under the Exchange Act
on April 1, 2005).
3.3 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).
4.11 Liquidation Preferences Agreement between Tangible Asset
Galleries, Inc., the holders of the outstanding Series B
Preferred Stock of Tangible Asset Galleries, Inc. and Stanford
Venture Capital Holdings, Inc. dated January 31, 2003
(incorporated herein by this reference to Exhibit 4.1 to the
Current Report on Form 8-K of Superior Galleries, Inc. filed
March 3, 2003).
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 tSeries E Preferred Stock Purchase Agreement dated as of March
29, 2005, between Superior Galleries, Inc. and Stanford
Investment Bank Limited (incorporated herein by this reference to
Exhibit 10.1 to the Current Report on Form 8-K of Superior
Galleries, Inc. filed under the Exchange Act on April 1, 2005).
10.2 Registration Rights Agreement dated as of March 29, 2005 and
between Superior Galleries, Inc. and Stanford Investment Bank
Limited (incorporated herein by this reference to Exhibit 10.4 to
the Current Report on Form 8-K of Superior Galleries, Inc. filed
under the Exchange Act on April 1, 2005).
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EXHIBIT
NUMBER DESCRIPTION
------- -----------
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).
10.4 Registration Rights Agreement dated January 31, 2003 by and among
Tangible Asset Galleries, Inc. and holders of our Series B
Preferred Stock, Series C Preferred Stock, Series D Stock and
Certain Warrants (incorporated herein by this reference to
Exhibit 10.3 to the Current Report on Form 8-K of Tangible Asset
Galleries, Inc., filed under the Exchange Act on March 3, 2003).
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).
10.7 Commercial Loan and Security Agreement dated October 13, 2003
between Superior Galleries, Inc. and Stanford Financial Group
Company (incorporated herein by this reference to Exhibit 10.1 to
the Current Report on Form 8-K of Superior Galleries, Inc. filed
under the Exchange Act, filed October 16, 2003).
10.8 Commercial Note by Superior Galleries, Inc. to Stanford Financial
Group Company dated October 1, 2003 (incorporated herein by this
reference to Exhibit 10.2 to the Current Report on Form 8-K of
Superior Galleries, Inc. filed October 16, 2003).
10.9 Secured Revolving Line of Credit Agreement dated August 8, 2002
between Tangible Asset Galleries, Inc. and John Wesley English
(incorporated herein by reference to Exhibit 10.9 of the
registrant's Registration Statement on Form SB-2, as amended,
filed September 24, 2004).
10.10 Renewal and Modification Agreement dated September 30, 2003
between Superior Galleries, Inc. and the John Wesley English
Living Trust (incorporated herein by reference to Exhibit 10.10
of the registrant's Registration Statement on Form SB-2, as
amended, filed September 24, 2004)
10.11 Promissory Note in the maximum amount of $1,000,000, dated
February 10, 2003, from Tangible Asset Galleries, Inc. to Silvano
DiGenova (incorporated herein by reference to Exhibit 10.11 of
the registrant's Registration Statement on Form SB-2, as amended,
filed September 24, 2004)
10.12 Promissory Note dated December 10, 2002 by Tangible Asset
Galleries, Inc. to Silvano DiGenova (incorporated herein by
reference to Exhibit 10.12 of the registrant's Registration
Statement on Form SB-2, as amended, filed September 24, 2004)
10.13 Promissory Note dated December 13, 2002 by Tangible Asset
Galleries, Inc. to Silvano DiGenova (incorporated herein by
reference to Exhibit 10.13 of the registrant's Registration
Statement on Form SB-2, as amended, filed September 24, 2004)
10.14 Series D Preferred Stock Purchase and Warrant Exercise Agreement
dated January 31, 2003, between Tangible Asset Galleries, Inc.,
Stanford Venture Capital Holdings, Inc., Silvano DiGenova and
certain warrant holders (incorporated herein by this reference to
Exhibit 10.1 to the Current Report on Form 8-K of Superior
Galleries, Inc. filed March 3, 2003).
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EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.15 Share Exchange and Note Modification Agreement dated January 31,
2003 between Tangible Asset Galleries, Inc., Stanford Venture
Capital Holdings, Inc. and Silvano DiGenova (incorporated herein
by this reference to Exhibit 10.2 to the Current Report on Form
8-K of Superior Galleries, Inc. filed March 3, 2003).
10.16 Consulting Agreement between Tangible Asset Galleries, Inc. and
Stanford Venture Capital Holdings, Inc., dated January 31, 2003
(incorporated herein by reference to Exhibit 10.16 of the
registrant's Registration Statement on Form SB-2, as amended,
filed September 24, 2004)
10.17 Independent Contractor and Proprietary Information Agreement
dated July 1, 2003 between Superior Galleries, Inc. and Stephen
Deeds, Inc. (incorporated herein by reference to Exhibit 10.17 of
the registrant's Registration Statement on Form SB-2, as amended,
filed September 24, 2004)
10.18 First Amendment to Renewal and Modification Agreement dated
December 15, 2004 between Superior Galleries, Inc. and the John
Wesley English Living Trust (incorporated herein by reference to
Exhibit 10.18 of the registrant's Registration Statement on Form
SB-2, as amended, filed September 24, 2004)
10.19 Waiver and Extension Agreement dated December 29, 2004 between
Silvano DiGenova and Superior Galleries, Inc. (incorporated
herein by reference to Exhibit 10.19 of the registrant's
Registration Statement on Form SB-2, as amended, filed September
24, 2004)
10.20 Investor Relations Agreement dated December 30, 2004 between
American Capital Ventures, Inc. and Superior Galleries, Inc.
(incorporated herein by reference to Exhibit 10.20 of the
registrant's Registration Statement on Form SB-2, as amended,
filed September 24, 2004)
10.21 Promissory note dated October 1, 2004 by Superior Galleries, Inc.
in favor of Stephen Gehringer (incorporated herein by reference
to Exhibit 10.21 of the registrant's Registration Statement on
Form SB-2, as amended, filed September 24, 2004)
10.22 Promissory note dated October 14, 2004 by Superior Galleries,
Inc. in favor of Stephen Gehringer ((incorporated herein by
reference to Exhibit 10.22 of the registrant's Registration
Statement on Form SB-2, as amended, filed September 24, 2004))
10.23 Promissory note dated October 25, 2004 by Superior Galleries,
Inc. in favor of Stephen Gehringer (incorporated herein by
reference to Exhibit 10.23 of the registrant's Registration
Statement on Form SB-2, as amended, filed September 24, 2004)
10.24 Amendment Dated as of March 29, 2005 to Commercial Loan and
Security Agreement between Superior Galleries, Inc. and Stanford
Financial Group Company (incorporated herein by this reference to
Exhibit 10.2 to the Current Report on Form 8-K of Superior
Galleries, Inc. filed under the Exchange Act on April 1, 2005)
10.25 Commercial Note dated as of March 29, 2005 by Superior Galleries,
Inc. in favor of Stanford Financial Group Company (incorporated
herein by this reference to Exhibit 10.3 to the Current Report on
Form 8-K of Superior Galleries, Inc. filed under the Exchange Act
on April 1, 2005)
10.26 Primary Supplier Agreement dated May 18, 2005 between Superior
Galleries, Inc. and Stanford Coins and Bullion (incorporated
herein by this reference to Exhibit 10.1 to the Current Report on
Form 8K of Superior Galleries, Inc., filed under the Exchange Act
on May 18, 2005).
10.27 Second Extension to Commercial Loan and Security Agreement
between Superior Galleries, Inc. and Stanford Financial Group,
Incorporated dated as of July 21, 2005 (executed July 31, 2005)
(incorporated herein by this reference to Exhibit 10.1 to the
Current Report on Form 8K of Superior Galleries, Inc., filed
under the Exchange Act on August 2, 2005).
-49-
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.28 Second Amendment to Renewal and Modification Agreement, dated as
of July 31, 2005, by and between Superior Galleries, Inc. and the
John Wesley English Living Trust (incorporated herein by this
reference to Exhibit 10.2 to the Current Report on Form 8K of
Superior Galleries, Inc., filed under the Exchange Act on August
2, 2005).
14.1 Superior Galleries, Inc. Code of Ethics (filed herewith).
31.1 Certification of CEO pursuant to Securities Exchange Act Rules
13a-14 and 15d-14 as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
31.2 Certification of CFO pursuant to Securities Exchange Act Rules
13a-14 and 15d-14 as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
32.1 Certification of CEO pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act OF 2002
(filed herewith)
32.2 Certification of CFO pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act OF 2002
(filed herewith)
-50-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: August 10, 2005 SUPERIOR GALLERIES, INC.
By: /s/ Silvano DiGenova
-------------------------------
Silvano DiGenova,
Chief Executive Officer
Dated: August 10, 2005 SUPERIOR GALLERIES, INC.
By: /s/ Paul Biberkraut
-------------------------------
Paul Biberkraut,
Chief Financial Officer
Pursuant to requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
SIGNATURE CAPACITY DATE
--------- -------- ----
/s/ Silvano DiGenova Director August 10, 2005
- -------------------------------
Silvano DiGenova
/s/ Paul Biberkraut Director August 10, 2005
- -------------------------------
Paul Biberkraut
/s/ Anthony Friscia Director August 10, 2005
- -------------------------------
Anthony Friscia
/s/ Lee Ittner Director August 10, 2005
- -------------------------------
Lee Ittner
/s/ David Rector Director August 10, 2005
- -------------------------------
David Rector
-51-
SUPERIOR GALLERIES, INC.
INDEX TO FINANCIAL STATEMENTS
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
To the Board of Directors
Superior Galleries, Inc.
Beverly Hills, California
We have audited the balance sheets of Superior Galleries, Inc.. as of June 30,
2005 and 2004, and the related statements of operations, stockholders' equity
(deficit), and cash flows for each of the two years in the period ended June 30,
2005. 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 audits.
We conducted our audits 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 audits provided 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, 2005 and 2004, and the results of their operations and their cash flows
for each of the two years in the period ended June 30, 2005, in conformity with
U S. generally accepted accounting principles.
/s/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
August 2, 2005
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 statement of operations,
stockholders' equity (deficit) and cash flows of Superior Galleries, Inc. and
subsidiaries (the "Company") 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 results of the operations and cash flows
of Superior Galleries, Inc. and subsidiaries for the year ended June 30, 2003,
in conformity with accounting principles generally accepted in the United States
of America.
/s/ HASKELL & WHITE LLP
Irvine, California
September 5, 2003, except for the last
sentence in each of Note 6 and Note 7,
as to which the date is August 2, 2005
F-3
SUPERIOR GALLERIES, INC.
BALANCE SHEETS
(In thousands)
JUNE 30, 2005 JUNE 30, 2004
--------------- ---------------
ASSETS
(NOTE 6 AND 7)
CURRENT ASSETS
Cash and cash equivalents (Note 1) $ 417 $ 447
Accounts receivable, net of allowance for uncollectible
accounts of $122 (2005) and $259 (2004) (Note 1) 4,969 3,713
Auction and customer advances (Notes 1, 5 and 6) 4,950 6,402
Inventories (Notes 1, 2, 6, 7, 8 and 9) 8,713 6,106
Prepaid expense 346 51
--------------- ---------------
Total current assets 19,395 16,719
Property and equipment, net (Notes 1 and 3) 220 135
Other assets -- 11
--------------- ---------------
TOTAL ASSETS $ 19,615 $ 16,865
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Line of credit - related party (Note 6) $ 9,250 $ 6,600
Line of credit (Note 7) 2,200 2,500
Accounts payable and accrued expenses 5,154 7,261
Notes payable to a related party (Note 9) 350 300
Series A stock redemption payable (Note 11) 275 344
Notes payable (Note 8) 650 --
--------------- ---------------
Total current liabilities $ 17,879 $ 17,005
=============== ===============
(See accompanying notes to Financial Statements)
F-4
SUPERIOR GALLERIES, INC.
BALANCE SHEETS (CONTINUED)
(In thousands)
JUNE 30, 2005 JUNE 30, 2004
--------------- ---------------
LONG-TERM LIABILITIES
Notes payable to a related party, net of current portion (Note 9) $ 400 $ 600
Series A stock redemption payable, net of
current portion (Note 11) -- 344
--------------- ---------------
Total long-term liabilities 400 944
--------------- ---------------
TOTAL LIABILITIES 18,279 17,949
--------------- ---------------
COMMITMENTS, CONTINGENCIES AND SUBSEQUENT EVENTS (NOTES 5, 6, 7, 8,
9, 10, 11, 12, 13 AND 14)
STOCKHOLDERS' EQUITY (DEFICIT) (NOTE 11)
Preferred Stock, 693 shares undesignated, none outstanding -- --
Series B convertible preferred stock $1.00 par value, 3,400 shares
designated 3,400 shares issued and outstanding with a liquidation
preference of $3,400 2,967 2,967
Series D convertible preferred stock $1.00 par value, 2,000 shares
designated 2,000 shares issued and outstanding with a liquidation
preference of $2,000 1,931 1,931
Series E convertible preferred stock $1.00 par value, 2,500 shares
designated 2,500 shares issued and outstanding with a liquidation
preference of $2,500 2,488 --
Common stock, $.001 par value, 12,500 shares authorized, 4,820 (2005)
and 4,486 (2004) issued and outstanding 5 4
Additional paid in capital 8,459 7,912
Accumulated deficit (14,514) (13,898)
--------------- ---------------
Total stockholders' equity (deficit) 1,336 (1,084)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 19,615 $ 16,865
=============== ===============
(See accompanying notes to Financial Statements)
F-5
SUPERIOR GALLERIES, INC.
STATEMENTS OF OPERATIONS
(In thousand, except per share data)
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, 2005 JUNE 30, 2004 JUNE 30, 2003
--------------- --------------- ---------------
Net sales $ 37,340 $ 26,916 $ 18,044
Commission income 2,195 3,081 2,311
--------------- --------------- ---------------
TOTAL REVENUE 39,535 29,997 20,355
COST OF SALES 32,027 23,382 15,952
--------------- --------------- ---------------
GROSS PROFIT 7,508 6,615 4,403
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 7,708 5,959 6,676
IMPAIRMENT OF GOODWILL (NOTES 1 AND 4) -- -- 591
--------------- --------------- ---------------
Income (loss) from operations (200) 656 (2,864)
--------------- --------------- ---------------
OTHER INCOME (EXPENSE)
Interest income 376 476 125
Interest expense (Notes 6, 7, 8 and 9) (788) (535) (672)
Other expense, net (3) (33) (67)
--------------- --------------- ---------------
Total other income (expense) (415) (92) (614)
--------------- --------------- ---------------
INCOME (LOSS) BEFORE INCOME TAX PROVISION (615) 564 (3,478)
INCOME TAX PROVISION (NOTE 10) 1 12 13
--------------- --------------- ---------------
NET INCOME (LOSS) $ (616) $ 552 $ (3,491)
=============== =============== ===============
(See accompanying notes to Financial Statements)
F-6
SUPERIOR GALLERIES, INC.
STATEMENTS OF OPERATIONS (CONTINUED)
(in thousand, except per share data)
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, 2005 JUNE 30, 2004 JUNE 30, 2003
--------------- --------------- ---------------
Calculation of net income (loss) per share:
Net income (loss) $ (616) $ 552 $ (3,491)
Preferred stock accretion -- (50) (67)
Preferred stock dividend -- (37) (429)
--------------- --------------- ---------------
Net income (loss) applicable to common shares $ (616) $ 465 $ (3,987)
=============== =============== ===============
NET INCOME (LOSS) PER COMMON SHARE:
from net income (loss), basic $ (0.13) $ 0.11 $ (1.75)
=============== =============== ===============
from net income (loss), fully diluted $ (0.13) $ 0.06 $ (1.75)
=============== =============== ===============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING:
Basic 4,627 4,370 2,278
=============== =============== ===============
Fully diluted 4,627 8,098 2,278
=============== =============== ===============
(See accompanying notes to Financial Statements)
F-7
SUPERIOR GALLERIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 2005, 2004 AND 2003
(In thousands)
RETAINED
SERIES B SERIES D SERIES E ADDI- EARNINGS TOTAL
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON TIONAL (ACCUMU- STOCK-
------------------ ------------------ ------------------ ------------------ PAID IN LATED HOLDER'S
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) EQUITY
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Balance, June 30, 2002 3,400 $ 2,967 -- $ -- -- $ -- 2,061 $ 2 $ 6,939 $(10,492) $ (585)
Issuance of Series D
Preferred stock,
net of offering
cost (Note 11) -- -- 2,000 1,931 -- -- -- -- -- -- 1,931
Issuance of common
stock in exchange
for Series C
Preferred Stock
(Note 11) -- -- -- -- -- -- 583 1 699 -- 700
Fair value of
re-priced warrants
as dividends on
Series B Preferred
Stock (Note 11) -- -- -- -- -- -- -- -- 340 (340) --
Fair value of
re-priced warrants
pursuant to Series
D Preferred Stock
offering (Note 11) -- -- -- -- -- -- -- -- 29 -- 29
Purchase and
cancellation of
common stock -- -- -- -- -- -- (3) -- -- -- --
Accretion of
redemption value of
Series A Preferred
Stock (Note 11) -- -- -- -- -- -- -- -- (67) -- (67)
Dividends on
preferred stock -- -- -- -- -- -- -- -- -- (89) (89)
Net loss -- -- -- -- -- -- -- -- -- (3,491) (3,491)
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
BALANCE JUNE 30, 2003 3,400 $ 2,967 2,000 $ 1,931 -- $ -- 2,641 $ 3 $ 7,940 $(14,412) $ (1,572)
(See accompanying notes to Financial Statements)
F-8
SUPERIOR GALLERIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
FOR THE YEARS ENDED JUNE 30, 2005, 2004 AND 2003
(In thousands)
RETAINED
SERIES B SERIES D SERIES E ADDI- EARNINGS TOTAL
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON TIONAL (ACCUMU- STOCK-
------------------ ------------------ ------------------ ------------------ PAID IN LATED HOLDER'S
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) EQUITY
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Issuance of common
stock (Note 11) -- -- -- -- -- -- 1,845 1 -- -- 2
Fair value of options
granted -- -- -- -- -- -- -- -- 22 -- 22
Accretion of
redemption value of
Series A Preferred
Stock (Note 11) -- -- -- -- -- -- -- -- (50) -- (50)
Dividends on
preferred stock -- -- -- -- -- -- -- -- -- (38) (38)
Net income -- -- -- -- -- -- -- -- -- 552 552
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
BALANCE JUNE 30, 2004 3,400 $ 2,967 2,000 $ 1,931 -- $ -- 4,486 $ 4 $ 7,912 $(13,898) $ (1,084)
Issuance of Series E
Preferred stock,
net of offering
cost (Note 11) -- -- -- -- 2,500 2,488 -- -- -- -- 2,488
Issuance of common
stock (Note 11) -- -- -- -- -- -- 105 -- 77 -- 77
Fair value of
options granted -- -- -- -- -- -- -- -- 92 -- 92
Fair value of common
stock issued for
services (Note 11) -- -- -- -- -- -- 229 1 378 -- 379
Net loss -- -- -- -- -- -- -- -- -- (616) (616)
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
BALANCE, JUNE 30, 2005 3,400 $ 2,967 2,000 $ 1,931 2,500 $ 2,488 4,820 $ 5 $ 8,459 $(14,514) $ 1,336
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
(See accompanying notes to Financial Statements)
F-9
SUPERIOR GALLERIES, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, 2005 JUNE 30, 2004 JUNE 30, 2003
--------------- --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (616) $ 552 $ (3,491)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 77 94 127
Bad debts -- -- 131
Loss on retirement of property and equipment 3 33 49
Loss on investments -- -- 17
Impairment of goodwill -- -- 592
Fair value of options, warrants and common stock
granted for services rendered 471 22 29
Increase (decrease) in cash from changes in assets
and liabilities:
Accounts receivable (1,256) (887) 2,429
Auction and customer advances, net 1,451 (2,907) (1,647)
Other receivables -- -- 27
Inventories (2,606) (3,609) 786
Prepaid expenses and other (296) 39 (35)
Other assets 11 3 223
Accounts payable and accrued expenses (2,107) 423 (125)
Customer deposits -- -- (242)
--------------- --------------- ---------------
Net cash used in operating activities (4,868) (6,237) (1,130)
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (164) (56) (48)
Proceeds from sale of property and equipment -- 10 20
Collection on sale note receivable -- -- 69
--------------- --------------- ---------------
Net cash (used in) provided by investing activities (164) (46) 41
=============== =============== ===============
(See accompanying notes to Financial Statements)
F-10
SUPERIOR GALLERIES, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, 2005 JUNE 30, 2004 JUNE 30, 2003
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under related party line of credit 8,400 11,000 --
Repayments under related party line of credit (5,750) (4,400) --
Borrowings under lines of credit -- 3,300 2,500
Repayments under lines of credit (300) (3,300) (376)
Borrowings under notes payable 650 -- 2,191
Repayments under notes payable -- (64) (4,212)
Borrowings under related party debt -- -- 360
Repayments under related party debt (150) (460) --
Repayments on obligations under capital lease -- -- (4)
Repayments under repurchase agreement -- -- (556)
Payments under Series A preferred stock redemption (413) -- --
Issuance of common shares 77 2 --
Issuance of Series D preferred shares, net of
offering expenses -- -- 1,931
Issuance of Series E preferred shares, net of
offering expenses 2,488 -- --
Purchase of common stock for cancellation -- -- (1)
Payment of dividends on preferred stock -- (37) (89)
--------------- --------------- ---------------
Net cash provided by financing activities 5,002 6,041 1,744
--------------- --------------- ---------------
Net (decrease) increase in cash and equivalents (30) (242) 655
Cash and cash equivalents beginning of year 447 689 34
--------------- --------------- ---------------
Cash and cash equivalents, end of year $ 417 $ 447 $ 689
--------------- --------------- ---------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 788 $ 749 $ 458
=============== =============== ===============
Income taxes $ 1 $ 9 $ 2
=============== =============== ===============
(See accompanying notes to Financial Statements)
F-11
SUPERIOR GALLERIES, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITY
During the years ended June 30, 2005, 2004 and 2003, the Company completed
non-cash transactions as follows:
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, 2005 JUNE 30, 2004 JUNE 30, 2003
--------------- --------------- ---------------
NON-CASH INVESTING AND FINANCING ACTIVITIES
Accretion of redemption value of Series A Preferred stock -- 50 67
Series A preferred stock redemption liability -- 688 --
Issuance of common stock on conversion of Series C
preferred stock -- -- 700
Fair value of re-priced warrants as dividends on Series B
preferred stock -- -- 340
Cancellation of treasury common stock -- -- 1
(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 and 2005 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 results of operations for the year ended
June 30, 2003 were consolidated, but the results of operations for the
year ended June 30, 2004 and 2005 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
transactions have been eliminated in consolidation.
RECLASSIFICATIONS
Certain amounts may have been reclassified in the 2003 consolidated
financial statements to conform to the basis of presentation used in
2005 and 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 (CONTINUED)
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, 2005 and 2004, 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 $591,000 during the quarter ended December 31, 2002.
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.
F-14
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. We
recognize sales on an F.O.B. shipping point basis.
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, 2005 and 2004, management has established an
accounts receivable reserve of $122,000 and $259,000, 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 (CONTINUED)
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. Any
customer may return a coin if they can demonstrate that the coin is not
authentic, or there was an error in the description of a graded coin
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 (CONTINUED)
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, 2005, 2004 and 2003, advertising expenses were $633,000, $578,000
and $502,000, 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 (CONTINUED)
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 2005 and 2004 (there
were no options granted in 2003):
2005 2004 2003
----------- ----------- -----------
Risk free interest rate 2.6 - 3.7% 1 - 2% n/a
Dividends - - n/a
Volatility factor 250 - 275% 275% n/a
Expected life 1 - 4 years 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, 2005, 2004
and 2003 as follows:
2005 2004 2003
--------- --------- ---------
(In thousands)
Net income (loss) applicable to common shares,
as reported $ (616) $ 465 $ (3,987)
Add: Stock-based employee compensation included in reported
net income (loss) -- -- --
Less: Total stock-based employee compensation
expense determined under Black-Scholes option pricing
model, net of tax effects 247 21 --
--------- --------- ---------
Pro forma net income (loss) $ (863) $ 444 $ (3,987)
========= ========= =========
Earnings (loss) per share - as reported:
Basic $ (0.13) $ 0.11 $ (1.75)
Diluted $ (0.13) $ 0.06 $ (1.75)
Earnings (loss) per share - pro forma:
Basic $ (0.19) $ 0.10 $ (1.75)
Diluted $ (0.19) $ 0.05 $ (1.75)
F-18
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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. No dividends were paid nor were there any
accretion on preferred stock for the year ended June 30, 2005.
Dividends and accretion on preferred stock totaled $37,000 and $50,000,
respectively, for the year ended June 30, 2004. Dividends and accretion
on preferred stock totaled $429,000 and $67,000 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 3,808,000 at June 30, 2005 and 5,671,000
at June 30, 2003, as the effects of such are anti-dilutive for those
years. 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.
CUSTOMER AND VENDOR CONCENTRATIONS
During the years ended June 30, 2005, 2004 and 2003, the Company had no
customer that accounted for 10% or more of the Company's net sales. As
of June 30, 2005, the Company had no customer that represented 10% or
more of accounts receivable as of such date; and as of June 30, 2004,
the Company had one customer that represented 18% of accounts
receivable as of such date.
During the years ended June 30, 2005, 2004 and 2003, the Company did
not purchase 10% or more of its inventories from any single vendor. As
of June 30, 2005, the Company had one vendor that represented 20% of
accounts payable of such date; and as June 30, 2004 the Company had no
vendor that represented 10% or more of accounts payable as of such
date.
F-19
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 2005 and 2004. 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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
SFAS No. 123(R)
---------------
In March 2004, the FASB issued SFAS No. 123(R), "SHARE-BASED PAYMENT."
SFAS 123(R) amends SFAS No. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION," and APB Opinion 25, "ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES." SFAS No.123(R) requires that the cost of share-based
payment transactions (including those with employees and non-employees)
be recognized in the financial statements. SFAS No. 123(R) applies to
all share-based payment transactions in which an entity acquires goods
or services by issuing (or offering to issue) its shares, share
options, or other equity instruments (except for those held by an ESOP)
or by incurring liabilities (1) in amounts based (even in part) on the
price of the entity's shares or other equity instruments, or (2) that
require (or may require) settlement by the issuance of an entity's
shares or other equity instruments. This statement is effective (1) for
public companies qualifying as SEC small business issuers, as of the
first interim period or fiscal year beginning after March 15, 2005, or
(2) for all other public companies, as of the first interim period or
fiscal year beginning after June 15, 2005, or (3) for all nonpublic
entities, as of the first fiscal year beginning after March 15, 2005.
F-20
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
SFAS No. 123(R) (continued)
---------------------------
Management is currently assessing the effect of SFAS 123(R) on the
Company's financial statements. Currently the Company uses the Black
Scholes option pricing model to estimate the fair value of stock
options granted to employees and is evaluating option valuation models
including Black Scholes to determine which model the Company will use
upon the adoption of SFAS No. 123(R). The Company will adopt SFAS No.
123(R) effective with its fiscal year beginning July 1, 2005.
SFAS No. 151
------------
In November 2004, the FASB issued SFAS No. 151, "INVENTORY COSTS." SFAS
No. 151 amends the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage) under
the guidance in ARB No. 43, Chapter 4, "Inventory Pricing." Paragraph 5
of ARB No. 43, Chapter 4, previously stated that ." . . under some
circumstances, items such as idle facility expense, excessive spoilage,
double freight, and rehandling costs may be so abnormal as to require
treatment as current period charges. . . ." This Statement requires
that those items be recognized as current-period charges regardless of
whether they meet the criterion of "so abnormal." In addition, this
Statement requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. This statement is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. Management does not
expect adoption of SFAS No. 151 to have a material impact on the
Company's financial statements.
SFAS No. 152
------------
In March 2004, the FASB issued SFAS No. 152, "ACCOUNTING FOR REAL
ESTATE TIME-SHARING TRANSACTIONS." The FASB issued this Statement as a
result of the guidance provided in AICPA Statement of Position (SOP)
04-2, "Accounting for Real Estate Time-Sharing Transactions." SOP 04-2
applies to all real estate time-sharing transactions. Among other
items, the SOP provides guidance on the recording of credit losses and
the treatment of selling costs, but does not change the revenue
recognition guidance in SFAS No. 66, "ACCOUNTING FOR SALES OF REAL
ESTATE," for real estate time-sharing transactions. SFAS No. 152 amends
Statement No. 66 to reference the guidance provided in SOP 04-2. SFAS
No. 152 also amends SFAS No. 67, "Accounting for Costs and Initial
Rental Operations of Real Estate Projects," to state that SOP 04-2
provides the relevant guidance on accounting for incidental operations
and costs related to the sale of real estate time-sharing transactions.
SFAS No. 152 is effective for years beginning after June 15, 2005, with
restatements of previously issued financial statements prohibited. This
statement is not applicable to the Company.
F-21
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (CONTINUED)
SFAS No. 153
------------
In March 2004, the FASB issued SFAS No. 153, "EXCHANGES OF NONMONETARY
ASSETS," an amendment to Opinion No. 29, "Accounting for Nonmonetary
Transactions." Statement No. 153 eliminates certain differences in the
guidance in Opinion No. 29 as compared to the guidance contained in
standards issued by the International Accounting Standards Board. The
amendment to Opinion No. 29 eliminates the fair value exception for
nonmonetary exchanges of similar productive assets and replaces it with
a general exception for exchanges of nonmonetary assets that do not
have commercial substance. Such an exchange has commercial substance if
the future cash flows of the entity are expected to change
significantly as a result of the exchange. SFAS No. 153 is effective
for nonmonetary asset exchanges occurring in periods beginning after
June 15, 2005. Earlier application is permitted for nonmonetary asset
exchanges occurring in periods beginning after March 16, 2004.
Management does not expect adoption of SFAS No. 153 to have a material
impact on the Company's financial statements.
FAS No. 154
-----------
In May 2005, the FASB issued Statement of Accounting Standards (SFAS)
No. 154, "ACCOUNTING CHANGES AND ERROR CORRECTIONS" an amendment to
Accounting Principles Bulletin (APB) Opinion No. 20, "Accounting
Changes," and SFAS No. 3, "REPORTING ACCOUNTING CHANGES IN INTERIM
FINANCIAL STATEMENTS" though SFAS No. 154 carries forward the guidance
in APB No. 20 and SFAS No. 3 with respect to accounting for changes in
estimates, changes in reporting entity, and the correction of errors.
SFAS No. 154 establishes new standards on accounting for changes in
accounting principles, whereby all such changes must be accounted for
by retrospective application to the financial statements of prior
periods unless it is impracticable to do so. SFAS No. 154 is effective
for accounting changes and error corrections made in fiscal years
beginning after December 15, 2005, with early adoption permitted for
changes and corrections made in years beginning after May 2005.
FIN No. 47
----------
In March 2005, the FASB issued FASB Interpretation ("FIN") No. 47,
"Accounting for Conditional Asset Retirement Obligations." FIN No. 47
clarifies the meaning of the term CONDITIONAL ASSET RETIREMENT
OBLIGATION as used in FASB Statement No. 143, "Accounting for Asset
Retirement Obligations" and clarifies when an entity would have
sufficient information to reasonably estimate the fair value of an
asset retirement obligation. This interpretation is effective no later
than the end of fiscal years ending after December 15, 2005 (December
31, 2005 for calendar-year companies). Retrospective application of
interim financial information is permitted but is not required.
Management does not expect adoption of FIN No. 47 to have a material
impact on the Company's financial statements.
F-22
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. INVENTORIES
Inventories are comprised of rare coins.
Inventory totaling $1,286,000 and $1,228,000 was on consignment with
third parties at June 30, 2005 and 2004, respectively.
The Company, from time to time, enters into informal partnerships with
third parties who are either vendors or customers for the purchase and
sale of specific rare coins. These arrangements include joint ownership
of the rare coin and equal participation in profit or loss on specific
transactions adjusted for agreed upon expenses and interest costs. When
the rare coins are purchased the Company records its proportional
ownership as inventory and upon the sale of the rare coins, the Company
records its proportional sale and profit or loss. In most instances,
the Company elects to buy-out the partnership interest in rare coins
prior to its sale and the recording of a proportional sale and profit
or loss are no longer applicable. At any given time, the Company may be
involved in one to two of these agreements. As of June 30, 2005 and
2004, inventory totals reflected the Company's total proportional
ownership and does not include any minority interest claims in regard
to such partnership arrangements.
During the year ended June 30, 2004, the Company applied the inventory
reserve of $665,000 that it had established at June 30, 2003. This
inventory reserve had been established in connection with management's
decision to liquidate art inventory when the Company exited the art
business segment. The Company completed the liquidation of the art
inventory in October 2003.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
JUNE 30, 2005 JUNE 30, 2004
--------------- ---------------
(In thousands)
Furniture and equipment $ 143 $ 134
Computer equipment and software 351 216
Leasehold improvements 121 112
--------------- ---------------
615 462
Accumulated depreciation and amortization (395) (327)
--------------- ---------------
$ 220 $ 135
=============== ===============
Depreciation expense for the years ended June 30, 2005, 2004 and 2003 were
$77,000, $94,000 and $127,000, respectively.
F-23
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. GOODWILL
On July 6, 2001, the Company recorded goodwill for its purchase of its
SGBH subsidiary in the amount of $591,000. 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 unit's 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 $591,000 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. Auction and customer advances bear interest at
rates between 6% and 12% based primarily on the customer's
creditworthiness and the loan size. The average term of the loan is
approximately three months and no individual loan will exceed one year.
Customers may require minimum prices for their consigned coins, and if
the coin has not sold by the loan maturity date, the customer must
either refinance the loan, repay the loan, or permit Superior to
liquidate the coin. Superior will retain control of the assigned
inventory until the customer repays the advance. Auction and customer
advances consist of the follows:
JUNE 30, 2005 JUNE 30, 2004
------------- -------------
(In thousands)
Auction advances $ 3,358 $ 4,454
Customer inventory advances 1,592 1,948
------------- -------------
$ 4,950 $ 6,402
============= =============
F-24
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. LINE-OF-CREDIT - RELATED PARTY
On October 13, 2003, Superior executed a Commercial Loan and Security
Agreement ("LOC"`) with Stanford Financial Group Company ("Stanford
Financial"), an affiliate of a principal stockholder, Stanford
International Bank Limited ("SIBL" or "Stanford"), 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. On March 31, 2005, Stanford Financial Group
Company's affiliate, SIBL, pursuant to its purchase of $2.5 million of
the Company's Series E stock (see Note 10) assumed, converted and
cancelled $2.5 million of the Company's indebtedness under the
Commercial LOC. In addition, Stanford Financial further amended the
Commercial LOC increasing the line of credit to $10 million. The
Commercial LOC bears interest at the prime-lending rate (6.00% at June
30, 2005) and is secured by substantially all of Superior's assets. As
of June 30, 2005 the outstanding balance was $9,250,000 and there was
no accrued interest payable. During the years ended June 30, 2005, 2004
and 2003, Superior incurred interest expense on the line of credit -
related party totaling $394,000, $104,000 and $0, respectively.
Effective July 28, 2005 the Commercial LOC's expiration date was
extended to October 1, 2006.
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. On December 15, 2004, the Company and
the executor of the Lender Estate executed an amendment to the Renewal
and Modification Agreement described above that provides for principal
payments of $100,000 per month for three months starting January 31,
2005 with the remaining principal balance of $2,200,000 to be repaid on
January 31, 2006. As of June 30, 2005 the outstanding Line of Credit
balance was $2,200,000 and there was no accrued interest payable.
Effective July 31, 2005 the Renewal and Modification Agreement was
further amended to provide for principal payments in the aggregate
amount of $500,000, payable in minimum monthly payments of $50,000
beginning October 1, 2005, with the remaining principal balance of
$1,700,000 to be paid on September 1, 2006.
F-25
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. NOTES PAYABLE
During October 2004 the Company executed three demand notes payable
with a private lender totaling $650,000 bearing interest at 10% per
annum secured by specific inventory. Interest is payable monthly. As of
June 30, 2005, the outstanding balance was $650,000 and there was no
accrued interest payable.
9. NOTES PAYABLE TO A RELATED PARTY
On April 10, 2002 the Company executed a subordinated note payable in
the amount of $1,000,000 to the Company's Chief Executive Officer and a
principal stockholder ("CEO") bearing interest at 9% per annum with
quarterly installment payments of $150,000 plus interest. As the CEO
did not enforce the repayment obligation, the amount had been
classified as long term. On February 14, 2003, the terms of the note
were modified to provide for repayment of principal in the amount of
$50,000 per quarter commencing on September 30, 2003 and for interest
to be paid monthly. The Company is in arrears of $150,000 of principal
payments that were due on December 31, 2004, March 31, 2005 and June
30, 2005 of $50,000 each. However, the CEO agreed to delay these
principal repayments until no later than September 30, 2005. At June
30, 2005 there was no accrued interest payable and the balance due were
as follows:
JUNE 30, 2005 JUNE 30, 2004
------------- -------------
(In thousands)
Total $ 750 $ 900
Less current portion (350) (300)
------------- -------------
Long-term $ 400 $ 600
============= =============
Interest expense incurred to notes payable to related parties during
the year ended June 30, 2005, 2004 and 2003 totaled $78,000, $101,000
and $122,000 respectively. Future minimum payments under notes payable
to a related party are as follows:
YEAR ENDING AMOUNT
JUNE 30, (IN THOUSANDS)
-------------- --------------
2006 $ 350
2007 $ 200
2008 $ 200
--------------
$ 750
==============
F-26
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES
The provision for income taxes consists of the following components:
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, 2005 JUNE 30, 2004 JUNE 30, 2003
------------- ------------- -------------
(In thousands)
Current:
Federal $ - $ - $ -
State 1 12 13
------------- ------------- -------------
1 12 13
------------- ------------- -------------
Deferred:
Federal - - -
State - - -
------------- ------------- -------------
- - -
------------- ------------- -------------
$ 1 $ 12 $ 13
============= ============= =============
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, 2005 JUNE 30, 2004 JUNE 30, 2003
--------------- --------------- ---------------
(IN THOUSANDS)
Deferred tax assets:
Unearned income $ 7 $ 7 $ 7
Net operating loss carryforwards 3,592 3,747 3,040
Inventory reserve -- -- 265
Goodwill 186 203 204
Intangible asset 8 8 8
Accrued vacation pay 23 29 22
Allowance for doubtful accounts 52 111 190
Contributions 1 1 1
Options and warrants not exercised 95 54 42
Depreciation 26 12 36
Other 8 8 309
--------------- --------------- ---------------
Gross deferred tax assets 3,998 4,180 4,124
Valuation allowance (3,836) (3,988) (4,012)
--------------- --------------- ---------------
Deferred tax assets, net of reserve 162 192 112
Deferred tax liabilities:
Depreciation (162) (192) (112)
--------------- --------------- ---------------
Net deferred tax liabilities $ -- $ -- $ --
=============== =============== ===============
F-27
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
At June 30, 2005, 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 YEAR ENDED
JUNE 30, 2005 JUNE 30, 2004 JUNE 30, 2003
--------------- --------------- ---------------
Computed tax benefit $ (209) $ 192 $ (1,182)
Decrease (increase) in income tax benefit
resulting from:
Nondeductible expenses 21 12 4
State income tax expense (32) 46 2
Change in valuation allowance 221 (238) 1,174
Other -- -- 15
--------------- --------------- ---------------
$ 1 $ 12 $ 13
=============== =============== ===============
At June 30, 2005, the Company has a Federal tax net operating loss
("NOL") carryforward of approximately $9,416,000, which expires at
various dates though 2024, and a state net operating loss carryforward
of approximately $4,413,000, which expires at various dates through
2014.
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 SIBL'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 carry forwards for the purposes of
offsetting California state taxable income have been suspended for the
tax years beginning in 2002 and 2003, only.
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.
F-28
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. EQUITY (CONTINUED)
COMMON STOCK TRANSACTIONS
On December 26, 2002, the Company purchased 3,222 of its own common
stock for $1,000. 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).
On August 20, 2004, the Company issued 24,000 common shares to an
investor and public relations firm in exchange for services. The
services were valued at $30,000 and were based on the closing price of
the Company's common stock as listed on NASDAQ's Over-the-counter
Bulletin Board on the day the shares were issued.
On January 4, 2005, the Company issued 180,000 common shares to an
investor relations firm in exchange for services. The services were
valued at $270,000 and were based on the closing price of the Company's
common stock as listed on NASDAQ's Over-the-counter Bulletin Board on
the day the shares were issued.
Between March 17, 2005 and June 6, 2005, the Company issued 55,000
common shares for cash of $27,000 pursuant to the exercise of stock
options under our 2003 Omnibus Stock Option Plan
On June 20, 2005, the Company issued 50,000 shares for cash of $50,000
pursuant to the exercise of stock warrants.
On June 20, 2005, the Company issued 25,000 common shares in exchange
for future services of an employee. The shares vest over a four period
on either a quarterly or annual basis at the option of the employee.
The services were valued at $79,000 and were based on the closing price
of the Company's common stock as listed on NASDAQ's Over-the-counter
Bulletin Board on the day prior to the day the shares were issued.
F-29
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. EQUITY (CONTINUED)
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 $938,000 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 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.
F-30
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. EQUITY (CONTINUED)
SALE AND REDEMPTION OF SERIES A CONVERTIBLE PREFERRED STOCK (CONTINUED)
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, at the time,
because the Company's liabilities exceeded its assets, the Company was
prohibited under Delaware corporation law from commencing the
redemption. The Company had informed the stockholders of the redemption
provision. As of March 31, 2005, the Company was no longer prohibited
from commencing the redemption and in April 2005, the Company began the
redemption. The company has reflected the Series A Preferred Stock
redemption payable as a liability on its Balance Sheet. As of June 30,
2005, the balance payable with respect to the Series A Preferred Stock
redemption was $275,000. The Company has four remaining payments under
the redemption of $69,000 each due on September 30, 2005, December 31,
2005, March 31, 2006 and June 30, 2006. The Company will continue to
make quarterly dividend payments as long as the Series A Preferred
Stock redemption payable remains outstanding.
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.
These shares were issued on April 10, 2002. In connection with this
transaction, the Company issued to the purchasers warrants to purchase
an aggregate of 1,700,000 shares of its common stock, at exercise
prices ranging from $2.00 to $4.00 per share. Management estimated the
fair value of these warrants at $434,000, based on an appraisal of
previously issued options with similar terms and the trading price of
the Company's stock, and this amount was recorded as additional paid-in
capital. 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.
F-31
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 $29,000 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, Series D and Series E
Preferred shareholders at $1.00 per share each.
F-32
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. EQUITY (CONTINUED)
SALE OF SERIES E CONVERTIBLE PREFERRED STOCK
On March 31, 2005, The Company issued 2,500,000 shares of newly created
Series E $1.00 convertible preferred stock ("Series E stock") for a
purchase price of $2,500,000 pursuant to a stock purchase agreement
("purchase agreement") with SIBL, a principal stockholder of the
Company. On that date the purchase price of $2.5 million was paid by
the conversion and cancellation of $2.5 million of indebtedness under
the Company's Commercial LOC with Stanford Financial, an affiliate of
Stanford (see Note 6). The Series E stock is convertible into common
shares of the Company at any time at the option of Stanford at a
conversion rate of six Series E shares into one common share subject to
certain anti-dilution adjustments. The Series E 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 E stock is convertible.
STOCK OPTIONS
During the year ended June 30, 2005, the Company granted to certain
employees and non-employees, 360,000 stock options to purchase common
stock at an average exercise price of $2.80. The range of exercise
prices of options issued during the year was $1.01 to $4.25. The stock
options vest over time of up to four years. All are exercisable over
period of up to five years after vesting 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, 2005, the Company cancelled 95,000 stock options that
expired or had not vested at the time of employees and non-employees
discontinued service with the Company and 55,000 stock options were
exercised. The stock option grants during the year ended June 30, 2005
include 60,000 stock options to Board of Director members.
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 five years after vesting 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 stock options 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.
F-33
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. EQUITY (CONTINUED)
STOCK OPTIONS (CONTINUED)
The following table summarizes information about stock option
transactions for the years shown:
YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, 2005 JUNE 30, 2004 JUNE 30, 2003
-------------------------- -------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTION EXERCISE OPTION EXERCISE OPTION EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
----------- --------- ----------- --------- ----------- ---------
Outstanding at beginning of
period 426,000 $ 1.50 113,750 $ 6.05 119,750 $ 14.20
Options granted 360,000 2.80 410,000 0.77 -- --
Options canceled (95,000) 0.91 (97,750) 3.74 (6,000) 25.45
Options exercised (55,000) 0.49 -- -- -- --
----------- --------- ----------- --------- ----------- ---------
Outstanding at end of period 636,000 $ 2.41 426,000 $ 1.50 113,750 $ 6.05
=========== ========= =========== ========= =========== =========
Exercisable at end of period 182,000 $ 2.68 121,250 $ 2.96 95,667 $ 6.76
=========== ========= =========== ========= =========== =========
The weighted average remaining contractual life of the options
outstanding at June 30, 2005, is 7.2 years.
The following table provides information for the stock options granted
during the year ended June 30, 2005:
WEIGHTED
AVERAGE WEIGHTED
EXERCISE AVERAGE
NUMBER PRICE FAIR VALUE
-------- --------- ----------
Options exercise price equal to stock price 350,000 $ 2.82 $ 2.76
Options exercise price exceeds the stock price 10,000 $ 2.20 $ 1.84
The following table provides additional information for stock options
outstanding at June 30, 2005:
OUTSTANDING EXERCISABLE
-------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE AVERAGE AVERAGE AVERAGE
---------------------- EXERCISE CONTRACTUAL EXERCISE
FROM TO NUMBER PRICE LIFE NUMBER PRICE
-------- ------- ------ ---------- ----------- ------- --------
$ 0.30 $ 0.33 35,000 $ 0.31 6.5 22,500 $ 0.31
$ 1.00 $ 2.20 397,500 $ 1.42 6.9 121,000 $ 1.40
$ 3.80 $ 5.00 190,000 $ 4.08 8.2 25,000 $ 5.00
$ 8.75 $ 20.00 13,500 $ 13.75 3.6 13,500 $ 13.75
------- -------
636,000 182,000
------- -------
F-34
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. EQUITY (CONTINUED)
STOCK OPTIONS (CONTINUED)
As of June 30, 2005, 2004 and 2003, the Company had reserved shares of
common stock for the following purposes:
JUNE 30, JUNE 30, JUNE 30,
2005 2004 2003
----------- ----------- -----------
Options 636,000 426,000 113,750
Warrants 132,500 189,063 2,122,042
Series A Convertible Preferred Stock - - 68,750
Series B Convertible Preferred Stock 1,719,802 1,700,000 1,700,000
Series D Convertible Preferred Stock 1,666,667 1,666,667 1,666,667
Series E Convertible Preferred Stock 416,667 - -
----------- ----------- -----------
Total 4,571,636 3,981,730 5,671,209
=========== =========== ===========
12. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases office space in Beverly Hills under an operating
lease agreement expiring in September 2007. Future minimum rental
payments required under the above leases as of June 30, 2005 are as
follows:
YEARS ENDING JUNE 30
2006 $ 224,000
2007 224,000
2008 56,000
-----------
$ 504,000
===========
Rent expense for all leases for the years ended June 30, 2005, 2004 and
2003 was $274,000 $386,000 and $388,000 respectively.
F-35
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
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 $12,807,000, $7,345,000 and $8,264,000 for
years ended June 30, 2005, 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.
F-36
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
GUARANTEED LIQUIDITY AND BUY BACK (CONTINUED)
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
We have been sued by Heritage Capital Corporation ("Heritage"), a
competitor of ours, in connection with our employment of Larry Abbott,
a former employee of Heritage. This case is pending in the Dallas
County District Court in Texas, pursuant to a petition filed June 3,
2005. The parties to this case include Heritage, Superior Galleries,
Inc. and Mr. Abbott. In this case, Heritage has sued Mr. Abbott for
breach of his employment agreement with that company, following his
resignation in May 2005. Heritage further alleges that Mr. Abbott has
misappropriated Heritage's trade secrets and that in hiring Mr. Abbott
we have wrongfully interfered with Mr. Abbott's employment contract and
employment relationship with Heritage. Heritage seeks actual and
exemplary damages, attorneys' fees and costs in unspecified amounts and
an order from the court concerning the enforceability and scope of the
arbitration provisions of his employment contract. We intend to
vigorously defend the claims against us in this matter.
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. Except as set forth above, 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, liquidity or cash flows.
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
F-37
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
STATE SALES AND USE TAXES (CONTINUED)
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.
13. RELATED PARTY TRANSACTIONS
On January 31, 2003, the Company entered into a consulting agreement
with Stanford Group Company, and affiliate of SIBL, a principal
stockholder of the Company 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 $16,000 on sale of the art inventory
to the CEO. The sale was paid in full by reductions of notes payable to
the CEO.
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 was from June 1, 2004 through September 30,
2004 and provided for a monthly rental payment of $4,000. The sub-lease
terminated concurrently with the Company's master lease of the Newport
Beach facility on September 30, 2004.
On May 18, 2005 the Company entered into a Primary Supplier Agreement
with Stanford Coins & Bullion, Inc. ("Stanford C&B"), which is an
affiliate of a principal shareholder, SIBL. Under this arrangement,
which has a term of six months commencing June 1, 2005, Stanford C&B is
required to provide Superior with a preferential right to source coins
on a wholesale basis for that company. Stanford C&B will pay a flat 7%
over Superior's bid for all rare coins and 3.5% for all generic coins.
Superior will provide marketing services for Stanford C&B, including
providing information on possible sales leads and making Superior's
inventory of coins available on Stanford C&B's web site. For Stanford
C&B's customers that sell coins through Superior's auctions, Superior
will pay Stanford C&B a fee of 6%, and will pay their sales person a
commission of 2%. During the year ended June 30, 2005 Stanford C&B
purchased $1,576,000 of rare coins from Superior. Most of the rare
coins purchased were prior to the effective date of the agreement.
See also notes 2, 6, 7, 9 and 11 for discussion of additional
transactions with related parties
F-38
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. SELECTED QUARTERLY FINANCIAL DATA
The following data present unaudited quarterly financial information
for each of the eight quarters beginning with September 30, 2003 and
ending on June 30, 2005. The information has been derived from our
unaudited quarterly financial statements, which have been prepared by
us on a basis consistent with our audited financial statements
appearing elsewhere in this Form 10-K. The financial information set
forth below includes all necessary adjustments, consisting only of
normal recurring adjustments, that management considers necessary for a
fair presentation of the unaudited quarterly results. The following
data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in
this report.
FISCAL QUARTER ENDED
YEAR ENDED ----------------------------------------------------
JUNE 30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30,
2005 2005 2005 2004 2004
STATEMENTS OF OPERATIONS DATA --------- --------- -------- -------- ---------
(in thousands, except per share data)
Total revenue $ 39,535 $ 10,205 $ 11,658 $ 8,403 $ 9,269
Cost of sales 32,027 8,364 9,661 6,787 7,215
--------- --------- -------- -------- ---------
Gross profit 7,508 1,841 1,997 1,616 2,054
Selling, general and administrative expenses 7,708 2,114 2,098 1,642 1,854
--------- --------- -------- -------- ---------
Operating income (loss) (200) (273) (101) (26) 200
Other income (expense) (415) (135) (102) (104) (74)
--------- --------- -------- -------- ---------
Income (loss) from before income tax provision (615) (408) (203) (130) 126
Income tax provision (benefit) 1 -- -- -- 1
--------- --------- -------- -------- ---------
Net income (loss) $ (616) $ (408) $ (203) $ (130) $ 125
========= ========= ======== ======== =========
Net income (loss) per common share:
from net income (loss), basic $ (0.13) $ (0.09) $ (0.04) $ (0.03) $ 0.03
========= ========= ======== ======== =========
from net income (loss), fully diluted $ (0.13) $ (0.09) $ (0.04) $ (0.03) $ 0.02
========= ========= ======== ======== =========
Weighted average shares outstanding:
Basic 4,627 4,743 4,685 4,510 4,497
Fully diluted 4,627 4,743 4,685 4,510 8,170
F-39
SUPERIOR GALLERIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. SELECTED QUARTERLY FINANCIAL DATA (CONTINUED)
FISCAL QUARTER ENDED
YEAR ENDED ----------------------------------------------------
JUNE 30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30,
2004 2004 2004 2003 2003
STATEMENTS OF OPERATIONS DATA --------- --------- -------- -------- ---------
(in thousands, except per share data)
Total revenue $ 29,997 $ 9,467 $ 9,459 $ 5,154 $ 5,916
Cost of sales 23,382 7,394 7,120 4,242 4,625
--------- --------- -------- -------- ---------
Gross profit 6,615 2,073 2,339 912 1,291
Selling, general and administrative expenses 5,958 1,659 1,603 1,387 1,310
--------- --------- -------- -------- ---------
Operating income (loss) 657 414 736 (475) (19)
Other income (expense) (92) (54) 9 2 (49)
--------- --------- -------- -------- ---------
Income (loss) from before income tax provision 565 360 745 (473) (68)
Income tax provision (benefit) 13 3 5 6 (2)
--------- --------- -------- -------- ---------
Net income (loss) $ 552 $ 357 $ 740 $ (479) $ (66)
========= ========= ======== ======== =========
Calculation of net income (loss) per share
Net income (loss) $ 552 $ 357 $ 740 $ (479) $ (66)
Preferred stock accretion (50) -- (17) (17) (17)
Preferred stock dividends (37) -- (12) (13) (12)
--------- --------- -------- -------- ---------
Net income (loss) applicable to common shares $ 465 $ 357 $ 711 $ (508) $ (95)
--------- --------- -------- -------- ---------
Net income (loss) per common share:
from net income (loss), basic $ 0.11 $ 0.08 $ 0.16 $ (0.11) $ (0.02)
========= ========= ======== ======== =========
from net income (loss), fully diluted $ 0.06 $ 0.04 $ 0.09 $ (0.11) $ (0.02)
========= ========= ======== ======== =========
Weighted average shares outstanding:
Basic 4,370 4,486 4,486 4,486 4,020
Fully diluted 8,098 8,163 8,223 4,486 4,020
F-40
SUPERIOR GALLERIES, INC.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Superior Galleries, Inc.
Beverly Hills, California
Our audits as of June 30, 2005 and 2004 and for each of the two years in the
period ended June 30, 2005 were conducted in accordance with the standards of
the Public Company Accounting Oversight Board (United States) and were made for
the purpose of forming an opinion on the basic financial statements taken as a
whole. The supplemental schedule II is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not a part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
/s/ SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
August 2, 2005
F-41
SUPERIOR GALLERIES, INC.
SCHEDULE II
ALLOWANCE FOR DOUBTFUL ACCOUNTS AND INVENTORY RESERVES
Charged to
Balance at expenses/ Application
Beginning against against Balance at
(In thousands) of Year revenue assets End of Year
--------- ---------- ----------- -----------
Allowance for doubtful accounts:
Year ended June 30, 2003 $ 25 251 -- $ 271
Year ended June 30, 2004 $ 271 20 (32) $ 259
Year ended June 30, 2005 $ 259 -- (137) $ 122
Inventory reserve:
Year ended June 30, 2003 $ 525 140 -- $ 665
Year ended June 30, 2004 $ 665 -- (665) $ --
Year ended June 30, 2005 $ -- -- -- $ --
F-42
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
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 Certificate of Designation of Superior Galleries, Inc., relating to
Series E $1.00 Convertible Preferred Stock (incorporated herein by this
reference to Exhibit 3.1 to the Current Report on Form 8-K of Superior
Galleries, Inc. filed under the Exchange Act on April 1, 2005).
3.3 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) .
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).
-52-
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
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).
4.11 Liquidation Preferences Agreement between Tangible Asset Galleries,
Inc., the holders of the outstanding Series B Preferred Stock of
Tangible Asset Galleries, Inc. and Stanford Venture Capital Holdings,
Inc. dated January 31, 2003 (incorporated herein by this reference to
Exhibit 4.1 to the Current Report on Form 8-K of Superior Galleries,
Inc. filed March 3, 2003).
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 Series E Preferred Stock Purchase Agreement dated as of March 29, 2005,
between Superior Galleries, Inc. and Stanford Investment Bank Limited
(incorporated herein by this reference to Exhibit 10.1 to the Current
Report on Form 8-K of Superior Galleries, Inc. filed under the Exchange
Act on April 1, 2005).
10.2 Registration Rights Agreement dated as of March 29, 2005 and between
Superior Galleries, Inc. and Stanford Investment Bank Limited
(incorporated herein by this reference to Exhibit 10.4 to the Current
Report on Form 8-K of Superior Galleries, Inc. filed under the Exchange
Act on April 1, 2005).
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).
10.4 Registration Rights Agreement dated January 31, 2003 by and among
Tangible Asset Galleries, Inc. and holders of our Series B Preferred
Stock, Series C Preferred Stock, Series D Stock and Certain Warrants
(incorporated herein by this reference to Exhibit 10.3 to the Current
Report on Form 8-K of Tangible Asset Galleries, Inc., filed under the
Exchange Act on March 3, 2003).
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).
10.7 Commercial Loan and Security Agreement dated October 13, 2003 between
Superior Galleries, Inc. and Stanford Financial Group Company
(incorporated herein by this reference to Exhibit 10.1 to the Current
Report on Form 8-K of Superior Galleries, Inc. filed under the Exchange
Act, filed October 16, 2003).
10.8 Commercial Note by Superior Galleries, Inc. to Stanford Financial Group
Company dated October 1, 2003 (incorporated herein by this reference to
Exhibit 10.2 to the Current Report on Form 8-K of Superior Galleries,
Inc. filed October 16, 2003).
-53-
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.9 Secured Revolving Line of Credit Agreement dated August 8, 2002 between
Tangible Asset Galleries, Inc. and John Wesley English (incorporated
herein by reference to Exhibit 10.9 of the registrant's Registration
Statement on Form SB-2, as amended, filed September 24, 2004).
10.10 Renewal and Modification Agreement dated September 30, 2003 between
Superior Galleries, Inc. and the John Wesley English Living Trust
(incorporated herein by reference to Exhibit 10.10 of the registrant's
Registration Statement on Form SB-2, as amended, filed September 24,
2004)
10.11 Promissory Note in the maximum amount of $1,000,000, dated February 10,
2003, from Tangible Asset Galleries, Inc. to Silvano DiGenova
(incorporated herein by reference to Exhibit 10.11 of the registrant's
Registration Statement on Form SB-2, as amended, filed September 24,
2004)
10.12 Promissory Note dated December 10, 2002 by Tangible Asset Galleries,
Inc. to Silvano DiGenova (incorporated herein by reference to Exhibit
10.12 of the registrant's Registration Statement on Form SB-2, as
amended, filed September 24, 2004)
10.13 Promissory Note dated December 13, 2002 by Tangible Asset Galleries,
Inc. to Silvano DiGenova (incorporated herein by reference to Exhibit
10.13 of the registrant's Registration Statement on Form SB-2, as
amended, filed September 24, 2004)
10.14 Series D Preferred Stock Purchase and Warrant Exercise Agreement dated
January 31, 2003, between Tangible Asset Galleries, Inc., Stanford
Venture Capital Holdings, Inc., Silvano DiGenova and certain warrant
holders (incorporated herein by this reference to Exhibit 10.1 to the
Current Report on Form 8-K of Superior Galleries, Inc. filed March 3,
2003).
10.15 Share Exchange and Note Modification Agreement dated January 31, 2003
between Tangible Asset Galleries, Inc., Stanford Venture Capital
Holdings, Inc. and Silvano DiGenova (incorporated herein by this
reference to Exhibit 10.2 to the Current Report on Form 8-K of Superior
Galleries, Inc. filed March 3, 2003).
10.16 Consulting Agreement between Tangible Asset Galleries, Inc. and
Stanford Venture Capital Holdings, Inc., dated January 31, 2003
(incorporated herein by reference to Exhibit 10.16 of the registrant's
Registration Statement on Form SB-2, as amended, filed September 24,
2004)
10.17 Independent Contractor and Proprietary Information Agreement dated July
1, 2003 between Superior Galleries, Inc. and Stephen Deeds, Inc.
(incorporated herein by reference to Exhibit 10.17 of the registrant's
Registration Statement on Form SB-2, as amended, filed September 24,
2004)
10.18 First Amendment to Renewal and Modification Agreement dated December
15, 2004 between Superior Galleries, Inc. and the John Wesley English
Living Trust (incorporated herein by reference to Exhibit 10.18 of the
registrant's Registration Statement on Form SB-2, as amended, filed
September 24, 2004)
10.19 Waiver and Extension Agreement dated December 29, 2004 between Silvano
DiGenova and Superior Galleries, Inc. (incorporated herein by reference
to Exhibit 10.19 of the registrant's Registration Statement on Form
SB-2, as amended, filed September 24, 2004)
10.20 Investor Relations Agreement dated December 30, 2004 between American
Capital Ventures, Inc. and Superior Galleries, Inc. (incorporated
herein by reference to Exhibit 10.20 of the registrant's Registration
Statement on Form SB-2, as amended, filed September 24, 2004)
10.21 Promissory note dated October 1, 2004 by Superior Galleries, Inc. in
favor of Stephen Gehringer (incorporated herein by reference to Exhibit
10.21 of the registrant's Registration Statement on Form SB-2, as
amended, filed September 24, 2004)
-54-
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.22 Promissory note dated October 14, 2004 by Superior Galleries, Inc. in
favor of Stephen Gehringer ((incorporated herein by reference to
Exhibit 10.22 of the registrant's Registration Statement on Form SB-2,
as amended, filed September 24, 2004))
10.23 Promissory note dated October 25, 2004 by Superior Galleries, Inc. in
favor of Stephen Gehringer (incorporated herein by reference to Exhibit
10.23 of the registrant's Registration Statement on Form SB-2, as
amended, filed September 24, 2004)
10.24 Amendment Dated as of March 29, 2005 to Commercial Loan and Security
Agreement between Superior Galleries, Inc. and Stanford Financial Group
Company (incorporated herein by this reference to Exhibit 10.2 to the
Current Report on Form 8-K of Superior Galleries, Inc. filed under the
Exchange Act on April 1, 2005)
10.25 Commercial Note dated as of March 29, 2005 by Superior Galleries, Inc.
in favor of Stanford Financial Group Company (incorporated herein by
this reference to Exhibit 10.3 to the Current Report on Form 8-K of
Superior Galleries, Inc. filed under the Exchange Act on April 1, 2005)
10.26 Primary Supplier Agreement dated May 18, 2005 between Superior
Galleries, Inc. and Stanford Coins and Bullion (incorporated herein by
this reference to Exhibit 10.1 to the Current Report on Form 8K of
Superior Galleries, Inc., filed under the Exchange Act on May 18,
2005).
10.27 Second Extension to Commercial Loan and Security Agreement between
Superior Galleries, Inc. and Stanford Financial Group, Incorporated
dated as of July 21, 2005 (executed July 31, 2005) (incorporated herein
by this reference to Exhibit 10.1 to the Current Report on Form 8K of
Superior Galleries, Inc., filed under the Exchange Act on August 2,
2005).
10.28 Second Amendment to Renewal and Modification Agreement, dated as of
July 31, 2005, by and between Superior Galleries, Inc. and the John
Wesley English Living Trust (incorporated herein by this reference to
Exhibit 10.2 to the Current Report on Form 8K of Superior Galleries,
Inc., filed under the Exchange Act on August 2, 2005).
14.1 Superior Galleries, Inc. Code of Ethics (filed herewith).
31.1 Certification of CEO pursuant to Securities Exchange Act Rules 13a-14
and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 (filed herewith)
31.2 Certification of CFO pursuant to Securities Exchange Act Rules 13a-14
and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 (filed herewith)
32.1 Certification of CEO pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act OF 2002 (filed
herewith)
32.2 Certification of CFO pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act OF 2002 (filed
herewith)
- ----------------
-55-